Dissent in CFPB Case Foreshadows Lengthy Legal Battle

A federal appeals court has set aside a massive fine against mortgage lender PHH Corporation and declared that the Consumer Financial Protection Bureau (CFPB), which levied the fine, is unconstitutionally structured.  However, the ruling, which came down on Tuesday, is unlikely to affect operations of the agency.  PHH had asked in its lawsuit that the agency be dismantled.

The U.S. Court of Appeals for the District of Columbia, ruled that the structure of the agency violates the Constitution's separation of powers because too much power is vested in the hands of its director (currently Richard Cordray).  This deficiency could be corrected, the court said, by giving the president power to oversee the agency and remove its director. The CFPB can continue functioning, but must restructure how it runs within the executive branch. "The CFPB therefore will continue to operate and to perform its many duties, but will do so as an executive agency akin to other executive agencies headed by a single person, such as the Department of Justice and the Department of the Treasury."

Judge Brett Kavanaugh, who wrote the decision regarding the courts 2-1 ruling said, "The director of the CFPB possesses more unilateral authority - that is, authority to take action on one's own, subject to no check - than any single commissioner or board member in any other independent agency in the U.S. government. The CFPB's concentration of enormous executive power in a single, unaccountable, unchecked director not only departs from settled historical practice, but also poses a far greater risk of arbitrary decision-making and abuse of power, and a far greater threat to individual liberty, than does a multi-member independent agency."

The court decision also invalidated the $109 million penalty CFPB levied against PHH.  The New Jersey mortgage servicing company was originally fined $6.4 million by the Department of Housing and Urban Development for referring customers to insurers who then bought reinsurance from one of PHH's subsidiaries but subsequently RESPA enforcement, the justification for the fine was transferred to CFPB.  In June Cordray greatly increased the penalty prompting PHH's lawsuit.

However, the partial dissent, writing by Judge Karen Henderson, implies that Kavanaugh's constitutional ruling was gratuitous and beyond the reach of the suit.  According to Allison Frankle, writing for Reuters, Judge Henderson agreed with the invalidation of the monetary penalty but said that should have been the beginning and the end of the appellate court's consideration of PHH's case.

"We recognize 'a well-established principle governing the prudent exercise of this court's jurisdiction that normally the court will not decide a constitutional question if there is some other ground upon which to dispose of the case,'" Henderson wrote. "I believe prudential considerations counsel against our reaching out to invalidate the for cause removal provision."  In all likelihood, this dissenting opinion will be at the heart of a lengthy legal battle to determine the ultimate structure of the bureau.

Kavanagh wrote that they had no choice, as PHH had asked for dismantling the agency, but to address the constitutional issue. "In our view, failing to decide the constitutional issue here would be impermissible judicial abdication, not judicial restraint." He also said the court was showing judicial restraint by not insisting the CFPB be converted into a multi-commissioner independent agency, which would require the CFPB to shut down temporarily while the court created new offices and lawmakers filled them.

The Mortgage Bankers Association, speaking through its President and CEO David H. Stevens, said it was "gratified that the court has issued an extremely thoughtful opinion."  Stevens said the ruling addresses all of the key issues raised in PHH's lawsuit "including the proper interpretation of the Real Estate Settlement Procedures Act (RESPA), the need for due process including reasonable statutes of limitations and the very constitutionality of the CFPB itself." 

"All that said," Stevens continues, "we recognize that the CFPB does important work to protect consumers and that this case is far from settled and expect the Government to continue to litigate it.  We will continue to fight on behalf of our members, particularly on the RESPA and due process issues, as they go to the heart of a core argument that MBA has been making for several years now - that lenders need clear, consistent and reasonable interpretations of the rules in order to be able to best serve their borrowers and contribute to a smoothly functioning real estate market."

PHH said in an email it was also "gratified" by the decision. "We are hopeful that the Court's opinion will provide greater certainty to the entire mortgage industry regarding the industry's reliance on long-standing regulation as to how to conduct business."

Not surprisingly the CFPB had the opposite reaction and said it was reviewing its options and that its work will continue. "Congress has charged the bureau with ensuring that the markets for consumer financial products and services are fair, transparent, and competitive and with protecting consumers in these markets from unlawful practices," the bureau emailed. "Today's decision will not dampen our efforts or affect our focus on the mission of the agency."

CFPB was established by the Dodd Frank Wall Street Reform and Consumer Protection Act and while its director is appointed by the president and confirmed by the Senate it is funded through the Federal Reserve in an attempt to allow it to operating free from politics. This funding mechanism has been a bone of contention, especially for congressional Republicans and they have proposed legislation to give Congress authority over the bureau's budget.