Thursday, April 13, 2017

CFPB back in court on PHH, Sprint

By Katalina M. Bianco

The case of PHH v. CFPB continued this week when PHH Corporation asked the U.S. Court of Appeals for the District of Columbia Circuit to reverse a $109 million Consumer Financial Protection Bureau administrative disgorgement order without remanding the appeal for further action by the bureau. According to the company and its affiliates, the appellate court should declare that the Dodd-Frank Act’s creation of the CFPB violated constitutional separation of powers requirements and the only remedy is the complete invalidation of the bureau. The companies’ reply brief also argues that the CFPB has offered no real support for its effort to enforce a reinterpretation of the Real Estate Settlement Procedures Act against the companies.

Constitutionality arguments. PHH Corp. focuses much of its reply brief on arguments that the CFPB’s single-director, removal-for-cause structure is an unconstitutional intrusion on the president’s powers by Congress. If the CFPB is constitutional, there is no logical curb on Congress’s ability to create independent agencies, the brief asserts. The bureau’s broad powers and ability to fund itself by drawing on the Federal Reserve Board’s assessments exacerbate the problem.

The brief paints a picture of the bureau as having an essentially unrestrained ability to act as the director chooses.

Severing the removal-for-cause provision from the remainder of the Dodd-Frank Act will not solve the problem, the brief claims. Congress intended to create what amounts to a wholly unconstitutional agency, and that agency must be wholly restructured.

PHH Corp. also argues that the enforcement action cannot be remanded to an unconstitutional agency. The appellate court must decide the constitutional issue. The brief notes as well that all of the parties agree the question should be decided.

RESPA arguments. The three-judge panel unanimously rejected the bureau’s new interpretation of RESPA and its claim not to be restricted by a statute of limitations, and it was right to do so, the reply brief contends. The use of captive reinsurance companies did not amount to a prohibited kickback because the companies actually rendered a service in exchange for reasonable payments.

Applying a reinterpretation of the law to completed conduct that was deemed legal when it occurred offends fundamental fair notice principles, the PHH Corp. brief continues. The entire industry relied on the Department of Housing and Urban Development’s prior regulatory interpretation. The bureau can change an interpretation, or even decline to offer an interpretation, the brief concedes, but it cannot punish a company for relying on guidance it actually has issued.

Sprint. Noting that "the siren song of $15.14 million in unexpended funds lured some new sailors into the shoals of this litigation," a federal trial judge has ordered the CFPB and Justice Department to supply their respective positions regarding a proposed modification of a 2015 consent order between the CFPB and Sprint Corporation.

The 2015 consent order was intended to settle a lawsuit brought by the bureau against Sprint, in U.S. District Court for the Southern District of New York, alleging that Sprint knowingly allowed unauthorized third-party charges to be billed to its wireless telephone customers between 2004 and 2013.

The court’s latest Memorandum and Order was the result of a Jan. 3, 2017, "Memorandum in Support of Joint Motion to Intervene to Modify Stipulated Final Judgment and Order" filed by the Attorneys General for the states of Connecticut, Indiana, Kansas, and Vermont. The state AGs sought to intervene in the case to ensure that the approximately $14 million of Sprint’s remaining, unused "consumer redress funds" are used for "consumer protection purposes." 

It should be noted that during 2015, Sprint entered into separate multi-million dollar settlements, totaling $18 million, with the Federal Communications Commission and with all 50 states and the District of Columbia to resolve charges stemming from its third-party billing practices.

The court ordered the CFPB and DOJ to provide their positions on the proposed modification of the consent order since that modification would "alter the Consent Order in a fundamental way by redirecting elsewhere $15.14 million earmarked for the U.S. Treasury." The court added that the proposed modification "may raise an issue implicating the Miscellaneous Receipts Act, which provides that Government officials ‘receiving money for the Government from any source shall deposit that money with the Treasury.’"

To comply with the court’s order, the CFPB and DOJ must file their respective memoranda by May 10, 2017. The state AGs and Sprint may file responsive memoranda by May 24, 2017. As part of its memorandum, the CFPB also is requested to "advise this Court where the unexpended funds have been deposited during the pendency of the intervenors’ application."

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