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PHH will not seek to appeal the January 31 decision by the U.S. Court of Appeals for the D.C. Circuit, which upheld the CFPB’s constitutionality in a 7-3 decision. (Covered by a Buckley Sandler Special Alert.) The Supreme Court requires petitions for writ of certiorari to be filed within 90 days of the decision, which would have put PHH’s deadline around May 1. According to reports, a PHH spokesperson confirmed the company did not file the petition but declined to provide further comment.
As previously covered by InfoBytes, the U.S. Court of Appeals for the 5th Circuit recently agreed to hear a similar challenge to the constitutionality of the CFPB’s single-director structure by two Mississippi-based payday loan and check cashing companies.
On April 24, the U.S. Court of Appeals for the 5th Circuit agreed to hear a challenge by two Mississippi-based payday loan and check cashing companies to the constitutionality of the CFPB’s single-director structure. The CFPB filed a complaint against the two companies in May 2016 alleging violations of the Consumer Financial Protection Act for practices related to the companies’ check cashing and payday lending services, previously covered by InfoBytes here. The district court denied the companies’ motion for judgment on the pleadings, rejecting their arguments that the structure of the CFPB is unconstitutional and that the CFPB’s claims violate due process. However, the district court granted the companies’ motion to certify an interlocutory appeal as to the question of the constitutionality of the CFPB’s structure, referencing the D.C. Circuit’s decision in PHH Corp. v. CFPB, (covered by a Buckley Sandler Special Alert here), and noting the “substantial ground for difference of opinion as to this issue as exhibited by the differences of opinion amongst the jurists in the [D.C. Circuit] who have considered this issue.” The district court emphasized that the question is a “controlling question of law” that the 5th Circuit has yet to decide and, if the CFPB were determined to be an unconstitutional entity, this would materially advance the underlying action’s termination. A panel of the 5th Circuit has now granted the companies’ motion for leave to appeal from the interlocutory order on the issue of the constitutionality of the CFPB’s structure.
CFPB Succession: Mulvaney pleads for Congress to restructure the CFPB; oral arguments held in English litigation
On April 11 and 12, acting Director of the CFPB, Mick Mulvaney, testified before the House Financial Services Committee and the Senate Banking Committee regarding the Bureau’s semi-annual report to Congress. (Previously covered by InfoBytes here). Mulvaney’s prepared testimony, which was submitted to both committees, covers the salient points of the semi-annual report but also includes the same request to Congress that he made in the report: change the law “in order to establish meaningful accountability for the Bureau.” This request, which includes four specific changes (such as, subjecting the Bureau to the Congressional appropriations process and creating an independent Inspector General for the Bureau), was the focus of many of Mulvaney’s responses to questions posed by members of each committee. Specifically, during the House Financial Services hearing, Mulvaney encouraged the members of the committee to include the CFPB restructure in negotiations with the Senate regarding the bipartisan regulatory reform bill, S.2155, which passed the Senate last month. (Previously covered by InfoBytes here).
Mulvaney also fielded many questions regarding the Bureau’s announcement that it plans to reconsider the final rule addressing payday loans, vehicle title loans, and certain other extensions of credit (Rule); however, his responses gave little indication of what the Bureau’s specific plans for the Rule are. As previously covered by InfoBytes, resolutions have been introduced in the House and the Senate to overturn the rule under the Congressional Review Act. Additionally, on April 9, two payday loan trade groups filed a lawsuit in the U.S. District Court for the Western District of Texas asking the court to set aside the Rule because, among other reasons, the CFPB is unconstitutional and the Bureau’s rulemaking failed to comply with the Administrative Procedure Act. The complaint alleges that the Rule is “outside the Bureau's constitutional and statutory authority, as well as unnecessary, arbitrary, capricious, overreaching, procedurally improper and substantially harmful to lenders and borrowers alike.” The complaint also argues that the rule is a product of an agency that violates the Constitution’s separation of powers due to the Bureau’s structure of a single director who may only be removed by the president “for cause.” A similar argument in CFPB v. PHH Corporation was recently rejected by the U.S. Court of Appeals for the D.C. Circuit (covered by a Buckley Sandler Special Alert).
Additionally, on April 12, the U.S. Court of Appeals for the D.C. Circuit heard oral arguments in English v. Trump. In this suit, Leandra English, the current deputy director of the CFPB, challenges Mulvaney’s appointment as acting director. Unlike previous arguments, which focused on the president’s authority to appoint Mulvaney under the Federal Vacancies Reform Act (FVRA), the court spent considerable time discussing Mulvaney’s concurrent role as head of the Office of Management and Budget (OMB), and whether that dual role is inconsistent with the independent structure of the Bureau, as established by the Dodd-Frank Act.
Buckley Sandler Special Alert: D.C. Circuit upholds CFPB’s constitutionality but rejects its interpretation of RESPA
On January 31, the U.S. Court of Appeals for the D.C. Circuit issued its long-awaited en banc decision in CFPB v. PHH Corporation. In a 7-3 decision, the court concluded that the CFPB’s single-director structure is constitutional, even though the president can only remove the director for cause. Importantly, however, the court also reinstated the portion of t he October 2016 panel opinion concluding that the CFPB misinterpreted the Real Estate Settlement Procedures Act (RESPA) and its statute of limitations. As a result, the $109 million penalty imposed on PHH is vacated and the case will go back to the CFPB, where new leadership must decide whether to pursue the action. PHH has 90 days to seek review by the Supreme Court.
Ten judges issued seven separate opinions in this case, totaling 250 pages. The following is a summary of the key holdings.
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If you have questions about the decision or other related issues, please visit our Consumer Financial Protection Bureau practice page, or contact a Buckley Sandler attorney with whom you have worked in the past.
On January 10, Judge Timothy Kelley denied CFPB Deputy Director Leandra English’s request for a preliminary injunction to prevent OMB Director Mick Mulvaney from serving as the acting director of the CFPB. In his opinion, Judge Kelley emphasized that English failed to show a likelihood of success on the merits because, among other reasons, “[t]he best reading of the two statutes [at issue] is that Dodd-Frank requires that the Deputy Director ‘shall’ serve as acting Director, but that under the [Federal Vacancies Reform Act] the President ‘may’ override that default rule.” Additionally, in finding that English failed to demonstrate irreparable harm, Judge Kelley stated that “[t]he CFPB is not and will not be shuttered; it continues to operate with Mulvaney functioning as acting director” with “the backing of the CFPB’s General Counsel and senior management.” He concluded his opinion by stating:
There is little question that there is a public interest in clarity here, but it is hard to see how granting English an injunction would bring about more of it…. The President has designated Mulvaney the CFPB’s acting Director, the CFPB has recognized him as the acting Director, and it is operating with him as the acting Director. Granting English an injunction would not bring about more clarity; it would only serve to muddy the waters.
The decision follows a hearing on December 22, 2017, where Judge Kelley heard arguments from both parties, as previously covered by InfoBytes. While English’s requests have now been denied twice, as expected, she has filed an appeal to the U.S. Court of Appeals for the D.C. Circuit, which is also currently considering the challenge to the CFPB’s constitutionality by PHH Corporation.
In addition to the English litigation, Mulvaney and President Trump face similar arguments in a complaint brought by a credit union in the U.S. District Court for the Southern District of New York, as previously covered by InfoBytes here. On December 22, 2017, the defendants responded to the complaint with a motion to dismiss, arguing that the credit union does not have standing to sue, will not succeed on the merits, and will not suffer irreparable harm from the appointment. In its reply, the credit union added an additional argument that the CFPB’s decision to slow HMDA enforcement will remove the compliance incentive and HMDA data “will cease being reliable” to show compliance with the Community Reinvestment Act (“CRA”). The credit union asserts that banks deposit at their institution to meet CRA objectives but may cease to do so without an incentive to comply with HMDA. A hearing is scheduled for January 12.
As previously covered by InfoBytes, the CFPB issued a statement that supervisory examinations of 2018 HMDA data will be “diagnostic” to help “identify compliance weaknesses, and will credit good-faith compliance efforts” and that it does not intend to impose penalties with respect to errors reported in the 2018 data.
On September 29, the U.S. Chamber of Commerce (Chamber) and other financial industry groups joined together to file a lawsuit in a Texas District Court against the CFPB over the constitutionality and legality of the Bureau’s arbitration rule (rule). The complaint alleges four reasons why the rule is invalid and should be set aside:
- the rule is a product of the unconstitutional structure of the CFPB – as covered in a previous InfoBytes, a similar argument is being heard in the U.S. Court of Appeals for the D.C. Circuit in the case brought by PHH;
- the CFPB failed to follow procedures in the Administrative Procedures Act (APA) in adopting the conclusions of a flawed arbitration study. Specifically, the complaint alleges that the study improperly limited public participation, applied flawed methodologies, misunderstood relevant data, and did not address key considerations;
- the rule is a model of arbitrary and capricious agency action because it fails to take into account important aspects of the problem it is attempting to address and runs counter to the record before the Bureau; and
- the rule is a violation of the Dodd Frank Act because it fails to advance the public interest or consumer welfare.
Currently, the rule is also under scrutiny by Congress. As previously discussed in InfoBytes, the House passed a disapproval resolution, under the Congressional Review Act, to repeal the rule. A similar measure is set for discussion in the Senate.
Buckley Sandler will follow up with a more detailed summary of the lawsuit.
On August 4, a federal judge in the U.S. District Court for the Middle District of Pennsylvania denied a motion to dismiss brought by a student loan servicer, ruling that the CFPB is constitutional, and that it has the authority to act against companies without first adopting the rules used to define a specific practice as unfair, deceptive, or abusive. Further, the court found that the Bureau’s complaint is “adequately pleaded.” As previously reported in InfoBytes, the CFPB filed a complaint in January of this year, contending that the student loan servicer systematically created obstacles to repayment and cheated many borrowers out of their rights to lower repayments, causing them to pay much more than they had to for their loans.
Citing numerous precedents, including several which have already examined the issue of the CFPB’s constitutionality, the court disposed of several arguments raised by the student loan servicer, finding that:
- There is no merit in the argument that the “CFPB lack[ed] statutory authority to bring an enforcement action without first engaging in rulemaking to declare a specific act or practice unfair, deceptive, or abusive,” because under the provisions of Title X of Dodd-Frank, the CFPB has the authority to declare something as “unlawful” both through rulemaking and litigation.
- The CFPB isn’t outside the bounds of the Constitution, in part because its provision making it difficult for the President to remove the CFPB’s director isn’t any more burdensome than those of other agencies, such as the FTC. By recognizing this, and that the CFPB director “is not insulated by a second layer of tenure and is removable directly by the President,” the court ruled that the “Bureau’s structure is not constitutionally deficient.”
- The funding method utilized by the Bureau has parallels in other federal agencies and does not affect presidential authority, stating that “although the CFPB is funded outside of the appropriations process, Congress has not relinquished all control over the agency’s funding because it remains free to change how the Bureau is funded at any time.” The court therefore found that the President’s constitutional powers have not been curtailed.
The court dismissed the student loan servicer’s assertion that it is unable to “reasonably prepare a response” due to the vague and ambiguous nature of the complaint. Rather, the court argues that the Bureau’s complaint provides enough “multiple specific examples” to warrant a response by way of an answer.
On July 13, a federal judge in the U.S. District Court for the Western District of Kentucky issued an opinion holding that a safe harbor provision for affiliated business arrangements under Section 8(c)(4) of RESPA protects a Louisville law firm's relationship with a string of now-closed title insurance agencies. (See CFPB v. Borders and Borders, Plc, No. 3:13-cv-01047-CRS-DW (W.D. Ky. July 13, 2017)). In 2013, the CFPB alleged the firm violated RESPA by paying kickbacks for real estate settlement referrals through a network of joint ventures with the principals of nine title insurance companies. (See previous InfoBytes summary here.) The judge granted the firm’s motion for summary judgment on only one safe harbor question, stating that the firm’s agreements with the title insurance agencies qualified as “affiliated business arrangements” because it “disclosed the relationship…, the customers could reject the referral, and the Bureau failed to show that the [title insurance companies] received anything of value beyond their ownership interests.”
The judge rejected the firm's claim that the CFPB cannot seek disgorgement as a remedy and further declined to address the firm’s ultra vires argument that the CFPB is an unconstitutional agency and therefore lacks legal authority to bring suit, stating that the en banc decision in PHH Corp. v. CFPB has not yet been issued.
Notably, however, the judge appeared to suggest that case could be appealed because the firm’s other arguments fail to qualify for RESPA safe harbors under Sections 8(c)(1) and 8(c)(2).
On June 13, PHH Corporation sent a letter to the U.S. Court of Appeals for the District of Columbia Circuit responding to a June 7 letter from the CFPB that stated RESPA’s three-year statute of limitations is not applicable in its enforcement action against the company. In its letter, the CFPB cited a decision in Kokesh v. SEC where the U.S. Supreme Court ruled that a five-year limit applies to civil penalties, and that, furthermore, “[d]isgorgement in the securities-enforcement context is a ‘penalty’ within the meaning of §2462, and so disgorgement actions must be commenced within five years of the date the claim accrues.” The Bureau further supported its argument for a five-year limit by claiming that RESPA’s three-year statute of limitations provision applies only to “actions” brought in a “United States district court or any other court of competent jurisdiction,” and its administrative proceeding against the company for alleged mortgage kickbacks was not an “action” under RESPA.
In response, PHH countered that Section 2462 contains a “catch-all limitations period ‘[e]xcept as otherwise provided’ by Congress.” Thus, the D.C. Circuit panel was correct when it held that Congress “otherwise provided” a three-year statute of limitations under RESPA that applies to enforcement proceedings because in the “second part of Section 2614, the term ‘actions’ is not limited to actions brought in court.” PHH further asserts that Dodd-Frank “repeatedly uses the term ‘action’ to encompass court actions and administrative proceedings.”
As previously covered in InfoBytes, on May 24, the D.C. Circuit, sitting en banc, heard oral arguments on the constitutionality of the CFPB. It did not indicate that it was inclined to revisit the panel’s determination that the Bureau misinterpreted RESPA when applying it to PHH’s practices.
On May 24, the en banc U.S. Court of Appeals for the D.C. Circuit heard oral arguments in the matter of PHH Corp. v. CFPB. The parties and the Department of Justice generally presented their arguments as expected based on their briefs. However, questions from some members of the court indicated doubts about the conclusion by a panel of the court in October 2016 that the CFPB’s structure was unconstitutional. In particular, multiple members of the court repeatedly pressed PHH’s counsel on whether prior Supreme Court decisions upholding the constitutionality of the Federal Trade Commission and other independent agencies led by presidential appointees who could only be removed “for cause” prevented the D.C. Circuit from concluding that the president lacked sufficient authority over the CFPB’s Director.
Notably, however, in response to statements by PHH that current CFPB Director Richard Cordray could remain in his position after the expiration of his term in July 2018 until a successor was confirmed by the Senate, the CFPB’s counsel stated that, in the Bureau’s view, the “for cause” removal limitation no longer applied once the Director’s term expired, and the president could then remove the Director “at will.”
In contrast to the constitutional issue, the questioning on other aspects of the case was minimal and did not indicate that the en banc court was inclined to revisit the panel’s determination that the CFPB misinterpreted the Real Estate Settlement Procedures Act (RESPA) when applying it to PHH’s practices, violated due process by failing to give PHH proper notice of its interpretation, and improperly failed to apply RESPA’s statute of limitations in its administrative proceedings.
At the direction of the en banc court, the oral arguments in PHH followed those in Lucia v. SEC, a case addressing whether the SEC’s administrative law judges (ALJs) violate the appointments clause of the U.S. Constitution. Although this issue was not discussed during the PHH oral arguments, the CFPB originally brought its claims against PHH before an ALJ borrowed from the SEC and the court had previously suggested that a finding that the SEC ALJs were improperly appointed could also justify reversal of the CFPB’s decision against PHH. (See previous Special Alert here.)
A decision from the en banc court is not expected for months. Importantly, while questioning during oral argument is often used as a barometer of the potential outcome of a case, the questions asked by a judge do not necessarily indicate how that judge will vote on a particular issue. Judges often use oral argument to see how the parties and their colleagues will respond to hypotheticals, rather than to share their views of the case.
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