On June 5, 2017, the U.S. Supreme Court handed down a unanimous decision in Kokesh v. SEC. In Kokesh, the SEC took the position that disgorgement was not a penalty and therefore not subject to the statute of limitations in 28 U.S.C. § 2462. The Court held that disgorgement remedies are indeed “penalties” and therefore  subject to the five-year statute of limitations in § 2462. In its PHH briefing, the CFPB argued that “[its] administrative proceedings are subject only to the statute of limitations set forth in 28 U.S.C. § 2462.” Thus, the Supreme Court’s reasoning in Kokesh would also apply squarely to the disgorgement remedies available to the CFPB.

The opening paragraph of the Kokesh opinion says it all.

“A 5-year statute of limitations applies to any ‘action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise.’ 28 U.S.C. § 2462. This case presents the question of whether § 2462 applies to claims for disgorgement imposed as a sanction for violating a federal securities law. The Court holds that it does. Disgorgement in the securities-enforcement context is a ‘penalty’ within the meaning of § 2462, and so disgorgement actions must be commenced within the five years of the date the claim accrues.”

The Court rested its decision on the principle that “[s]uch limits are ‘vital to the welfare of society’ and rest on the principle that ‘even wrongdoers are entitled to assume that their sins may be forgotten.'” The CFPB has argued that, except for the statute of limitations in § 2462, no statute of limitations applies to claims it brings through administrative enforcement actions. This argument was brought to the fore by the PHH case, which we have blogged about extensively. The CFPB lost on that issue in the PHH case before a three-judge panel of the D.C. Circuit. The panel’s decision was vacated when the D.C. Circuit decided to re-hear the case en banc. We are still waiting to see what the en banc court will do.

On May 24, 2017, the US Court of Appeals for the D.C. Circuit (D.C. Circuit) held oral argument in the PHH case, which we have blogged about extensively. The constitutionality of the CFPB’s structure was the central issue at the oral argument, occupying the vast majority of the time and the judges’ questions. It appears that the court intends to decide whether the CFPB’s single-director-removable-only-for-cause structure violates the Constitution’s separation of powers doctrine, even if the court rules in PHH’s favor on the RESPA issues.

The judges’ questioning signaled that, in their minds, the resolution turns on three questions: First, how does the CFPB structure diminish Presidential power more than a multi-member commission structure, which the Supreme Court has approved? Second, doesn’t the CFPB’s structure make it more accountable and transparent than a multi-member commission? Third, what are the consequences of approving the CFPB structure? Judges that appeared not to be concerned with the CFPB’s structure generally focused on the first two questions. Judges that appeared to be concerned with the CFPB’s structure focused on the third question. Another key theme addressed at various points throughout the oral argument is whether the CFPB’s structure is sufficiently close to the structures validated in prior Supreme Court cases, such that the court must uphold the CFPB’s structure.

At the oral argument, PHH’s counsel urged the court to recognize the serious affront that the various features of the CFPB’s structure, taken together, present to Presidential power, including: (i) the single director, (ii) the for cause removal provision, (iii) the funding outside the Congressional appropriations process, (iii) the director’s ability to appoint all inferior officers with no outside input, (iv) the director’s five-year term, (v) the deferential standard of review given to the director’s decisions, (vi) the director’s ability to promulgate regulations unilaterally, and (vii) the director’s sole ability to interpret and enforce regulations.

Before PHH’s counsel could even fully articulate his argument, however, judges started questioning him on how these features diminished Presidential power more than the multi-member commissions running other agencies, which the Supreme Court approved in Humphrey’s Executor. The DOJ, which was given time at the oral argument, forcefully responded to the judges’ questions. The “quintessential” character of the executive is the ability to act “with energy and dispatch,” counsel argued. Multi-member panels, as deliberative bodies, lack that quality and are thus more legislative and judicial than executive. Thus, they encroach on Presidential power to a much lesser degree.

DOJ’s counsel also pointed out that the rationale justifying the for cause removal provision that that the Supreme Court approved in Humphrey’s Executor was not present in agencies endowed with the CFPB’s structural features. The DOJ’s counsel pointed to language in Humphrey’s Executor approving the for-cause removal provisions only as to “officers of the kind here under consideration,” namely FTC commissioners. The Humphrey’s Executor court extensively described the FTC and the officers “here under consideration” in a way that precluded any applicability of the case to the CFPB. In Humphrey’s Executor, the FTC was described as a “non-partisan,” non-political body of experts that exercised quasi-judicial and quasi-legislative powers. The CFPB does not fit that mold, the DOJ ‘s counsel argued.

Counsel for both PHH and the DOJ also stressed that the CFPB did not fit the mold of the inferior officer at issue in Morrison v Olson, in which the Supreme Court approved a for-cause removal provision applicable to a special prosecutor. A few judges asked counsel questions apparently aimed at establishing that the existence of special prosecutors was as great an affront to Presidential power as is the CFPB’s structure.

During these lines of questioning, one judge suggested that the CFPB’s structure makes it more accountable to the President. She pointed out that, with a single director, there is one person to blame for problems and that, unlike multi-member commissions, the President has the power to appoint leadership with complete control over the agency. Counsel for PHH and the DOJ responded to this by reminding the court that the President can only appoint a director after the last director’s five-year term expires or the for-cause removal provision is triggered. Interestingly, no one raised the point that the for cause removal provision and five-year term also limit the ability of a President to remove a director that he or she appointed, even if the appointee did not act in a manner satisfactory to the President. Thus, the argument that the CFPB director is somehow more accountable than a multi-member commission does not hold water.

Some judges’ questions presented the issue that “if” the CFPB director is the same as a special prosecutor or FTC commissioner, then the D.C. Circuit is bound by Humphrey’s Executor and Morrison v. Olson. Without missing a beat, however, the DOJ picked up on that “if” and argued the point that the CFPB director is nothing like either position. DOJ’s counsel asserted that the director is not an inferior officer, as was the special prosecutor in Morrison v. Olson, nor is the director part of a non-partisan body of experts, as was the FTC commissioner in Humphrey’s Executor.

During the argument, Judge Brown and Judge Kavanaugh, who wrote the panel’s majority opinion, attempted to draw the rest of the court’s attention to the consequences of extending Humphrey’s Executor to a single-director agency and Morrison v. Olson to principal, as opposed to inferior, officers. Judge Brown suggested that, if the CFPB’s structure is constitutional, nothing would prevent Congress from slapping lengthy terms and for-cause removal restrictions on cabinet-level officials. That, she argued, would reduce the presidency to a “nominal” office with no real executive power. Judge Kavanaugh addressed the same issue making an apparent reference to the speculation that Elizabeth Warren may run for President after Trump leaves office. How would it be, he questioned, if she ran on a consumer protection platform, got elected, and was stuck with a Trump-appointed CFPB director, who would presumably take a much different position on issues central to her platform?

The CFPB’s counsel defended the Bureau’s structure at the hearing using the same technical arguments that the CFPB has been making all along. The CFPB’s counsel asserted that the CFPB’s structure was constitutional because each of the features taken individually has support in Supreme Court jurisprudence, principally Humphrey’s Executor and Morrison v. Olson.

In discussing the CFPB’s problematic structural features, CFPB counsel argued that, because each feature is a “zero” in terms of a problematic Congressional encroachment on Presidential power, that adding them together resulted in zero constitutional problems. “Zero plus zero plus zero, is zero,” he said. In rebuttal, PHH’s counsel pointed out that, as catchy as the argument may be rhetorically, it completely ignores the fact that even Supreme Court jurisprudence supportive of the individual features recognizes them as departures from the norm, acceptable only under certain circumstances. PHH’s counsel observed that the features at issue are not “zeros.”

The RESPA and statute of limitations issues did not occupy much time at the oral argument. Counsel for PHH urged the D.C. Circuit to reinstate the panel’s RESPA and statute of limitations rulings, all of which were in favor of PHH, and to rule on one issue not addressed by the panel.  While the panel decided, contrary to the CFPB’s views, that the CFPB is subject to statutes of limitations in administrative proceedings, the panel left for the CFPB on remand to decide if, as argued by the CFPB, each reinsurance premium payment triggered a new three-year statute of limitations, or whether, as argued by PHH, the three year statute of limitations is measured from the time of loan closing.  The judges did not raise any questions in response to counsel’s arguments on the RESPA and statutes of limitation issues.

Even though Lucia v. SEC was argued that same day, no questions surfaced during the PHH oral argument about the impact that Lucia may have on the PHH case.

* * *

It is likely that the earliest the D.C. Circuit’s decision will be issued is toward year-end. We will continue to monitor developments in this case.

 

PHH filed its reply brief with the D.C. Circuit on April 10 in the en banc rehearing of the PHH case. We have blogged extensively about the case since its inception. Central to the case is whether the CFPB’s single-director-removable-only-for-cause structure is constitutional. Of course, the CFPB fiercely defends its structure, while PHH, the DOJ, and others argue that the CFPB’s structure epitomizes Congressional usurpation of executive power in violation of the constitution’s separation of powers principles.

If the CFPB’s structure is constitutional then there is no reason why Congress can’t divest the President of all executive power, PHH argues. “[I]f Congress can divest the President of power to execute the consumer financial laws, then it may do so for the environmental laws, the criminal laws, or any other law affecting millions of Americans.” “The absence of any discernible limiting principle is a telling indication that the CFPB’s view of the separation of powers is wrong.”

Even if existing Supreme Court precedent authorizes Congress to assign some executive power to independent agencies, PHH argued that the CFPB’s structure goes too far. “No Supreme Court case condones the CFPB’s historically anomalous combination of power and lack of democratic accountability, and the Constitution forbids it.” The fact that the CFPB has the power of a cabinet-level agency while lacking any democratic accountability or structural safeguards is a sure sign that its structure is unconstitutional.

The only remedy to the CFPB’s unconstitutional structure, PHH argues, is to dismantle the agency entirely. “The CFPB’s primary constitutional defect, the Director’s unaccountability [], is not a wart to be surgically removed. Congress placed it right at the agency’s heart, and it cannot be removed without changing the nature of what Congress adopted.”

* * *

PHH’s reply completes the briefing in this appeal. Oral arguments are scheduled to take place on May 24, with each side being given 30 minutes to argue. On April 11, the D.C. Circuit granted the DOJ’s request for 10 minutes to present its views during oral argument.

Several individuals and organizations filed amicus briefs in support of the CFPB in the en banc rehearing in the PHH case. Among the amici is a brief filed by current and former members of Congress, including Chris Dodd and Barney Frank, the principal architects and namesakes of the Dodd-Frank Act, which created the CFPB. Senator Sherrod Brown and Representative Maxine Waters, both of whom previously sought to intervene, joined the brief as well.

The current and former members of Congress assert that the structure of the CFPB is constitutional and critical to the congressional design of Dodd-Frank. They stress the importance of the CFPB’s “independence” and the ability of a single director “to avoid the delay and gridlock to which multi-member agencies are susceptible.” These themes are repeated throughout the brief.

Of course, the flipside of independence is unaccountability. The CFPB’s structure heavily shields it from the consequences of an election. The ability of voters to voice their approval or disapproval with the CFPB’s enforcement and rulemaking is far lower than that of other important agencies such as the EPA. And although a single director may be able to move more swiftly than a multi-member commission, faster is not always better. Before a multi-member commission reaches a decision, it must debate the matter internally among a group of commissioners with diverse perspectives and experiences. That internal debate arguably has the ability to produce a better, more efficient outcome than any individual commissioner would be able to reach on their own. Indeed, input from multiple commissioners is particularly valuable to an agency like the CFPB that relies more heavily on enforcement actions than notice-and-comment rulemaking to effect industry-wide change.

A group of financial regulation scholars likewise submitted a brief in support of the CFPB’s position, focused entirely on the constitutionality of the CFPB’s structure. The scholars’ brief is, not surprisingly, more esoteric than many of the other briefs submitted in the case. Unlike the CFPB, the scholars concede that its structure is “novel,” but argue that the novel structure is evidence of a creative legislative approach to an issue, not evidence that it is unconstitutional. The brief then attempts to argue two seemingly inconsistent positions: 1) that the CFPB’s independence is necessary to prevent regulatory capture, but 2) the CFPB is subject to significant oversight.

The scholars’ regulatory capture argument is particularly weak. They claim that three features of the CFPB’s structure are key to preventing business interests from capturing the CFPB: “non-appropriated funding; a for-cause removal standard; and a single director.” The scholars correctly note that industry funding can create regulatory capture in the classical sense in that the regulated industry has direct control over the agency’s funding. That argument has no relevance to the actual issue in this case, however, since the real controversy is whether the CFPB should be subject to Congressional appropriations, not whether it should be industry funded.

The scholars then switch from capture theory to public-choice theory to argue that Congressional appropriation is unwise because concentrated industry groups have greater influence over Congress and the Executive Branch than individual consumers. In making this argument, the scholars focus not on industry capture of the CFPB but of the entire Legislative and Executive Branches. And the activities with which the scholars take issue – lobbying and campaign contributions – are key First Amendment activities. The scholars therefore argue that the CFPB’s structure is necessary because members of the public might exercise their First Amendment rights successfully to oppose the actions of the CFPB.

The scholars then undercut their legislative-and-executive-capture argument completely in the next session of their brief, in which they argue that the CFPB is, in fact, subject to extensive legislative oversight and control. This argument is wholly inconsistent with the prior argument that the CFPB is completely independent and thus immune from capture. Namely, if the CFPB is subject to extensive oversight and control, then it is also subject to Legislative-and-Executive capture.

A group of separation of powers scholars likewise filed an amicus brief heavy on theory. As their name suggests, the separation of powers scholars focus on whether the single director, removable-for-cause feature of the CFPB violates constitutional separation of powers principals. The brief firsts undertakes an originalist-style historical analysis of early federal-and-state executive agencies. Next, the scholars argue that the number of commissioners is irrelevant to the constitutional analysis. Then, they argue that the for-cause removability feature leaves enough Presidential discretion over the CFPB Director to preserve its constitutionality.

Finally, in a preview of arguments likely designed to drive a wedge between Justice Kennedy and other members of the Supreme Court, Chief Justice Roberts in particular, the scholars argue that abstract concerns over the protection of “individual liberty” and separation of powers do not supply independent constitutional bases to invalidate the CFPB structure. Instead, they argue that the structure must violate a specific constitutional provision, not an abstract ideal. This particular line of argument will likely receive greater attention if the constitutional issues reach the Supreme Court, as there are different views regarding it among the conservative majority.

A host of “consumer and civil rights organizations who advocated for the CFPB’s creation,” many of which unsuccessfully sought to intervene, filed a brief that mainly covers public policy arguments in favor of the CFPB’s structure. They essentially argue that the CFPB has succeeded where other agencies failed in terms of protecting consumers.

The AARP also filed an amicus brief in support of the CFPB’s position. Unlike other amici, however, the AARP brief focused more on the RESPA issues in the case than the more esoteric constitutional issues. The AARP claimed that kickbacks and “junk fees” have a disproportionate impact on older individuals.  It argued that older individuals are often the target of “unscrupulous mortgage lending practices,” which increases the cost of homeownership to older individuals by several thousand dollars. After the policy-heavy introduction, the brief tackles the history and purpose of the RESPA provisions at issue, which we blogged about in detail.

Although the constitutional issues received the most attention in the press, the RESPA issues discussed in the AARP brief could very well be more important to the outcome of the appeal. The court could reverse the district court on the RESPA issues and invoke the doctrine of constitutional avoidance to decline to reach the overall constitutionality of the CFPB’s structure.

On March 31, the CFPB and supporting amici submitted their briefs in the en banc rehearing of the PHH case. We have blogged extensively about the PHH case in which the D.C. Circuit is grappling with four critical issues: (i) whether the CFPB’s structure is constitutional (the CFPB says, yes), (ii) whether administrative actions brought by the CFPB are subject to a statute of limitations (the CFPB says, no), (iii) whether the CFPB’s interpretation of RESPA is correct (the CFPB says, yes), and (iv) whether the CFPB’s interpretation of RESPA, which differs from HUD’s historical interpretation, can be applied retroactively (the CFPB says, yes). We’ll focus here on the CFPB’s constitutional arguments.

The CFPB’s main argument is that under Humphry’s Executory and its progeny, there is only one relevant question to determining whether its structure is constitutional: Is its structure “of such a nature that [it] impede[s] the President’s ability to perform his constitutional duty” to take care that the laws are faithfully executed? It insists that the  D.C. Circuit panel erred in undertaking “’an additional inquiry’ into whether an agency’s structure somehow threatens individual liberty.”

This is, of course, a strained argument. On the one hand the CFPB grants that its structure is a “departure from tradition” in that “most independent agencies[, like the FTC,] have been headed by multi-member commissions.” Yet, at the same time, the CFPB argues that the D.C. Circuit must slavishly apply precedents such as Humphry’s Executor which address (and, indeed, create) the “traditional” structure of independent agencies. It seems obvious that a different structure demands a different analysis.

In making this argument, the CFPB ignores the underlying separation of powers issue by insisting that the protections for individual liberty in the structure of other independent agencies are irrelevant to the constitutional analysis.  Counsel for PHH put it succinctly in recent testimony before a Senate sub-committee. Quoting James Madison, he pointed out that the consolidation of executive, judicial, and legislative power in one person is the “very definition of tyranny.”  By constituting other independent agencies as commissions, Congress prevented that consolidation and avoided the very problem the U.S. structure of government was designed to prevent. Yet, the CFPB argues that the commission and single-director structures are “indistinguishable” from a constitutional perspective.

The CFPB also ignores other features of agencies with a  commission structure that  make them more likely to operate as “independent” agencies, a precondition to the courts’ acceptance of their constitutionality. For example, no more than three of the FTC’s five commissioners can be of the same political party. As a result, the decision-making body at the FTC is required to receive input from those with differing views.  Not so with the CFPB director. He can set an agenda driven by the politics of his party without any check on his authority, even if that agenda is completely contrary to that of the President. This too is irrelevant from the CFPB’s perspective.

As we had indicated, on March 16, the subcommittee on Oversight and Investigations of the House Financial Services Committee conducted a hearing entitled “The Bureau of Consumer Financial Protection’s Unconstitutional Design.” Unsurprisingly, Republicans and Democrats on the subcommittee talked past each other in making remarks and questioning the four witnesses: Ted Olson, Saikrishna Prakash, Adam White, and Brianne Gorod.

The Democrats on the subcommittee, by and large, ignored the constitutional issues. One Democratic subcommittee member, Keith Ellison of Minnesota, stated that the constitutional arguments are a “subterfuge” for business interests’ desire to go back to having the un-checked ability to abuse consumers. Instead of the constitutional issues, subcommittee Democrats focused principally on the “good” outcomes that the CFPB has achieved for consumers. They cited the billions and billions in fines and redress that the CFPB has extracted from the financial services industry, among other things. Various Democratic subcommittee members vowed to protect the CFPB from being dismantled by what they saw as the forces of evil.

Oddly, the ranking member of the subcommittee, Al Green, a Democrat from Texas, spent almost all of his time criticizing the subcommittee for holding the hearing while the PHH case was pending before the D.C. Circuit. He found it particularly troublesome that Ted Olson would be testifying before Congress instead of advocating in the courts. His zeal for the issue was especially peculiar, given that Gorod, another witness testifying on the panel, was an attorney who represented Mr. Green and other Congressional Democrats in filing amicus briefs in the PHH case in an attempt to intervene on behalf of the CFPB.

Republicans, in contrast, focused on the constitutional issues, namely, the CFPB’s lack of accountability either to Congress or the President and the unprecedented consolidation of legislative, judicial, and executive power in the CFPB director. In response to questioning on these issues, Ted Olson, quoting James Madison, said that such consolidation of power is “the very definition of tyranny.”

Of course, while the Republicans focused on the constitutional issues, they did not miss the opportunity to shoot a few barbs back at Democrats on the “results” achieved by the CFPB. They pointed out that the CFPB’s various accomplishments have increased the size of the unbanked population in America, diminished access to credit, and hurt smaller financial institutions who cannot afford “armies” of lawyers and compliance professionals.

Republicans on the subcommittee and three of the witnesses, Olson, White, and Prakash, seemed to agree that three steps are needed to fix the CFPB’s structure: (i) eliminate the removal only for cause provision, (ii) make the CFPB’s budget part of the appropriations process, and (iii) limit the Chevron deference afforded to the CFPB’s interpretations of consumer financial services laws.

Republicans, Olson, White, and Prakash also agreed that the President has the right and responsibility to refuse to enforce unconstitutional laws. Republicans on the subcommittee took this to mean that the President has the power, even now that the PHH panel decision has been vacated, to remove Director Cordray from office at will.

Olson, White, and Prakash also pointed out the dangerous precedent the CFPB structure would set for future agencies. All agreed at various points during the hearing that, if the CFPB’s current structure is constitutional, that would mean no limit exists on Congress’s ability to vest executive, judicial, and legislative authority in anyone of its choosing. They argued that, if the CFPB’s structure stands, there is nothing left of the separation of powers doctrine or the unitary executive.

The DOJ submitted its amicus brief in the PHH case on Friday, March 17.  We have blogged extensively about this case since its inception. Unsurprisingly, the Trump DOJ supports striking from Dodd-Frank the removal-only-for-cause protection currently applicable to the director of the CFPB.  In its “view, the panel correctly applied severability principles and therefore properly struck down only the for-cause removal restrictions.”  If the DOJ gets its way, the CFPB would remain intact with a director that President Trump can replace at any time.

While PHH likely appreciates the DOJ’s support, the DOJ is advocating a more limited remedial measure than PHH is seeking.  As we’ve noted before, PHH is arguing in the case that the CFPB should be dismantled in its entirety because its “unprecedented independence from the elected branches of government violates the separation of powers” and because the CFPB’s “constitutional infirmities extend far beyond limiting the President’s removal power…the proper remedy is to strike down the agency in its entirety.”  In sharp contrast, the Trump DOJ supports keeping the CFPB intact with a director removable at the will of the President.

Though the brief does not highlight the fact, the Trump DOJ has departed substantially from the position that the DOJ took under President Obama.  The departure is most obvious in brief’s first footnote, where the DOJ notes that “[i]n one case filed against several federal agencies and departments . . ., [t]he [DOJ’s] district court briefs . . . argued that, based on the Supreme Court’s decision in Humphrey’s Executor, the CFPB’s for-cause removal provision is consistent with the Constitution.”  However, the footnote goes on, “[a]fter reviewing the panel’s opinion here and further considering the issue, the [DOJ] has concluded that the better view is that the provision is unconstitutional.”  The obviously political nature of the change makes it difficult to predict how the judges on the court will react to the DOJ’s brief.

Of course, the change at the DOJ is not reflected in the CFPB’s view, which is diametrically opposed to the DOJ’s.  It’s rare that two executive agencies disagree so starkly and so publicly on an issue of such importance.  This contrast only highlights the problems created by a federal agency headed by a single person that is not accountable to the president.

The D.C. Circuit issued its long-awaited decision in PHH Corporation v. CFPB. In reversing the decision of Consumer Financial Protection Bureau (CFPB) Director Cordray to impose an enhanced penalty of $109 million on PHH for its use of a captive (wholly-owned) mortgage reinsurer, the court made several landmark rulings.

First, it held that the CFPB’s single-director-removable-only-for-cause structure is unconstitutional. The court held that it was a violation of Article II for the CFPB to lack the “critical check” of presidential control or the “substitute check” of a multi-member governance structure necessary to protect individual liberty against “arbitrary decisionmaking and abuse of power.” The court remedied this constitutional defect by severing the removal-only-for-cause provision from the Dodd-Frank Act. Under the ruling, Director Cordray now serves at the will of the President and is subject to supervision and management by the President. In a footnote, the court acknowledged that this may create some fallout in other cases, but left it for other courts to address.

It also rejected the CFPB’s argument that statutes of limitations do not apply to its administrative enforcement actions. The court’s holding was straightforward: If Congress had intended to alter the standard statute of limitations scheme, it would have said so. “[W]e would expect Congress to actually say that there is no statute of limitations for CFPB administrative actions . . . But the text of Dodd-Frank says no such thing.”

In addition, the court held that the plain language of RESPA permits captive mortgage re-insurance arrangements like the one at issue in the PHH case, if the mortgage re-insurers are paid no more than the reasonable value of the services they provide. This is consistent with HUD’s prior interpretation. For the first time in 2015, in prosecuting the case against PHH, the CFPB announced a new interpretation of RESPA under which captive mortgage reinsurance arrangements were prohibited. The court rejected this on the ground that the statute unambiguously allows the kinds of payments that the CFPB’s 2015 interpretation prohibited. We have blogged about the CFPB’s erroneous interpretation of the RESPA provisions at issue in this case.

Finally, the court further admonished the CFPB by alternatively holding that—even assuming that the CFPB’s interpretation was permitted under any reading of RESPA—the CFPB’s attempt to retroactively apply its 2015 interpretation, which departed from HUD’s prior interpretation, violated due process. It held that “the CFPB violated due process by retroactively applying that new interpretation to PHH’s conduct that occurred before the date of the CFPB’s new interpretation.”

Notably, the court explicitly declined to address the CFPB’s claim that each mortgage insurance payment made in violation of RESPA triggers a new three-year statute of limitations for that payment. The CFPB’s view on this point was one basis that allowed it to dramatically increase the penalties it sought from PHH. The court’s decision not to address this point in its opinion makes it likely that this will not be the last circuit court opinion required to resolve the case.

The opinion of the court also did not address one aspect of the CFPB Director’s prior decision that disgorgement of the entire amount of the premiums was required, without an offset for the claims paid, which had also added considerably to the penalty amount. The court states in footnote 24 that if a mortgage insurer paid more than reasonable market value for reinsurance, the disgorgement remedy is the amount that was paid above reasonable market value. The court did not expressly address the Director’s approach of ignoring the claims paid. The concurring/dissenting opinion by Judge Henderson does address this point, however, indicating that disgorgement must be reduced by the claims paid.

Because the opinion did not dismantle the CFPB, the court remanded the case to the CFPB for consideration of whether PHH violated RESPA as interpreted by HUD.

Almost a year ago, on October 30, 2015, the FTC conducted a workshop on lead generation entitled to “Follow the Lead.” We published a three-part series on the workshop highlighting the key takeaways. On September 15, 2016, the FTC published its own staff paper discussing the workshop and providing its own analysis. The paper appears intended to serve as a warning to lead buyers and sellers about FTC expectations. Indeed, the staff states that the workshop and paper will “Inform our ongoing law enforcement work.” The paper is also likely to inform the CFPB’s ongoing supervisory and enforcement activities.

While the staff paper acknowledges some of the many positive aspects of lead generation, it focuses on what regulators are likely to view as the negatives:

  • Complexity and Lack of Transparency: The FTC staff recognized that the online lead generation process is complex and often not transparent to consumers. They suggest that consumers may not understand the process, specifically:
    • That their information may be going to a lead generator not a lender,
    • That their information can be sold multiple times leading to multiple offers from lenders and marketers,
    • That the offer they receive may be coming from the company that bid the most to get their information, and
    • That lenders who buy their information may supplement it with additional information about the consumer obtained from other sources.The staff stated that all of these issues should be prominently disclosed to consumers.

The staff stated that all of these issues should be prominently disclosed to consumers.

  • Aggressive or Potentially Deceptive Marketing: The staff also called attention to lead generators who engage in blatantly misleading advertising. One example cited was a lead generator that disguised loan applications to look like job applications.
  • Potential Abuse of Sensitive Consumer Information: The staff further highlighted that bad actors may purchase or obtain consumer information from lead generators and aggregators and use it to commit acts of fraud. In one recent FTC enforcement action the staff noted, a company was accused of purchasing consumer information and using it to debit funds from consumers’ accounts without authorization.

The staff issued stern warnings to lead buyers and sellers alike that neither will be permitted to benefit from this kind of misconduct and avoid liability.

Lead buyers are warned that “companies who choose to ignore warning signs [of the above misconduct] and look the other way may be at risk of violating the law themselves.”  The staff acknowledged that many lead buyers are taking increasingly sophisticated steps to identify and reject leads potentially obtained through misleading advertising. For example, at least one company has developed an online tool that assigns unique identifiers to leads allowing them to be tracked throughout the lead generation ecosystem. Lead buyers can also carefully monitor and audit the sites of companies that they buy leads from. The staff’s warning makes clear that these and other steps are not options for lead buyers who wish to avoid violating the law.

To lead sellers, the staff warns that “ignoring warning signs that third parties are violating the law and pleading ignorance will not shield companies from FTC liability.” The staff explained that self-regulatory bodies such as the Better Business Bureau and the Online Lenders Alliance can help sellers in preventing fraud, if the bodies publish clear guidance and follow-it up with robust monitoring and enforcement. The staff also stated that lead sellers have an obligation to vet and monitor the companies they sell leads to. The staff paper indicates that FTC enforcement in this area will not let up. Thus, following industry best practices and the careful vetting and monitoring of lead buyers are essential for lead sellers to avoid liability.

As we’ve noted previously, we’re seeing an uptick in CFPB enforcement in this area even though the FTC seems to have taken primary responsibility for enforcement actions against lead generators. The FTC staff paper will likely inform the CFPB’s own expectations in its increasingly common enforcement activity in the lead generation ecosystem.

On June 23, PHH filed a letter in the D.C. Circuit supplementing its appeal briefing in PHH Corp v. CFPB, No. 15-1177. For those of you who may have missed our prior posts on this, PHH is appealing a decision made by CFPB Director Richard Cordray while sitting as the CFPB’s administrative appellate judge. In that capacity, Cordray held that PHH violated RESPA in connection with a captive mortgage reinsurance arrangement. In the appeal before the D.C. Circuit, the CFPB argues that Director Cordray’s interpretation of RESPA section 8(c)(2), which is central to the Director’s decision, is entitled to Chevron deference.

In its original appeal briefing, PHH vigorously opposed the application of Chevron deference to Director Cordray’s interpretation of RESPA section 8(c)(2). The Director determined the RESPA section 8(c)(2) is not an exemption from the broad referral fee prohibition of RESPA section 8(a).  PHH argued that deference only applies if the “normal tools of statutory construction” fail to produce a clear outcome. It further argued that, because RESPA is also a criminal statute, any ambiguities must be resolved in PHH’s favor under the Rule of Lenity.

In its June 23 supplement, PHH argued that the Supreme Court’s June 20 decision in Encino Motorcars,LLC v. Navarro, No. 15-415 is yet another reason not to apply Chevron deference to Director Cordray’s decision. In Encino, the Court addressed a Department of Labor (DOL) final rule under which automobile dealer service advisors are not covered by an exemption from the requirement to pay overtime pursuant to the Fair Labor Standards Act.  The Court held that the DOL interpretation in the final rule, which is opposite of the DOL position on the issue for more than 20 years preceding the rule, is not entitled to deference because of the reliance of the automobile industry on the prior position and because the DOL “gave almost no reasons” for the change.

Like the DOL position in the final rule that was at issue in Encino, Director Cordray’s decision went counter to previously-published guidance interpreting RESPA section 8(c)(2) as an exemption to the RESPA section 8(a) referral fee prohibition. Before the CFPB came into existence, HUD enforced RESPA. HUD interpreted RESPA section 8(c)(2) as an exemption to RESPA section 8(a), and had provided informal guidance on how lenders could establish mortgage reinsurance arrangements in compliance with RESPA. When PHH’s case was before the CFPB, PHH argued that it relied on these HUD interpretations. Director Cordray, however, summarily dismissed the reliance arguments as unpersuasive. PHH argues that, under Encino, Cordray’s unreasoned dismissal is fatal to the application of Chevron deference to his decision.