On October 11, 2016, the D.C. Circuit Court of Appeals issued its bombshell opinion in PHH Corp. v. CFPB, 839 F.3d 1 (D.C. Cir. 2016).  Media reports have primarily covered the Constitutional issue the decision resolved—that the structure of the Consumer Financial Protection Bureau (“CFPB”) violates Article II’s delegation of all executive powers to the President.  But the decision also contains two practical holdings that will benefit financial institutions subject to the CFPB’s regulation.  Those holdings, while unquestionably good, are not enough to warrant celebration just yet.  The decision may invite a spike in future CFPB enforcement actions, and it is uncertain whether the decision will remain good law in any event.  The CFPB has petitioned the D.C. Circuit for hearing en banc, and if the en banc panel upholds the decision, it could possibly petition the United States Supreme Court for certiorari.

Practical Holdings Unrelated To The CFPB’s Structure.  The decision’s first practical holding relates to the CFPB’s practice of adopting a new legal position, then applying it retroactively to past conduct.  To view the issue in the proper context, remember that the nineteen different consumer protection laws the CFPB is now tasked with regulating were previously overseen by other agencies before the CFPB was established.  So, there is a wealth of earlier agency interpretations on which financial institutions traditionally relied in deciding whether they were compliant.

The CFPB went wrong by suddenly interpreting those laws differently, then applying its new positions retroactively to past conduct.  The PHH decision squarely rejects that practice.   To be sure, the CFPB can change a prior regulator’s interpretation of a statute that the CFPB now administers.  But it must explain the reason for the change, the new interpretation must be consistent with the statute, and the new interpretation may not be applied retroactively to conduct undertaken in reliance on the prior regulator’s interpretation.

The decision’s second practical holding is that the CFPB’s administrative enforcement actions and remedies are limited by the statutes of limitation applicable to the statutes it enforces.  The CFPB had previously asserted that it was not subject to any limitation periods when it brought enforcement actions in an administrative forum.  The court rightly disagreed.  Now, the limitations period for the underlying statute is what governs, whether the CFPB brings the action in an administrative forum or not.

The Practical Impact And Next Steps. The practical impact of these holdings in the short term is, without a doubt, beneficial to the industry.  The industry should be safer from the CFPB’s retroactive application of its new positions.  The CFPB should become more transparent and provide better guidance to the industry about what the agency believes is noncompliant.  Likewise, the industry should be better insulated from stale charges of misconduct in which the underlying limitations period has expired.

But don’t rejoice just yet.  The decision’s long term effects are much harder to predict.

If the CFPB can no longer reach misconduct occurring outside the applicable limitations period, the industry may see a spike in enforcement actions, because the CFPB now has a greater incentive to act swiftly before claims expire.  For the same reason, the industry may see a decline in the time duration of CFPB investigations.  While shorter investigations may initially seem attractive, they could have an unfortunate side effect: premature suits filed for the purpose of avoiding the statute of limitations defense, but where the underlying investigations are still incomplete.  Similarly, financial institutions should expect to receive requests from the CFPB to enter into tolling agreements while investigations are underway.  Declining such requests, of course, may itself invite litigation.

Perhaps the most important question, however, is whether the two practical holdings discussed above will be around long enough to make any difference.  Shortly after the decision was filed, the CFPB released a statement expressing that it “respectfully disagree[d]” with the decision, and that the CFPB was considering its options.  However, the CFPB was more forthright in a subsequent brief it recently filed in an unrelated enforcement action.  There, the CFPB branded the decision as “wrongly decided” and went so far as to state that the decision “has no basis in the text of the Constitution or in Supreme Court case law.”  Brief of CFPB at 1, 2, CFPB v. Intercept Corp., No. 3:16-cv-00144-RRE-ARS (D.N.D. Oct. 14, 2016).

Then, on November 18, 2016, the CFPB filed a petition for rehearing en banc.  Describing the decision as “dramatic and unprecedented,” the CFPB’s petition asserts that the decision has set up “the most important separation-of-powers case in a generation.”  Id. at 2.  Importantly, the CFPB’s rehearing petition did not merely target the decision’s holding regarding the Constitutionality of the CFPB’s structure.  The petition also takes the D.C. Circuit to task for misinterpreting the Real Estate Settlement Procedures Act (“RESPA”) “in a manner that so fundamentally defeats the statutory purpose as to warrant rehearing en banc.”  Id. at 3.  Going even farther, the CFPB’s petition insists that the CFPB can change its own interpretation of RESPA and then apply it retroactively, at least when―in its view―lenders have not justifiably relied on earlier interpretations.  Id. at 15-16.

With all this in mind, expect a petition for certiorari to be filed in the United States Supreme Court if the petition for rehearing is denied.  If the rehearing petition is granted, or if certiorari is later granted, the primary focus of the Courts’ inquiry will no doubt be the Constitutional question regarding the CFPB’s structure.  But the decision’s two practical holdings discussed above could become casualties in the eventual opinion(s).  Time will tell whether the decision’s good news will last, and if does, whether it will cause a surge in CFPB enforcement actions.

For more information regarding the PHH decision and its impact on financial institutions, please contact
Kerry W. Franich at kwf@severson.com.