On its face, Tuesday’s federal appeals court decision curtailing the authority of the Consumer Financial Protection Bureau director was a blow to an agency that had become a jewel of the Dodd-Frank financial reform law.
The U.S. Court of Appeals for the D.C. Circuit found too much power—with too little oversight—was vested in the bureau’s director, Richard Cordray, a ruling that will provide fodder for Republicans who have long wanted to erase the agency itself from Washington’s regulatory landscape.
But the court’s tailored decision, with what it called a “targeted remedy,” could limit any aftershock for future enforcement. Indeed, the appeals court was insistent that the agency “will continue to operate and perform its many duties.”
What about old cases? The D.C. Circuit’s decision could entice past targets of the agency to challenge the enforcement actions. Companies might struggle on that front, however, because many enforcement actions are taken through consent orders. And revisiting past enforcement actions could also exacerbate reputational damage or further strain relations with the agency.
The D.C. Circuit expressly declined to confront how its ruling might play out. “We need not here consider the legal ramifications of our decision for past CFPB rules or for past agency enforcement actions,” Judge Brett Kavanaugh wrote. “We note, however, that this is not an uncommon situation.”
Kavanaugh identified adverse actions against the National Labor Relations Board, the Copyright Royalty Board and the Public Company Accounting Oversight Board. “Without major tumult, the agencies and courts have subsequently worked through the resulting issues regarding the legality of past rules and of past or current enforcement actions,” Kavanaugh wrote.
The remedy the court fashioned Tuesday gives the president the power to remove and supervise the CFPB director, a position that had already required U.S. Senate confirmation. The court otherwise left untouched the structure of the agency.
“If the court had ruled that the decisions of the bureau have to be made by a commission, that would cast more doubt than this ruling, which makes clear that Director Cordray can be removed by this president or the next president,” Covington & Burling partner Eric Mogilnicki said.
The CFPB said in a statement that “the bureau will continue its important work. Congress has charged the Bureau with ensuring that the markets for consumer financial products and services are fair, transparent, and competitive and with protecting consumers in these markets from unlawful practices. Today’s decision will not dampen our efforts or affect our focus on the mission of the agency.”
The CFPB’s past actions could be protected by the so-called “de facto officer doctrine,” which holds that a federal employee’s actions cannot be undone if it is later found that the employee’s government post has a legal defect, said Deepak Gupta, founding principal of the Washington boutique Gupta Wessler.
“It’s just designed to prevent chaos,” said Gupta, a former CFPB attorney.
“The agency is going to be able to continue operating as it has operated,” he said. “At least for now, this doesn’t kick the can back to Congress. It doesn’t say we’ve identified a constitutional flaw and it needs new legislation.”
$109M CFPB penalty vacated
The D.C. Circuit panel’s decision vacated a $109 million penalty against PHH Corp., a mortgage loan provider that the CFPB had charged with engaging in a kickback scheme by only referring customers to mortgage insurers that had contracts with a subsidiary, Atrium Insurance Co. The agency alleged the kickbacks took the form of insurance premiums that mortgage insurers paid to Atrium, a provider of mortgage “reinsurance” that PHH created in 1994.
Kavanaugh sided with PHH on the technical aspects of mortgage lender regulations, ruling that the company’s referral framework was legal so long as the premiums paid to Atrium did not exceed the market rate.
The CFPB will still have a chance on remand to make its case against PHH and “demonstrate that the relevant mortgage insurers in fact paid more than reasonable market value to the PHH-affiliated reinsurer for reinsurance,” Kavanaugh said.
Kavanaugh disagreed with the CFPB’s view that, under Dodd-Frank, there is no statute of limitations for violations of any consumer protection law. “First of all,” he wrote, the Dodd-Frank Act incorporates the statutes of limitations in the underlying laws enforced by the CFPB, including the three-year statute of limitations in the law at issue in the PHH case—the Real Estate Settlement Procedures Act. Kavanaugh also found that the CFPB “violated bedrock principles of due process” by departing from the Department of Housing and Urban Development’s prior regulatory interpretations.
In a prepared statement, PHH said it was “extremely gratified” and “hopeful that the Court’s opinion will provide greater certainty to the entire mortgage industry regarding the industry’s reliance on long-standing regulation as to how to conduct business consistent with RESPA.”
Ted Olson, the Gibson, Dunn & Crutcher partner who argued the case for PHH in the D.C. Circuit, said the CFPB’s structure made the agency feel it had unlimited power and “caused them to do unlawful things.”
“I think that, going back, there’s a lot of things that need to be corrected before this agency can properly go forward,” Olson told the National Law Journal. “But that might be for another day to litigate.”
The D.C. Circuit’s opinion immediate effect was primarily political.
Indeed, House Financial Services Committee Chairman Jeb Hensarling, R-Texas, was quick to seize on the ruling, saying the decision “vindicated what House Republicans have said all along, that the CFPB’s structure is unconstitutional.”
“By design the CFPB is arguably the most powerful and least accountable Washington bureaucracy in American history, and it shows,” he said.
All three judges on the D.C. Circuit panel were nominated by Republican presidents. Given the conservative nature of the three-judge panel, Gupta said the chances of the full D.C. Circuit hearing the case are “pretty high.” Democrat-appointed judges have a majority on the D.C. Circuit, even without Chief Judge Merrick Garland on the bench as he awaits a Supreme Court confirmation vote.
“I expect the government will file a petition for rehearing en banc, and I expect it will have a good chance of being granted,” Gupta said.