Appeals Court Ruling Offers Hint of Clarity on CFPB

Last week’s court ruling on the constitutionality of the Consumer Financial Protection Bureau and its practices provides a smidgeon of clarity on several complex issues, but leaves the real estate finance industry still wanting more.

The D.C. Circuit Court of Appeals handed down its ruling–or perhaps better said, rulings–this week in a long-simmering legal case, PHH Corporation et al v. Consumer Financial Protection Bureau. On one hand, the Court of Appeals upheld the constitutionality and independence of the current CFPB structure.

On the other hand, and perhaps more importantly, the Court of Appeals rejected the CFPB’s ruling-through-enforcement practices, saying the CFPB violated PHH’s due process by not providing the company clarity with its evolving interpretation of the Real Estate Settlement Procedures Act.

Mitch Kider, chairman and managing partner of Weiner Brodsky Kider, which litigated the case for PHH, called the ruling “a complete victory for PHH and the mortgage industry.” Kider told American Banker: “The court has clearly said that lenders can do business with someone that may be referring business to them as long as they are paying a reasonable, fair market value for the services rendered.”

Mortgage Bankers Association Chairman David Motley, CMB, issued a statement on behalf of the Association.

“MBA is gratified the Court recognized that the CFPB violated the law when it tried to change longstanding RESPA rules through the enforcement process rather than by issuing a new rule or guidance,” Motley said. “This decision notwithstanding, the Bureau still owes the industry clear and constructive guidance on its view of the permissibility under RESPA of arrangements like marketing services agreements. Greater regulatory clarity and consistency on this front will benefit consumers and lenders alike.”

The case originated in January 2014, after then-CFPB Director Richard Cordray took action against PHH, alleging PHH harmed consumers through a mortgage insurance kickback scheme that started as early as 1995. The CFPB imposed a $109 million civil fine, a permanent injunction to prevent future violations and victim restitution.

PHH, Mount Laurel, N.J., a nonbank mortgage lender and servicer, fired back, filing a lawsuit challenging the constitutionality of the CFPB structure and asserting that it had not received clear or current interpretations from the CFPB on RESPA. PHH further asserted the CFPB, created in 2009, had no authority to penalize it or any other financial institution for any potential RESPA violations that might have occurred beyond a three-year statute of limitations involving administrative cases.

The case took on a partisan bent on Capitol Hill, with Republicans–and as the case dragged on, the Trump Administration–supporting PHH in its challenge to the CFPB’s constitutionality and calling for tighter controls over the CFPB’s independence. Democrats argued the CFPB’s independent structure has numerous federal legal precedents and decry the Trump Administration’s efforts to “gut” the agency

The real estate finance industry, including MBA, generally supported PHH’s regulatory arguments. MBA has long-criticized the CFPB’s use of consent decrees and administrative decisions to make changes in the rules, instead of using rulemaking or published guidance.

“Enforcement actions by the CFPB have raised profound questions about how the Bureau will apply laws that were transferred to it under the Dodd-Frank Act, as well as the process that it will follow in making changes in interpretation,” MBA said in an Issue Paper ( “This has created uncertainty in the market and undue costs for consumers. MBA urges the CFPB, when implementing new rules or changing the interpretation of existing rules, to adopt clear ‘rules of the road’ through the notice and comment process, written interpretative rules, supervisory guidance and/or compliance bulletins to facilitate regulatory certainty and consistent consumer protections throughout the market.”

MBA has also called for eliminating the CFPB’s single-director leadership structure and favors a five-person commission, similar to that of the Securities and Exchange Commission and other federal agencies.

This week’s 8-3 ruling by the D.C. Court of Appeals resolves issues only temporarily. Cordray left the CFPB in November to prepare for a run for governor of Ohio. President Trump appointed Budget Director Mick Mulvaney as acting CFPB director and has prevailed over several legal challenges from Cordray’s handpicked successor, Deputy Director Leandra English, with Cordray citing authority to do so under the Dodd-Frank Act.

The Appeals Court ruling means for now, President Trump can only fire a CFPB director for cause and not at will, leaving him with little control over the agency despite Mulvaney’s daily presence. The ruling also leaves Democrats with little solace, as the CFPB’s independence remains in limbo.

Meanwhile, Mulvaney has ordered a “review” of the CFPB’s practices and issued a Request for Information about administrative adjudications. “The Bureau is seeking to better understand the benefits and impacts of its use of administrative adjudications and how its existing process may be improved,” the CFPB said in a news release.

And neither PHH nor the Trump Administration has yet indicated if they will appeal the ruling–action that could ultimately end up in the Supreme Court.