In a 110-page decision issued on Oct. 11, 2016, the United States Court of Appeals for the District of Columbia Circuit declared the Consumer Financial Protection Bureau’s (CFPB) single-director structure unconstitutional and vacated a $103 million fine against PHH. The Court found that the current structure allows the Commissioner to wield too much power that is unchecked by any other part of government. To remedy this concern, the Court severed the “for cause” provision from the statute, placing the agency under the direct supervision of the president. The Court also vacated the Order against PHH, finding that the CFPB’s interpretation of RESPA violated PHH’s due process rights in several respects. First, the Commissioner erred in disregarding long-standing guidance from the Department of Housing and Urban Development (HUD) recognizing that Section 8 of RESPA allows captive reinsurance arrangements so long as the amount paid by the mortgage insurer for the reinsurance does not exceed the reasonable market value of the reinsurance. The Court declared that Section 8 shall continue to have the meaning ascribed to it by HUD. Secondly, in calculating the penalty against PHH, the Commissioner had improperly included loans that had closed more than three years prior to the action. The Court rejected the CFPB argument that it was not subject to any statute of limitations, and ruled that the agency was subject to the three-year limitations period that has traditionally applied to agency actions to enforce RESPA.
As we wrote about previously, this case stems back to a June 2015 CFPB order in which CFPB Director Richard Cordray singlehandedly increased a $6 million fine levied by an administrative law judge against PHH for allegedly referring consumers to mortgage insurers in exchange for kickbacks in violation of the Real Estate Procedures Act (RESPA). The ALJ’s fine was based upon loans closed on or after July 21, 2008.. PHH appealed that ruling to the Director. Cordray issued a final order that required PHH to disgorge $109 million – all the reinsurance premiums it received on or after July 21, 2008.On appeal, PHH challenged Cordray’s authority to levy the additional fine and challenged the constitutionality of the CFPB itself.