The D.C. Circuit Court issued its long-awaited opinion in PHH Corporation v. Consumer Financial Protection Bureau, No. 15-1177 (D.C. Cir., filed 2015) regarding the constitutionality of the Consumer Financial Protection Bureau’s (CFPB) single-director structure, and the CFPB’s attempted enforcement action against PHH Corp. (PHH) for alleged violations of the Real Estate Settlement Procedures Act (RESPA). While the biggest headline coming out of that decision is that the CFPB’s structure, as designed by the Dodd-Frank Act, was determined to be unconstitutional, the Court also issued significant opinions regarding statutes of limitations in administrative actions, and the CFPB’s attempt to retroactively apply a novel interpretation of Section 8 of RESPA. With regard to the last point, the D.C. Circuit held that the CFPB’s interpretation of Section 8 of RESPA was inconsistent with the statute’s text, and that retroactively applying that interpretation violated due process because it was in direct conflict with prior guidance issued by the Department of Housing and Urban Development (HUD).
CFPB’s Interpretation of Section 8 of RESPA
In the context of this case, Section 8(a) of RESPA prohibits “payment by a mortgage insurer to a lender for the lender’s referral of a customer to the mortgage insurer.” However, section 8(c) provides that “[n]othing in [Section 8] 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 for services actually performed” (12 U.S.C. § 2607(c)(2)). HUD, the federal agency responsible for enforcing RESPA prior to the CFPB’s formation, publicly interpreted this to mean that a “bona fide” payment is one that is consistent with the reasonable market value of the good or service.
The CFPB, on the other hand, took the opinion that a mortgage insurer’s payment for reinsurance is not “bona fide” if it is part of a tying arrangement. In other words, the CFPB took issue with the practice of referring customers to a mortgage insurer that would, in turn, purchase reinsurance from the lender. The Court bluntly noted that the CFPB’s interpretation “makes little sense,” that “Section 8(c) of RESPA specifically bars the aggressive interpretation of Section 8(a) advanced by the CFPB in this case,” and that “the CFPB’s interpretation flouts not only the text of the statute but also decades of carefully and repeatedly considered government interpretations” (PHH Corp. v. CFPB, No. 15-1177 at 74, 75, and 76).
Retroactive Application Violates Due Process
Next, the Court addressed the CFPB’s attempt to retroactively apply its new interpretation to PHH’s prior reinsurance arrangements. As mentioned above, when HUD was tasked with enforcing RESPA, it publicly issued opinion letters in 1997 and 2004 explaining that captive reinsurance arrangements are “permissible if the payments made to the reinsurer (1) are ‘for reinsurance services actually furnished or for services performed’ and (2) are ‘bona fide compensation that does not exceed the value of such services.’” (citing letter from John P. Kennedy, Associate General Counsel for Finance and Regulatory Compliance, Department of Housing and Urban Development, to American Land Title Association 1 (Aug. 12, 2004) (J.A. 259)). In essence, so long as any fee paid for reinsurance bears a reasonable relationship to the market value of that reinsurance, then it does not violate Section 8(a) of RESPA.
In 2015, once the CFPB was assigned to enforce RESPA, they determined that captive reinsurance arrangements were prohibited by Section 8 because the payment was part of a tying arrangement. Relying upon its new interpretation, the CFPB attempted to penalize PHH for conduct that occurred as far back as 2008. Citing numerous Supreme Court cases, the D.C. Circuit Court held that the CFPB’s retroactive application is prohibited by the Due Process Clause. Because HUD had previously issued widely relied upon guidance on this issue and the CFPB had never publicly changed course—which they are free to do—the CFPB cannot retroactively impose adverse consequences for an entity’s past conduct that was structured in reliance upon the government’s prior advice.
The CFPB argued that nothing about HUD’s prior opinions should have given entities a reason to rely upon them, noting that they were not reflected in a binding rule. The Court strongly rebuked the CFPB’s position with the following statement:
We therefore find this particular CFPB argument deeply unsettling in a Nation built on the Rule of Law. 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. The rule of law constrains the governors as well as the governed.
After reiterating that the CFPB’s interpretation of RESPA is impermissible, the D.C. Circuit Court remanded the case so that the CFPB may determine whether the fees paid by any mortgage insurers were more than the reasonable market value to the reinsurer, subject to any applicable statutes of limitations.
In addition to being perhaps the strongest public rebuke of the CFPB’s authority to date, this holding reiterates and confirms that the CFPB is subject to prior agencies’ interpretations. The CFPB may adopt different interpretations of consumer financial laws, but those interpretations must be made public before an entity can retroactively be punished for actions that are consistent with the prior agency’s guidance.