“It’s not the end of the world if Cordray is removable without cause,” said Jon Eisenberg, a partner at K&L Gates.
“It’s not the end of the world if Cordray is removable without cause,” said Jon Eisenberg, a partner at K&L Gates.

Despite a tough public grilling of the Consumer Financial Protection Bureau last week by two D.C. Circuit judges, several legal experts said a ruling against the agency and its director, Richard Cordray, may have a limited impact.

While there are important constitutional and legal issues at play, the most likely decision is that the court could strike down language in the Dodd-Frank Act that only allows the CFPB's director to be removed "for cause." As a result, a CFPB director – either Cordray or a successor – could be removed for any reason, most likely when a new administration takes office.

Other options, such as striking down the agency and every rule or enforcement action it has taken, are probably too draconian, experts said.

"It's not the end of the world if Cordray is removable without cause," said Jon Eisenberg, a partner at K&L Gates. "Courts are practical, and I can't see the court saying everything the CFPB has done to date is invalid because the agency is not constitutional. That could call into question its extensive rulemaking as well – I just can't picture that."

At issue is PHH Corp.'s lawsuit against the CFPB, which, among other things, claims the "for cause" provision violates the Constitution's separation of powers doctrine. During oral arguments last week, Judge Brett M. Kavanaugh appeared receptive to removing the "for cause" provision as a possible remedy, citing a 2010 Supreme Court decision.

Several experts said the three-judge D.C. Circuit panel is unlikely to push further.

"Even if the government ultimately loses, I think the narrow decision is the likeliest outcome and that would be to strike the 'for cause' provision," said Peter Wilson, an associate at Katten Muchin Rosenman in Chicago and a former attorney at the CFPB. "Some of these constitutional challenges, if they are upheld, can really have profound consequences, so [courts have] found creative ways to give relief to the plaintiffs and vindicate the constitutional challenge while limiting the collateral damage."

But the case has raised other issues that could have a broader effect. Jenny Lee, a partner at Dorsey & Whitney and another former CFPB enforcement attorney, said the case combines several key issues surrounding the agency at present.

"This case is a manifestation of a larger policy debate that has been going on for the last four years on two issues: the longstanding commentary about the CFPB's decision to regulate by enforcement, and the idea of what predilections are guiding their policy and enforcement preferences as far as assumptions about the industry," Lee said. "They don't accept the assumption that if an industry standard has been followed for many years, then that is evidence to determine there was no violation."

Aside from the constitutional concerns, the biggest one may be whether the CFPB has to rely on previous interpretations of the Real Estate Settlement Procedures Act.

PHH claims that the CFPB's interpretation of RESPA in the administrative order against the firm was substantially different from previous interpretations made by the Department of Housing and Urban Development.

"The aggressive interpretation of RESPA in this case fed into the broader challenges to the agency," said Ori Lev, a partner at Mayer Brown and a former deputy enforcement director at the CFPB. "Arguments about the constitutional structure and concentration of power resonate more strongly when coupled with… an argument about alleged overreach."

In oral arguments, Ted Olson, the former solicitor general who represents PHH, said it was "exceedingly important" for the court to address the substantive RESPA issues.

Last year, PHH appealed a $109 million judgment by Cordray that overturned an administrative law judge's $6.4 million fine, alleging the New Jersey mortgage lender illegally accepted kickbacks for referrals on reinsurance. PHH claimed it relied on a 1997 HUD staff letter that allowed its practices even though the letter was not a formal rule.

Kavanaugh appeared sympathetic to the argument that CFPB changed the rules without first saying so.

"Correct me if I'm wrong. Everyone was doing this?...There was a widespread understanding, wasn't it, that this was legal?" Kavanaugh said. "It's as if the police officer says you can cross the street here, and then when you get to the other side the officer gives you a thousand-dollar ticket. That's what it seems like happened here. You had this blessing to go ahead and then it's $109 million [penalty]."

In addition, because RESPA can be criminally enforced, the judges suggested that ambiguities in the statute could not be used against PHH.

"It's a big deal for RESPA itself and for other agencies that they have to be careful about using enforcement to solve statutory ambiguity," said Eisenberg at K&L Gates. "What the D.C. Circuit seems to be saying is that if it's not clear, ambiguities don't get to be interpreted in the government's favor if you're talking about imposing a substantial penalty retroactively."

Agencies are allowed to choose whether to solve problems by rulemaking or enforcement, but the about-face on RESPA surprised the industry.

"The problem for the bureau is, there's no obvious reason to change the longstanding interpretation of RESPA," said Wilson. "This was a bolt from the blue, it was a radical departure in the interpretation of the statute. And that's where agencies can find themselves challenged by the courts."

In addition to its interpretation of the law, the CFPB's theory of the statute of limitations also is under fire. Lawrence Demille-Wagman, a senior litigation counsel for the CFPB, argued that because PHH's appeal went through an administrative law judge, and not a court proceeding, RESPA's three-year statute of limitations did not apply.

But both Kavanaugh and Judge A. Raymond Randolph rejected that argument. (Judge Karen LeCraft Henderson, a 1990 appointee of President George H.W. Bush, did not attend the oral arguments.)

"Your theory would allow the agency, the single director, to go back decades…and impose major liability on someone for something that happened a long time ago," said Kavanaugh, who was appointed by President George W. Bush in 2003 and is a protégé of former independent prosecutor Kenneth Starr.

Randolph cited cases dating back to the early 1800s in which courts borrow either a federal or state statute of limitations.

"The court says it would be an abomination to have the federal official not bound by a statute to be allowed to bring an action decades after an event," said Randolph, who was also appointed in 1990 by George H.W. Bush.

"The CFPB couldn't articulate the reason why there should be no statute of limitations," said Lev. "They had no bigger story to tell, and you want to be able to articulate why your bigger argument makes sense."

A ruling on the statute of limitations would have a ripple effect on other government agencies, Eisenberg said, particularly because agencies often use the disgorgement of profits to exact large settlements from companies. By contrast, there is a statute of limitations that applies broadly to the government on financial penalties, he said.

"They seemed completely offended at the concept that there would be no statute of limitations," Eisenberg said. "It would be a big deal if [the panel said] agencies couldn't simply could go back forever [on disgorgement.]"

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