Appeals Court Hears CFPB Leadership Structure Case

PHH Corp. v. Consumer Financial Protection Bureau originated two years ago when the CFPB said nonbank mortgage lender PHH violated the Real Estate Settlement Procedure Act (RESPA) by participating in an alleged mortgage insurance kickback scheme for more than a decade. New Jersey-based PHH had sued the CFPB after the agency’s director, Richard Cordray, issued an order against the firm for $109 million for the alleged scheme. As part of the suit, PHH argued that the agency's single-director structure and its funding outside of congressional appropriations were unconstitutional.

"This is a novel structure with very few precursors that I found - very few even historical" precursors, Judge Brett Kavanaugh, one of three judges considering the case, said during oral arguments on Tuesday. "If you have that kind of structure, you want it to be a group of nonpartisan or bipartisan commissioners."

PHH had contested the CFPB’s claims that it violated the anti-kickback provisions of RESPA but an administrative law judge ruled in favor of the CFPB in November 2014. The judge ordered the mortgage lender to pay more than $6 million in damages. PHH also contested an increase in its original fine for allegedly violating RESPA. Last June, Cordray increased the amount to $109 million based on his decision that the company was liable for violating RESPA every time it accepted a kickback payment on or after July 21, 2008. On Tuesday, regarding the CFPB’s structure, Lawrence Demille-Wagman, a senior litigation counsel for the CFPB, argued that Congress had endowed different executive agencies with a variety of structures - ranging from bipartisan commissions like the Securities and Exchange Commission and the Commodity Futures Trading Commission to executive agencies like the Office of the Comptroller of the Currency and the Social Security Administration.Judge Kavanaugh on Tuesday appeared supportive during oral arguments of the CFPB's claims that many agencies receive funding outside of Congress.

"On that issue, you're right," Kavanaugh told Demille-Wagman. "On the single-headed agency, not so much."

That was a bad sign for a case that could have critical implications for the CFPB.

Theodore Olson, the former solicitor general who appeared on behalf of PHH, claimed during his oral arguments that the CFPB's vesting of executive authority within a single director - as opposed to a multimember commission - is unconstitutional because it gives that single director unilateral authority to bring administrative enforcement actions.

Olson argued that because the Dodd-Frank Act, which created the agency, makes it independently funded by the Federal Reserve and only allows the director to be dismissed "for cause" — as opposed to serving at the pleasure of the president — the CFPB is effectively unaccountable to either Congress or the president. 

Olson complained that Cordray's judgment effectively reversed longstanding administrative precedent by the Department of Housing and Urban Development, which enforced Respa before the CFPB was created in 2011, and in so doing retroactively changed the rules.

"Individuals should have the opportunity to know the conduct … that will be permitted and what will be prohibited," Olson said. "The imposition of a $109 million substantial penalty took place in the context of a clear rewriting of the statute."