“It’s tough to make predictions, especially about the future.” — Yogi Berra
My last bold prediction was made in 1980 when, as a 30-year-old banker speaking to a large room full of realtors, I predicted we would never again see 30-year fixed mortgage rates of 10%. (Mortgage rates were stubbornly above 15% at the time.) I was so sure I didn’t even qualify my prediction. I was absolute. I try not to do that anymore, at least not publically.
In March I posted some thoughts on a couple of cases in front of the D.C. Circuit Court of Appeals, in particular PHH Corp. v. CFPB. CFPB and the Courts. At issue was Director Richard Cordray’s order finding that PHH violated RESPA each time it accepted a kickback on or after July 21, 2008, rather than applying UDAAP’s 3-year statute of limitations. This increased the disgorgement penalty to $109 million from the $6.5 million ordered by an administrative law judge. In increasing the penalty, Mr. Cordray asserted, as he has repeatedly, that no statute of limitations applies when the CFPB enforces RESPA in an administrative proceeding rather than in the courts. PHH took issue with that position and also argued that CFPB’s structure — with a single director that could only be removed by the President “for cause” — was unconstitutional. PHH sought an order that would shut down the agency.
At the time of my March post I made some not-so-bold predictions about the impact of a win by PHH:
If Congress’ delegation of authority to the CFPB or the recess appointment of its director were deemed unconstitutional, every CFPB action would be subject to challenge. Such a result seems unlikely. Alternative possible outcomes might include court-imposed limits on the CFPB’s authority to remedy constitutional difficulties — either through interpretation of Dodd-Frank or by invalidating and severing certain of its provisions.
The D.C. Circuit Court agreed with PHH that the structure — with a single director removable only for cause — was unconstitutional and referred to it as a “gross departure” from the checks and balances normally imposed on regulatory agencies. Yet rather than taking the dramatic step of shutting down the CFPB, it severed the objectionable “for cause” language from the Dodd-Frank provision dealing with the President’s ability to fire the director. In the Court’s view, this was all that was required to place the necessary check on the agency’s power. (One of the judges dissented on this portion of the holding, saying addressing that issue was unnecessary in resolving the case.) Left untouched was the CFPB’s budgetary independence, which leaves it free of the Congressional appropriations process.
Perhaps of more immediate practical significance, the Court held that statutes of limitations do apply to the CFPB’s enforcement actions. In so holding, the Court observed that if Congress had intended to alter the standard statute of limitations scheme, the Court “would expect Congress to actually say there is no statute of limitations for CFPB administrative actions . . . But the text of Dodd-Frank says no such thing.”
The Court also rejected on several grounds CFPB’s interpretation of RESPA that — contrary to HUD interpretations — certain captive mortgage reinsurance arrangements are prohibited. In support of its holding, the Court determined that RESPA unambiguously allows the kinds of payments that the CFPB’s interpretation prohibited. Since the decision did not dismantle the CFPB, the Court remanded the case for the CFPB to determine among other things whether, within the three-year statute of limitations, the payments made by mortgage insurers to the PHH-affiliated reinsurer reflected reasonable market value.
As of this writing, the CFPB had not yet announced what it plans to do next. It may seek an en banc appeal in hopes of getting a friendlier reception from the D.C. Circuit’s full eleven-judge panel (seven of whom were appointed by Democratic presidents) rather than the 3-judge panel (all Republican appointees) that handed down the decision. Or it could appeal directly to the U.S. Supreme Court. There is not an automatic right to appeal, so either route would be discretionary within the courts.
In the meantime, Mr. Cordray will remain as Director (unless removed by this or the next President), and the CFPB’s rule makings and enforcement actions will remain in place. Appeals of the Director’s actions must still first come to him before becoming eligible for judicial review.
A reversal of the decision would return the CFPB back to its status quo, with unprecedented power over the consumer financial services industry. How likely is this to happen? I think I’ll defer to the wisdom of Yogi.
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