On September 17, 2018, four Amici filed briefs in the CFPB’s case against All American Check Cashing, which is now before the Fifth Circuit Court of Appeals. The Court is considering whether the structure of the CFPB is constitutional and what impact its structure, right or wrong, has on its ability to continue to prosecute claims against regulated entities. The Amici, all supporting the CFPB, were as follows:

  • Certain current and former Members of Congress involved in drafting Dodd-Frank;
  • Five people calling themselves “CFPB Separation of Powers Scholars,” including Harold Bruff, Gillian Metzger, Peter Shane, Peter Strauss, and Paul Verkuil;
  • Nine consumer advocacy groups, including Public Citizen, Inc., Americans for Financial Reform Education Fund, Center for Responsible Lending, Consumer Federation of America, Consumers Union, National Association of Consumer Advocates, National Consumer Law Center, Tzedek DC, and U.S. Public Interest Research Group Education Fund, Inc.; and
  • The Appleseed Foundation, Inc.

The Amici made substantially the same arguments made by amici supporting the CFPB in connection with the PHH case.

A petition for certiorari was filed in the U.S. Supreme Court late last week by State National Bank of Big Spring (SNB) which, together with two D.C. area non-profit organizations that also joined in the petition, had brought one of the first lawsuits challenging the CFPB’s constitutionality.

Originally filed in 2012 in D.C. federal district court, the complaint alleged that the CFPB’s structure violated the U.S. Constitution’s separation of powers. The district court dismissed for lack of standing but on appeal, the D.C. Circuit held that the plaintiffs did have standing and remanded the case to the district court.  Further proceedings in the case were held in abeyance by the district court pending the outcome of the PHH case in the D.C. Circuit.

Following the D.C. Circuit’s en banc PHH decision that held the CFPB’s structure is constitutional, the district court lifted its abeyance order and, with the parties having agreed that PHH foreclosed the district court from ruling in favor of the plaintiffs on their constitutional challenge, entered judgment against the plaintiffs.  On June 8, 2018, the D.C Circuit entered an order summarily affirming the district court’s judgment.  Citing its en banc PHH decision, the D.C. Circuit order stated that “the merits of the parties’ positions are so clear as to warrant summary action.”

In their petition for certiorari seeking Supreme Court review of the D.C. Circuit’s June 8 order,  SNB and the non-profits urge the Supreme Court to grant the petition “to resolve the conflict” between PHH and the Fifth Circuit’s decision in Collins v. Mnuchin.  In Collins, the Fifth Circuit ruled that the Federal Housing Finance Agency (FHFA) is unconstitutionally structured because it is excessively insulated from Executive Branch oversight.  While stating that it was “mindful” of the D.C. Circuit’s en banc PHH decision, the Fifth Circuit found that “salient distinctions” between the CFPB’s structure and the FHFA’s structure dictated different conclusions as to each agency’s constitutionality.  SNB and the non-profits argue in their petition that “the approaches of the D.C. Circuit and the Fifth Circuit cannot be reconciled.”

We continue to follow two other active cases involving challenges to the CFPB’s constitutionality that could come before the Supreme Court.  In April 2018, the Fifth Circuit agreed to hear All American Check Cashing’s interlocutory appeal from the district court’s ruling upholding the CFPB’s constitutionality.  In RD Legal Funding, Judge Preska of the Southern District of New York is expected to soon enter a Rule 54(b) judgment against the CFPB so that it can file an appeal with the Second Circuit from her June 21 order in which she ruled that the CFPB’s structure is unconstitutional and struck all of Title X of Dodd-Frank.

 

 

As we discuss below, President Trump’s nomination of D.C. Circuit Judge Brett Kavanaugh to serve as a Justice of the U.S. Supreme Court could have significant implications for all federal agencies should Judge Kavanaugh be confirmed.  However, in light of Judge Kavanaugh’s rulings in the PHH case, the implications for the CFPB could be even more consequential.

Judge Kavanaugh was a member of the 3-judge D.C. Circuit panel and the author of the panel’s decision in PHH which held that the CFPB’s single-director-removable-only-for-cause structure violates Article II of the U.S. Constitution.  He also took the same position in his dissent from the en banc majority decision in PHH which held that the structure is constitutional.  In both the panel decision and his dissent from the en banc decision, Judge Kavanaugh concluded that the proper remedy was to sever the for-cause removal provision from the Dodd-Frank Act and thereby allow the CFPB to continue to operate with a Director removable by the President at will (rather than strike Title X of Dodd-Frank in its entirety).

While there is no possibility of PHH reaching the Supreme Court (none of the parties sought certiorari and the CFPB dismissed its administrative proceeding against PHH), there are several other pending cases involving a challenge to the CFPB’s constitutionality that could reach the Supreme Court in the coming years.  Those cases include All American Check Cashing’s interlocutory appeal to the U.S. Court of Appeals for the Fifth Circuit of the district court’s ruling upholding the CFPB’s constitutionality which is currently being briefed and a possible appeal to the Second Circuit in the RD Legal Funding case of the district court’s ruling holding that the CFPB’s structure is unconstitutional.

Should Judge Kavanaugh have an opportunity to rule on the question of the CFPB’s constitutionality as a member of the Supreme Court, we would expect him to be a definite vote in favor of a decision that holds that the CFPB’s structure is unconstitutional and severs the for-cause removal provision instead of striking all of Title X.  (Of course, there is also the possibility that this question could become moot if Congress were to change the for-cause removal provision or change the CFPB’s leadership structure to a multi-member commission.)  For that reason, we would also expect Judge Kavanaugh to face a request for him to recuse himself from the litigants who are defending the CFPB’s constitutionality.

In making such a request, the litigants are likely to rely on 28 U.S.C. Section 455 which provides:

(a) Any justice, judge, or magistrate judge of the United States shall disqualify himself in any proceeding in which his impartiality might reasonably be questioned.

(b)  He shall also disqualify himself in the following circumstances:

[(1)-(2) omitted]

(3)   Where he has served in governmental employment and in such capacity participated as counsel, adviser or material witness concerning the proceeding or expressed an opinion concerning the merits of the particular case in controversy;

[(4)-(5) omitted].

The litigants seeking Judge Kavanaugh’s recusal might argue that based on his PHH opinions, he is a “justice” who “has served in governmental employment and in such capacity…expressed an opinion concerning the merits of the particular case in controversy.”

While the phrase “particular case in controversy” arguably is limited to the specific case in which the Justice previously issued an opinion (i.e. PHH), a broader reading is suggested by a memorandum written by Justice Scalia regarding his decision not to recuse himself from a case in which Vice President Cheney was a named party.  That case involved a claim that a government committee had not complied with the Federal Advisory Committee Act (FACA).  According to Justice Scalia, Vice President Cheney’s name appeared in the lawsuit “only because he was the head of [that] Government committee.”

In explaining his decision not to recuse himself, Justice Scalia indicated that his personal friendship with Vice President Cheney did not call his impartiality into question under Section 455(a).  He stated that “while friendship is a ground for recusal of a Justice where the personal fortune or the personal freedom of the friend is at issue, it has traditionally not been a ground for recusal where official action is at issue, no matter how important the official action was to the ambitions or the reputation of the Government officer.”

However, in a footnote, Justice Scalia noted that the public interest group that was seeking his recusal had cited to the Supreme Court’s decision in Public Citizen v. Department of Justice, 491 U. S. 440 (1989), as a prior case in which Justice Scalia had recused himself.  Justice Scalia commented that while that case also involved FACA, as Assistant Attorney General for the Office of Legal Counsel, he had provided an opinion “that addressed the precise question presented in Public Citizen: whether the American Bar Association’s Standing Committee on Federal Judiciary, which provided advice to the President concerning judicial nominees, could be regulated as an ‘advisory committee’ under FACA.”  Judge Scalia stated that he “concluded that [his] withdrawal from the case was required by 28 U. S. C. §455(b)(3), which mandates recusal where the judge ‘has served in governmental employment and in such capacity . . . expressed an opinion concerning the merits of the particular case in controversy.’”  He further stated that, in contrast, “I have never expressed an opinion concerning the merits of the present case.”

Even if the phrase “the merits of the particular case in controversy” is read broadly, it seems doubtful that Section 455 was intended to apply where the prior opinion in question is one that a Justice whose recusal is sought issued as an appellate judge.  A separate provision, 28 U.S.C. Section 47, bars a judge from hearing an appeal in a case only where he or she was the trial judge.  There is no similar express prohibition on a Supreme Court Justice hearing an appeal in a case where he or she was an appellate judge.  It also bears noting that the circumstances involved in Justice Scalia’s recusal from Public Citizen are distinguishable from those that would be presented by Judge Kavanaugh’s recusal in that Justice Scalia had previously expressed his views on FACA in his capacity as a government attorney and not as a judge.  In any event, there is no mechanism for enforcing a Supreme Court Justice’s compliance with 28 U. S. C. Section 455 and Supreme Court Justices do not feel bound by the restrictions that apply to other members of the federal judiciary.

Based on the panel decision in PHH, it appears that Judge Kavanaugh would likely take an unfavorable view of aggressive actions and positions of any federal agency that are not clearly consistent with the agency’s statutory authority.  In the panel decision, Judge Kavanaugh refused to give Chevron deference to the CFPB’s interpretation of RESPA, observing that the statutory language “specifically bars the aggressive interpretation of [RESPA’s referral fee prohibition] advanced by the CFPB in this case.”

The panel decision in PHH also found that the CFPB’s retroactive application of its RESPA interpretation violated the Due Process Clause.  This suggests that Judge Kavanaugh could be favorably disposed to other due process challenges to agency actions or positions.

American Banker has reported that that CFPB is planning to dismiss its lawsuit against PHH.  According to the American Banker report, the CFPB and PHH have issued a joint statement in which the parties confirm that they have conferred and agreed to recommend the dismissal and request that Acting Director Mulvaney proceed to dismiss the CFPB’s administrative proceeding.

On January 31, 2018, the D.C. Circuit issued its en banc PHH decision reinstating the RESPA-related portions of the D.C. Circuit’s October 2016 panel decision.  The panel had 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.  However, disagreeing with the panel decision, the en banc court rejected PHH’s challenge to the CFPB’s constitutionality based on its single-director-removable-only-for-cause structure.  Neither PHH Corporation nor the CFPB filed a petition for certiorari asking the U.S. Supreme Court to review the en banc decision.

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 panel rejected this interpretation on the ground that the statute unambiguously allows the kinds of payments that the CFPB’s 2015 interpretation prohibited.  The panel remanded the case to the CFPB to determine whether PHH complied with RESPA under the longstanding interpretation previously articulated by HUD.   The en banc court’s reinstatement of that aspect of the panel decision led it to order that the case be remanded to the CFPB for further proceedings.

Although the D.C. Circuit panel had agreed with PHH that the RESPA three-year statute of limitations applies to administrative proceedings, it left undecided another statute of limitations issue for the CFPB to consider on remand.  The panel stated:  “We do not here decide whether each alleged above-reasonable-market value payment from the mortgage insurer to the reinsurer triggers a new three-year statute of limitations for that payment.  We leave that question for the CFPB on remand and any future court proceedings.”

Since the en banc court reinstated the panel’s decision “insofar as it related to the interpretation of RESPA and its application to PHH,” the issue of when the RESPA three-year statute of limitations is triggered, which is of great significance to the mortgage industry, might have been addressed on remand.  The CFPB’s dismissal of the administrative proceeding means the CFPB will not have an opportunity to rule on that issue in this case.

A determination on remand as to whether PHH complied with RESPA under the longstanding interpretation previously articulated by HUD would have required the CFPB to consider whether the mortgage re-insurers were paid more than reasonable market value for the services they provided.  The dismissal of the administrative proceeding also means the CFPB will not have an opportunity to rule on how reasonable market value is determined in mortgage re-insurance arrangements.

 

Neither PHH Corporation nor the CFPB has filed a petition for certiorari asking the U.S. Supreme Court to review the D.C. Circuit’s en banc PHH decision.  The filing deadline was May 1.

In that decision, which was issued on January 31, the D.C. Circuit ruled in favor of PHH on its challenge to the CFPB’s RESPA interpretation but rejected PHH’s challenge to the CFPB’s constitutionality based on its single-director-removable-only-for-cause structure.

While the decisions of the CFPB and PHH not to seek certiorari means the PHH case will not be the vehicle for a Supreme Court ruling on the CFPB’s constitutionality, other pending cases could provide such a vehicle.  Among such cases is CFPB v. All American Check Cashing, in which the Fifth Circuit recently agreed to hear an interlocutory appeal challenging the CFPB’s constitutionality.

 

On January 31, 2018, the en banc D.C. Circuit handed down its opinion in the PHH v. CFPB case, which we’ve discussed at length. It held, 7 to 3, that the CFPB’s single-director-removable-only-for-cause structure is constitutional but that the CFPB’s interpretation of RESPA was wrong.

En Banc Court Reinstates Panel’s RESPA Ruling

The en banc Court reinstated the RESPA-related portions of the D.C. Circuit’s October 2016 panel decision. The panel had 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 panel rejected this on the ground that the statute unambiguously allows the kinds of payments that the CFPB’s 2015 interpretation prohibited.

In remanding the case to the CFPB for further proceedings, the panel had 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.” The en banc Court cited the panel’s due process analysis with approval.

The panel’s RESPA decision remanded the case to the CFPB to determine whether PHH violated RESPA under the longstanding interpretation previously articulated by HUD. The en banc Court’s reinstatement of that aspect of the panel decision led it to order that the case be remanded to the CFPB for further proceedings.

Statute of Limitations Continues to Apply to RESPA Cases Before CFPB

At the administrative stage of the case, the CFPB argued that no statute of limitations applies to any CFPB administrative action. The panel soundly rejected that argument, holding that RESPA’s three-year statute of limitations applies to any RESPA claims that the CFPB brings, whether administratively or otherwise. That aspect of the panel decision, because it pertains to RESPA, is also reinstated by the en banc Court’s ruling.

CFPB’s Structure Deemed Constitutional

The panel of the D.C. Circuit had also held that the CFPB’s structure was unconstitutional because it improperly prevented the President from “tak[ing] Care that the Laws be faithfully executed.” Rejecting this holding, the en banc Court held that “[w]ide margins separate the validity of an independent CFPB from any unconstitutional effort to attenuate presidential control over core executive functions.” In other words, the en banc Court found (wrongly, in our view) that it wasn’t even a close call.

In reaching this conclusion, the en banc Court considered two questions: First, it asked whether the “means” that Congress employed to make the CFPB independent was permissible? That is, were the independence-creating tools used ones that the Supreme Court approved of, such as for-cause removal or budgetary independence? The en banc Court found that the Supreme Court approved each of the “means” Congress used to achieve CFPB “independence” individually. It reasoned then, that those “means” could all be combined in a single agency without running afoul of the U.C. Constitution.

Second, the en banc Court asked whether “the nature of the function that Congress vested in the agency calls for that means of independence?” In answer to the second question, the en banc Court found it was consistent with historical practice to grant financial regulators like the CFPB such independence.

The en banc Court went further, however, and dismissed the panel’s other constitutional concerns under the heading “Broader Theories of Unconstitutionality.” For example, it rejected the panel’s concern that having a powerful unaccountable CFPB Director was a threat to individual liberty. It suggested that such an argument “elevat[ed] regulated entities’ liberty over those of the rest of the public.” “It remains unexplained why we would assess the challenged removal restriction with reference to the liberty of financial services providers, and not more broadly to the liberty of the individuals and families who are their customers,” it said. In doing so, it seems to have forgotten that Dodd-Frank gives the CFPB Director broad powers to go after individuals, “mom and pop” businesses, and large “regulated entities.”

Lucia Issue Regarding ALJ Appointment Not Addressed

Notably, the en banc Court in PHH specifically “decline[d]to reach the separate question whether the ALJ who initially considered this case was appointed consistently with the Appointments Clause.” That was the issue in Lucia, which we have blogged about extensively. In that case, Raymond J. Lucia challenged the manner in which the SEC appointed administrative law judges (“ALJs”), arguing that ALJs are “inferior officers” who must be appointed by the president, a department head, or the courts under the Appointments Clause of the U.S. Constitution.  The Supreme Court recently agreed to hear Lucia.

On January 12, 2018, the U.S. Supreme Court agreed to hear the Lucia case in which Raymond J. Lucia is challenging how the SEC appoints administrative law judges (“ALJs”). He argues that ALJs are “inferior officers” who must be appointed by the President, the courts, or a department head in accordance with the Constitution’s appointments clause. Lucia filed a petition for certiorari with the Supreme Court after the D.C. Circuit rejected his argument. A circuit split was created when the 10th Circuit reached the opposite conclusion in another case making a similar appointments clause challenge. The Supreme Court’s decision in Lucia may impact numerous past and pending ALJ decisions, including cases involving the CFPB, most notably the PHH case. We’ve discussed the potential impact of Lucia and the related 10th Circuit case before and will continue to follow them closely.

On July 21, 2017, an investment adviser sought review by the Supreme Court of the D.C. Circuit’s recent ruling in Lucia that allowed to stand a district court decision holding that SEC administrative law judges (“ALJs”) are not officers subject to the appointments clause of the U.S. Constitution. We’ve blogged about Lucia extensively because the issue in that case has the potential to impact the outcome of the PHH case.

The initial PHH decision was decided by an SEC ALJ who was on loan to the CFPB. If the Supreme Court decides to hear Lucia and decides that SEC ALJs are subject to the appointments clause, then the initial ALJ decision in PHH may be invalidated. If that happens, the D.C. Circuit could remand PHH back to the CFPB for decision by a properly-appointed ALJ. That would provide the D.C. Circuit with another basis to decide the PHH case without addressing the constitutionality of the CFPB’s structure. Given how the PHH oral arguments went, that seems unlikely, but we will continue to follow Lucia just in case.

On June 7, the CFPB submitted a Rule 28(j) letter to the D.C. Circuit in the PHH case.  In the letter, the CFPB embraced the fact that the Supreme Court’s recent Kokesh v. SEC decision makes the five-year statute of limitations in 28 USC § 2462 applicable to disgorgement remedies in CFPB administrative proceedings.  The CFPB asserted (incorrectly in our view) that Kokesh somehow obviated the applicability of RESPA’s three-year statute of limitations in the PHH case.

PHH forcefully responded to that argument in its reply letter.  It started with the point that § 2462’s limitation period applies “except as otherwise provided” by Congress. Because RESPA “otherwise provides” a three-year statute of limitations, § 2462 is inapplicable.  Next, it pointed out how unreasonable it is for the CFPB to assume that Congress would set one statute of limitations for judicial actions and another for administrative proceedings.  That “would destroy the certainty that Section 2614 was intended to provide,” it argued.  PHH also reminded the court of the CFPB Director’s holding in an earlier proceeding that no statute of limitations applies to administrative actions.  It chided the CFPB for trying to back away from that position at the “eleventh-hour.”

PHH also pointed out that “at the same time the CFPB argued in this Court that Section 2462 governs disgorgement, the Acting Solicitor General argued in Kokesh that it does not.  The CFPB’s freelancing merely underscores that the Director answers to no one but himself.”

Clients are always asking me and others in our Consumer Financial Services Group about how long Richard Cordray will remain as CFPB Director.  The short answer is nobody knows, perhaps not even Richard Cordray.  There are a number of factors, however, that lead me to believe that he will remain as Director until the end of his term on July 16, 2018 unless he voluntarily resigns before then to run for Governor of Ohio.

A Politico article yesterday reported that Gary Cohn, top White House economic aide, recently had a dinner meeting with Director Cordray at which he gave him an ultimatum:  resign or be removed by President Trump.  The article reported that Mr. Cohn had heard the rumors that Director Cordray wants to run for Ohio governor and, according to people familiar with the meeting, left the dinner thinking that the rumors were true.  According to the article, the White House decided to hold off on firing Director Cordray because President Trump “didn’t want to cause a sensation that could boost his candidacy and juice his fundraising.”

While it is very hazardous to predict what President Trump will do, I doubt whether he will try to remove Director Cordray either for cause or without cause.  As things now stand, the only event which could change my opinion would be if the Court of Appeals en banc in the PHH case were to reach the same conclusion as the 3-judge panel in the case – namely, that the CFPB was unconstitutionally structured and the appropriate remedy is to enable the President to remove the Director without cause – and the en banc judgment were to become final before Director Cordray’s term ends on July 16, 2018 (which is only 15 months away).  In my view, the likelihood of those events happening before July 16, 2018 is remote.

The recent filing of a brief  by the DOJ in the PHH case essentially urging  the en banc court to adopt the opinion of the 3-judge panel  suggests that President Trump will not jump the gun by attempting to remove Director Cordray before a final judgment in the PHH case authorizes him to do so.  An attempt by the President to remove Director Cordray for cause would likely trigger a legal challenge by Director Cordray that would outlast the expiration of his term unless his removal were to coincide with a decision by him to voluntarily resign to run for Ohio Governor.  Such a lawsuit would likely be stayed pending the outcome of the PHH case.  If President Trump intended to pursue a removal for cause, I believe he would have done so by now.  If he were to attempt now to remove Director Cordray for cause, that would also likely result in litigation that would outlast July 16, 2018 and, in the meantime, Director Cordray might remain in office.

Ultimately, I believe the length of Director Cordray’s remaining tenure at the CFPB will turn on whether he decides to run for Ohio Governor, and, if so, his view on when he needs to resign as Director to begin his campaign.

Even if Director Cordray remains at the CFPB for several months or longer, it does not necessarily mean that he will finalize any new regulations.  While he should have sufficient time to finalize at least the arbitration regulation, he may be deterred from doing so because of his concern that the rule will be overridden by Congress and President Trump under the Congressional Review Act.  Congress and President Trump have already overridden at least 13 final regulations issued by other federal agencies.

While Director Cordray may be deterred from finalizing any additional regulations, there is no reason to believe that there will be any let-up in his continuing pursuit of his enforcement and supervisory activities.  Indeed, the CFPB has initiated 9 enforcement actions since President Trump’s inauguration.