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The CFPB Is Fighting for Its Life. Here's What to Know

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From the day it was born out of the Dodd-Frank reforms, the Consumer Financial Protection Bureau has faced questions over the constitutionality of its independent, single-director structure.

On Wednesday, the U.S. Court of Appeals for the D.C. Circuit will take a step toward providing an answer, as a full panel of 11 judges will hear arguments in the mortgage provider PHH Corp.’s appeal of a $109 million penalty.

PHH, represented by a team from Gibson, Dunn & Crutcher, prevailed before a divided three-judge panel, which struck down the CFPB’s structure as unconstitutional in October. Writing for the majority, Judge Brett Kavanaugh slammed the “massive, unchecked power” afforded to the CFPB director and said the president should be able to fire the agency’s leader at will — not just for cause. That ruling was vacated when the D.C. Circuit agreed to rehear the case.

“The bureau was designed to be largely immune from politics, and has governed accordingly.  The court’s decision may also determine whether that approach changes — both during this administration and beyond,” Covington & Burling partner Eric Mogilnicki said.

The Big Picture: What’s at Stake?

The CFPB isn’t going away no matter how the D.C. Circuit rules. But giving the president greater power to remove the director — a Senate-confirmed post that comes with a five-year term — does lessen the bureau’s independence.

“You can debate all the constitutional questions and get into the weeds. The reality is what it is: [Richard] Cordray is viewed as very aggressive. If he could be removed, then [President Donald] Trump could put in someone who is more open to hearing industry concerns,” said Reed Smith partner Maria Earley, a former CFPB enforcement attorney.

Cordray’s term is set to expire in July 2018. There is speculation Cordray, a Democrat, might run for governor in his home state of Ohio. Trump could move to fire Cordray before the appeals court rules — and before there’s any action in the Supreme Court — but that could kick up a big lawsuit or even give Cordray a publicity boost.

A ruling against the CFPB could also spur significant litigation — from other companies — about the propriety of earlier rulings and fines. The D.C. Circuit panel back in October expressly declined to take up that issue. “We need not here consider the legal ramifications of our decision for past CFPB rules or for past agency enforcement actions,” Kavanaugh wrote.

Who’s Arguing on Wednesday?

After winning over the three-judge panel, former Solicitor General Theodore Olson will again argue on behalf of PHH before the en banc court. Olson and CFPB attorney Lawrence DeMille-Wagman were each given 30 minutes of argument time. U.S. Department of Justice lawyer Hashim Mooppan will receive 10 minutes of argument.

Mooppan joined the Justice Department’s Office of the Solicitor General in February from Jones Day, where he had been a partner. He was appointed this month as deputy assistant attorney general for civil appellate. Mooppan was among the more than a dozen Jones Day attorneys who left the firm to join the Trump administration or executive agencies.

What’s PHH Fighting Over Anyway?

In a word, a huge penalty: $109 million. The CFPB alleged in 2014 that PHH had been engaging in an illegal kickback scheme. According to the CFPB, PHH referred borrowers to partner mortgage insurers. In exchange for the referral, the mortgage insurers purchased reinsurance from PHH.

An administrative law judge ordered PHH to pay $6.5 million in disgorgement. The administrative law judge, Cameron Elliot, limited the disgorgement to kickbacks from loans closed on or after July 21, 2008. On appeal, Cordray hiked the penalty to $109 million, ruling that PHH had violated the Real Estate Settlement Procedures Act every time it received a payment after that July 2008 date. PHH hired Gibson Dunn and took the case to the D.C. Circuit.

Where’s the Justice Department in the Dispute?

After previously defending the CFPB’s structure under the Obama administration, the Justice Department changed its tune under U.S. Attorney General Jeff Sessions.

In March, the Justice Department abandoned its defense of the agency, endorsing Kavanaugh’s view that the president should be able to fire the CFPB director at will, rather than only for cause.

Justice Department lawyers wrote that CFPB’s single-director design “lacks those critical structural attributes that have been thought to justify ‘independent’ status for multimember regulatory commissions.” The department’s new stance sets up the rare dynamic of two federal agencies squaring off in court.

What Does PHH Think of the D.C. Circuit’s proposed fix?

Not much. In April, PHH argued that Kavanaugh’s remedy of making the CFPB director fireable at will would not go far enough to make the agency constitutional. “Only the legislative branch can fix the CFPB’s structure,” PHH’s defense lawyers wrote, noting that Congress “continually emphasized the importance of establishing an ‘independent bureau,’” when it created the CFPB.

So What Does Congress Have in Mind?

In the last Congress, House Financial Services Committee chairman Jeb Hensarling proposed transforming the CFPB into a commission akin to the U.S. Securities and Exchange Commission.

But what a difference an election makes.

With a Republican now in the White House, Hensarling’s latest idea for the CFPB’s structure aligns with Kavanaugh’s proposed cure of empowering the president to readily remove the agency’s leader. His bill also calls for subjecting the CFPB to congressional appropriations, along with stripping the agency of its supervisory power and an important enforcement tool: the authority to file lawsuits over alleged “unfair, deceptive or abusive acts or practices.”

Will the Court Rule on the CFPB’s Constitutionality?

Not necessarily. In October, the three-judge panel was united in overturning the CFPB’s interpretation of the Real Estate Settlement Procedures Act, the statute at the foundation of the enforcement action. But Judge Karen LeCraft Henderson, in a dissent, said the court should not have reached the constitutionality issue of the CFPB’s leadership structure. Kavanaugh, for his part, said that “failing to decide the constitutional issue here would be impermissible judicial abdication, not judicial restraint.”

The full D.C. Circuit has left the door open to punt on the constitutional question and rule on narrower grounds. The D.C. Circuit posed three questions when it granted en banc review in February. Among them: “May the court appropriately avoid deciding that constitutional question given the panel’s ruling on the statutory issues in this case?”


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