October 13, 2016
On October 11, 2016, the United States Court of Appeals for the D.C. Circuit issued a historic decision in PHH Corp. v. Consumer Financial Protection Bureau, No. 15-1177 (D.C. Cir. Oct. 11, 2016), holding that the structure of the Consumer Financial Protection Bureau ("CFPB") is unconstitutional. The court also held that the CFPB misinterpreted Section 8 of the Real Estate Settlement Procedures Act ("RESPA"), that the CFPB violated PHH’s due process rights by attempting to apply its new interpretation retroactively, and that administrative-enforcement proceedings at the CFPB must comply with the limitations periods in the underlying consumer-protection statutes that the CFPB enforces. Gibson Dunn was proud to secure this victory for PHH.
The CFPB was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act. Although the CFPB was originally proposed as a multi-member independent commission modeled on existing agencies like the Federal Communications Commission, Congress ultimately chose to vest the agency’s power in a single Director appointed to a five-year term. The Director was to be independent from Presidential control and therefore could be removed by the President only for "inefficiency, neglect of duty, or malfeasance in office." See 12 U.S.C. § 5491(c)(3).
In 2015, the Director, on appeal from the decision of an Administrative Law Judge, ordered PHH to pay $109 million in disgorgement for alleged violations of Section 8 of RESPA, which generally bars real estate settlement service providers from receiving fees or kickbacks in exchange for referring business to other providers. See 12 U.S.C. § 2607. According to the Director, PHH violated RESPA by selling so-called "captive reinsurance" to mortgage insurers that insured loans originated by PHH. That decision departed from past statements by the Department of Housing and Urban Development ("HUD"), which had specifically instructed providers that similar reinsurance agreements were legal under RESPA. PHH appealed to the D.C. Circuit, which granted a stay of the CFPB’s order shortly thereafter.
In a lengthy opinion written by Judge Brett Kavanaugh, the D.C. Circuit agreed with the arguments advanced by PHH nearly across the board. The opinion first held, by a vote of 2-1, that the CFPB’s structure is unconstitutional. The court noted the foundational principle that the President must be able to remove executive officers at will so that he is "’accountable to the people.’" Slip Op. 19 (citation omitted). The majority characterized Humphrey’s Executor v. United States, 295 U.S. 602 (1935), as providing an exception to this rule by allowing Congress to create independent agencies headed by groups of individuals who are removable by the President only for cause. Until now, however, Congress had never created such an agency headed by one person. Indeed, the court found, "the Director of the CFPB is the single most powerful official in the entire U.S. Government, other than the President." Id. at 27. To remedy the constitutional violation, the court severed the provision of Dodd-Frank that limits the President’s ability to remove the Director. Going forward, therefore, the Director is removable at will by the President. The court declined to address how its decision would affect existing rules or past enforcement actions. Id. at 69–70 n.19.
The court went on to decide several questions of major importance to the real estate service industry and to reinforce the fundamental principle of due process that agencies must provide fair notice of what the law requires. First, the Court squarely rejected the CFPB’s interpretation of Section 8 as prohibiting captive-reinsurance arrangements even when mortgage insurers pay market value, calling it "not a close call." Slip Op. 73. Although Section 8(a) bans payments for referrals, the court observed that Section 8(c) clarifies that "bona fide" payments for services actually performed are permissible, making the agency’s contrary reading incorrect. Slip Op. 73 (citing 12 U.S.C. § 2607(a), (c)(2)). The court held that a payment is "bona fide" if it "bears a reasonable relationship to the market value of the services performed or products provided." Id. at 74 & n.22. This holding confirms the legality of longstanding practices in the real estate industry.
Second, the court held that even if the CFPB’s interpretation of Section 8(c) were permissible, applying that interpretation to PHH violated due process. Since HUD had publicly interpreted Section 8 to allow reinsurance agreements like those entered into by PHH, the CFPB’s attempt to punish PHH for relying on that interpretation violated "Rule of Law 101." Slip Op. 86. The court invoked the "bedrock due process principle that the people should have fair notice of what conduct is prohibited." Id. at 83. The court found the CFPB’s argument that the industry could not rely on HUD’s statements "deeply unsettling" and compared the agency’s conduct to a police officer telling a pedestrian she can cross the street, and then fining her for jaywalking. Id. at 87–88. Going forward, the PHH decision provides an important reminder that an agency may not hold regulated parties liable for conduct unless they had fair notice that their conduct was illegal.
Third, the court held that the CFPB is bound by RESPA’s three-year statute of limitations for government enforcement actions, regardless whether the agency brings an action in court or in an administrative proceeding. In doing so, the court held that the Dodd-Frank Act "incorporates the statutes of limitations in the underlying statutes enforced by the CFPB." Slip Op. 12. The CFPB had argued that Dodd-Frank gave it everlasting enforcement authority, notwithstanding any limitations periods in the statutes it enforces. Thus, the D.C. Circuit’s opinion has important implications not just for enforcement actions under RESPA, but also under the other 18 consumer-protection statutes enforced by the CFPB.
Fourth, in footnotes, the court further held that the CFPB bears the burden of proving, by a preponderance of the evidence, that the mortgage insurer paid PHH "more than reasonable market value" for reinsurance and that these "were disguised payments for referrals," id. at 89 n.27. The court also held that "disgorgement" is limited to "the amount that was paid above reasonable market value," id. at 79 n.24. Thus, in future actions, the CFPB, not the regulated party, will have to carry its burden to demonstrate that captive reinsurance payments violated Section 8.
In sum, the PHH decision represents a significant victory for the real estate service industry, for other businesses that are regulated by the CFPB, and indeed for any regulated entity that faces the risk of arbitrary agency action. The decision enforces the Constitution’s structural limits on the authority that may be delegated to a single, democratically unaccountable agency official. The decision also prevents the CFPB from adopting an interpretation of RESPA that contravenes the plain meaning of the text and the industry’s widely accepted understanding of that statute, and limits the CFPB’s ability to bring enforcement actions for conduct that occurred long ago. And the decision affirms the core principle that regulated parties may not be held liable unless the government provides fair notice of the conduct it deems unlawful.
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Gibson Dunn partners Theodore B. Olson, Helgi C. Walker, and Scott P. Martin represented PHH, along with associates Theodore M. Kider, Lochlan F. Shelfer, and Matt Gregory.
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