Is the Consumer Financial Protection Bureau (CFPB) constitutional? A panel of the D.C. Circuit Court of Appeals is currently considering the issue after hearing oral argument in PHH Corporation v. CFPB.

What happened

In November 2014, an administrative law judge (ALJ) held that mortgage lender PHH Corporation violated the Real Estate Settlement Procedures Act (RESPA) by accepting kickbacks for loans in the form of mortgage reinsurance premiums that mortgage insurers paid to a subsidiary of PHH. The ALJ ordered a $6 million fine.

PHH appealed the decision to Bureau Director Richard Cordray, arguing that the CFPB's enforcement actions were subject to a three-year statute of limitations, even in an administrative proceeding. The company also argued that it had not violated RESPA.

In the first decision on an appeal of a CFPB administrative enforcement proceeding, Cordray affirmed the ALJ's determination that PHH illegally referred consumers to mortgage insurers in exchange for kickbacks, prohibiting the company from future violations. He also held that PHH violated RESPA every time it accepted an alleged kickback payment on or after July 21, 2008, whereas the ALJ had limited PHH's violations to kickbacks that were connected with loans that closed on or after July 21, 2008, and as a result increased the amount of the order from $6 million to $109 million.

PHH appealed again, this time to the D.C. Circuit Court of Appeals with a direct challenge to the constitutionality of the CFPB, contending that the Bureau's structure violates separation of powers principles by putting legislative, executive, and judicial power in the hands of a single director.

The company also argued that Cordray impermissibly applied new interpretations of RESPA retroactively to punish past conduct, as its mortgage reinsurance practices had long been understood to be legal and were widespread throughout the country.

The Bureau countered that the quid pro quo arrangement used by PHH had never been explicitly blessed by any federal agency and resulted in exactly the type of market distortion that the statute was intended to prevent. Further, the CFPB is entitled to deference under the framework established in the U.S. Supreme Court's 1984 decision in Chevron v. Natural Resources Defense Council, the agency said, and Congress can choose how an agency's leadership is structured.

Prior to the oral argument, the three-judge panel issued an order instructing the parties to be prepared to address additional questions: "What independent agencies now or historically have been headed by a single person? For this purpose, consider an independent agency as an agency whose head is not removable at will but is removable only for cause," and "If an independent agency headed by a single person violates Article III … what would the appropriate remedy be? Would the appropriate remedy be to sever the tenure and for-cause provisions of this statute? Or is there a more appropriate remedy? And how would the remedy affect the legality of the Director's action in this case?"

Only two of the judges attended the oral argument (the third planned to listen to the audio recording), where PHH characterized the CFPB as a "super-executive agency" with authority limited only by the judiciary.

When queried if the Bureau would be constitutional if the President could remove the Director for a reason other than cause, PHH told the court that other issues would continue to make the CFPB unconstitutional, citing the lack of congressional control over Bureau funding and the Director's ability to hire and fire agency employees and control their salaries. Counsel for PHH urged the panel to weigh in on the substantive RESPA issues presented by the appeal as well.

What if the panel finds the CFPB structure to be unconstitutional? PHH suggested Cordray would be out as Director and "Congress should come back and create in a constitutional way" a new agency.

Facing the court, the Bureau advocated that Congress can choose how the leadership of agencies are structured. While most agencies are made up of commissions whose members can only be removed for cause, a few agencies are headed by a single individual, the CFPB said. As for possible remedies, the CFPB argued that should the court find the structure unconstitutional, it could sever the for-cause provision and remand the case back to Director Cordray for reconsideration.

Why it matters

An opinion striking down the structure of the CFPB would have huge ramifications in the financial industry, but the panel members present at the oral argument appeared receptive to PHH's argument and wary of the extent of the CFPB's power, although they provided no hints about a possible remedy. U.S. Circuit Judge Brett Kavanaugh noted "there are very few precedents" for the Bureau's structure, expressing his concern that it is "very dangerous" to place so much power in one individual's hands. He also seemed to side with the mortgage insurer with regard to its position on RESPA, commenting to the CFPB's counsel, "Correct me if I'm wrong, but everyone was doing this … There was a widespread understanding, wasn't there, that this was legal." The Director's reversal of the ALJ and increase in the order from $6 million to $109 million may have affected Judge Kavanaugh's views. A decision from the panel is expected in the coming months.

To read the Director's decision in In the Matter of PHH Corporation, click here.

To read PHH's brief in PHH Corp. v. CFPB, click here.

To read the CFPB's brief, click here.