CFPB Survives Legal Attack as Court Trims Director’s Power

The Consumer Financial Protection Bureau survived a constitutional challenge and will remain in business, though a federal appeals court took away power from its director and tossed out a $109 million penalty against a mortgage company.

The long-awaited decision was a blow to the agency, which was created in the wake of the financial crisis to regulate mortgages, credit cards and other products directed at consumers. Ever since, it’s been the subject of almost constant criticism from Republicans and the industry, most recently when it scored its highest-profile victory to date, penalizing Wells Fargo & Co. for opening accounts without clients’ knowledge.

The appellate court found the CFPB to be “unconstitutionally structured” because the autonomy vested in Director Richard Cordray -- who could only be fired by the president and for cause -- was a “gross departure from settled historical practice.” 

But the three-judge panel rejected calls to dismantle the agency, instead voiding the for-cause provision and making the director removable by the president at any time and for any reason.

“This agency was on its own,” Ted Olson, former U.S. solicitor general and the lawyer for the mortgage company, PHH Corp., said in a phone interview. “Now it will have to respond to the guidance, leadership, oversight of whoever is the president.”

In a further blow to the bureau’s authority, the court also found that the CFPB violated the mortgage company’s due process rights by reversing a long-standing interpretation of real estate law without notice and then retroactively applying its new standard to impose violations.

Considering Options

Moira Vahey, a CFPB spokeswoman, said the agency was considering its options for further review of the ruling, while remaining focused on its mission.

“The bureau respectfully disagrees with the Court’s decision,” Vahey said in an e-mailed statement. “The Bureau believes that Congress’s decision to make the director removable only for cause is consistent with Supreme Court precedent.”

The CFPB’s options include seeking reconsideration by the full complement of judges on the Washington-based court and petitioning for U.S. Supreme Court review.

U.S. Senator Elizabeth Warren, the Massachusetts Democrat who fought for formation of the bureau before being elected to Congress, predicted the ruling would be appealed and eventually overturned. Even if it stands, she said the ruling constitutes a "small, technical tweak" and doesn’t question "any other past, present or future actions of the CFPB.”

“Continued Republican efforts to transform the agency’s structure or funding should be seen for what they are: attempts fostered by big banks to cripple an agency that has already forced them to return over $11 billion to customers who have been cheated,” she said, in an e-mailed statement.

Texas congressman Jeb Hensarling, the Republican chairman of the House Financial Services Committee, had a more favorable view, calling the ruling “a good day for democracy, economic freedom, due process and the Constitution.”

“The second highest court in the land has vindicated what House Republicans have said all along, that the CFPB’s structure is unconstitutional,” he said, in an e-mailed statement.

Democratic Praise

The court action comes only a month after the CFPB drew praise from Democrats, including presidential candidate Hillary Clinton, for its role among other regulators in fining Well Fargo $185 million to resolve allegations that bank employees opened deposit and credit-card accounts without customer approval to satisfy sales goals and earn financial rewards. The bank agreed to pay $100 million of that to the CFPB.

Republicans countered that the bureau had failed to act soon enough.

In addition to reducing Cordray’s powers, the appellate court threw out a CFPB decision imposing a $109 million penalty on PHH Corp., a New Jersey mortgage-servicing company.

The agency had punished the company for referring customers to insurers who then purchased reinsurance from a PHH subsidiary. CFPB determined those payments were part of an illegal kickback scheme. PHH said the law creating the CFPB gave an unaccountable director too much authority.

PHH was accused of violating provisions of the Real Estate Settlement Procedures Act, or RESPA, a consumer-protection statute first passed in 1974, by referring borrowers to mortgage insurers that did business with Atrium Insurance Corp., PHH’s own reinsurance business.

‘Bedrock Due Process’

RESPA’s purpose, according to the government, was to eliminate kickback and referral fees that increased costs for consumers. PHH said the premiums paid to Atrium, were for a legitimate purpose. The bureau reversed long-standing industry expectations when it declared the company in violation, its lawyers told the court.

The CFPB also overrode an earlier determination that only conduct committed within the last three years could be subject to punishment, stretching the look-back time to 2008, according to the mortgage company. The bureau then used its own formula to determine the penalty against the mortgage company, boosting the original $6.4 million fine to more than $109 million.

U.S. Circuit Judge Brett Kavanaugh, who wrote the appeals court’s primary opinion, said the CFPB erred in retroactively applying the law, violating “the bedrock due process principle that the people should have fair notice of what conduct is prohibited.”

Kavanaugh referred to the CFPB’s directorship as “the single most powerful official in the entire U.S. government other than the president.” He derided the bureau’s position that it could pursue an enforcement action for an indefinite time after an alleged violation as “an absurdity.”

The case is PHH Corp. v. Consumer Financial Protection Bureau, 15-1177, U.S. Court of Appeals, District of Columbia Circuit (Washington).