Yesterday, a federal appeals court invalidated a Consumer Financial Protection Bureau (CFPB) fine against PHH Corp. for mortgage reinsurance transactions initially deemed violations of the Real Estate Settlement Procedures Act (RESPA). The decision is a solid victory for PHH although the case remains subject to Supreme Court review.
We expected the victory for PHH on the RESPA issue while acknowledging that the underlying constitutional question in the case -- whether the single-director leadership structure of the CFPB unconstitutionally usurps the executive power of the President -- could keep the case in play all the way to the Supreme Court. Yesterday's split decision of the DC Circuit Court of Appeals, sitting en banc before all of the Court's active judges, followed the anticipated script, reinstating an initial three-judge ruling of the same court in favor of PHH (Hedgeye Potomac, Introducing Legal Catalysts, Oct. 20, 2017) (click here).
In a proceeding before the CFPB, PHH Corp. was accused of an illegal kickback scheme in violation of RESPA when mortgage insurers purchased mortgage reinsurance from an affiliated PHH entity (Atrium). An administrative law judge imposed a $6 million penalty but the Director of the CFPB (Richard Cordray served as Director at the time of this proceeding) interpreted RESPA to justify hiking the penalty to $109 million. PHH then appealed the CFPB decision to the U.S. Court of Appeals for the DC Circuit.
A three-judge panel of the Court agreed with PHH that the reinsurance transactions of its affiliate did not violate RESPA but the panel also concluded the CFPB leadership structure violated the Constitution because a single director removable for cause, but not at the will of the President, conferred a level of control and power that unduly encroached on the executive authority of the President.
Yesterday's en banc decision reinstated the three-judge decision on the RESPA issue but disagreed with the panel's constitutional ruling. Thus, on the merits of the underlying statutory penalty, PHH emerges as the clear winner. The matter will now be remanded to the CFPB where the acting director, Nick Mulvaney, could dismiss the fines and penalties, implementing the substantive decision now adopted as the view of the full DC Circuit appellate court.
The constitutional question, however, remains a high profile issue that generates significant controversy among legal scholars. If the statutory liability issue under RESPA is fully resolved, PHH is no longer in financial jeopardy and the entire case could be moot, terminating the prospect of an appeal on the constitutional issue to the Supreme Court. We note that the Trump Administration's Justice Department filed a brief supporting PHH on the constitutional question and the numerous parties filing amicus briefs in the case would like to the see the case move up to the High Court.
The acting director will determine how to proceed. But on the issue of financial liability, PHH Corp. emerges as the clear victor.
