Last week, the D.C. Circuit Court of Appeals issued its much-anticipated decision in PHH Corp. v. CFPB. The 100+ page decision offered thoughtful analysis on the myriad of issues at play in the matter, including the constitutionality of the CFPB’s single director structure. Perhaps the ruling with the greatest impact on the mortgage compliance industry though was the Court’s finding that the CFPB violated due process by retroactively enforcing an alternative interpretation of RESPA Section 8 which deviated from the long-standing interpretation set forth by HUD. As the Court summarized,
“In its order in this case, the CFPB thus discarded HUD’s longstanding interpretation of Section 8 and, for the first time, pronounced its new interpretation. And then the CFPB applied its new interpretation of Section 8 retroactively against PHH, notwithstanding PHH’s reliance on HUD’s prior interpretation. The CFPB sanctioned PHH for previous actions that PHH had taken in reliance on HUD’s prior interpretation, even though PHH’s conduct had occurred before the CFPB’s new interpretation of Section 8.”
(emphasis in original)
The D.C. Circuit Court of Appeals found that not only did the CFPB violate “bedrock due process principles” by retroactively applying a new interpretation of the statute, but that the CFPB had also misinterpreted Section 8(c) of RESPA. The Court confirmed that Section 8(c) of RESPA indeed carves out a safe harbor for certain types of payments between settlement service providers and found the CFPB’s recent interpretation that it does not provide a “substantive exemption” to be “a facially nonsensical reading of Regulation X.” Specifically, the Court held that Sections 8(a) and 8(c) of RESPA as read together, “allow captive reinsurance arrangements so long as the mortgage insurance companies pay no more than reasonable market value to the reinsurers for services actually provided.” The Court then remanded the matter back to the CFPB to determine whether more than reasonable market value was paid for reinsurance in this particular case.
This ruling has a substantial impact on the mortgage compliance industry as it affords industry participants more security than was previously offered regarding the CFPB’s ability to create and enforce retroactively new interpretations of existing rules and regulations. This is not to say that the CFPB cannot re-interpret those laws and regulations within its jurisdiction, just that they must provide the industry with proper advance notice when doing so and may only enforce such interpretations on a prospective basis.
The Court also found in its decision that a three year statute of limitations applies to enforcement actions brought by the CFPB under RESPA, which is in opposite of the CFPB’s prior stance that such a statute of limitations did not apply to administrative enforcement actions brought by the Bureau. Together, the Court’s rulings act to limit the CFPB’s ability to seek restitution for certain actions which fall outside the statute of limitations and where an institution’s actions were consistent with the controlling guidance at the time.
It is worth noting that the Court also found the current single-director structure of the CFPB where the director is only removable by the President for cause to be unconstitutional. However, the Court remedied this constitutional deficiency by striking the “for cause” provision in the applicable statute and allowing the President to now remove the director “at will at any time.”
It is likely that the CFPB will appeal the Circuit Court decision and that the case is far from settled at this time. Still, the Circuit Court has given the industry a clear win in terms of security and clarity surrounding CFPB retroactive enforcement and interpretations (at least for now).