En Banc Panel Surprises in PHH v. CFPB Decision

The decision of the D.C. Circuit Court of Appeals in PHH Corporation et al v. Consumer Financial Protection Bureau, No.15-1177 (January 31,2018) took many twists and turns in its almost four year sojourn to the long awaited decision issued on January 31, 2018. In the opinion of some, the journey aptly reflected the political changes roiling Washington and the Bureau during that same period. Please click here to view the decision.

The dispute which precipitated the case began in 2014. The CFPB brought an enforcement action against PHH alleging violations of RESPA for premiums ceded under its captive mortgage reinsurance program. Section 8 of RESPA generally prohibits giving or accepting a fee or thing of value (a kickback) under an agreement to refer business involving real estate settlement services. However, Section 8(c)(2) provides a safe harbor if the payment is bona fide and (emphasis added) for goods actually furnished or services performed. In the enforcement action, then Director Cordray ignored prior Federal precedent and adopted an entirely new interpretation of RESPA in alleging that the premiums would be considered bona fide only if paid solely for the service being performed on its own merits and not tied to a referral of business. He applied this theory retroactively further holding that RESPA’s three year statute of limitations was applicable to civil but not to administrative enforcement actions. Finally he determined that a violation would accrue upon payment of each monthly premium rather than at loan closing. The initial disgorgement penalty of $6 million ballooned to $109 million. PHH fired back and sued the CFPB challenging the Director’s interpretations of RESPA while also arguing the Bureau’s leadership structure (a single director appointed for a five year term and removable by the President only for cause) was unconstitutional.

In 2016 the D.C. Circuit Court of Appeal’s three judge panel sided with PHH. The panel rejected the Director’s interpretation of RESPA as contrary to law and determined that the attempted retroactive application violated PHH’s right to due process. The panel capped off its slam down by holding that the CFPB’s leadership model violated the doctrine of separation of powers and was therefore unconstitutional.

The CFPB sought and was granted a re-hearing en banc (whole panel). As the case progressed, the Republicans won the White House as well as majorities in the House and Senate and suddenly PHH found an unexpected ally in the Department of Justice who in its filing in the case appeared to side with PHH in arguing that the for-cause restriction on removal of the director impermissibly limited Presidential powers and was therefore unconstitutional.

On January 31, 2018, the full panel issued its majority decision including three concurring and three dissenting opinions. The Court reinstated the three judge’s prior ruling on RESPA and in a surprising reversal, held that the CFPB structure of allowing Presidential removal of its Director only for “inefficiency, neglect of duty or malfeasance in office” was consistent with the executive power given the President to execute laws of the United States under Article II of the Constitution and was therefore constitutional. In reaching its decision, the Court relied heavily on its characterization of the Bureau as an “independent” agency charged with curbing fraud and promoting transparency in consumer finance, aligning it with other “independent” agencies such as the FTC, OCC and Federal Reserve having in the opinion of the majority, similar responsibilities.

In reaching its decision the Court set out to answer two questions:

  • Is the means of independence permissible?


Answer: The removal for cause is but a “mild constraint” on the President’s authority and the “…means of independence that Congress chose here is entirely permissible”. The Court noted that the specific limitation on for- cause removal placed on the CFPB  were identical to those of other independent agencies such as the FTC citing the decision of the U.S. Supreme  Court in Humphrey’s Executor v United States, 295 U.S. 602 (1935). In fact, in one of the concurring opinions in the PHH case, one judge surmised that these grounds were likely sufficient to allow removal for sundry transgressions including for “inefficiency” in failing to implement policy.


  • Do the functions given to the CFPB require this means of independence?


Answer: The CFPB is a financial regulator. Congress has historically given a “modicum of independence”  to agencies charged with financial regulation which according to the Court “shields the nation’s economy from manipulation or self-dealing by political incumbents…”

The Panel stated that the decision by Congress to create this restriction on removal was a valid exercise of its Article I legislative power and didn’t “impermissibly burden” the President’s Article II powers nor his authority to assure the competency of the director’s performance where a “degree of independence is necessary to the proper functioning of the agency or official”, citing Morrison v. Olson, 487 U.S. 654 (1988).

The majority noted the concept of independence also extended to budgetary autonomy enjoyed by other independent federal regulators- the CFPB’s source of funding is the Federal Reserve rather than Congress. Finally, the En Banc Panel soundly rejected PHH’s carefully crafted argument that the Bureau’s single director leadership model did not have the checks and balances of the multimember leadership structure of regulators like the FTC and was therefore constitutionally defective.

The dissents in the PHH case were vigorous in their opposition. One of the two dissenting Judges in the case argued in favor of severing the for -cause removal provisions of the CFPB’s director from the Dodd- Frank Act while the other in a forcefully worded opinion advocated for a wholesale elimination of the CFPB from Dodd- Frank leaving it to Congress to revisit the Bureau and its mission in its entirety.

For the moment, the case has been remanded to the CFPB to address the RESPA issues, unless of course review of the decision by the Supreme Court is pursued. This case could still take a few more turns.

For questions about this case, contact Julie Moran, Senior Executive Counsel at jmoran@orlans.com.