This is Part II of a two-part blog series examining the D.C. Circuit Court’s opinion in PHH Corp. v. Consumer Financial Protection Bureau, [1] issued on October 11, 2016. Part I provided background information and examined one holding from the Court’s decision—that the single-director structure of the CFPB [2] was unconstitutional. The Court addressed this constitutional issue by holding that the CFPB’s director is now subject to oversight and removable at will by the President—a remedy the Court feels will not affect the ongoing operations of the CFPB.

This post will review perhaps the more significant holdings from the Court’s opinion, including the Court’s rejection of (i) the CFPB’s new interpretation that RESPA Section 8 did not allow captive reinsurance arrangements, (ii) the CFPB’s attempt to apply its new interpretation against PHH retroactively, and (iii) the CFPB’s argument that relevant statutes of limitation do not apply to its administrative enforcement actions.

As the D.C. Circuit viewed it, “the basic statutory question in this case [was] not a close call.” [3] The Court rejected the CFPB’s interpretation that RESPA Section 8 did not permit the captive reinsurance arrangements that PHH had engaged in for decades relying on HUD’s guidance. [4] The Court noted that, standing alone, Section 8(a) could possibly be construed to call into question mortgage insurers’ arrangements to purchase reinsurance from a lender affiliate. [5] Indeed, one of RESPA’s purposes was to eliminate “kickbacks or referral fees that tend to increase unnecessarily the costs of certain settlement services.” [6] However, as the industry has long understood, Section 8(c) “carve[s] out a series of expansive exceptions, qualifications, and safe harbors related to Section 8(a).” [7]   In relevant part, the Court explained that Section 8(c)(2) provides that “[n]othing in this section shall be construed as prohibiting . . . the payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or four services actually performed . . . .” [8]

Accordingly, the D.C. Circuit confirmed what the industry had been told and understood for decades: “Section 8(c) permits captive reinsurance arrangements where mortgage insurers pay no more than reasonable market value for the reinsurance.” [9]

Even if the CFPB had correctly interpreted RESPA Section 8, the Court made it clear that it took exception to the CFPB’s “gamesmanship” in retroactively applying its new interpretation. In addition to decades of HUD guidance, the Court noted that HUD even “adopted a rule, Regulation X, under which captive reinsurance arrangements were permitted so long as the insurer paid reasonable market value for the reinsurance.” [10]   The CFPB not only provided a new interpretation in 2015 that “represented a complete about-face from the Federal Government’s longstanding prior interpretation” of the statute, but also  “ retroactively appl[ied] that new interpretation to PHH’s conduct that occurred before the date of the CFPB’s new interpretation.” [11] The Court held that by doing so, “CFPB violated bedrock due process principles” [12] —principles that, in the words of the Court, “are Rule of Law 101.” [13]

The Court perhaps summed it up best: “When a government agency officially and expressly tells you that you are legally allowed to do something, but later tells you ‘just kidding’ and enforces the law  retroactively   against you and sanctions you for actions you took in reliance on the government’s assurances, that amounts to a serious due process violation.” [14]

Finally, the Court had little patience for the CFPB’s position that statutes of limitation did not apply to its administrative proceedings. The D.C. Circuit rejected the CFPB’s arguments that the Dodd-Frank Act, and specifically RESPA, do not impose any statute of limitations “on CFPB enforcement actions brought in an  administrative  proceeding, as opposed to in court.” [15]   Instead, the Court characterized the language of the statute at issue, 12 U.S.C. § 2614, as “straightforward,” “logical,” and “predicable,” held that it clearly imposes a three-year statute of limitations on CFPB administrative actions, and described the CFPB’s contrary position as “absurd.” [16]

[1] PHH Corp. v. Consumer Fin. Protec. Bureau , 15-1177, 2016 WL 5898801, at *35 (D.C. Cir. Oct. 11, 2016), available at https://www.cadc.uscourts.gov/internet/opinions.nsf/AAC6BFFC4C42614C852580490053C38B/$file/15-1177-1640101.pdf  (last visited Oct. 18, 2016).

[2] Acronyms and abbreviations not otherwise defined herein will have the same meaning as in Part I.

[3] PHH Corp. , 2016 WL 5898801, at *30.

[4] Id. at *5, 29.

[5] See id.   at *6.

[6] S ee  12 U.S.C. § 2601(b)(2); see also id.  § 2607(a) (plaining prohibiting such practices).

[7] See PHH Corp. , 2016 WL 5898801, at *6.

[8] Id.  (quoting 12 U.S.C. § 2607(c)(2)).

[9] Id.  at *30.

[10] Id.  at *31 (citing 24 C.F.R. § 3500.14(g)).

[11] Id.  at *33-34.

[12] Id.  at *30.

[13] Id. at *35.

[14] Id.  at *35.

[15] Id.  at *5, 37.

[16] See id.   at *39-41.

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