The
entire consumer financial industry has been buzzing about yesterday’s U.S. Court
of Appeals decision
in PHH Corporation v. Consumer Financial
Protection Bureau, wherein the D.C. Circuit Court ruled the CFPB’s
structure to be unconstitutional. For
the debt collection industry, however, the Court’s firm ruling on how the
CFPB’s enforcement actions are subject to the statute of limitations and how new
interpretations of law cannot be applied to conduct that predates said
interpretations could be much more impactful. What’s more, the ruling opens the
CFPB up to potential legal challenges over past enforcement actions.
Unconstitutional Structure
In one of
the few cases where a financial services corporation challenged the CFPB’s
enforcement action, PHH’s legal challenge proved to be successful. The Court vacated the CFPB’s $109 million
order against the mortgage lender and remanded the case back to the CFPB to
apply the law as the Court instructed in its 101-page ruling.
The Court
found the Dodd-Frank statutory scheme that created the CFPB unconstitutional,
holding that Congress created the CFPB as an independent agency without any
checks on its power. Historically, to be constitutional, administrative
agencies must either have a director who can be removed at will by the
President—“the official who is accountable to the people and who is responsible
under [the Constitution] for the exercise of executive power”—or have a
multi-member board comprised of “experts appointed by law and informed by
experience” from both major political parties.
As the Court noted, the original blueprint for the CFPB, as envisioned
by “then-Professor, now-Senator, Elizabeth Warren,” had a traditional multi-member
board at the helm. The Executive Branch’s
proposal also included a similar multi-member structure. However, the final version established an
independent agency with a single Director removable only for cause. This is the structure the Circuit Court found unconstitutional.
Per the ruling, the CFPB is “lack[ing] that critical check” that prevents “arbitrary
decision making” and protects “individual liberty.”
The Court
solved the constitutional flaw by deleting Dodd-Frank’s “for-cause” removal
language, thereby giving the President the power to “check” the CFPB through
the “at will” removal of the director.
The concern
for the financial services industry is that this “check” does not change the
ability of the CFPB to wield “vast power over the U.S. economy.” In fact, the Court-fashioned
remedy presents problems of instability in the enforcement and implementation
of agency initiatives as a result of inconsistent policy objectives between directors. It is conceivable that every four years there
will be a new CFPB Director with different philosophies and goals for the
agency. For the time being, we can expect Director Cordray to remain at the
helm with no major shift in CFPB policy or goals, especially if the Democrats
remain in the White House.
Statutes of Limitations and Retroactive
Application
The Circuit
Court’s holdings concerning the application of a statute of limitations period
on CFPB enforcement actions and the retroactive application of new interpretations
of law are perhaps even more important for the debt collection industry in the
near-term.
First, the
Circuit Court dismissed as “absurd” the CFPB’s argument that, “under
Dodd-Frank, there is no statute of limitations for any CFPB administrative action to enforce any consumer protection law” (emphasis in the original). The Court, citing a long line of Supreme Court
cases upholding the importance of a statute of limitations in civil penalty
provisions, held CFPB enforcement actions are confined to the statute of
limitations period in all 19 statutes the CFPB enforces. In PHH’s case the Real Estate Settlement
Procedures Act (the statute the CFPB alleged PHH violated) has a three year
statute of limitations period. In the
case of a Fair Debt Collection Practices Act (FDCPA) enforcement action, the
statute of limitations would be one year as proscribed by the statute. Therefore, going forward, the CFPB cannot
punish a debt collector or debt buyer for FDCPA violations that occurred over a
year prior to the inception of the enforcement action.
Second, the
Court held that the CFPB violated PHH’s due process rights by retroactively
applying a new interpretation of a well-settled principle regarding captive
reinsurance arrangements – “captive reinsurance
arrangements were lawful so long as the mortgage insurer paid no more than
reasonable market value to the reinsurer for reinsurance actually
furnished.” PHH, in good faith,
developed its captive reinsurance practices based on this principal, reflected
in the Department of Housing and Urban Development’s “longstanding
interpretation of the law.” However, in
2015 the CFPB “decided that captive reinsurance agreements were prohibited and
applied its new interpretation [] retroactively against PHH based on conduct
that had occurred as far back as 2008.”
The
Circuit Court first held the CFPB’s new interpretation of the statute to be
wrong and sent the matter back to the CFPB to apply the correct and “well-settled
principle” regarding captive reinsurance arrangements to PHH’s actions. In so ruling the court stated, “The CFPB
obviously believes that captive reinsurance arrangements are harmful and should
be illegal. But the decision whether to adopt a new prohibition on captive
reinsurance arrangements if for Congress and the President when exercising the
legislative authority. It is not a
decision for the CFPB to make unilaterally.”
The
Circuit Court also found unconstitutional the CFPB’s retroactive application of
its new interpretation to PHH’s actions taken before the company knew of the
CFPB’s interpretation. The Court held
this retroactive application was a violation of the Due Process Clause of the
Constitution, a deeply rooted principle in our history, which precludes the government
from applying new rules or laws retroactively to actions that occurred prior to
a new rule or law.
The CFPB
has advanced new interpretations of FDCPA provisions in many of the enforcement
actions and Consent Orders against debt collectors, debt buyers, and debt
collection law firms. For example, in CFPB v. Frederick J. Hanna & Associates, PC the CFPB’s complaint alleged
a lack of meaningful attorney involvement under the FDCPA. After losing a motion to dismiss on different
grounds, Hanna entered into a Consent
Order demonstrating the CFPB’s interpretation that debt collection law firms
should have in hand all the evidence necessary to prove the existence of a debt
prior to filing a law suit to recover the debt—a requirement that did not exist
in the FDCPA, in the Georgia court rules, or even under the ethical code of
conduct for attorneys. This CPFB
interpretation also appears in its Outline of Proposed
Debt Collection Rules and Alternatives Considered. (Notably, the Seventh
Circuit recently dismissed an FDCPA claim alleging a violation against a law
firm for not having sufficient information to proceed to trial after filing a
collection lawsuit in St. John v. Cach,
LLC, 2016 U.S. App. LEXIS 9117 (7th Cir. 2016).)
One of
the major concerns raised at the SBREFA panel for debt collection rulemaking
was the possibility that the CFPB would attempt to apply its pending debt
collection rules retroactively. This PHH
decision confirmed that the CFPB should only apply new regulations to accounts
not opened until after the new regulation takes effect.
The
Circuit Court declined to “consider the legal ramifications” of its decision on
past rules and enforcement actions, but opened the door for challenges of past
CFPB rules and past agency enforcement actions. The Court explained in footnote 19 that other
agencies after losing constitutional challenges have “without major tumult”
been able to “work though the resulting issues regarding the legality of past
rules and past enforcement actions.” This footnote empowers companies (perhaps
even those who entered into consent orders) to consider a legal challenge to
any adverse action by the CFPB because at the time of CFPB action the agency
was structured unconstitutionally.
Following
the release of the Court’s ruling, the CFPB announced that it is “considering
options for seeking further review of the Court’s Decision.” The first step would be a review by the
entire D.C. Circuit Court. If denied,
the CPFB can petition the U.S. Supreme Court to hear the case.
