The Consumer Financial Protection Bureau's temporary legal victory on Thursday has lowered the odds that President Trump will seek to remove the agency's director, Richard Cordray, despite repeated calls by prominent Republicans for his ouster.
The court agreed to an "en banc" review of the case, PHH Corp. v. CFPB, throwing out an earlier decision that said the CFPB director could be fired at will by the president. In setting a May 24 hearing, the appeals court is signaling it is not likely to make a decision until late summer at the earliest.
Given the ongoing legal uncertainty, lawyers said it was unlikely that the Trump administration would seek to launch a separate court battle by attempting to fire Cordray "for cause," the only way a CFPB director can be fired under the Dodd-Frank Act.
"It would be a very challenging move to make," said Quyen Truong, a partner at Stroock & Stroock & Lavan and a former CFPB assistant director and deputy general counsel. "It would ignite a major legal challenge."
To be sure, Trump excels at defying predictions, but any move against Cordray will be heavily criticized and challenged immediately.
"All signs point to Trump waiting to see how this plays out," said James Kim, an attorney with Ballard Spahr. "It's sticky, it's complicated."
If Trump doesn't attempt to fire Cordray, what happens next? Following is a guide to the possible ways the case might now play out:
The full appeals court again strikes down the "for cause" provision:
The case began in 2014 when the CFPB sued New Jersey mortgage lender PHH, alleging it took illegal kickbacks from mortgage insurers in violation of the Real Estate Settlement Procedures Act.
An administrative law judge initially fined the company $6.4 million, which Cordray later overruled, increasing the fine to $109 million. PHH sued, arguing that the agency was unconstitutional and that Cordray wielded too much power.
Though the D.C. Circuit posed three questions focused mostly on the CFPB's constitutionality, the court also asked whether it could avoid deciding the constitutional question and instead focus on the statutory issues.
One outcome for the case would be for the court to strike language in the Dodd-Frank Act that allows the CFPB's director to be removed only "for cause." That remedy was suggested by a three-judge panel that ruled in October the CFPB's structure was unconstitutional.
But it's not clear that the full appeals court — a panel of 10 judges — will agree to go that route. Some lawyers suggested the full D.C. Circuit would be more sympathetic to the CFPB than the conservative smaller panel, which was led by Judge Brett A. Kavanaugh, an appointee of President George W. Bush and protégé of former Baylor University president and independent prosecutor Kenneth Starr
The appeals court goes after administrative judges
The appeals court surprised many lawyers with a question asking whether agencies can appoint their own administrative law judges or if they should be appointed by the president.
"The issue did come out of the blue and the fact that they shoe-horned it into this case raises a lot of questions," said Truong.
In the PHH case, the CFPB did not hire its own administrative law judge but rather had borrowed Judge Cameron Elliot from the SEC, thus allowing the court to examine the issue.
The D.C. Circuit also separately agreed to rehear another case, Lucia v. SEC, one of a number of cases challenging the constitutionality of the Securities and Exchange Commission's use of administrative proceedings rather than courts to settle disputes.
Dodd-Frank gave the SEC authority to use the administrative process to resolve issues but companies have increasingly challenged that agency.
Invalidating the ability of agencies to appoint administrative law judges would have a significant impact on many federal agencies, and likely would be appealed to the Supreme Court, lawyers said.
"It's a very difficult set of issues and it's very significant not only for the SEC but in this town with a whole alphabet of agencies that have hearing officers," said Tom Gormon, a partner at Dorsey and Whitney. "If [the D.C. Circuit] invalidated the [administrative law judge], what about all the other cases that did not get appealed and those that are pending?"
How that would impact the case against the CFPB's constitutionality is unclear. The judges could tackle the administrative judges question, and avoid ruling on the issue of Cordray altogether. One of the three questions the court asked was whether the case could be resolved without attempting to resolve concerns about the CFPB's constitutionality, raising the question about whether the court will sidestep that fight.
Leave challenges to RESPA hanging in the balance
Mortgage lenders were disappointed that the appeals court did not directly mention the underlying issues in the PHH case related to the Real Estate Settlement Procedures Act, a 1974 law that prohibits lenders from accepting kickbacks in exchange for referrals.
For years, the mortgage industry has relied on an interpretation by the Department of Housing and Urban Development that allowed the payment of fees in exchange for referrals as long as the payment was a reasonable value for the services provided. But the CFPB reinterpreted the definition of kickbacks in its case against PHH.
The three-judge panel in October heavily criticized Cordray for his novel interpretation of the statute. But the full appeals court didn't ask any questions about RESPA, raising the prospect that it might choose to avoid dealing with that issue as well. That will create further uncertainty for many mortgage lenders.
"Once the panel ruling came out the market decided that it was back to business as usual until the D.C. Circuit accepted the appeal," said Sarah Johnson Auchterlonie, a special counsel at the law firm Carlton Fields, and a former assistant litigation deputy and acting deputy enforcement director. "Because we don't have a good regulation that matches the market right now, there is a lot of uncertainty."
One potential outcome is that the appeals court could remand the case back to the CFPB, which would have to refile their charges against PHH with a different rationale, she said. Such an outcome would not resolve many of the underlying questions about RESPA.
"It's an area that has the entire mortgage lending community concerned," said Auchterlonie.