The U.S. Court of Appeals for the D.C. Circuit yesterday issued its opinion in the PHH Corp. v. CFPB case, finding that the provision of Dodd-Frank making the CFPB Director removable only “for cause” unconstitutional, and rejecting the CFPB’s interpretation of RESPA, stating unequivocally that “The basic statutory question in this case is not a close call.”
In a 110 page opinion, the Court determined that the power centralized in the CFPB Director, with little accountability to anyone because of his removal only for cause, created a fundamental violation of separation of powers and threatened individual liberty: “The CFPB’s concentration of enormous executive power in a single, unaccountable, unchecked Director not only departs from settled historical practice, but also poses a far greater risk of arbitrary decision making and abuse of power, and a far greater threat to individual liberty, than does a multi-member independent agency.” While the Court found the “for cause” provision unconstitutional, the Court deemed the remedy for this defect was striking the provision, thus allowing the CFPB to continue its operations.
And the Court found the CFPB’s interpretation of RESPA’s requirements, in particular its interpretation of Section 8(c)(2), to be contrary to the statutory language as well as the regulatory language of Regulation X. In discussing the statutory language of Section 8(c)(2), which provides that “Nothing in this section shall be construed as prohibiting” the “payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed,” the Court made clear its position: “Nothing means nothing.” The Court went on to say that “Section 8(c) specifically bars the aggressive interpretation of Section 8(a) advanced by the CFPB in this case.”
The Court found that the statutory language proscribes only payment for referrals, and does not proscribe other transactions occurring between settlement service providers. The Court did emphasize, however, that the payment made for such services under Section 8(c)(2)’s exemption of liability should be the reasonable market value, as set forth in Regulation X. In fact, the Court held that as long as the payments under the contract bear a reasonable relationship to the fair market value of the services that the payments are for, any “tying” of that contract to a referral of settlement service business is not prohibited by RESPA. In so doing, the D.C. Circuit has joined the 9th Circuit in rejecting this argument from the CFPB.
Further, the Court found that PHH reasonably and justifiably relied upon HUD’s pronouncements on captive reinsurance arrangements, and the CFPB’s “about face” on this issue violated fundamental tenets of due process. The Court likened this to a police officer instructing a citizen to cross the street, and then immediately issuing that citizen a $1,000 citation for jaywalking upon the citizen reaching the other side.
The Court further rejected the CFPB’s position that Section 8(c)(2) constituted an affirmative defense for which PHH bore the burden of proof, instead requiring the CFPB to meet its burden of proving that the reinsurance at issue in the case was not properly priced as an element of its affirmative case. Similarly, the Court rejected the CFPB’s position that it could order “disgorgement” of reinsurance premiums as a whole, holding instead that even if disgorgement were appropriate, which it did not rule on, the correct measure would be the amount (if any) by which the insurance premiums exceeded the fair market value of the reinsurance.
Finally, the Court rejected the CFPB’s attempt to avoid RESPA’s three-year statute of limitations, holding that the limitations period is fully applicable to administrative enforcement actions, and not only in court. Notably, the logic of this ruling on statutes of limitations should apply to all statutes the CFPB has authority over, not just RESPA. The Court did not reach the question of when the statute of limitations begins to run with respect to RESPA, leaving that question for the CFPB to determine on remand.
WBK will provide further analysis of this important opinion in the weeks to come.