Appeals court aids CFPB in constitutionality case, but adds a twist

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A federal appeals court agreed Thursday to scrap an earlier ruling against the Consumer Financial Protection Bureau's constitutionality, saying it will revisit the issue at a hearing on May 24, while also opening the door to discuss a new wrinkle in the case.

The U.S. Court of Appeals for the D.C. Circuit said it agreed to consider the CFPB's petition on an "en banc" basis, allowing 10 judges to revisit a decision made last year by a three-judge panel of the court. The decision effectively wiped out that ruling, which found that the CFPB's single-director structure was unconstitutional and struck down the Dodd-Frank Act's provision that a CFPB director could only be fired "for cause."

The decision was a victory for the CFPB, but the agency is far from out of the woods. Now it must convince a majority of the judges that Dodd-Frank provided appropriate checks and balances for the agency. It will also have to tackle a new, unexpected issue, according to questions asked by the appeals court in its decision Thursday.

The court wants the two sides in the case — PHH Corp. and the CFPB — to weigh in on these issues:

  • Is the single-director structure consistent with the Constitution and, if not, what is the way to solve that problem?
  • Can the court decide the case without addressing the question of constitutionality?
  • What happens if the court decides that the administrative law judge who initially decided the case is an "inferior officer" under the law rather than an "employee" of the CFPB?

While the first two questions have previously been discussed, the last one is a surprise. It means the court is preparing to take up the matter of whether agencies can appoint their own administrative law judges or whether they should be appointed by the president.

The PHH case was initially decided by Cameron Elliot, an administrative law judge who worked for the Securities and Exchange Commission. Elliot recommended an enforcement action against PHH after the CFPB alleged in 2014 that the New Jersey-based mortgage lender took illegal kickbacks in violation of the Real Estate Settlement Procedures Act.

Elliot ruled that PHH's reinsurance agreements violated Respa's prohibition on kickbacks in exchange for referrals and ordered that PHH disgorge more than $6 million in damages.

In 2015, CFPB Director Richard Cordray overruled that decision and ordered PHH to pay $109 million after expanding the scope of the allegations to date back to 2008, beyond the statute of limitations.

The case is being closely watched because it could determine Cordray's fate. Although his term does not expire until July 2018, if the decision stands, President Trump could fire him at will. Republicans have been urging Trump to fire Cordray "for cause" even without a ruling.

Consumer advocates and civil rights groups praised the D.C. Circuit's order.

"The court’s decision to hear the petition is a step in the right direction. We need a strong and independent CFPB agency and director now more than ever,” said Mike Calhoun, president of the Center for Responsible Lending.

But the victory may be short-lived. The full 10-judge court (Judge Merrick Garland recused himself) could reinstate the earlier court ruling — or go beyond it.

"It's a win at least temporarily for the CFPB," said Richard Horn, a former CFPB attorney. "This gives the bureau a very important additional time at bat."

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