By Chris Bruce

Federal appeals court judges focused mostly on the CFPB’s constitutionality in an extended argument May 24 that suggests PHH’s case against the agency is likely headed to the U.S. Supreme Court (PHH Corp. v. Cons. Fin. Protection Bureau, D.C. Cir. en banc, No. 15-cv-01177, oral argument 5/24/17).

They spent less time on a cluster of statutory questions that are at least as important, and perhaps more so, to the Mount Laurel, N.J., based mortgage provider and other financial services companies.

PHH Corp. attorney Ted Olson of Gibson Dunn & Crutcher in Washington all but pleaded with the judges that, whatever their decision, they also address questions about the Real Estate Settlement Procedures Act, due process, and whether certain CFPB actions are subject to a statute of limitations.

“While it was fascinating to hear how different hearing participants play hypothetical chess, there was almost no discussion of the PHH-related RESPA issues, aside from a few statute of limitations questions,” Isaac Boltansky and Fred Small of Compass Point Research & Trading said in a May 24 note on the argument.

Advantage CFPB?

Overall, many saw the argument as a good day for the CFPB. The 11 judges who heard the case seemed to have mixed approaches to it, though there were plenty of signs that the agency may walk away a winner.

“When Congress set up the CFPB, it made the considered decision that a single director removable only for cause would enable the Bureau to most effectively fulfill its mission, and it looks today like a majority of the D.C. Circuit is going to rightly conclude that that choice was constitutional,” Constitutional Accountability Center Chief Counsel Brianne Gorod said in a statement following the argument.

Questions About RESPA

However, even if the CFPB wins on the constitutional question, there’s still the matter of RESPA and related questions.

The case arose after the CFPB said PHH and several affiliates violated RESPA by referring business to mortgage insurers with whom PHH had captive reinsurance agreements. The CFPB said the payments PHH received were unlawful “kickbacks” under RESPA.

Those arrangements are important because they’re common in the home mortgage business, and affect a wide range of companies whose fate may also be tied to the outcome in the PHH case. They also matter to consumers and consumer advocates, because it’s a part of the transaction process about which borrowers may have little visibility or understanding.

“Although most consumers actively shop for a home and some shop for a mortgage, very few actually shop for settlement services,” Consumer Financial Protection Bureau Director Richard Cordray said in his June 2015 ruling against PHH.

Cordray Issues Ruling

An administrative law judge (ALJ) recommended a mixed ruling, and PHH appealed the decision to Cordray, who expanded upon the ALJ’s decision. He said PHH violated RESPA each time it accepted payments at issue in the case, and ordered PHH to disgorge $109 million. He also said the Dodd-Frank Act applies statutes of limitation to CFPB actions brought in court, but not to administrative actions.

PHH quickly asked the D.C. Circuit to stay the CFPB’s action, calling Cordray’s ruling “a radical new interpretation” of RESPA.

The three-judge panel, which divided on the constitutional question in an October 2016 decision, was unanimous on the other matters. All three said the CFPB violated PHH’s due process rights by retroactively applying a new and erroneous interpretation of RESPA. They also rejected the CFPB’s claim that no statute of limitations applies to cases brought in its administrative forum.

Olson Urges Focus

Olson urged the D.C. Circuit to address the statutory questions and related issues at the May 24 argument — just as he did a little over a year ago.

In April 2016, when the case was heard by the three-judge panel, Olson closed his argument by pressing the court to specifically address the statutory questions, citing the importance of those matters to the industry.

He did the same again on May 24, ending the 96-minute argument with a similar request. The panel’s October ruling on RESPA and related questions, he said, must be reinstated. “People have to understand what the rule of law is,” said Olson, a former Solicitor General.

A Few Questions

There was some discussion of those matters May 24, but not much. Judge A. Raymond Randolph asked CFPB attorney Lawrence DeMille-Wagman whether the CFPB still believes that statutes of limitation don’t apply to administrative actions. DeMille-Wagman said a five-year limitations statute found at 28 U.S.C. 2462 applies, but that it didn’t have any effect in this case because of the timing of the CFPB’s action.

On that question, at least, some clarity may be ahead in a separate case. In April, the U.S. Supreme Court heard argument in Kokesh v. Sec. and Exchange Comm., U.S., No. 16-cv-00529. That case tests whether the five-year statute in Section 2462 applies to claims for disgorgement. It’s not clear when the justices will issue a ruling in that dispute.

Meanwhile, Judge Cornelia T.L. Pillard brought up the due process question, asking DeMille-Wagman whether and how PHH was on notice that its payments were illegal.

DeMille-Wagman said RESPA itself is clear that PHH’s actions were unlawful, saying the company set up its reinsurance business to evade RESPA’s requirements. “They could read that from the statute,” he told Pillard.

Constitutional Issues Dominate

Overall, though, the judges largely left the October panel’s conclusions on RESPA unaddressed, focusing for the most part on the constitutional aspects of the case.

Benjamin K. Olson, a partner with Buckley Sandler in Washington, said the judges didn’t show much interest in reconsidering the panel’s conclusions on RESPA, but also said a clear answer will have to wait.

“We will not know what they really think until we have a written decision, which is likely to be months from now,” said Olson, a former deputy assistant director for the CFPB’s Office of Regulations.

Ori Lev, a former CFPB deputy enforcement director and now a partner with Mayer Brown in Washington, said one option is that the D.C. Circuit might adopt the panel’s ruling on the substantive questions, including RESPA.

“It’s unlikely that the en banc court would affirm the agency’s interpretation of RESPA having not asked a single question about it during oral argument,” he said. “That would surprise me.”