October 7, 2019 / 9:52 PM / a month ago

In case against Ocwen, a sign of turmoil to come for CFPB

(Reuters) - I told you this was going to happen.

Last month, after the Consumer Financial Protection Bureau filed a brief at the U.S. Supreme Court arguing that its own director was appointed under an unconstitutional provision, I predicted that the bureau’s abandonment of its longstanding defense of its own constitutionality was going to affect the CFPB’s entire mission.

Now we’re beginning to see the first ripples from the CFPB’s new position. And if the Supreme Court didn’t already understand the urgency of resolving the future of the federal agency that’s supposed to make sure consumers aren’t being ripped off by financial institutions, new developments in the CFPB’s sweeping case against the mortgage servicer Ocwen should set off alarm bells. The justices are scheduled to conference this Friday on a petition by the California debt resolution firm Seila Law, which is challenging the constitutionality of the CFPB’s structure. The Ocwen litigation shows the uncertainty that will cloud CFPB litigation if the justices punt.

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Here’s the background on the Ocwen case. The CFPB brought an enforcement action against Ocwen in 2017, seeking an injunction and money damages for mortgage servicing violations on thousands of loans. Ocwen’s lawyers at Goodwin Procter moved to dismiss the case, arguing, among other things, that the CFPB’s structure is unconstitutional because its omnipotent director can only be fired for good cause, allegedly in violation of separation of powers doctrine. (Ocwen’s lawyers did not respond to my email about the case.)

On Sept. 5, U.S. District Judge Kenneth Marra of West Palm Beach mostly denied Ocwen’s dismissal motion. The judge rejected the mortgage servicer’s constitutional argument, citing rulings in which the District of Columbia and 9th U.S. Circuit Courts of Appeal held that the CFPB’s structure does not violate separation of powers doctrine.

Judge Marra’s decision came before the CFPB changed its position and decided that its structure is unconstitutional. So late last week, Ocwen asked Judge Marra to reconsider his ruling in light of the CFPB’s new position - and its filing makes clear just how perilous this constitutional question could turn out to be for the CFPB.

As you surely recall, the Justice Department and the CFPB said in their joint brief encouraging the Supreme Court to take up the issue of the CFPB’s constitutionality that there’s an easy fix for the law’s defect: The justices need only sever the provision insulating the CFPB director from accountability to the president and strike the language mandating that the director can only be removed for good cause. The government portrayed the separation-of-powers issue as a problem that can be solved without any disruption to the CFPB’s work.

The new Ocwen motion shows that the CFPB's targets have a drastically different view of the implications of the CFPB’s allegedly unconstitutional structure. The brief argued that if the CFPB is unconstitutional, as the bureau itself now concedes, its sweeping case against the mortgage servicer must be dismissed in its entirety.

Ocwen contends that under the Supreme Court’s holding in 2018’s Lucia v. Securities and Exchange Commission, a party that raises a constitutional challenge to federal agency action is entitled to meaningful relief if it wins. And under 2010’s Free Enterprise Fund v. Public Company Accounting Oversight Board and 1995’s Ryder v. U.S., Ocwen argued, when an agency’s director has been appointed under an unconstitutional provision, the director does not have the authority to bring an enforcement action. Therefore, according to Ocwen, it is entitled to nothing less than the dismissal of the CFPB’s case, with prejudice.

The CFPB did not respond to my email requesting comment on Ocwen’s motion for reconsideration or the mortgage servicer’s argument that the agency’s case must be dismissed now that the CFPB has conceded that its appointment provision is unconstitutional.

The Supreme Court was presented with similar arguments just a week ago from another CFPB target, the payday lender All American Check Cashing, in a petition asking the court to hear All American’s case instead of or in addition to the Seila Law case. All American’s lawyers at Gibson Dunn & Crutcher argued that Seila’s petition does not present the question of an appropriate remedy; Seila’s lawyers at Paul Weiss Rifkind Wharton & Garrison responded in a brief Friday that argues the Seila case is an ideal vehicle for both the constitutional and remedy questions.

Both All American in last week’s Supreme Court petition and Ocwen in the motion for reconsideration argued that the Supreme Court would itself be violating separation-of-powers doctrine if it were simply to sever the appointment provision of the Consumer Financial Protection Act, which is itself part of the Dodd-Frank financial reform law. Congress clearly intended for the CFPB director to be insulated from accountability to the president, they argued, so the Supreme Court would be defying lawmakers’ will if it were to attempt to rewrite the statute.

On the other hand, the 5th Circuit ruled just last month in Collins v. Federal Housing Finance Agency that the cure for a statute that unconstitutionally insulates the head of a federal agency is severance of the flawed appointment provision – not invalidation of all actions by the improperly-appointed director. (The plaintiffs who challenged the FHFA’s constitutionality, shareholders of Fannie Mae and Freddie Mac, have asked the Supreme Court to take their case to decide the appropriate remedy.) It's also worth noting that when Justice Brett Kavanaugh sat on the D.C. Circuit, he opined that severing the appointment provision would remedy constitutional flaws in the appointment provision.

It’s way too soon to predict how the Supreme Court will ultimately resolve questions about whether the CFPB’s structure is unconstitutional and, if so, how to fix the defect. But it’s time for the court to take on those questions.

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