by Charles D. Gullickson

As published in the Independent Community Bankers of South Dakota newsletter, March 2017 edition.  Sign up for ICBSD e-news here.

Few agencies of the federal government have generated as much controversy in recent years as the CFPB.  The very creation of the agency sparked controversy, and it has only grown since then.  Now in its sixth year of existence, has the CFPB become an example of the consequences of overreaching? Independent Community Bankers of South Dakota logo

Some of the most heated controversies sparked by the creation of CFPB surrounded how it is funded and structured.  Its funding does not go through the Congressional budgeting process but instead comes from a dedicated revenue stream from the Federal Reserve.  As for its structure, the CFPB is led by a single director, rather than a bi-partisan commission, and that director may be removed by the President only “for cause.”

An enforcement action brought by the CFPB against PHH Corporation, a home mortgage lender, is a case study in the controversies surrounding the CFPB.  In its action the CFPB alleged – and ultimately concluded – that PHH violated Section 8 of RESPA in referring borrowers to mortgage insurers who in turn obtained reinsurance from an entity controlled by PHH.  In concluding that PHH violated RESPA the CFPB reversed a longstanding HUD interpretation of Section 8 and, furthermore, concluded that in seeking damages from PHH it was not bound by a three-year statute of limitations in RESPA for enforcement actions.  The administrative law judge presiding over the case ordered PHH to pay $6.4 million in allegedly ill-gotten profits from its practices.  When PHH appealed the decision to the director of the CPFB, Richard Cordray, the result was a healthy application of salt to PHH’s wounds – Director Cordray increased the disgorgement order against PHH to $109 million.

PHH appealed the CFPB decision to the United States Court of Appeals for the District of Columbia.  In a decision handed down on October 11, 2016, the appellate court handed PHH almost a complete victory.  It ruled that the structure of the Bureau, headed by a single director who can only be removed by the President for cause, violates the U.S. Constitution.  It also ruled that CFPB violated PHH’s due process rights by retroactively applying a new interpretation of RESPA’s Section 8, thereby striking down the $109 million order entered against PHH.  Finally, the court concluded that the CFPB is bound by RESPA’s 3-year statute of limitations. [1]

The Court’s decision would have been a complete victory for PHH were it not for how the court resolved the constitutional flaw that it found in the CFPB’s structure. Instead of concluding that the CFPB should be dismantled due to that flaw (as advocated by PHH) the court simply voided that portion of the law stipulating that the CFPB’s director could only be removed “for cause.”  Having ordered that remedy, and thus making the director subject to dismissal by the President for any reason, the court concluded that the CFPB’s constitutional flaw had been fixed.

If the Court of Appeals decision in the PHH case was distressing to the CFPB and its Director, the presidential and congressional election results just four weeks later presumably were considerably more distressing to advocates of the CFPB.  Director Cordray now reports to a Republican President who can dismiss Cordray for any reason (at least as the PHH case now stands), and the Bureau faces Republican majorities in Congress.

Director Cordray’s and the CFPB’s biggest threats are now political, not legal.  Republicans in Congress, possessed of majorities in both Houses, clearly intend to make restructuring of the CFPB a priority.  As for the White House, many of the things that President Trump is doing, or being called upon to do by his base, are divisive even to some Republicans, but clipping the wings of Director Cordray and the CFPB definitely is not.

Did Congress overreach in how it structured the CFPB in 2010?  Did the CFPB overreach in the PHH case?  There may be a lesson to be learned here:  even when one has the political, legal, or administrative power to force a controversial result, if one cannot build a solid base of support for that result across a broad spectrum, one’s efforts may be in vain.

[1] In November 2016, the CFPB petitioned the United States Court of Appeals for the D.C. Circuit to grant a rehearing en banc of the Court’s decision in CFPB v. PHH Corporation.  The Court invited the Solicitor General of the United States to respond to the CFPB’s petition and similarly, permitted PHH the opportunity to respond.  PHH was further granted leave to file a supplemental response to address arguments raised by the United States in its brief, which supported the rehearing en banc.  Recently, motions to intervene in the appeal have been filed by the Democratic Attorneys General of sixteen states and the District of Columbia, two Democratic lawmakers, and several consumer advocacy groups.  PHH has filed oppositions to the motions filed by the Attorneys General and the Democratic lawmakers.  PHH has indicated it also intends to oppose the consumer advocacy groups’ motion.

Davenport, Evans, Hurwitz & Smith, LLP, located in Sioux Falls, South Dakota, is one of the state’s largest law firms. The firm’s attorneys provide business and litigation counsel to individuals and corporate clients in a variety of practice areas. For more information about Davenport Evans, visit