Constitutionality of CFPB upheld

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cfpb-logoThe D.C. Circuit Court of Appeals upheld the constitutionality of the Consumer Financial Protection Bureau (CFPB) in a case decided last week. This decision reverses the October 11, 2016 holding of a three-judge panel which ruled unanimously that the structure of the CFPB allowed its director to wield too much power.

The highly publicized case began when PHH Corp. was ordered by former 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 former 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.

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

The lower Court agreed, writing, “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 lower Court removed the restriction that the Director can only be removed for cause, giving the President the power to remove the Director at will. The lower Court also reversed former Director Cordray’s retroactive applicability of fines.

The Court of Appeals upheld the constitutionality of the CFPB, preserving the single-director leadership and the independence of the agency. The ruling indicates the President can only fire the Director for cause and allows the current five-year terms to remain in place. Five-year terms will, of course, mean that directors of the agency may remain in place after the termination of the term of the president who appointed him or her.

The CFPB is largely the brain child of the Democratic Party, and Acting Director Mulvaney has taken steps to rein in its power since he was appointed by President Trump. The Court of Appeals ruling was mostly decided on ideological lines. One Republican appointee joined the Democratic appointed judges in upholding the CFPB’s structure.

The Court did rule in favor of PHH by rejecting the large penalty imposed by former Director Cordray. The decision requires that the penalty be reviewed again by the CFPB.

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Wells Fargo distributes new settlement agent memo

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Wells Fargo circulated a new Settlement Agent Communication on December 15, addressing several points that may be of interest to South Carolina closing attorneys. 

  • The Seller Closing Disclosure must be delivered to Wells Fargo prior to closing, and Wells’ performance reports of settlement agents will soon include proper receipt of the Seller CD.
  • Wells Fargo is adamant that the Borrower Closing Disclosure must be the form provided to the closing attorney by the lender. Wells will not tolerate substitutions or additions to the Borrower CD.
  • Closing attorneys are encouraged to communicate with the lender before, during and after closing to insure the accuracy of signing and disbursement dates on the borrower CD.
  • Closing attorneys are instructed to refrain from adding per diem interest charges in the payoff calculations of a Wells Fargo first mortgage when that mortgage is being refinanced with Wells. These payoffs will be net funded and will be the responsibility of the lender.
  • When a title insurance policy is delivered to the lender electronically, there is no need to also provide a paper copy.

The memo also contained a brief RESPA update indicating that despite the July 11 ruling against the CFPB by the D.C. Circuit Court of Appeals in the PHH Corp. v. CFPB case, Wells will continue to adhere to the 2015 bulletin distributed by the CFPB indicating Marketing Service Agreements are in disfavor.

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.

Lender Challenges CFPB’s Constitutionality

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On July 30, this blog discussed State Bank of Big Spring v. Lew, a case in which the U.S. Court of Appeals for the District of Columbia ruled on that day that a small Texas bank had standing to challenge the constitutionality of the Consumer Financial Protection Bureau (CFPB).

The same court was asked on August 5 by mortgage lender PHH Corporation to stay a final decision of the CFPB on constitutionality grounds.

The latter case follows the CFPB’s final decision in an enforcement action against PHH requiring the lender to pay $109 million in disgorgement. The lender was accused of illegally increasing consumers’ closing costs by requiring them to pay reinsurance premiums to PHH’s in-house reinsurance company. The CFPB classified the reinsurance payments as kickbacks.

The court granted the stay, holding PHH “satisfied the stringent requirements for a stay pending appeal.”

PHH argues the CFPB is unconstitutional because Director Richard Cordray has the sole authority to issue final decisions, rendering the CFPB’s structure to be in violation of the separation of powers doctrine. The petition states, “Never before has so much authority been consolidated in the hands of one individual, shielded from 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 System’s operating expenses, distancing him from Congress’s power to refuse funding.

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The court issued a one paragraph stay order, and it is not clear whether the motion was successful based on the constitutionality argument because PHH had also argued that Director Cordray misinterpreted settled law on mortgage reinsurance and on how disgorgements are calculated.

The stay is in place pending the appeal. It will now be interesting to see whether the Court of Appeals will reach the constitutionality issue or decide the case on the legal interpretation issues. And, of course, it will be interesting to see whether future constitutionality challenges continue with regard to this powerful agency that is changing the rules for residential closings.