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As we highlighted last week, the U.S. Court of Appeals for the District of Columbia on Tuesday heard oral arguments in mortgage company PHH Corp.’s challenge to CFPB Director Richard Cordray’s $109 million enforcement action, which ruled that the company took kickbacks in violation of the Real Estate Settlement Procedures Act (RESPA).
As noted, this case is the first legal challenge to a CFPB administrative action. When this case was first decided by an Administrative Law Judge, PHH was handed a $6 million fine. But after pushing back against the decision, Director Cordray increased the fine by 18 times, to $109 million.
As reported by Bloomberg, the case is important because it could create new precedent based on the CFPB’s reading of RESPA, and also the larger question of how the agency interpreted the statute of limitations as not applying to administrative proceedings. A CFPB victory in this case could lead them to challenge practices under other laws or authority based on alleged violations going back several years. For example, this could mean financial institutions 10 years from now could be held liable for their current conduct if the CFPB’s interpretation was to apply to other statutes.
There are also several other implications for RESPA depending on how the court rules.
The case also is reviewing the constitutionality of the CFPB’s single director structure. During oral arguments on Tuesday, the court seemed very concerned with Director Cordray’s actions concerning the PHH fine, and questioned the constitutionality of the single director structure. Judge Brett Kavanaugh asked a number of pointed questions about the CFPB’s structure. He called it “very unusual structure” and noted that it has “few precedents.”
Theodore Olson, who appeared on behalf of PHH, made several arguments. One argument was that a single director, rather than a five person commission, makes the CFPB unconstitutional because of the director’s unilateral authority to bring administrative enforcement actions. Olson also argued that since CFPB is independently funded by the Federal Reserve and only allows the director to be dismissed “for cause”, rather than serving at the pleasure of the president, the CFPB is effectively unaccountable to either Congress or the president. While the court seemed very interested in this topic, it is often difficult to predict a case's outcome from just the oral arguments.
A change to the structure of the CFPB would obviously have a major impact on credit unions. However, we believe there would be a number of legal challenges and hurdles prior to this happening. A decision either way will likely be appealed to the Supreme Court.
We are watching this case very closely and expect a decision by the end of this year.
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