With just a week to spare before its 45-day deadline for appeal expired, last week the Consumer Financial Protection Bureau (CFPB) petitioned the U.S. Court of Appeals for the D.C. Circuit for en banc review of the October three-judge panel decision in PHH Corp. v. CFPB. Penned by Judge Brett Kavanaugh, that ruling declared the CFPB's single-director structure unconstitutional and rejected the CFPB's interpretation of Section 8 of the Real Estate Settlement Procedures Act (RESPA). The CFPB's petition does not come as a surprise. If the D.C. Circuit agrees to rehear the constitutional and/or RESPA arguments, the three-judge panel ruling will be stayed pending the full court's decision and the CFPB will return to business as usual, at least for now.
As we wrote previously, the CFPB had issued a final ruling in 2015 that PHH Corp. (PHH) violated RESPA by doing business exclusively with mortgage insurance companies that agreed to purchase reinsurance from a wholly-owned PHH subsidiary. The CFPB concluded the reinsurance premiums constituted illegal kickbacks for PHH's referrals of the initial mortgage insurance business in violation of Section 8(a), which prohibits giving or receiving any "thing of value" in return for settlement service business. The CFPB required PHH to disgorge all of the reinsurance premiums its subsidiary received from mortgage insurers since 2008, totaling $109 million as compared to the $6 million disgorgement order from the administrative law judge.
Then, as indicated above, a three-judge panel of the D.C. Circuit overturned the CFPB's order on October 11, 2016. The panel: (1) held (by a 2-1 vote) the CFPB's single-director structure unconstitutional given the President's ability to remove the Director only "for cause;" (2) unanimously rejected the CFPB's RESPA interpretation of Section 8 and found its retroactive application of a new interpretation to violate constitutional due process; and (3) unanimously rejected the CFPB's claim that its enforcement proceedings outside of federal court are not subject to RESPA's three-year statute of limitations. The court stayed the issuance of its opinion pending the CFPB's decision whether to seek review by the full Court of Appeals. On Friday, the CFPB sought en banc review of the court's constitutional and RESPA holdings, but did not dispute the statute of limitations ruling.
The CFPB is challenging the court's decision that the CFPB is unconstitutionally structured on the premise it conflicts with two U.S. Supreme Court cases. First, it argues the decision conflicts with Humphrey's Executor v. United States (1935), which allows Congress to create independent agencies headed by Presidentially-appointed officers removable by the President only for good cause. Second, it argues the decision conflicts with Morrison v. Olson (1988), which holds that the President does not have infinite power over independent agencies, and a "for cause" provision does not impede the President's ability to perform his or her constitutional duties, since it allows the President to remove the agency head if he or she fails to meet statutory obligations. The CFPB further argues the court erred in finding that a single agency head is less accountable to the President than a commission by explaining that commission members have no power to remove each other from office. The CFPB states a single director may actually be more accountable, since there is no question whom should receive blame for any wrongdoing at the agency. The CFPB characterizes the PHH Corp. case as "what may be the most important separation-of-powers case in a generation" and criticizes the court's decision as contrary to Supreme Court precedent, not based on separation-of-powers principles, unduly restrictive of Congress' ability to respond to crises through such means as creating single-director independent agencies, and potentially damaging to other similarly structured independent agencies such as the Social Security Administration, Federal Housing Finance Agency, and Office of Special Counsel.
In addition to challenging the court's constitutional holding, the CFPB is challenging the court's RESPA ruling on the theory the judges misinterpreted RESPA in a way that fundamentally defeats the statute's purpose. The three-judge panel rejected the CFPB's position that Section 8(c)(2) of RESPA does not provide a substantive exception to the anti-kickback provision in Section 8(a) and fair market value payments for real services performed are insufficient when referrals are present. The panel found that applicable statutory and regulatory language, legislative history, and prior RESPA interpretations by the Department of Housing and Urban Development (HUD) all make clear RESPA prohibits payments for referrals but allows "bona fide" payments (i.e., payments at reasonable market value) for actual services performed. The CFPB is claiming the court interpreted Section 8(c)(2) to allow what Section 8(a) prohibits as long as kickbacks are disguised as compensation for goods or services. The CFPB charges the judges with two statutory mistakes. First, it argues that while Section 8(a) proscribes the exchange of any "thing of value" in return for referrals, the panel ignored the term "thing of value" in holding Section 8(a) proscribes only payments, and thereby ignored the fact PHH received a thing of value in the form of reinsurance premiums in return for referrals of mortgage business. Second, the CFPB argues the panel's definition of "bona fide" to mean reasonable market value conflicts with the very translation of the term as "in good faith" and with case law noting the purpose of requiring something to be bona fide is to disallow evasion. The CFPB asserts the three-judge panel decision would allow lenders to condition referrals on the purchase of goods or services in any related or unrelated business line, which flouts the core purpose of RESPA to protect consumers from unnecessarily high settlement charges caused by abusive practices, encourage evasion, and hamper the ability of both private citizens and public officials to enforce RESPA.
Lastly, the three-judge panel ruled that, even if the CFPB's RESPA interpretation were correct, it conflicts with prior HUD pronouncements and its retroactive application, therefore, violates constitutional due process. While the CFPB acknowledges the court's due process holding may be insufficient alone to justify en banc review of the three-judge panel decision, it notes a prior D.C. Circuit holding (Clark-Cowlitz Joint Operating Agency v. FERC (1987)) that an agency may reverse an interpretation and apply it to the case at hand unless there is a severe impact to the respondent and justifiable reliance on contrary agency pronouncements. The CFPB asserts PHH did not justifiably rely on prior HUD opinions and requests an opportunity to address this holding if the court rehears the RESPA arguments.
While the CFPB awaits the court's consideration of its petition, the CFPB will continue operating as an independent agency with a single director removable by the President only for cause and presumably will rely on the RESPA interpretations it espoused in the PHH Corp. case. The CFPB's petition likely will extend this case another 9 to 12 months, which will give the new Trump administration, advocacy groups, and the settlement services industry plenty of time to weigh in.
Originally published November 21, 2016
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