11 Oct Court Rules Consumer Financial Protection Bureau’s Structure Is Unconstitutional

This morning the D.C. Circuit Court of Appeals issued an unprecedented, 110-page decision in PHH Corp. v. CFPB, which held that the Consumer Financial Protection Bureau (CFPB) incorrectly interpreted the Real Estate Settlement Procedures Act (RESPA); that it violated due process by its retroactive interpretation; and that a three-year statute of limitations applies to enforcement actions brought by the CFPB under RESPA.

The court also found the current structure of the CFPB is unconstitutional, but stated that the CFPB could continue to operate and perform its duties as an executive agency, subject to the supervision of the President.  The decision was a response to mortgage lender PHH Corporation’s petition (the first of its kind), which asked for the CFPB to be eliminated and for the court to dismiss a $109 million-dollar enforcement action from the agency, for alleged violations of the anti-kickback provisions in Section 8(a) of RESPA.

Specifically, the court took issue with the inability for other arms of the government to review or rebuke the Bureau’s judgments or actions and the unilateral power imbued in the CFPB’s director, Richard Cordray, stating the following:

The Director enjoys significantly more unilateral power than any single member of any other independent agency. By “unilateral power,” we mean power that is not checked by the President or by other colleagues.  Indeed, other than the President, the Director of the CFPB is the single most powerful official in the entire United States Government, at least when measured in terms of unilateral power.

The decision has far-reaching policy, compliance and political implications that require further review.  The CFPB—originally the brainchild of Senator Elizabeth Warren—was created in the wake of the financial crisis by the Dodd-Frank Act, and was meant to reform the financial sector and protect the public from predatory and dangerous practices by allowing the CFPB the autonomy to proceed with its work without worrying too much about political retribution.

This autonomy has been a sticking point for conservatives, with the financial services oversight committee recently passing two bills to give Congress control over the Bureau’s budget. The Heritage Foundation, a conservative think tank, has even called for dismantling the CFPB altogether.

This decision is the first of its kind against a huge government entity like the CFPB, and emphasizes the lender’s need for consistent and clear interpretations of the rules in order to best serve their borrowers and properly contribute to a smoothly-functioning housing finance market.

Stay tuned for more on this groundbreaking decision.