A federal appeals court decision Wednesday upholding the lawfulness of the Consumer Financial Protection Bureau’s independent, single-director design will carry wide implications as companies continue to challenge the agency and sets the stage for a final showdown in the U.S. Supreme Court.

The decision Wednesday upholding the power structure at the agency won’t be the last word on the case. Either side could decide to take the dispute to the U.S. Supreme Court, and things could get tricky there.

For the moment, the D.C. Circuit’s ruling in PHH v. CFPB keeps the status quo—the president can only remove the agency director for cause, not at will, a protection that kept the Obama-appointed director, Richard Cordray, in power.

Even as the Trump administration faced pressure to fire him. Mick Mulvaney, the White House budget director, is the interim leader of the agency. (The Cordray-picked successor, Leandra English, is suing over Mulvaney’s appointment.)

What follows are three considerations about the fallout from Wednesday’s ruling—and what might be next.

1. The Supreme Court’s probably the next venue, but it’ll get tricky there.

The U.S. Justice Department, under U.S. Attorney General Jeff Sessions, abandoned its defense of the CFPB back in March 2017.

Still, the CFPB—with Cordray still at the helm—was able to defend itself in the D.C. Circuit, sending appellate lawyer Lawrence DeMille-Wagman to argue for the bureau in May.

The CFPB’s authority to mount a self-defense ended there. Under the Dodd-Frank Act, which created the agency, the CFPB enjoys independent litigating up through the circuit court but needs the Justice Department’s permission to argue before the Supreme Court.

If PHH takes the case to the high court, it’s unclear who will defend the D.C. Circuit ruling.

The Justice Department, in the Supreme Court, would argue against the constitutionality of the independent single-director power scheme. PHH was represented in the D.C. Circuit by one of the country’s top appellate lawyers, Theodore Olson of Gibson, Dunn & Crutcher.

When asked Wednesday about whether the CFPB would make a written request to represent itself before the Supreme Court, a spokesman said only that the agency was “analyzing the decision.”

In cases where no party is defending a lower-court ruling, the justices have the option to appoint a lawyer to do just that. The Supreme Court this month appointed an O’Melveny & Myers partner to defend a D.C. Circuit ruling upholding the constitutionality of the U.S. Securities and Exchange Commission’s administrative law judges.

That case will be argued later this term. In that case, the Justice Department also reversed its earlier litigation stance.

2. The consequences of the D.C. Circuit decision will touch many pending cases.

The D.C. Circuit decision—unless or until it’s overturned—effectively forecloses one avenue of attack companies mounted against the agency in many federal cases across the country.

Companies in the CFPB’s crosshairs seized on the October 2016 panel ruling that struck down the agency’s structure as unconstitutional.

Lawyers for financial services companies pointed to the decision to bolster their argument that the CFPB’s enforcement action against them—whether a lawsuit or an investigation—was unlawful because so too was the agency’s structure.

In Florida, a mortgage servicing company took the piggybacking even further. Ocwen Financial Corp.—represented by Greenberg Traurig and Goodwin Procter—invited the Justice Department to tell the court that the government was no longer backing the independence of the agency. The Justice Department ultimately decided not to take Ocwen up on the offer to weigh in.

The decision will most immediately be felt in Washington federal district court, which is bound by D.C. Circuit precedent.

Shortly after the en banc D.C. Circuit handed down its decision Wednesday, a federal district judge ordered the CFPB and a company challenging an agency investigation to state their positions “concerning the effect, if any,” of the PHH ruling.

3. Don’t forget about RESPA. Companies will look anew at how the CFPB reinterprets this law.

For the CFPB’s challenger, PHH, Wednesday’s ruling was not a complete loss. And that part of the decision—concerning the Real Estate Settlement Procedures Act—could benefit companies facing CFPB investigations.

The D.C. Circuit left intact the panel’s decision that the CFPB had misinterpreted the law at issue in the underlying enforcement action: the Real Estate Settlement Procedures Act.

Cordray ordered PHH in 2015 to pay $109 million after finding that the mortgage company had unlawfully referred consumers to insurers in exchange for kickbacks.

In 2016, the law firm Mayer Brown described Oct. 11—the date of the D.C. Circuit panel decision striking down that penalty—as a “banner day” for real estate brokers, agents, lenders and title companies subject to the Real Estate Settlement Procedures Act.

With Wednesday’s decision, it is likely that the CFPB will sharply reduce the $109 million in ordered disgorgement or drop the case entirely.

“The combination of that opinion and Acting Director Mulvaney’s recent statement that the bureau would stop ‘pushing the envelope’ on enforcement matters will provide PHH with strong arguments for why the case should be dropped,” said Eric Mogilnicki, a partner at Covington & Burling.

Olson of Gibson Dunn said in a statement: “We are pleased that the en banc D.C. Circuit Court of Appeals has reinstated the panel’s decision holding that former Director Cordray improperly interpreted and applied RESPA to PHH and vacating his order imposing $109 million in penalties and other sanctions.”

He added: “The D.C. Circuit has now made clear that there was no lawful basis for the order under RESPA and the Due Process Clause. We have presented strong arguments showing that the Consumer Financial Protection Bureau’s unprecedented structure violates the Constitution. We are evaluating our options for seeking further judicial review, if necessary.”

Instant Insights /

3 things about the court ruling on the Consumer Financial Protection Bureau

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