PHH Corp. finds temporary respite in D.C. Circuit’s RESPA ruling

November 23, 2016

courtroom juryA District of Columbia Circuit Court of Appeals panel has found the Consumer Finance Protection bureau unconstitutionally structured, and vacated the agency director’s $109 million disgorgement ruling against mortgage giant PHH Corp.

The bureau is “disappointed” with the decision, but plans to appeal.

For now, despite the court’s criticism of the bureau’s structure and positions, the effects of the decision may be mostly political, observe Frank A. Hirsch Jr. and Caitlin A. Counts of Alston & Bird.

(Westlaw users: Click here for the article and here for the latest from Consumer Financial Services Law Report.)

The case centered on the CFPB’s interpretation of Section 8 of the Real Estate Settlement Procedures Act, prohibiting the giving or receiving of kickbacks by industry participants. In the years leading up the financial crisis, PHH participated in captive reinsurance deals involving private mortgage insurance, which the bureau determined violated Section 8’s prohibition. In late 2013 and early 2014, the bureau targeted mortgage insurers for the same conduct, before setting its sights on lenders like PHH.

Ignoring prior guidance and interpretations from the Department of Housing and Urban Development permitting such arrangements, the bureau — which proceeded HUD in enforcing Section 8 — retroactively applied a new interpretation of the statute to PHH’s involvement in the captive arrangements. In addition to arguing its interpretation was entitled to Chevron deference, the bureau dismissed prior HUD guidance as “informal” and “not binding.” Further, the CFPB interpreted the Dodd-Frank Act as not placing any statute of limitations on enforcement actions initiated administratively, as opposed to by litigation.

The D.C. Circuit, in a 100-plus page opinion, criticized the bureau’s “gamesmanship” and violation of basic due process principles, and rejected its interpretation of RESPA, its statute of limitations argument, and nearly every other position. But the court did not side wholesale with PHH. Although the court agreed the bureau was unconstitutionally structured, it disagreed with the suggested remedy.

Despite PHH’s urging to deconstruct the agency and invalidate its past actions, the court relied on Supreme Court precedent and the express severability clause in Dodd-Frank to strike the removal “for cause” clause in Title X. In doing so, the bureau was converted from an independent agency with a single-director head into an executive agency overseen by the President of the United States. Now, the bureau’s director may be removed at-will, in cases of “inefficiency, neglect of duty, or malfeasance in office.”

Because the court explicitly left the remainder of Dodd-Frank intact, which governs the bureau’s examination, regulatory, rulemaking, and enforcement powers, it is business as usual for the CFPB, conclude Hirsch and Counts. It is unlikely the agency will change its position regarding RESPA and prior statutory guidance relating to the other eighteen statutes it enforces, until forced to do so.

For example, in another case pending in North Dakota federal district court, the bureau responded to an argument based on the PHH decision by stating it “was wrongly decided and, in any event, does not control the outcome of defendants’ motion to dismiss in this case.”