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CFPB Appeals 'Dramatic and Unprecedented' Constitutional Ruling

Release date: 11/18/2016

American Banker – November 18, 2016
CFPB Appeals 'Dramatic and Unprecedented' Constitutional Ruling
By John Heltman

WASHINGTON — The Consumer Financial Protection Bureau has formally appealed an October court ruling that undercut the agency's independent status, arguing that the decision laid out a theory of separation of powers without precedent in case law or the Constitution.

"A panel of this Court has rendered a dramatic and unprecedented ruling that purports to override Congress's explicit determination to create 'an independent bureau' to exercise regulatory and law enforcement authority in a particular segment of the economy," the CFPB said in the filing. "It thus sets up what may be the most important separation-of-powers case in a generation."

At issue is an appeals court ruling in the case of PHH v. CFPB, where a mortgage originator was fined $109 million over what the bureau said amounted to a kickback scheme. The company would allegedly steer borrowers toward mortgage insurance vendors who would buy reinsurance from a company owned by PHH. The CFPB based its fine on a new interpretation of the Real Estate Settlement Procedures Act, known as Respa, which was substantially different from previous interpretations made by the Department of Housing and Urban Development. PHH argued in its legal challenge that the CFPB had no business applying a new interpretation of an existing law retroactively, and the lower court agreed.

But PHH also argued that the CFPB could not make any interpretations of Respa because the agency's director could not be fired by the U.S. president but for cause. The single-director structure for an independent agency vests an unconstitutionally large amount of power outside of the president's direct control, PHH claimed. The D.C. Circuit agreed with that argument as well, deciding simply to strike the "for cause" clause, effectively nullifying the CFPB's independent status by allowing the president to remove the director for any reason.

The CFPB said in its appeal that the court's decision relies on the assumption that a multimember commission — such as the Securities and Exchange Commission or the Federal Trade Commission — somehow passes constitutional muster while a single-director structure does not. That decision seems to ultimately be based on a simple preference by the judges for multimember commissions, the appeal said.
"The panel's answer had nothing to do with a lack of presidential accountability. The panel opined that 'multi-member commissions or boards … reflect a deep and abiding concern for safeguarding the individual liberty protected by the Constitution,' " the bureau said. "The panel thus rested its ruling on criteria that lack definition or boundary and have no foundation in Supreme Court precedent or separation-of-powers principles."

The CFPB was widely expected to appeal the ruling, though the future of the case remains uncertain. The expanded review, known as an en banc review, by all of the judges of the D.C. Circuit will likely be granted because the case has such a high profile and such drastic effects if it were to stand.
If the case is not overturned, President-elect Donald Trump would have the ability to fire current CFPB Director Richard Cordray, whose term is not slated to expire until July 2018.
If the en banc review is not successful, the CFPB would still have the ability to appeal the case to the Supreme Court.

The bureau also said that the court erred in striking down its application of Respa, arguing that the arrangement that PHH had with its preferred mortgage insurance vendors was precisely the kind of kickback scheme that the law was originally passed to stop.

Among other errors, the court ignored the provision in the law that prohibits the exchange of a "thing of value" for business referrals — something that reinsurance would qualify as being.
"In exchange for these referrals it received profitable kickbacks from mortgage insurers who purchased reinsurance," the CFPB said. "This is certainly 'a thing of value.'"

Banking industry groups wasted little time in criticizing the agency's appeal. The Competitive Enterprise Institute — a pro-industry think thank that has filed an amicus brief in support of PHH and the plaintiff in another challenge to the CFPB's constitutionality — said that the court's ruling would stand and that the CFPB's structure would be struck down.

"We believe the PHH ruling will be upheld, and we are optimistic that our own broader constitutional challenge to the CFPB, now in district court, will ultimately succeed."