D.C. Circuit Declares CFPB Structure Unconstitutional, Wipes Out $109 Million Penalty


On Tuesday, the D.C. Circuit Court of Appeals delivered a significant blow to the Consumer Financial Protection Bureau (CFPB), which has long been criticized by the financial services industry for its unprecedented autonomy and vaguely defined enforcement authority.

In PHH Corp., et al. v. Consumer Financial Protection Bureau, petitioner PHH Corp., a New Jersey-based mortgage lender and servicer, challenged the CFPB’s imposition of a $109 million fine for alleged violations of the Real Estate Settlement Procedures Act (RESPA). PHH argued not only that the imposition of the fine violated constitutional due process and broke with long-standing precedent on RESPA enforcement, but also that the CFPB’s structure itself was unconstitutional, and, therefore, the agency should be shut down. While the D.C. Circuit declined to shutter the agency entirely, it did impose a check on the CFPB’s autonomy, striking the provision from the Dodd-Frank Act that the President could remove the CFPB’s Director only “for cause.” The court also rejected the interpretation of RESPA proffered by the CFPB and the agency’s attempt to impose penalties retroactively.

CFPB Structure Declared Unconstitutional

In ruling on the constitutionality of the CFPB, the court discussed the dangers created by a lack of oversight, noting: “The CFPB has the power to impose a wide range of legal and equitable relief, including restitution, disgorgement, money damages, injunctions, and civil monetary penalties. And all of this massive power is lodged in one person – the Director – who is not supervised, directed or checked by the President or by other directors.” The court concluded that the “the CFPB is unconstitutionally structured” under Article II of the Constitution “because it is an independent agency headed by a single Director.” Declining PHH’s request to dismantle the CFPB entirely, the court decided to “remedy the constitutional violation here by severing the for-cause removal provision from the statute.” The court explained that as a result of its ruling the “President of the United States now has the power to supervise and direct the Director of the CFPB, and may remove the Director at will at any time.” While the court’s ruling will not likely have an impact on the CFPB’s power or leadership in the near term, the decision, if upheld, would provide future presidents with significantly more power to impose checks on the CFPB’s operations.

Court Rebukes CFPB’s Overreach and Strikes Penalty

Perhaps more immediately significant for the financial services industry is the court’s overruling of the $109 million penalty imposed by the CFPB. The CFPB alleged that PHH violated Section 8 of RESPA – the provision banning illegal kickbacks – by referring customers to insurers who then purchased reinsurance from a PHH subsidiary. Captive reinsurance plans such as the one employed by PHH had long been permissible under RESPA Section 8, provided that the mortgage insurer paid no more than reasonable market value. In 2015, however, the CFPB unilaterally determined that such programs were per se violations of Section 8 and imposed a $109 million fine on PHH for alleged violations that occurred years before the CFPB made its unilateral interpretation. The court explained that the CFPB’s interpretation was an overreach, stating:

“The CFPB obviously believes that captive reinsurance arrangements are harmful and should be illegal. But the decision whether to adopt a new prohibition on captive reinsurance arrangements is for Congress and the President when exercising the legislative authority. It is not a decision for the CFPB to make unilaterally.”

The court also held that even if the CFPB’s interpretation of Section 8 was permissible, “the CFPB violated due process by retroactively applying that new interpretation to PHH’s conduct that occurred before the date of the CFPB’s new interpretation.” Noting that the Assistant Secretary of HUD had previously advised entities like PHH that captive reinsurance programs were legal, the court stated:

“We therefore find this particular CFPB argument deeply unsettling in a Nation built on the Rule of Law. When a government agency officially and expressly tells you that you are legally allowed to do something, but later tells you ‘just kidding’ and enforces the law retroactively against you and sanctions you for actions you took in reliance on the government’s assurances, that amounts to a serious due process violation.”

Finally, the court rejected the CFPB’s novel and dangerous argument that no statutes of limitations apply to CFPB administrative enforcement actions. The CFPB argued that Dodd-Frank, which does not specify a limitations period for administrative enforcement actions, should override the express limitations periods provided in the 19 consumer protection statutes that the CFPB enforces. The court correctly rejected the CFPB’s argument, stating that exempting CFPB administrative actions from all statutory limitations periods “would be absurd.”

PHH’s victory in challenging the CFPB penalty is significant. Many financial services providers have been reluctant to challenge the CFPB’s actions in administrative procedures or through the judiciary. The D.C. Circuit’s strong rebuke of the CFPB’s actions may provide institutions with additional courage to challenge the agency’s overreaches in the future.

The full opinion from the D.C. Circuit Court of Appeals can be found at this link.

For additional information, please contact Larry Childs or any member of Waller’s Financial Services practice.

The opinions expressed in this bulletin are intended for general guidance only. They are not intended as recommendations for specific situations. As always, readers should consult a qualified attorney for specific legal guidance.