Appeals Court Offers Sympathetic Ear to Argument that CFPB Structure is Unconstitutional

Yesterday federal judges heard oral arguments in the case of PHH Corporation (PHH) v. CFPB.

As insideARM reported previously, the case began in 2014 with a decision by an administrative law judge against PHH for referring its customers (mortgage borrowers) to insurers in exchange for those insurers’ agreement to buy reinsurance from a PHH subsidiary.

Based on statutes of limitations in the Real Estate Settlement Procedures Act, the judge imposed a penalty of $6.4 million. But CFPB Director Cordray determined that the fine should actually be $109 million, because the company’s profits from the activity amounted to “kickbacks,” and were ill gotten gain — and statutes of limitations do not apply to administrative penalties.

PHH sued the CFPB as a result, claiming that the authority of the CFPB, led by a single director who is unaccountable to Congress and can only be fired by the President “for cause,” is unconstitutional. In January 2016, the case moved to the D.C. federal appeals court.

According to reports by American Banker (subscription required) and the Huffington Post, the judges (Brett Kavanaugh and Raymond Randolph, both Republican appointees) were receptive to the idea that the current structure is unconstitutional, and were more forceful in their questioning of Lawrence DeMille-Wagman, the CFPB senior litigation counsel than of Theodore Olson, the lead PHH attorney.

Olson summarized his remarks by saying, “This is an unprecedented, unconstitutional agency that has more power than Congress and the President put together.”

DeMille-Wegman argued that it is not unprecedented, and cited the Social Security Administration, the Office of Special Counsel, and the Federal Housing Finance Administration as examples of agencies headed by one person with arrangements similar to the CFPB director.

Judge Kavanaugh challenged Demille-Wagman, referring to the fact that those agencies with similar power, like the Federal Trade Commission, have a multi-member leadership structure. His comments also suggested that the President should have more leeway to change the CFPB director if they don’t agree with positions being taken.

DeMille-Wagman offered a “remedy,” should the court rule against their arguments; simply strike the language “for cause” which limits the President’s power to fire the director.

For several years, many industry groups and some in Congress have called for a change in the CFPB’s leadership structure, to one that is run by commission rather than a single director. A positive ruling in the PHH case could offer tangible support to that effort.

The Huffington Post reports that “anywhere from a few weeks to a year would not be unusual for a circuit court [to rule].” The losing side can then appeal to the full appeals court, and/or go to the Supreme Court.

insideARM Perspective

There is a lot at stake for both sides. This story will likely be around for quite a while.

The obvious question, of course, is whether an unfavorable ruling for the CFPB in this case would cause a flood of law suits from companies that are the target of other past or pending enforcement actions…not to mention the industries that have been negatively affected by CFPB rulemaking.