Benjamin Diehl is a partner with Stroock, Stroock & Lavan. Diehl practices in both the Financial Services/Class Action and Government Relations Practice Groups. He advises financial services companies and other clients with regard to compliance and regulatory matters and defends class actions and proceedings commenced by government agencies. Prior to joining Stroock, Diehl was with the California Attorney General’s Office for many years, most recently serving as Supervising Deputy Attorney General in the Consumer Law Section, where he oversaw civil prosecutions brought by the Attorney General’s Mortgage Fraud Strike Force and participated in other investigatory matters across multiple issues and industries. Among other things, Diehl played an active role in the negotiation of the multi-state National Mortgage Settlement.
Diehl recently discussed with DS News the trial in the case of PHH Corp. v. CFPB and the implications of the case for the financial industry. PHH, a nonbank mortgage lender based in New Jersey, is challenging the constitutionality of the Consumer Financial Protection Bureau and Director Richard Cordray, who penalized PHH $109 million last June for alleged RESPA violations. Oral arguments for the trial took place on Tuesday in the D.C. Circuit Court of Appeals. PHH is the first company to challenge a penalty issued by the CFPB.
Tell us about the legalities of this case.
The case came to the D.C. Circuit Court of Appeals on a direct appeal from the decision of Director Cordray. The CFPB has alleged that PHH has engaged in misconduct with respect to lender-placed insurance products and private mortgage insurance products. ALJ at the CFPB had issued an opinion, and both PHH and CFPB appealed that order to Director Cordray per Dodd-Frank. Director Cordray issued an opinion that drastically expanded PHH's liability under the citations issued by the CFPB and PHH appealed that to the D.C. Circuit Court of Appeals. The D.C. Circuit Court of Appeals indicated in the days leading up to the oral arguments that it wanted to have counsel specifically prepared to answer questions about, among other things, the constitutionality of the structure of the CFPB and in particular the fact that it has a single director who can only be removed for cause. The court was really aggressive in its questions to the CFPB about those provisions in the oral argument today.
What do you be believe will be the outcome in the case? Does PHH even have a chance?
I think that from the questions that were asked in the oral arguments, the panel definitely has concerns about the constitutionality of the CFPB, and it's clear that the court is looking long and hard at those questions. One of the things that is unclear is that even if the court decides that the CFPB is unconstitutional, it's unclear what remedy would be appropriate and what impact that would have and whether it would reach the statutory construction of RESPA question that's also part of the appeal, or if it would solely look at the question of the CFPB's structure. It's unclear how the court will structure what its opinion is, and I think it's also a virtual certainty that whichever side does not prevail will seek review of the decision by the U.S. Supreme Court.
What impact will this case have if it comes out in favor of PHH, and on the other side of that, what impact will if have if it comes out in favor of the CFPB?
If it comes out in favor of the CFPB, it would make it very difficult for other defendants to challenge the structure of the CFPB in the future. It's obviously being very closely watched as a result of that. And that's just the questions about the structure of the CFPB. It's also possible that the court could, because there are a number of questions that are before the court in the case. The court could structure its decision in a number of different ways. For example, it could conclude that there is not a constitutional question as to how the CFPB is structured, but that the director inaccurately interpreted and applied RESPA. Obviously, the fact that the court wanted to ask so many questions about the structure makes that particular scenario less likely than others, but it's an example of the fact that there's a lot of nuanced questions here, and it's not one question that gets answered yes or no to determine which side is the prevailing party in this action. There are a lot of interrelated questions before the court here, both in terms of the structure of the CFPB and in the appropriateness of the director's decision that's being appealed. So the ramification of any decision is going to take looking at how all those different questions about the CFPB are answered by the court. It's also possible the court could conclude that there is a constitutional problem with how the CFPB is structured and then not reach the underlying questions about how to interpret and apply the statute that is at issue. So it's really going to depend not just on what the court decides, but on how it structures its order.
What is the best possible outcome for PHH?
The best possible outcome for PHH and the arguments that it advanced today were both structure of the CFPB is unconstitutional and that the decision it was appealing from was inaccurate. PHH is hoping to prevail on both of those questions and is seeking not only to have this particular penalty against it set aside, but to get an order that would limit the way the CFPB can operate going forward. Such an order could, depending on how the court structures it, also raise questions about prior orders by the CFPB as well, which is another reason why there are a lot of questions presented here and why we need to read carefully whatever decision comes out.
If the court finds that the structure of the CFPB is unconstitutional, does that mean that other companies that have been penalized by the CFPB could appeal their penalties?
Maybe or maybe not. It depends on the way the court structures its decision. It would also depend on how future courts apply provisions of settlement agreements. There would be a lot of additional questions that would then get asked. The answer to those questions is really going to depend on how the court structures its opinion and also on what the U.S. Supreme Court does, if anything. This is a windy road that is far from a conclusion.
So it's still far from over even when the D.C. Circuit Court of Appeals decides.
The D.C. Circuit court will probably issue its decision near the end of the year. That's what everyone is expecting. Then there is going to be the appeal to the Supreme Court, which is expected. Then there is going to be questions about how to interpret whatever order does come out and that order could take a number of different shapes. There are a lot of questions packed into this case. It's not just about RESPA, and it's not just about the one particular case before it. The language of the opinion will have to be read to figure out how sweeping it is intended to be, and that will influence the next steps.