Court Also Interprets RESPA Section 8 Anti-Kickback Provisions and Rules that the CFPB Is Subject to RESPA Statute of Limitations

RESPA issues may be the most relevant aspect of the October 11, 2016, ruling by a three-judge panel of the U.S. Court of Appeals for the D.C. Circuit in PHH Corp. v. Consumer Financial Protection Bureau, 15-1177 (D.C. Cir. Oct. 11, 2016). While the opinion’s strongly worded 2-1 holding that the CFPB is unconstitutionally structured is quite noteworthy—to say the least—further consideration by the entire D.C. Circuit seems likely. And en banc consideration could result in the panel’s opinion on the unconstitutionality of the CFPB being vacated, if the court can avoid reaching that issue at this juncture. 


In PHH v. CFPB, after the Bureau fined mortgage lender PHH Corp. $109 million for RESPA violations, PHH argued both that the CFPB did not properly apply the law and that the CFPB itself is unconstitutional because it is controlled by one director, who, in the words of the court, “alone decides what rules to issue; how to enforce, when to enforce, and against whom to enforce the law; and what sanctions and penalties to impose on violators of the law.” This director cannot be removed without cause, and is therefore “unchecked by the President, the official who is accountable to the people and who is responsible under Article II for the exercise of executive power.”

The court’s opinion first addresses constitutional issues and then turns to RESPA issues.

Constitutional Issues

Judge Brett Kavanaugh’s opinion explains that under Article II of the Constitution, which states that “[t]he executive power shall be vested in a President of the United States of America,” the President must be able to remove executive officers at will: “Otherwise, a subordinate could ignore the President’s supervision and direction without fear, and the President could do nothing about it.” Nevertheless, Congress has created, and the Supreme Court has upheld, independent agencies that wield federal power and are controlled by appointees who do not serve at the will of the President. Franklin D. Roosevelt (FDR) was in fact the first President who challenged this system, by trying to remove an appointee from the Federal Trade Commission who had held over from the Herbert Hoover administration. The Supreme Court sided against FDR, and ruled that Congress could create an independent agency “wholly disconnected from the executive department” without violating the Constitution. Humphrey’s Executor v. United States, 295 U.S. 602, 630 (1935).

After discussing this history in depth, the PHH opinion contrasts the CFPB with other independent agencies. The court noted that the “Director of the CFPB can be considered even more powerful than the President” because it is the “Director’s view of consumer protection law that prevails over all others.” As the court puts it, “[i]n essence, the Director is the President of Consumer Finance.”

The panel noted that almost all other independent agencies are governed by multi-member commissions or boards. Only three independent agencies, it states, seem to be governed by one person who cannot be removed for cause: “the Social Security Administration, the Office of Special Counsel, and the Federal Housing Finance Agency.” However, unlike the CFPB, these agencies “do not exercise the core Article II executive power of bringing law enforcement actions or imposing fines and penalties against private citizens for violation of statutes or agency rules.”

Interestingly, the panel describes the Comptroller of the Currency, a single head of an agency, as “not independent” based on language first used in the National Banking Act of 1864 stating that the Comptroller can be removed mid-term “by the President, upon reasons to be communicated by him to the Senate.” This observation contradicts the common understanding, shared by the Office of the Comptroller of the Currency (OCC) itself, of the OCC as an independent agency (although the OCC is technically a bureau of the U.S. Treasury Department, the Secretary of the Treasury’s ability to intervene in the OCC’s affairs is strictly limited by that same statute the opinion cites (see 12 USC 1(b)(1.

For truly “independent” agencies that do exercise core Article II executive powers, the court explained that constitutional precedents such as Humphrey’s Executor did not give “Congress a free pass, without any boundaries, to create independent agencies that depart from history and threaten individual liberty.” Since “the CFPB departs from settled historical practice regarding the structure of independent agencies,” the court held that Congress violated the Constitution by creating the CFPB in the Dodd-Frank Act.

PHH v. CFPB then discusses the appropriate remedy for this unconstitutional situation. A simple answer is provided: “The President of the United States now has the power to supervise and direct the Director of the CFPB, and may remove the Director at will at any time,” the court declares. Significantly, the court notes that “[w]e need not here consider the legal ramifications of our decision for past CFPB rules or for past agency enforcement actions,” because “the CFPB’s enforcement action against PHH in this case must be vacated in any event.” The panel did not state that the CFPB should be disbanded or otherwise cease operating.

RESPA Issues

The next 20 pages of the opinion castigate the CFPB for its “aggressive” interpretation of the anti-kickback provisions of RESPA. “We hold that Sections 8(a) and 8(c) of the Real Estate Settlement Procedures Act allow captive reinsurance arrangements so long as the mortgage insurance companies pay no more than reasonable market value to the reinsurers for services actually provided,” the court stated. The same logic would likely apply to other real estate settlement services—as long as the payments in question are “for goods or facilities actually furnished or for services actually performed,” then the anti-kickback provisions of RESPA are not being violated.

The court rejected the CFPB’s practice of looking beyond the objective value of the goods and services being paid for, and instead looking at subjective intent behind the payments to determine whether the payment is a disguised illegal referral for real estate settlement services:

“A payment for a service pursuant to a tying arrangement does not make the payment any less bona fide, so long as the payment for the service reflects reasonable market value. A bona fide payment means a payment of reasonable market value.”

Under Section 8 of RESPA, “[p]ayments for referrals are proscribed, but payments for other services actually performed are permitted, so long as the payments reflect reasonable market value.”

While this ruling is somewhat helpful for clients subject to RESPA, prior guidance from the CFPB and other regulators on RESPA’s anti-kickback regulations must be heeded. The CFPB’s warning that each case could be subject to a “fact-intensive inquiry” should be remembered. For example, the proper market-based determination of payments for services should be adequately documented. Payments for services should not be based on successful sales by a third-party provider of real estate settlement services, since those payments could appear to be illegal success-based referral fees instead of legitimate payments for actual services performed. Recommendations or endorsements for third-party providers of settlement services should be avoided, especially on an exclusive basis. Counsel should be consulted regarding any such arrangements—particularly since violating RESPA can bring criminal penalties.

The court also found that the CFPB had violated PHH’s due process rights by fining PHH for conduct occurring prior to the CFPB’s (incorrect, according to the court) re-interpretation of RESPA. As the court emphasized, the “CFPB sanctioned PHH for previous actions that PHH had taken in reliance on HUD’s prior interpretation, even though PHH’s conduct had occurred before the CFPB’s new interpretation of Section 8.” The court had particularly strong language for this choice by the Bureau, stating that it had violated “fundamental anti-retroactivity principles” that are “Rule of Law 101.”

The final part of the opinion concludes by holding that the CFPB was bound by a three-year RESPA statute of limitations both in the enforcement action that the CFPB initiated against PHH in court and in the CFPB administrative action against PHH. Having already criticized the CFPB as an unconstitutional “wolf” that engaged in “gamesmanship,” the court concludes by discussing the “absurdity” of the CFPB’s position that it “is free to pursue an administrative enforcement action for an indefinite period of time after the relevant conduct took place.”

Dissent & Prognostication

The majority PHH v. CFPB opinion was authored by Circuit Judge Brett Kavanaugh, who was appointed by President George W. Bush in 2003 and confirmed in 2006. Senior Circuit Judge A. Raymond Randolph, a 1990 appointee of President George H.W. Bush, joined in this opinion but also stated that the administrative law judge who presided at the original hearing against PHH was not properly appointed, rendering the proceedings unconstitutional.

Circuit Judge Karen Lecraft Henderson, also appointed by President George H.W. Bush in 1990, agreed with her colleagues’ forceful opinions on the RESPA-related issues but argued that the court should exercise judicial restraint to avoid the constitutional issues because there were other grounds for vacating the lower court’s opinion in its entirety, thereby awarding PHH the full relief it requested.

Looking into the crystal ball, it seems plausible that the full, en banc D.C. Circuit may vacate the constitutional holdings of PHH v. CFPB. While the party affiliations of each circuit judge are obviously not dispositive, as shown by the opinions of the Republican appointees on the PHH v. CFPB panel, seven of the 11 active judges on the circuit are Democratic appointees, and judicial restraint—punting, as some might call it—is a doctrine that is alive and well at all levels of the federal government (as perhaps shown by the desire of federal lawmakers to create the CFPB but avoid responsibility for its actions).

It is also possible that this case could go away on remand. It may be argued that the CFPB has little upside in continuing this fight, and it is unclear what would happen at the U.S. Supreme Court level, particularly since the Court remains at less than full strength with the seat of the late Justice Antonin Scalia unfilled. In recent years, with Justice Scalia still on the Court, a 5-4 majority of the Court struck down on multiple occasions other delegations of federal power as violating separation of powers. See, e.g., Stern v. Marshall, 564 U.S. 462 (2011) (5-4 decision holding delegation of power under the Bankruptcy Code unconstitutional); Free Enterprise Fund v. Public Company Accounting Oversight Board, 561 U. S. 477 (2010) (5-4 decision holding delegation of power under Sarbanes–Oxley Act to the Public Company Accounting Oversight Board unconstitutional).

It is also questionable whether the D.C. Circuit or the Supreme Court would impose the same remedy that the panel imposed in PHH v. CFPB if they do agree with the panel and find constitutional violations. For instance, when the Supreme Court found the delegation of federal power to the Public Company Accounting Oversight Board unconstitutional in 2010, it declined to state what remedy is appropriate, such as changing the delegation of power versus changing the tenure of the delegees of that power. As Chief Justice John Roberts explained in Free Enterprise Fund v. Public Company Accounting Oversight Board, this “editorial freedom… belongs to the Legislature, not the Judiciary.” Further adding to the uncertainty, the will of Congress to pass any legislation fixing constitutional infirmities should be considered. Thus, it is possible that the CFPB could be better off with a judicial decision that does “blue-pencil” away any constitutional problems, to use Chief Justice Roberts’ words, rather than taking chances with what Congress might do.

In short, the future of the CFPB is unclear but the agency’s existence does not currently seem to be in danger. At this stage, the fate of this case likely will next lie in the hands of the full D.C. Circuit.