How the PHH Decision Could Limit CFPB's Enforcement Powers in Two Critical Ways

Unconstitutional Structure

In one of the few cases where a financial services corporation challenged the CFPB’s enforcement action, PHH’s legal challenge proved to be successful.  The Court vacated the CFPB’s $109 million order against the mortgage lender and remanded the case back to the CFPB to apply the law as the Court instructed in its 101-page ruling.

The Court found the Dodd-Frank statutory scheme that created the CFPB unconstitutional, holding that Congress created the CFPB as an independent agency without any checks on its power. Historically, to be constitutional, administrative agencies must either have a director who can be removed at will by the President—“the official who is accountable to the people and who is responsible under [the Constitution] for the exercise of executive power”—or have a multi-member board comprised of “experts appointed by law and informed by experience” from both major political parties.  As the Court noted, the original blueprint for the CFPB, as envisioned by “then-Professor, now-Senator, Elizabeth Warren,” had a traditional multi-member board at the helm.  The Executive Branch’s proposal also included a similar multi-member structure.  However, the final version established an independent agency with a single Director removable only for cause.  This is the structure the Circuit Court found unconstitutional. Per the ruling, the CFPB is “lack[ing] that critical check” that prevents “arbitrary decision making” and protects “individual liberty.”

The Court solved the constitutional flaw by deleting Dodd-Frank’s “for-cause” removal language, thereby giving the President the power to “check” the CFPB through the “at will” removal of the director.

The concern for the financial services industry is that this “check” does not change the ability of the CFPB to wield “vast power over the U.S. economy.” In fact, the Court-fashioned remedy presents problems of instability in the enforcement and implementation of agency initiatives as a result of inconsistent policy objectives between directors.  It is conceivable that every four years there will be a new CFPB Director with different philosophies and goals for the agency. For the time being, we can expect Director Cordray to remain at the helm with no major shift in CFPB policy or goals, especially if the Democrats remain in the White House.

Statutes of Limitations and Retroactive Application

The Circuit Court’s holdings concerning the application of a statute of limitations period on CFPB enforcement actions and the retroactive application of new interpretations of law are perhaps even more important for the debt collection industry in the near-term.

First, the Circuit Court dismissed as “absurd” the CFPB’s argument that, “under Dodd-Frank, there is no statute of limitations for any CFPB administrative action to enforce any consumer protection law” (emphasis in the original).  The Court, citing a long line of Supreme Court cases upholding the importance of a statute of limitations in civil penalty provisions, held CFPB enforcement actions are confined to the statute of limitations period in all 19 statutes the CFPB enforces.  In PHH’s case the Real Estate Settlement Procedures Act (the statute the CFPB alleged PHH violated) has a three year statute of limitations period.  In the case of a Fair Debt Collection Practices Act (FDCPA) enforcement action, the statute of limitations would be one year as proscribed by the statute.  Therefore, going forward, the CFPB cannot punish a debt collector or debt buyer for FDCPA violations that occurred over a year prior to the inception of the enforcement action.

Second, the Court held that the CFPB violated PHH’s due process rights by retroactively applying a new interpretation of a well-settled principle regarding captive reinsurance arrangements  – “captive reinsurance arrangements were lawful so long as the mortgage insurer paid no more than reasonable market value to the reinsurer for reinsurance actually furnished.”  PHH, in good faith, developed its captive reinsurance practices based on this principal, reflected in the Department of Housing and Urban Development’s “longstanding interpretation of the law.”  However, in 2015 the CFPB “decided that captive reinsurance agreements were prohibited and applied its new interpretation [] retroactively against PHH based on conduct that had occurred as far back as 2008.” 

The Circuit Court first held the CFPB’s new interpretation of the statute to be wrong and sent the matter back to the CFPB to apply the correct and “well-settled principle” regarding captive reinsurance arrangements to PHH’s actions.  In so ruling the court stated, “The CFPB obviously believes that captive reinsurance arrangements are harmful and should be illegal. But the decision whether to adopt a new prohibition on captive reinsurance arrangements if for Congress and the President when exercising the legislative authority.  It is not a decision for the CFPB to make unilaterally.”

The Circuit Court also found unconstitutional the CFPB’s retroactive application of its new interpretation to PHH’s actions taken before the company knew of the CFPB’s interpretation.  The Court held this retroactive application was a violation of the Due Process Clause of the Constitution, a deeply rooted principle in our history, which precludes the government from applying new rules or laws retroactively to actions that occurred prior to a new rule or law.

The CFPB has advanced new interpretations of FDCPA provisions in many of the enforcement actions and Consent Orders against debt collectors, debt buyers, and debt collection law firms.  For example, in CFPB v. Frederick J. Hanna & Associates, PC the CFPB’s complaint alleged a lack of meaningful attorney involvement under the FDCPA.  After losing a motion to dismiss on different grounds, Hanna entered into a Consent Order demonstrating the CFPB’s interpretation that debt collection law firms should have in hand all the evidence necessary to prove the existence of a debt prior to filing a law suit to recover the debt—a requirement that did not exist in the FDCPA, in the Georgia court rules, or even under the ethical code of conduct for attorneys.  This CPFB interpretation also appears in its Outline of Proposed Debt Collection Rules and Alternatives Considered. (Notably, the Seventh Circuit recently dismissed an FDCPA claim alleging a violation against a law firm for not having sufficient information to proceed to trial after filing a collection lawsuit in St. John v. Cach, LLC, 2016 U.S. App. LEXIS 9117 (7^th Cir. 2016).) 

One of the major concerns raised at the SBREFA panel for debt collection rulemaking was the possibility that the CFPB would attempt to apply its pending debt collection rules retroactively.  This PHH decision confirmed that the CFPB should only apply new regulations to accounts not opened until after the new regulation takes effect.

The Circuit Court declined to “consider the legal ramifications” of its decision on past rules and enforcement actions, but opened the door for challenges of past CFPB rules and past agency enforcement actions.  The Court explained in footnote 19 that other agencies after losing constitutional challenges have “without major tumult” been able to “work though the resulting issues regarding the legality of past rules and past enforcement actions.” This footnote empowers companies (perhaps even those who entered into consent orders) to consider a legal challenge to any adverse action by the CFPB because at the time of CFPB action the agency was structured unconstitutionally.

Following the release of the Court’s ruling, the CFPB announced that it is “considering options for seeking further review of the Court’s Decision.”  The first step would be a review by the entire D.C. Circuit Court.  If denied, the CPFB can petition the U.S. Supreme Court to hear the case.