Court Invalidates CFPB As Structured, Interprets RESPA

120817054748-richard-cordray-tablet-large“[O]ther than the President, the Director of the CFPB is the single most powerful official in the entire United States Government, at least when measured in terms of unilateral power.” Addressing that major concern, the U.S. Court of Appeals for the District of Columbia has ruled that the Consumer Finance Protection Bureau (CFPB) as structured is unconstitutional, and it has given guidance as to the application of the Real Estate Settlement Procedures Act. In doing so, the Court set aside a $109 Million fine levied against mortgage lender PHH and placed restrictions on the authority of the Director in the future.

The U.S. Constitution places the Executive power in the President, who is accountable to the people. While the President may grant some of his power to others, they must be accountable to him for their actions. The sole exception to this structure that has been legally allowed is when executive power has been given to a commission that has a multimember board whose members are appointed by the President but who serve independent of him and can be removed only for cause, the rationale being that those multiple members act as checks on one another in exercising the executive power of the commission. Such commissions include the Securities and Exchange Commission, the Federal Communications Commission, and others.

In PHH v. the CFPB, the Court explained that because the CFPB has but a single director in whom rests the power to execute 19 different laws of the U.S.—including credit card regulation, home mortgages, banking, and student loans—and the director, once appointed by the President, may be removed only for cause, the CFPB was a substantial threat to liberty and therefore was unconstitutional as structured. The Court therefore, held that the CFPB director had to be removeable by the President for any reason in order to be constitutionally permissible and struck down anything to the contrary in the Dodd-Frank Act.

At the core of the case was a $109 Million fine levied against PHH for a supposed violation of RESPA. Among other things, RESPA prevents kickbacks from being paid for the referral of business. PHH had formed Atrium Insurance Company. Certain of the mortgages originated by PHH had to be insured against losses if the borrower defaulted. Borrowers would pay a mortgage insurer the premiums for that insurance as part of their loan payments. Atrium would then provide reinsurance—that is, insurance to the mortgage insurers—to lessen their risk of loss from the mortgages in exchange for a portion of the premiums paid by the borrowers. When the Department of Housing & Urban Development (HUD) enforced RESPA, it approved this arrangement provided that the premiums received by the reinsurer were the reasonable equivalent value of the services provided. The CFPB took over the enforcement of RESPA after Dodd-Frank, however, and it decided this arrangement was a per se violation of RESPA in contravention to the previous HUD interpretation. And, the CFPB decided it could reach back and fine PHH for actions taken before the CFPB was formed, when HUD had approved the actions taken by PHH. It was on this basis that the CFPB fined PHH. PHH argued that this was unfair and was barred by the 3-year statute of limitations.

After finding that the CFPB was unconstitutional, as noted above, the Court then discussed the operation of RESPA. It ruled that the 3-year statute of limitations did apply, and it also decided that CFPB could not fine PHH for its reliance on the application of RESPA as interpreted by HUD.

Whether Congress will address the constitutional issues regarding the CFPB will have to be addressed after the election.