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PHH v. CFPB: A Blessing in Disguise for the CFPB

posted by Adam Levitin

The headlines look pretty bad:  the DC Circuit Court of Appeals held the CFPB's structure to be unconstitutional in a case call PHH v. CFPB, which deals with kickbacks in captive private mortgage reinsurance arrangements allegedly in violation of the Real Estate Settlement Procedures Act.  In fact, however, the ruling is a blessing in disguise for the CFPB. While the 110 page decision is filled with inflammatory rhetoric, it gives the CFPB's detractors very little succor in the end.  The CFPB lost on the decision's rhetoric, but won on the practical implications.  Although the CFPB’s current structure was declared unconstitutional, the court also immediately remedied the flaw by declaring that the CFPB Director is now removable by the President at will, rather than only "for cause" as provided for by the Dodd-Frank Act.  There are four critical implications from this ruling:   

  • First, the CFPB’s existing rule makings and enforcement actions remain valid and unaffected.  That's a huge win for the CFPB.  It's business as usual at the CFPB for all intents and purposes. 
  • Second, the CFPB’s Director is now under direct Presidential political control, but that doesn’t have partisan implications:  a GOP-appointed director could be removed as easily by a Democratic president as a Democratic-appointed director could be removed by a Republican president. Now the CFPB Director, instead of running on a five-year term will be on a five-year term that might get curtailed with every change in Presidential administration. That's not a particularly big deal. 
  • Third, the CFPB remains budgetarily independent.  The importance of this cannot be over-emphasized.  It means that if anyone wants to affect the CFPB's ability to function it has to be done out in the open. The agency cannot be quietly asphyxiated through the appropriations process as has happened with the SEC and FTC. 
  • And finally, the decision takes the wind out of sails of House GOP efforts to gut the CFPB by turning it into an ineffective commission structure and subjecting its budget to appropriations.  The House GOP has been attacking the CFPB as relentlessly as it has attacked Obamacare, and the DC Circuit just took away their leading argument, namely that the CFPB has to be removed wholesale because its structure is unconstitutional.  Not so said the court.  There was a very targeted surgical fix, and now the agency’s structure is kosher. Combine that with the Wells Fargo fake account scandal, which underscored the need for a strong CFPB, and the House GOP's attacks on the CFPB are standing on increasingly shaky ground. 

It's not at all clear that this DC Circuit ruling is the last word on the issue. The CFPB could ask for the DC Circuit to rehear the case en banc or petition the Supreme Court for certiorari.  Both are discretionary appeals with the courts, but I would think there'd be a very good chance of either court agreeing to hear the case.  The smart move for the CFPB would seem to be to seek en banc review, in that the particular three-judge panel in this case was an unusually conservative panel that is not representative of the DC Circuit overall.  The reason not to go directly to the Supreme Court is that if the court splits 4-4, then the lower court ruling stands.  Accordingly, it seems better to try and get a favorable ruling en banc from the DC Circuit that could then be reviewed by the Supreme Court than have an unfavorable DC Circuit panel ruling reviewed by the Supreme Court.  To be sure, there is some risk to the CFPB from appealing--it could lose with a broader remedy on appeal, but that seems very unlikely.  This is probably as bad as it gets, and as noted above, it's really not so bad. 

Where the decision actually has more sting is on a more technical issue, namely what statute of limitations applies to a CFPB administrative adjudication.  The CFPB can proceed with an enforcement action either in federal court or before a CFPB administrative law judge.  When the CFPB proceeds in federal court, it's been clear that the statute of limitations for the relevant statute at issue applies.  But the CFPB's position has been that there is no statute of limitations for administrative actions.  The DC Circuit rejected that and held that the same statute of limitations applies.  (For UDAAP actions, it is a 3 year statute of limitations.)  

It's not clear to me that this is such a favorable outcome for businesses.  If the CFPB knows that the clock is ticking, it may be more likely to bring actions or to demand tolling agreements as a condition of not bringing actions.  In other words, this decision might make the CFPB act more precipitously, which is not what a defendant wants because once litigation starts, it's hard for an agency to back off.  

The CFPB also lost on its interpretation of RESPA, specifically on the question of whether a captive private mortgage reinsurance placement at no more than fair market value is a kickback under RESPA, but this is something the agency can fix through a rulemaking, including by, potentially just prohibiting all captive reinsurance arrangements or imputing a presumption that they are not at fair market value.  (After all, what's the value of mortgage insurance to a lender if it just takes back the risk through reinsurance?  The whole game is about arbitraging regulatory capital requirements, which are lower for captive reinsurers than for banks. This is actually something that the prudential regulators should address--the OCC permitted captive mortgage reinsurance affiliations in some opinion letters in the late 1990s before Gramm-Leach-Blilely--over the objection of state insurance regulators---and it's an issue the OCC should perhaps revisit.) So all told, the headlines look bad, but this is actually a pretty good day for the CFPB.  


One sad thing about this case was the veritable rogues' gallery of industry amici, countered only by the AARP as amicus for the CFPB. You'd think that there might be a bit more pro-consumer firepower in a sexy DC Circuit case.

I did enjoy the way that Judge Kavanagh distinguished the OCC from the CFPB. He did so in a footnote (#6), introduced it with a Trumpian "some have suggested", and finished by refusing to analyze why mandatory "reasons communicated to the Senate" constitutes at-will tenure.

It's worth noting that Judge Henderson--herself a conservative--dissented on the Constitutional issue, largely on Ashwander grounds.

Any sense whether declaring it "an executive agency" will have implications for the pay scale and the other independent authorities from executive agency HR mandates? That matters a lot for banking regulator independence and competency too.

Curious: No. Unappropriated agencies, such as the CFPB, are not subject to the ordinary executive branch pay scale. Some appropriated agencies also get special allowances, such as the SEC (set to banking agencies' pay), or the NIH physicians.

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