Tuesday, October 11, 2016

FYI: DC Cir Holds CFPB "Unconstitutionally Structured," Overrules CFPB's Statute of Limitations and Captive Reinsurance Interpretations

The Consumer Financial Protection Bureau (CFPB) narrowly escaped a constitutional challenge today in a ruling by the U.S. Court of Appeals for the District of Columbia Circuit.


Although the DC Circuit found the CFPB is "unconstitutionally structured," this defect according to the Court did not warrant dissolution of the CFPB.


A link to the opinion is available here:  Link to Opinion


This action arose from a CFPB enforcement action against PHH Mortgage (PHH) alleging the company had violated Section 8 of the federal Real Estate Settlement Procedures Act. The CFPB ultimately imposed a $109 million penalty against PHH, which resulted in this appeal.


The DC Circuit's ruling vacates the penalty, reverses the CFPB's administrative ruling, and remands the case back to the CFPB.


The ruling provides a significant blow to the CFPB, offering several paths to challenge past CFPB actions.  The opinion also holds that the CFPB's enforcement actions are subject to statutory limitations periods, a position the CFPB has resisted.


PHH's Constitutional Challenge to the CFPB's Structure


One of the challenges made by PHH was to the constitutionality of the CFPB.  The Court noted that the CFPB is unaccountable to the president, and its structure offers no checks or balances to the unbridled discretion of the sole director, which PHH argued violates the separation of powers doctrine.


Executive agencies like the CFPB are considered "independent" because the agency heads can only be removed by the president "for cause," and not at will.  As a result, the agencies are not supervised or directed by the president.


Examples of such independent agencies are the Federal Communications Commission, the Federal Trade Commission and the Securities and Exchange Commission. Not only are they able to make rules, but they can also conduct enforcement actions against private citizens, and "pose a significant threat to individual liberty and the constitutional system of separation of powers and checks and balances."


CFPB's Director Was Accountable to No One


Although the CFPB director's rulings are subject to judicial review, the DC Circuit noted that this does not remedy a separation of powers violation posed by the single director structure of an independent agency like the CFPB. Likewise, the Court noted, there is no historical precedent for a single director, independent agency.


The Court found that the unique structure of the CFPB creates a "greater risk for arbitrary decision making and abuse of power, and a far greater threat to individual liberty," as opposed to the traditional commissioner structure.


Because the CFPB's director may only be removed by the president "for cause," the structure provides no check on his powers and the CFPB's director remains unaccountable to the president or any other person.


A 1935 Supreme Court of the United States ruling permitted the creation of independent agencies so long as their structure prevents a single person from exercising authority that is neither supervised nor accountable. Having multiple commissioners as independent agency heads, as is the case with the FCC, FTC and SEC, provides such a check.


Although the independent agency heads are not accountable to or supervised by the president, the commissioner structure makes each commissioner accountable to and checked by their fellow commissioner.  No single person can unilaterally exercise unsupervised authority free from accountability to any other person.


As the opinion notes, no independent agency has ever been headed by a single person – until the CFPB was created.


CFPB Survives Shutdown but is No Longer an Independent Agency


The DC Circuit declined PHH Mortgage's request to declare the CFPB void as unconstitutional.


Instead, the Court struck from the Dodd-Frank Act the provision that only permitted the director to be removed "for cause."  Under this ruling, the CFPB's director can now be removed by the president "at will," essentially stripping the CFPB of its independent status. Now, the Court noted, the CFPB will function like other single director executive agencies, such as the State Department, Department of Justice and Department of Treasury. Because these agency heads can all be removed by the president at-will, they remain accountable to the president and under the president's supervision.


In declining to declare the CFPB itself as unconstitutional, the DC Circuit reasoned that by removing the "for cause" provision, the remaining provisions of Dodd-Frank could remain "fully operative as a law." The Court also found that Congress would have preferred the remaining provisions of Dodd-Frank remain in effect.


The ruling allows the CFPB to continue its operations, albeit no longer as an independent agency.


Impact on the CFPB


Any president can now remove the CFPB director for any reason.  This would not have been the case prior to today's ruling.


The ruling also confirms that the CFPB's structure provided no accountability to any elected official.


Although the opinion may arguably remove the constitutional defect, it does underscore the extraordinary power still exercised by its director, noting that "the CFPB possesses enormous power over American business, American consumers, and the overall U.S. economy."


The DC Circuit considered and rejected as beyond its authority its own restructuring of the CFPB into a commission, but noted, "if Congress prefers to restructure the CFPB as a multi-member independent agency rather than as a single-Director executive agency, Congress may enact new legislation that creates a Bureau headed by multiple members instead of a single Director."


Recent legislation seeks to replace the CFPB director with a bi-partisan commission. This ruling may provide fodder to move the legislation through Congress.


Time Does Run Against the King – CFPB Enforcement Actions Subject to Limitations Periods


In several enforcement actions, the CFPB has argued it is not subject to the limitations periods of the statutes it is seeking to enforce.


For example, in an enforcement action against a law firm for violation of the federal Fair Debt Collection Practices Act, the CFPB argued the FDCPA's one-year limitations period did not apply to it because "time does not run against the King."


The DC Circuit disagreed, providing a significant blow to future CFPB enforcement actions.


PHH argued enforcement action as to many of the alleged violations was time-barred because the alleged violations occurred outside RESPA's three-year limitations period. The CFPB argued its efforts against PHH were not barred because the Dodd-Frank Act does not impose a statute of limitations against its efforts to enforce "any" consumer protection statute.  Alternatively, the CFPB argued no limitations period is applicable to its enforcement of RESPA's Section 8. 


The DC Circuit disagreed on both points finding that the Dodd-Frank Act incorporated the statutes of limitations of "the underlying statutes enforced by the CFPB in administrative proceedings."  


In addition, the Court specifically held that RESPA's three-year limitations period is applicable to the CFPB's enforcement actions, whether brought in a court or in a CFPB administrative proceeding.


Impact on Captive Reinsurance Arrangements


The DC Circuit reversed the CFPB's finding that Section 8 of the federal Real Estate Settlement Procedures Act prohibits any "captive" reinsurance arrangements.  According to the Court, "[i]n a captive reinsurance arrangement, a mortgage lender (such as PHH) refers borrowers to a mortgage insurer.  In return, the mortgage insurer buys reinsurance from a mortgage reinsurer affiliated with (or owned by) the referring mortgage lender."


The Court disagreed with the CFPB's interpretation of RESPA Section 8 and found that the "captive reinsurance" practice is permissible if the reinsurance were purchased at market rates.


The DC Circuit also found the CFPB violated PHH's due process rights when it retroactively applied the CFPB's own interpretation concerning the practice that was in direct contradiction to prior guidance issued by the Department of Housing and Urban Development.


On remand, the CFPB must demonstrate that the reinsurance rates paid to PHH's affiliate exceeded reasonable market rates. Simply engaging in the practice is not a violation, according to the Court.


Contesting Constitutionality of the CFPB's Prior Actions


It is possible that if the CFPB were unconstitutionally structured, it should void or make voidable the CFPB's prior actions, at least those where the director's authority was required to undertake an action.  In this case the Court did not reach the issue.


The DC Circuit avoided the issue of whether the CFPB's unconstitutional structure was alone sufficient to vacate the PHH penalty because it ruled that PHH had not violated the RESPA in the first place.


The Court ultimately had to address the constitutional argument because it could not remand the case back to the CFPB unless the constitutional defect was corrected. By deleting the "for cause" provision of the Dodd-Frank Act, the Court solved for itself the dilemma and allowed the remand. It also saved the CFPB from a shutdown.


However, the Court's finding that the CFPB was constitutionally defective may provide others with opportunities to challenge CFPB rulings, bulletins, and enforcement actions, particularly where these actions are tied to the director's authority.





Ralph T. Wutscher
Maurice Wutscher LLP
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Email: rwutscher@MauriceWutscher.com


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