It has been almost easy to forget that the PHH v. CFPB case started life as an appeal of an enforcement action taken by the Consumer Financial Protection Bureau (CFPB) for purported violations of the Real Estate Settlement Procedures Act (RESPA).  Technical RESPA issues quickly took a back seat in public discourse to the juicier issue in the case—whether the structure of the CFPB itself was unconstitutional. (Among the factors heightening the drama was the fact that, post-election, the new leadership at the Department of Justice reversed the Obama-era course in the litigation, directing its lawyers to argue against the CFPB and contend that the CFPB was unconstitutional.)

In the latest turn in the case, in a January 31 opinion, the US Court of Appeals for the DC Circuit brought the RESPA issues back to the fore — ironically, in an opinion that does not substantively discuss the RESPA issues. 

Rather, the majority opinion tackles the Constitutional question—holding, forcefully, that “[t]here is nothing constitutionally suspect about the CFPB’s leadership structure.” But the majority also upholds the panel’s earlier conclusion on the RESPA questions. The conclusion of that panel—and, now, of the en banc court—was that the CFPB’s RESPA sanctions against PHH were improper, as the CFPB based its enforcement action on a new interpretation of RESPA it made in the enforcement action itself. In addition, as upheld by the full court, the CFPB’s regulatory enforcement proceedings under RESPA are subject to the three-year statute of limitations provided in RESPA itself, and not free of any statute of limitations, as the CFPB had argued.

This outcome has implications for the CFPB’s future enforcement approach regarding RESPA, a statute whose provisions can be confusing and non-intuitive. In particular, it is possible that the CFPB will be more constrained in its RESPA enforcement activities, limited to citing violations for conduct already clearly and publicly identified at the time of the conduct as violative of RESPA. More broadly, the CFPB’s “regulation by enforcement” approach to any consumer financial statute is in question.

Changing Horses Midstream on RESPA Kickbacks

The CFPB had charged that PHH Corp., a mortgage lender, violated RESPA by referring consumers to mortgage insurers in exchange for kickbacks in the form of mortgage reinsurance premiums that the mortgage insurers paid to a wholly-owned subsidiary of PHH.

The part of RESPA at issue is Section 8, which generally prohibits any person from giving any other person “any fee, kickback, or thing of value pursuant to any agreement or understanding” to refer business involving a “real estate settlement service.” The definition of “real estate settlement service” includes a variety of products and services, including mortgage insurance, as well as mortgage loans themselves.

While this so-called kickback prohibition may sound straightforward, in practice, it is not. There are exceptions to the prohibition, and interpretations of those exceptions that have been sourced from regulatory issuances and court decisions. In particular, another part of Section 8 allows “the payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed.” PHH believed that it fit into this exception, relying on interpretations of it first issued in 1997 and 2004 by the US Department of Housing and Urban Development (HUD), which possessed authority to interpret and enforce RESPA until Dodd-Frank transferred that authority to the CFPB starting in 2011. The CFPB had not issued new regulations or guidance withdrawing or amending the earlier HUD guidance.

In the words of the DC Circuit panel, “[a]t the time PHH engaged in its captive reinsurance arrangements, everyone knew the deal: Captive reinsurance arrangements were lawful under Section 8 so long as the mortgage insurer paid no more than reasonable market value to the reinsurer for reinsurance actually furnished.”

But in 2015, “the CFPB decided that captive reinsurance agreements were prohibited by Section 8. The CFPB then applied its new interpretation of Section 8 retroactively against PHH, ruling against PHH based on conduct that had occurred as far back as 2008.”

The court found that this retroactive application of the CFPB’s new interpretation violated due process. Citing the US Supreme Court case of Christopher v. SmithKline Beecham (and a string of other sources, including George Orwell), the court emphasized that an agency “should not change an interpretation in an adjudicative proceeding where doing so would impose new liability on individuals for past actions which were taken in good-faith reliance on agency pronouncements.”

Statute of Limitations for RESPA Administrative Enforcement Actions 

PHH and the CFPB also disagreed as to whether any statute of limitations limited the CFPB’s enforcement action. PHH contended that RESPA’s 3-year statute of limitations applies to the violations in question even if PHH did violate RESPA (which it denied). The CFPB, in contrast, argued that no statute of limitations at all applies when the CFPB pursues a violation in an administrative proceeding as opposed to a lawsuit in court, because the three-year timeframe in RESPA is meant to refer to court actions and does not specifically mention administrative proceedings, and that the section of the Dodd-Frank Act that authorizes the CFPB to enforce laws through administrative proceedings does not contain a statute of limitations.

Intuitively, this argument raises the question of why the CFPB would ever bring a court action if it had an unlimited time to bring an administrative proceeding. Considering the same question, the DC Circuit upheld the panel’s conclusion that the three-year statute of limitations did apply. (However, in a concurrence, Judge David Tatel noted that he would have resolved the RESPA issues differently had the en banc court fully considered them, and observed that the US Supreme Court “addressed a remarkably similar issue in BP America, 549 U.S. 84, in which the Court unanimously held that a general statute of limitations for Government contract actions applied only to court actions, not to administrative proceedings initiated by the Government.”)

The Future of the CFPB’s Regulation-by-Enforcement Approach 

It remains to be seen whether the PHH case will be appealed to the US Supreme Court.

For now, the DC Circuit’s treatment of the CFPB’s retroactive reinterpretation of RESPA raises questions about the CFPB’s future approach to interpreting statutes through enforcement actions rather than through issuance of guidance or formal rulemaking (the latter of which would be required to include public notice and comment under the Administrative Procedures Act).

The CFPB has taken this approach most vocally in the context of defining unfair, deceptive, or abusive acts or practices (UDAAP). It could be argued that even if some degree of regulation by enforcement makes make sense in the context of UDAAP, which could apply to a potentially infinite number of practices that never could be completely anticipated or captured in a regulation, it may be less appropriate for a statute like RESPA, which covers a more circumscribed and finite area of practice, and thus lends itself to being interpreted by regulation or guidance giving explicit examples of what is or is not a violation.

One of the two people currently claiming rightful title to the CFPB acting directorship, Office of Management and Budget Director Mick Mulvaney, has expressly stated his objection to the regulation-by-enforcement approach (such as in a wide-ranging Wall Street-Journal op-ed in which he cast himself in the role of Sir Thomas More in the play A Man For All Seasons). Under his leadership, the agency has begun to issue requests for public comment on the CFPB’s protocols for enforcement actions and administrative adjudication proceedings, indicating that the agency may rethink and recast their approaches to such activities. This could include abandonment of the interpretation-by-enforcement approach — and a ratcheting back of the CFPB’s enforcement activities altogether.

But whether—and for how long—Mulvaney will be able to lead that charge remains to be seen. His right to occupy the CFPB Acting Director role is the subject of separate litigation in the DC Circuit, still pending as of this writing, with oral argument scheduled for April 12.

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