CFPB Structure Held Unconstitutional in PHH Case

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Don’t get excited; this shouldn’t change much for SC dirt lawyers.

A three-judge panel of the U.S. Court of Appeals for the District of Columbia ruled unanimously on October 11 that the structure of the Consumer Financial Protection Bureau allows its director to wield too much power.

This highly publicized case began when PHH Corp. was ordered by CFPB Director Richard Cordray to pay $109 million in restitution resulting from illegal kickbacks to mortgage insurers pursuant to Section 8 of RESPA. An administrative law judge had ordered a $6 million penalty at the trial level, but Director Cordray apparently wanted to set an example and ordered the “ill-gotten gains” to be disgorged. The trial court had limited the violations to loans that closed on or after July 21, 2008. Director Cordray applied the fines retroactively.

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PHH brought suit, arguing that the CFPB is unconstitutional because Director Cordray has the sole authority to issue final decisions, rendering the CFPB structure to be in violation of the separation of powers doctrine. The petition stated, “Never before has so much authority been consolidated in the hands of one individual, shielded from the President’s control and Congress’s power of the purse.” The petition argues that the Director is only removable for cause, distancing him from the power of the President, and is able to fund the agency from the Federal Reserve’s operating expenses, distancing him from Congress’s power to refuse funding.

The Court agreed. It wrote, “Because the Director alone heads the agency without Presidential supervision, and in light of the CFPB’s broad authority over the U.S. economy, the Director enjoys significantly more unilateral power than any single member of any other independent agency.”

The restriction that the Director can only be removed “for cause” was severed, giving the President the power to remove the Director at will. This decision effectively makes the CFPB an agency of the Executive Branch rather than an independent agency.

The Court did not agree with Director Cordray imposing the huge fine retroactively. The Court explained:

“Put aside all the legalese for a moment. Imagine that a police officer tells a pedestrian that the pedestrian can lawfully cross the street at a certain place. The pedestrian carefully and precisely follows the officer’s direction. After the pedestrian arrives at the other side of the street, however, the officer hands the pedestrian a $1,000 jaywalking ticket. No one would seriously contend that the officer had acted fairly or in a manner consistent with basic due process in that situation. Yet that’s precisely this case. Here, the CFPB is arguing that it has the authority to order PHH to pay $109 million even though PHH acted in reliance upon numerous government pronouncements authorizing precisely the conduct in which PHH engaged.”

It is not likely that this landmark decision will make any changes in our current closing practices. The Court stated specifically that the ongoing operations of the agency will not be affected. The Court vacated the CFPB’s order and remanded the case for further proceedings. We might also see an appeal. Regardless, the CFPB is still in charge of the closing process, and all the rules remain in place.

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