Two appeals court judges raised constitutional questions Monday about the structure of the Consumer Financial Protection Bureau in the agency's case alleging that PHH Corp. accepted illegal kickbacks.
Judges with the U.S. Court of Appeals for the District of Columbia said that lawyers involved in the case should be prepared to answer several constitutional questions at the next hearing, including: "What independent agencies now or historically have been headed by a single person?"
The judges also asked: "If an independent agency headed by a single person violates Article II [of the Constitution] … what would the appropriate remedy be?"
The appeals court is expected to hear oral arguments in the PHH case on April 12.
One of the issues that PHH raised in its appeal of a $109.2 million judgment by the CFPB last year is whether the structure of the bureau violates the Constitution's separation of powers doctrine.
PHH's "argument is that the president would not have the ability under the constitution to remove the director," said Richard Horn, a former senior counsel and special adviser at the CFPB who now runs his own law firm.
"There is an inherent conflict between the statute that created the CFPB, which allows its director to removed only "for cause," and Article II of the Constitution, in which the president can remove any executive officer without delay, Horn said.
"It looks like the court is taking a narrow view and determining whether to strike the 'for cause' provision of the statute," Horn said.
The CFPB declined to comment. PHH could not immediately be reached for comment, and lawyers for the mortgage bank in Mount Laurel, N.J., did not return calls seeking comment.
Last June, CFPB Director Richard Cordray overruled the recommendation of an administrative law judge that said PHH should disgorge $6.4 million for its involvement in a scheme that allegedly violated the Real Estate Settlement and Procedures Act. Cordray expanded the scope of the allegations, ordering the firm to instead pay more than $100 million. Lawyers had expected arguments in the case to focus on the statute of limitations and Section 8 provisions of the Real Estate and Settlement Procedures Act.
Instead, the judge's questions renew questions about the bureau's structure.
"This order makes it clear the court is giving very serious consideration to the constitutional concerns around the bureau's structure, and they are considering what to do if they in fact find it to be unconstitutional," said Joe Rodriguez, who formerly worked in the CFPB's fair-lending group and is now of counsel at Morrison & Foerster.
The questions allow for a wide range of outcomes depending on what the court decides.
"The court could do something as easy and simple as removing 'for cause' provision, which makes [CFPB Director Richard] Cordray or any future director removable for any reason," Rodriguez said. "That would be the easiest and cleanest way to deal with this if they find it is a violation."
Alternatively, the appeals court could find all actions of the agency are unconstitutional, at which point the CFPB would presumably appeal the case to the Supreme Court.
The three judges on the panel hearing PHH's appeal were all appointed by Republicans. Many GOP lawmakers have protested the CFPB's structure, arguing it should be headed by a five-person commission rather than a single director. (Other independent regulators — notably the Office of the Comptroller of the Currency — are led by a single director, while the Federal Reserve Board and Federal Deposit Insurance Corp. have multi-person boards of director.)
The questions were asked by Brett Michael Kavanaugh, a protégé of Kenneth Starr, who was nominated to the D.C. Court by President George W. Bush in 2003, and by Karen LeCraft Henderson, who was appointed to the court of appeals by President George H.W. Bush.
The third judge, Circuit Judge Arthur Raymond Randolph, was nominated to the court in 1990 by President George H.W. Bush.
Last July, the D.C. Circuit court unexpectedly reopened State National Bank of Big Spring's case against the CFPB, concluding the Texas community bank has legal standing to sue despite the fact that it is not directly supervised by the agency.
The court said the $340.5 million-asset bank's claims that the CFPB should be run by a commission rather than a single director and that Cordray was improperly appointed during a Congressional recess could move forward.