Problems With the CFPB’s Argument: An Analysis of the D.C. Circuit Oral Arguments on Statute of Limitations

CFPB LogoWhat began as a challenge to the Consumer Financial Protection Bureau’s (“CFPB”) $109 million enforcement ruling against the mortgage company PHH Corp. (“PHH”) for alleged violations of the Real Estate Settlement Procedures Act (“RESPA”), has evolved into a broader discussion about the constitutionality of the agency itself. As demonstrated in the closely watched federal appeal brought by PHH, critical developments occurred earlier this month that have implications for the agency’s future enforcement approach. As the first contested administrative adjudication, the case represents a very important test of CFPB authority and the first decision by the director in such a proceeding. Furthermore, even leaving aside the constitutionality question, the D.C. Circuit’s ruling in PHH Corp. v. Consumer Financial Protection Bureau will have repercussions that are extremely important for all financial services institutions, particularly on the issue of the applicable statute of limitations.

As we previously commented in our blog, the CFPB’s position is that the three-year statute of limitations in the CFPB’s enabling statute is inapplicable to enforcement actions brought in administrative proceedings. This issue is significant, especially since the Consumer Financial Protection Act (CFP Act) allows the CFPB to obtain through administrative proceedings the same remedies that are available in court actions. The Director’s order was appealed by PHH to the U.S. Court of Appeals for the D.C. Circuit.

Among the multiple issues of first impression presented by this appeal, however, the federal appellate court placed great emphasis on the statute of limitations issue during oral arguments on April 12, 2016. The two panel members who attended the oral argument, Judge Brett M. Kavanaugh and Judge A. Raymond Randolph, collectively asked about ten separate questions about the statute of limitations, coming back to the issue repeatedly.

For instance, the judges inquired into how detrimental the policy consequences would be if a government plaintiff could reach back for decades, or – under the CFPB’s view – even an infinite number of years, with no statute of limitations. In response, the CFPB’s counsel, Lawrence Demille-Wagman, deflected the main point underlying that question, urging the court not to view this as test case with dramatic consequences because Director Cordray’s order covered conduct that only went back to 2008, such that affirming the order would not be so detrimental or unfair to PHH as compared to an extreme case going back multiple decades. The judges seemed unconvinced. Indeed, the judges overall expressed considerable hostility towards the SOL arguments presented by the CFPB, as demonstrated in a number of exchanges:

  • Judge Randolph asked the attorney for PHH, Ted Olson, which statute – separate from the CFP Act – is the appropriate candidate for borrowing given that when a federal statute is silent as to the statute of limitations, it is well-established that the federal courts require the government to borrow statutes of limitations embedded in other state or federal statutes. Through this question, Judge Randolph seemingly rejected the underlying premise that the absence of a statute of limitations in the CFP Act in the section governing administrative proceedings is a persuasive basis to find that no SOL applies.
  • What’s more, Judge Randolph appeared to suggest, as we highlighted in our previous blog post, that the obstacle to the CFPB’s argument is the “catch-all” statute of limitations of five years set forth in 28 U.S.C. § 2462 for federal actions. In the course of questioning the CFPB’s counsel, Judge Randolph stated forcefully that this provision covers every agency in the federal government unless Congress says otherwise. The judge then remarked, “Silence is not Congress saying otherwise.”
  • As expressed in the case law that we cited in our previous blog post, statutes of limitations are essential for a well-functioning judicial system. Judge Randolph brought these issues to the forefront when he asked the CFPB’s counsel to explain the purpose of a statute of limitations. In response, a discussion ensued in which several reasons were identified, including fairness to the parties given fading witness memory over time, the difficulties posed by stale evidence, and the like. Judge Randolph then asked an extremely telling question: “Which one of those reasons do not apply in an administrative action?” The CFPB conceded that they all apply.
  • Judge Kavanaugh also inquired as to why Congress would want to create in the CFP Act a discrepancy by including a statute of limitations for district court cases but having none for administrative proceedings.
  • Of course, the penalty size and the statute of limitations issues go hand in hand. Judge Kavanaugh asked how common is it for agencies to have no statute of limitation for actions that impose penalties as severe as this? The CFPB lawyer explained that the Federal Trade Commission (“FTC”) has the same provision, however, we observe that this argument appears to ignore the fact that the FTC’s ability to assess penalties is limited compared to the powers of the CFPB.

The judges’ questions reveal an inclination to determine that some sort of statute of limitations ought to apply in administrative proceedings. What’s more, it seems that the statute of limitations is an issue in which the court could limit the CFPB – while also posing relatively less risk to the court – especially considering the broad implications of this issue, and the fairly straightforward nature of this issue compared to other issues on appeal. Furthermore, Judge Kavanaugh has repeatedly expressed concerns regarding the accountability of independent agencies’ enforcement activities. In one previously published law review article, Judge Kavanaugh provided his views on “the questionable effectiveness and accountability of some of the numerous independent regulatory agencies.” Brett M. Kavanaugh, Separation of Powers During the Forty-Fourth Presidency and Beyond, 19 MINN. L. REV. 1454, p. 9 (internal citations omitted). Judge Kavanaugh expressed doubt generally as to “whether the elaborate system of numerous independent agencies makes full sense today.” Id. at p. 20 (internal citations omitted). While it is hard to predict based on the oral argument how the Court of Appeals will rule, it is clear that the D.C. Circuit’s ruling will play a critical role in the continuing evolution of the CFPB’s enforcement program.

J.H. Jennifer Lee

J.H. Jennifer Lee

Jenny represents large and regional banks, card issuers, mortgage bankers or mortgage insurance companies, online lenders, Fin Tech firms, private equity firms with consumer-facing specialty finance strategies, or any “covered person” delineated in the Bureau’s statute, title X of the Dodd-Frank Act. As a lawyer who worked inside the Consumer Financial Protection Bureau (Bureau) Office of Enforcement for several years beginning with the Bureau’s founding, Jenny possesses unique experience that she draws upon to provide clients with defense strategies for enforcement by or litigation with the Bureau....

Jessica Mikhailevich Pierce

Jessica Mikhailevich Pierce

Jessica is an associate in the Bankruptcy and Finance and Restructuring Group. Jessica focuses her practice in the area of creditors’ rights, commercial litigation, and insolvency and receivership proceedings. She also represents significant creditors, official committees and lenders in bankruptcy cases and out-of-court restructurings. Jessica’s representation also includes assisting buyers in the acquisition of distressed assets in bankruptcy, including operating companies, real estate, distressed debt, intellectual property, and fixed assets. Jessica has represented both plaintiffs and defendants in numerous avoidance actions and adversary proceedings brought under the bankruptcy code.

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