Mortgage lender attacks CFPB’s constitutionality at D.C. Circuit

August 5, 2015

(Reuters) – The mortgage lender PHH Corporation was understandably jolted in June, when the Consumer Financial Protection Board issued its final decision in an enforcement action accusing PHH of jacking up consumers’ closing costs by demanding that mortgage insurers buy reinsurance from PHH’s in-house reinsurance company. CFPB director Richard Cordray ruled that those re-insurance deals are effectively kickbacks to PHH and ordered the company to pay $109 million in disgorgement – $103 million more than the $6 million disgorgement recommended by Administrative Law Judge Cameron Elliot.

Facing an Aug. 5 deadline to pay up, PHH’s lawyers at Gibson Dunn & Crutcher asked the District of Columbia U.S. Circuit Court of Appeals to stay the CFPB’s final decision while the mortgage lender appealed. On Monday, the motions panel – Judges Karen Henderson, Patricia Millett and Robert Wilkins – granted PHH’s motion, finding the company had “satisfied the stringent requirements for a stay pending appeal.”

That grant could be a very troubling development for the CFPB and its supporters. PHH isn’t just challenging the agency’s interpretation and application of the Real Estate Settlement Proceedings Act. It also claims the CFPB is unconstitutional. Specifically, the mortgage company argues that because Cordray has the sole authority to issue final decisions, the CFPB’s structure violates separation-of-powers doctrine.

“The director is not answerable to the President (he is removable only for cause) or Congress (he has sole power to fund his agency from the Federal Reserve System’s operating expenses),” PHH’s stay petition said. “Never before has so much authority been consolidated in the hands of one individual shielded from the President’s control and Congress’s power of the purse.”

According to PHH, the CFPB director’s power and tenure protection runs afoul of the U.S. Supreme Court’s 2010 decision in Free Enterprise Fund v. Public Company Accounting Oversight Board, the same Supreme Court decision that has recently gotten a workout in defendants’ challenges to the Securities and Exchange Commission’s administrative proceedings. It also cites the court’s 1988 decision in Morrison v. Olson, in which the justices upheld the constitutionality of independent counsel appointed by the executive branch. (Interestingly, one of PHH’s lawyers, Theodore Olson of Gibson Dunn, brought the constitutional challenge in the Morrison case when he was under investigation by an independent counsel for congressional testimony he gave as a member of the Justice Department in the Reagan administration. Olson lost at the Supreme Court but was ultimately vindicated when the investigator cleared him and Congress let the statute expire.)

The CFPB didn’t seem very worried about PHH’s constitutional arguments in its opposition to PHH’s stay motion. It said the president’s ability to oversee the agency isn’t impeded because the CFPB is headed by one director rather than five commissioners and that the bureau’s funding is not a constitutional issue. The CFPB’s brief also noted that two other defendants have already lost challenges similar to PHH’s, last year in CFPB v. Morgan Drexen and earlier this year in CFPB v. ITT Educational Services. (Both of those decisions were from trial court judges.)

In addition, it’s not clear from the D.C. Circuit’s one-paragraph stay order that it granted PHH’s motion based on the company’s constitutional arguments. PHH also claimed that Cordray overstepped his authority by unilaterally re-interpreting what the mortgage lender said was settled law on mortgage reinsurance and on how disgorgement for violations of the Real Estate Settlement Procedures Act are calculated. It could be that the motions panel was more interested in those arguments than in the constitutional challenge.

Nevertheless, the constitutionality of the CFPB’s structure is now on track for its first review by a federal appeals court. This is going to be interesting.

I reached out to the bureau’s media representatives but did not receive a response.

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