Amanda Robert Jul. 20, 2016, 10:35am


WASHINGTON (Legal Newsline) - A highly anticipated decision from the Washington, D.C., federal appellate court in a dispute between the Consumer Financial Protection Bureau and a New Jersey mortgage company may not only affect that particular industry, but also significantly impact the actions of the federal agency, attorneys say.

On April 12, the U.S. Court of Appeals for the D.C. Circuit heard arguments from PHH Corp. in the first challenge of a CFPB administrative action. PHH told the court that the CFPB misinterpreted the Real Estate Settlement Procedures Act and also ignored a three-year statute of limitations under the law.

For the first time, the court also heard from PHH that the CFPB’s structure is unconstitutional. The CFPB – established by the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010 and tasked with overseeing the consumer financial services industry – is run by a sole director, Richard Cordray.

“This is a court that has very broad jurisdiction over an agency that is extremely powerful,” said Jon Eisenberg, a partner in the D.C. office of K&L Gates.

“And so, if this court looks at the agency and says, ‘We’re overturning your first enforcement action to reach us and we don’t think you are constitutional,’ that’s a big deal in terms of how other litigants will look at the possibility of challenging the CFPB’s actions.”

Eisenberg contends that based on reactions from D.C. Circuit judges Brett Kavanaugh and A. Raymond Randolph, who heard the arguments, that’s exactly what could happen. The D.C. Circuit is expected to rule by the fall.

“It just looked overwhelmingly that they were going to reverse,” he said. “It was more a matter of on how many grounds.”

In June 2015, Cordray ruled that PHH violated RESPA because reinsurance payments received by PHH from mortgage insurers were either not for services actually performed or they significantly exceeded the value of reinsurance services.

An administrative law judge, who previously ruled against PHH in the case, ordered the mortgage company to pay $6.4 million in disgorgement. Cordray raised that to $109 million.

Theodore Olson, a partner in the Washington, D.C., office of Gibson, Dunn & Crutcher, represented PHH in the arguments. He explained that the CFPB and the Department of Housing and Urban Development consistently construed RESPA as “authorizing the payment of fees under real estate settlement circumstances for services actually rendered, bona fide payment for services actually rendered.”

“As this Court knows, as the Supreme Court has frequently said, the due process clause requires that an individual have the opportunity to know the conduct that will be prohibited or will be permitted, what the agency did here was make an abrupt turn, a complete 180 with respect to the interpretation of the statute giving no warning whatsoever,” Olson said.

“So, the imposition of this $109,000,000 substantial penalty took place in the context of a clear rewriting of the statute, and an overturning of settled expectations.”

When Lawrence DeMille-Wagman, senior CFPB litigation counsel, argued that PHH’s problem is that the payments it received from mortgagers were not solely for reinsurance, but quid pro quo for referrals, Kavanaugh questioned how the CFPB could fault PHH for a practice that the entire industry considered legal.

“Everyone understood what the deal was, and if you want to change it going forward we can talk about the statutory issue, whether you have the authority to do that,” Kavanaugh said. “But to pull the plug, kind of change it going backwards is very problematic.”

DeMille-Wagman also argued that the Consumer Financial Protection Act authorizes the CFPB to pursue cases either in court or administratively, and in administrative actions, there is no statute of limitations.

Kavanaugh and Randolph both questioned how a federal agency could seek major sanctions without a statute of limitations.

“We can’t just think about this case, your theory would allow the agency, the director, the single director to go back decades, I’m not saying this will happen often, but this is what we have to think about, go back decades and impose major liability on someone for something that happened a long time ago, which we usually don’t see,” Kavanaugh said.

“And there is a statute of limitations, it’s 28 U.S.C. 2462 that covers it,” Randolph also pointed out. “It covers every agency in the federal government unless Congress provides otherwise, and silence has never been construed as providing otherwise.”

The judges focused a significant amount of their attention on the larger question in this case – whether the CFPB violates the U.S. Constitution’s separation of powers doctrine. Currently, the president can only remove the agency’s director “for cause.”

While Olson contended that the CFPB is an “unprecedented, unconstitutional agency that has more power than Congress and the President put together,” DeMille-Wagman argued that the CFPB’s for-cause removal provision is no different than the one that applies to the Federal Trade Commission.

Kavanaugh told DeMille-Wagman that the situation is different when it concerns a commission rather than a single person.

“The reason for the commission structure was that this is an exception or a different from the usual control the President has over the Executive Branch, and if we’re going to have that kind of structure we want it to be a group that’s going to be non-partisan or bi-partisan, you can’t have that with a single person, you’re concentrating in a single person a huge amount of power, and the President has no authority over that,” he said.

Jenny Lee, a partner in the Washington, D.C., office of Dorsey & Whitney, points out that the implications of this case depend on whether the D.C. Circuit rules for or against the CFPB on just one or all of the issues.

She says the CFPB would be more limited in its ability to pursue older claims in an administrative action if it lost its argument over the statute of limitations. However, she adds, if the CFPB doesn’t like a particular industry’s actions, it could still sue companies for recent conduct.

Lee contends that the constitutionality issue could potentially have a broader impact on the CFPB.

“It will be very interesting to see how far the court goes in terms of their solution,” she said. “The court could rule that they’re going to delete the word ‘for cause’ and allow the president to remove the director for any reason, which would be a more gradual movement.

“Or, the court could rule that Congress needs to rewrite the law setting up the agency structure. That would be a much bigger deal.”

Lee also says PHH’s case appears to have inspired an increasing number of lawsuits involving arguments that the CFPB violates the constitution.

“It’s already had a relatively large effect on encouraging companies that are either already being sued  or investigated by the CFPB to sue first and argue that the CFPB is unconstitutional,” she said.

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