With just over a week to go before Richard Cordray steps down from the Consumer Financial Protection Bureau, the bureau still faces a looming legal showdown with President Trump over whether he has the authority to fire the head of an independent agency.

Cordray's departure would appear to make a ruling by the U.S. Court of Appeals for the D.C. Circuit moot, except that a ruling in the case, which is expected any day now, could have an impact on Trump's interim and final picks to lead the CFPB.

Depending on how PHH Corp. v. CFPB plays out, it could help or hurt the Trump administration in its efforts to control the CFPB, as well as resolve key questions about the agency's structure and powers.

"The PHH case still definitely matters; it still has an outcome that could impact the bureau," said R. Colgate Seldon, a partner at Alston & Bird.

CFPB Director Richard Cordray.
When CFPB Director Richard Cordray leaves on Nov. 30, it's unclear if the Trump administration can replace him immediately. Bloomberg News

Following is a guide to how the case could still play a role despite Cordray's departure.

D.C. Circuit rejects the CFPB's defense

At issue is a ruling last year by a three-judge panel that found the CFPB's structure is unconstitutional, and said the president could fire a director at will. That case was quickly appealed by the CFPB and is subject to a review by the entire Court of Appeals.

Republicans have argued for years that the CFPB's single-director structure is unconstitutional, objecting to language in the Dodd-Frank Act that said a director could only be fired "for cause."

If the appeals court affirms the lower court ruling, it would give Trump more leeway to determine a new CFPB director immediately.

While the Trump administration has signaled it wants to temporarily appoint Office of Management and Budget Director Mick Mulvaney to the post while a permanent successor is nominated and confirmed, it's not clear if he has legal leeway to do so. While some say Trump has that power once Cordray leaves, a strict reading of the Consumer Financial Protection Act suggests a deputy director, in this case, David Silberman, would fill that role until a successor is confirmed.

Jenny Lee, a partner at Dorsey & Whitney, said that because Cordray would be considered absent or unavailable by virtue of his resignation, the CFPB could name Silberman as interim director "regardless of whatever decision Trump makes with respect to Mulvaney or anyone else."

Adam Levitin, a professor at Georgetown University Law Center, wrote in a recent blog post that any appointment by President Trump to be acting CFPB director "would be illegal."

"Why design an agency to be insulated from Presidential control only to hand the keys to the White house whenever the director leaves before the expiration of his term?" Levitin wrote.

If the appeals court rules against the CFPB, however, that potential legal problem goes away. It would free Trump to appoint Mulvaney under the Federal Vacancies Act.

D.C. Circuit supports the CFPB

If the D.C. Circuit backs the CFPB's appeal, that would limit the power of Trump and future presidents to remove the director of the CFPB for any reason other than "for cause." It would also deal a blow to Republican efforts to reshape the agency and could prompt the Justice Department to appeal the case to the Supreme Court.

Upholding the CFPB's appeal also would be a big win for Cordray and for Sen. Elizabeth Warren, D-Mass., who helped create the bureau in the aftermath of the financial crisis.

Some lawyers argue that pending an appeal to the Supreme Court, the Trump administration would not be able to install an interim director unless Silberman resigns or steps aside.

"The reason the administration would be concerned about Silberman, is it's a policy agenda that they are not aligned with," said Benjamin Saul, a partner at White & Case. "I think they would work diligently to avoid that scenario, or that being a scenario for very long."

D.C. Circuit avoids the constitutional issue entirely

The PHH court battle began when the CFPB initiated a 2014 administrative action against the New Jersey mortgage lender. Initially, an administrative law judge ordered PHH to pay $6.4 million for allegedly taking illegal kickbacks for mortgage referrals. But Cordray threw out that ruling and ordered PHH to pay a $109 million penalty, setting the stage for PHH to sue the bureau, claiming it was unconstitutional.

Richard Gottlieb, a partner at Manatt Phelps & Phillips, said he thinks the D.C. Circuit could exercise restraint and rule on procedural grounds in favor of PHH without touching the larger issue.

"I expect a ruling that does not reach the constitutional issues," Gottlieb said.

The court could determine that Cordray’s interpretation of the Real Estate Settlement Procedures Act, known as Respa, differed dramatically from a previous interpretation by the Department of Housing and Urban Development. The case then might be remanded to the CFPB.

If a Trump appointee is in charge at that time, the CFPB could reduce the judgment against PHH, dismiss the case altogether or uphold HUD's original Respa ruling.

Subscribe Now

Authoritative analysis and perspective for every segment of the mortgage industry

30-Day Free Trial

Authoritative analysis and perspective for every segment of the mortgage industry