PHH v. CFPB - Recording of the Arguments, a Webinar About Yesterday's Action, What's Next?

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PHH & CFPB drama continues

Yesterday the Court of Appeals rehearing of the CFPB/PHH case took place to determine the constitutionality of CFPB's leadership structure. Remember that in October (time flies) the initial decision by the court determined the CFPB was, in fact, unconstitutional. Yesterday's hearing was an "en banc" review, previously agreed upon in February.

Attorney Brian Levy with Katten & Temple, LLP, contributed, "I just finished listening to the entire 90+ minute oral argument in the PHH Case before the entire DC Circuit sitting en banc. Please allow me save you and your readers some time and give you a brief synopsis. 

"While the case is extremely interesting to Constitutional and Administrative law geeks like me, mortgage people mostly just care about the RESPA issues (I'm a bigger RESPA geek). I would estimate that roughly 95% of the back and forth discussion between the lawyers and the judges was about those Constitutional issues. In fact, RESPA was not even mentioned until over an hour into it and then it was mostly a rather sheepish attempt by the CFPB lawyer to support Director Cordray's ridiculous statute of limitations position. When questioned by one judge as to how industry participants might have received 'notice' of the policy shift (from how HUD interpreted RESPA's 8 (c)(2) provisions), the CFPB lawyer nonsensically said it was in the statute itself.

"That's it folks, the court then got back to the Constitutional issues until PHH's attorney, Ted Olsen, wrapped up with a plea to remember the importance of deciding the RESPA issues for the industry, highlighting how the CFPB's RESPA interpretations reflect the result of an unaccountable agency. In fact, if a mortgage professional wanted to listen any of the hearing, I would recommend just listening to the last 3 or 4 minutes of Mr. Olsen's summation. 

Based on what I heard, the Constitutional issues are a toss-up and many of the judges seemed to be campaigning for a Supreme Court resolution (so it is likely to end up there). Sorry if you were expecting any quick resolutions, but RESPA may just have to take a back seat until the broader issues can be teed up for the next round.

Benjamin K. Olson, partner with Buckley Sandler LLP, noted, "Based on the questions, some of the judges seem to be concerned that only the Supreme Court can declare the CFPB unconstitutional in this case because prior Supreme Court decisions allowed similar limitations on the President's removal authority. In contrast, the questions did not indicate much interest in reconsidering the conclusion that the CFPB misapplied RESPA when bringing claims against PHH. It is, however, always dangerous to speculate based on the questions asked during oral argument because appellate judges ask questions for all sorts of reasons. We will not know what they really think until we have a written decision, which is likely to be months from now."

The court banter prompted one industry vet to observe, "I do find it odd that a US Appeals Court would consider pushing off a question of constitutionality to the SCOTUS as disconcerting. I would think that all Federal Courts rise to the level to determine constitutionality of a federal law, that's why this went to the full court for review.

Consumer and civil rights groups chimed in on the hearing. "The hearing reaffirmed the need to keep the CFPB leadership structure intact. Since its establishment, the CFPB has proven to be highly effective in responding to unlawful, abusive practices within the financial services industry. Its ability to make consumer protection a top priority is due to its leadership structure by a single director who is insulated from undue special interests. If the 2008 financial crisis showed us anything, it's that people need an independent regulator to look after consumers and keep industry accountable. CFPB Director Richard Cordray has led the Bureau with a steady hand and worked tirelessly with his staff to return billions of dollars back to hardworking people across the country harmed by abusive financial practices. The Center for Responsible Lending will continue to support the CFPB as the agency fights to maintain its independent structure so it can carry out its mission," said Mike Calhoun, president of the Center for Responsible Lending.

"Consumers rely on a CFPB run by a strong, independent and accountable director, like Richard Cordray," said Linda Sherry, Consumer Action's Director of National Priorities. "As the only federal financial regulator with sole responsibility for consumer protection, consumers cannot afford to lose it to a watered-down, weak regulator overly influenced by industry-controlled advisers. Consumer Action supports a firm and fair CFPB as it is currently structured."

Lastly, Isaac Boltansky with Compass Point LLC clocked in with, "The tone and tenor of these oral arguments were not nearly as conclusive as the April 2016 appeals court hearing where the three-judge panel showed a clear deference to PHH's argument. Instead, the questions from the en banc panel were generally more balanced. Furthermore, the repeated references to hypotheticals and historiography gave us the distinct impression that the D.C. Circuit felt the Supreme Court needed to consider the constitutional questions. Our sense following this hearing is that the odds are slightly in the CFPB's favor on the constitutionality questions given both the court composition and the case law.

"The hearing focused almost entirely on the CFPB constitutional issues, and we assign a very low probability to PHH having to pay the CFPB's increased $109M fine. While it was fascinating to hear how different hearing participants play hypothetical chess, there was almost no discussion of the PHH-related RESPA issues, aside from a few statute of limitations questions. Given that the focus has shifted completely away from the initial RESPA issues that catalyzed the case, we continue to think PHH's ultimate liability on those RESPA issues will be the original ~$5M or less.

"We expect a decision from the D.C. Circuit in late 4Q17 or 1Q18. The next step at that point will be determined by the court's decision. If the court rules in favor of the CFPB on the constitutional questions, PHH will likely appeal to the SCOTUS and our view is that the odds favor certiorari being granted. If this case does make it to the Supreme Court, it will likely take until 2019 for a final decision. But if the court rules in favor of PHH on the constitutional questions, the CFPB would be out of options as it is unable to appeal the SCOTUS under its own authority and would instead need approval from the Attorney General, which would surely be rejected. If this scenario unfolds while Director Cordray is still in his post, he will likely be dismissed by President Trump. Our sense is that the court could rule in favor of the CFPB on the constitutionality questions while upholding the previous decision to vacate the CFPB's penalty. If this scenario unfolds, some may question the utility of PHH appealing to the Supreme Court.

The MBA is hosting a complimentary webinar on PHH vs. CFPB oral arguments today, May 25th, from 2-3PM ET. "The case deals with whether CFPB incorrectly interpreted the Real Estate Settlement Procedures Act. This webinar will provide attendees with comprehensive analysis of the opinion and discuss the likely next steps in the case. To register for the webinar, please click here."

Capital markets

The bond markets moved yesterday afternoon after the release of the minutes from the FOMC's May 2-3 policy meeting. The minutes showed that nearly all the FOMC participants agreed that the Fed should not necessarily halt all reinvestments of the Fed's balance sheet when it begins to roll off its portfolio, likely later in 2017. Put another way, the tapering of reinvestments, while starting this year, would be gradual and capped, starting at low levels. The news boosted Treasuries from the 5- to 30-year maturities. Throw in a decent 5-year note auction and bonds responded with a small rally although the probability of a June rate hike is still hovering around 80%. The price of anything lenders and borrowers care about improved about .125 - the 10-year's closing yield was 2.27%.

Frankly the Fed has done a good job telegraphing its moves. The minutes discussed the staff's briefing which stressed the need for a "gradual and predictable" approach which would use a stepped approach and only involve run off (i.e., no sales). First the monthly cap would be announced indicating how much the Fed would allow to run off each month for both treasuries and MBS with any excess proceeds above the cap being reinvested. The cap would be raised every three months over a set period until "their fully phased-in levels" are reached. Most FOMC members pointed towards 2017 being appropriate for shrinking the Fed's balance sheet with the caveat that the economy stays on track.

The bond market seems to have its eyes on the holiday weekend - it is quiet out there. This morning's Initial Jobless Claims clocked in at 234k, +1k - strong. The advanced reading on the goods trade balance showed a slight widening. Later today is a $28 billion 7-year note auction. In the early going the 10-year is yielding 2.25% and agency MBS prices are unchanged versus last night.

Jobs, products, events

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