Debating the constitutionality of the CFPB

Written By: Joel Palmer, Op-Ed Writer

While much of Washington, D.C. was busy with the confirmation hearing of a Supreme Court candidate last week, a much less publicized Congressional hearing was taking place that could have a major impact on the mortgage industry. 

On Tuesday, March 21, the House Financial Services Committee held a hearing to debate the constitutionality of the Consumer Financial Protection Bureau (CFPB).

The agency has been a point of contention in Congress since it was formed as part of Dodd-Frank in 2010. It was created to overhaul financial regulation and to bring transparency to consumers, especially as it relates to mortgages and credit cards.

According to its website, CFPB provides “a single point of accountability for enforcing federal consumer financial laws and protecting consumers in the financial marketplace.” The website’s home page indicates that the agency has provided nearly $12 billion in “relief to consumers through enforcement actions.”

One of its most high profile actions and the one that launched the debate on the constitutionally of its structure is an ongoing claim against PHH Corp.

In January 2014, the CFPB announced an investigation against the mortgage lender. The agency claimed that for more than 20 years, PHH referred borrowers to mortgage insurers, who then purchased reinsurance from PHH subsidiaries. CFPB claimed these deals amounted to kickbacks that cost consumers more in mortgage insurance premiums. Furthermore, it levied a $6 million fine against the company.

The agency’s director, Richard Cordray, however, added a whopping $103 million to that fine. PHH fought it, claiming the director, appointed to his post by then President Obama, lacked the authority to take such an action. 

PHH argued that the CFPB’s governing structure violated the U.S. Constitution because it’s headed by a single director who has a fixed term and can only be removed by the President for cause. Furthermore, the bureau is not funded by Congressional appropriation but rather through the operating budget of the Federal Reserve system. 

At the time of its formation, Republicans demanded that the agency be governed by a five-person board instead of a single director and have its budget appropriated by Congress. Instead, Obama used a recess appointment to install Cordray as director for a five-year term that expires in 2018.

The U.S. Court of Appeals agreed with PHH in an October 2016 ruling and vacated the fine. However, the case is scheduled to be reheard in May.

Earlier this month, the Trump Administration’s Department of Justice filed an amicus brief in the case, asking the court to rule the CFPB’s leadership structure unconstitutional and grant the President the authority to remove Cordray and appoint his own director.

However, those in the industry who hoped to see the CFPB dissolved likely won’t get that wish. The DOJ filing stated that while the governing structure of the agency is unconstitutional,  it would not declare “the entire agency and its operations unconstitutional.”

Still, if the Trump Administration wins the right to appoint a new director sooner than 2018, it could have an impact on mortgage lenders, especially considering the President’s real estate background.

In addition to the case against PHH, other actions taken against by the CFPB against mortgage companies include:

•    It ordered Nationstar Mortgage earlier this month to pay a $1.75 million civil penalty for violating the Home Mortgage Disclosure Act (HMDA) by consistently failing to report accurate data about mortgage transactions for 2012 through 2014.

•    It filed a $9 million complaint in May 2015 against Provident Funding Associates accusing the company of charging higher broker fees on loans to African-Americans and Hispanic borrowers. 

•    It filed an $18 million complaint in June 2015 against RPM Mortgage, accusing the company of illegally paying bonuses and higher commissions to loan originators to incentivize them to steer consumers into costlier mortgages.

•    It accused BancorpSouth Bank in June 2016 of discriminatory mortgage lending practices that harmed African Americans and other minorities. The agency demanded restitution and penalties of more than $11 million.

About the Author

As an NAMU® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.

Opinion-Editorial (Op-Ed) Disclaimer For NAMU® Library Articles: The views and opinions expressed in the NAMU® Library articles are those of the authors and do not necessarily reflect any official NAMU® policy or position. Examples of analysis performed within this article are only examples. They should not be utilized in real-world application as they are based only on very limited and dated open source information. Assumptions made within the analysis are not reflective of the position of NAMU®. Nothing contained in this articles should be considered legal advice.