[00:00:00] Speaker 00: Case number 15-1177, PHH Corporation at L Petitioners versus Consumer Financial Protection Bureau. [00:00:11] Speaker 00: Mr. Olson for the petitioners, Mr. DeMille Wadman for the respondent. [00:00:16] Speaker 03: Good morning. [00:00:16] Speaker 03: Judge Henderson's not here this morning, not able to be here. [00:00:19] Speaker 03: She will consider these cases based on the audio recording of the oral argument. [00:00:24] Speaker 03: You may proceed. [00:00:25] Speaker 04: Thank you, Your Honor. [00:00:26] Speaker 04: May it please the Court? [00:00:29] Speaker 04: The overarching and grievous separation of powers problem presented by the CFPB arises in the context of an astonishingly capricious and unlawful agency decision. [00:00:45] Speaker 04: The director ran roughshod over clear provisions of federal law, rewriting Section 8 of RESPA to prohibit conduct expressly authorized by that law, disregarded and retroactively overruled decades of administrative and judicial application of that law and widespread industry reliance on it, [00:01:09] Speaker 04: dismissed and distorted a plainly applicable statute of limitations, contrary to authoritative judicial decisions. [00:01:18] Speaker 04: and impose draconian remedial punishment that Congress did not give or authorize to that Bureau under these circumstances. [00:01:28] Speaker 04: The context of this case is the rewriting of RESPA, a statute that addresses payments that might be made or might not be made at settlements of real estate transactions. [00:01:41] Speaker 04: The issue is Section 8 of that statute. [00:01:45] Speaker 04: and Section 8 specifically authorizes the transactions that were taking place here. [00:01:52] Speaker 04: And the director of the CFPB wrote that statute, Section C2, out of the statute completely. [00:02:00] Speaker 04: As we pointed out, the agency and the predecessor agency, the Housing and Urban Development, had consistently construed that statute in policy statements, in interpretations, in regulations, something called REG X. Courts had interpreted that provision as authorizing the payment of fees [00:02:23] Speaker 04: under real estate settlement circumstances for services actually rendered, bona fide payment for services actually rendered. [00:02:33] Speaker 04: The director of the CFPB wrote that statute out of existence and pretended it didn't exist at all, overriding industry reliance. [00:02:44] Speaker 04: on those interpretations that have taken place for decades. [00:02:48] Speaker 04: So that's one of the violations of clear violations of federal law that the director implemented in his decision. [00:02:58] Speaker 04: Secondly, so there was a misconstruction of Section 8 at Section 8C2 [00:03:05] Speaker 04: Secondly, it was an overturning, reasonable, relied upon expectations of the industry regulated that it depended upon, relied upon, and pursued and followed the agency's direction over decades, an unsettled [00:03:22] Speaker 04: settled expectations that have been based upon substantial reliance. [00:03:28] Speaker 04: As this court knows, as the Supreme Court has frequently said, the due process clause requires that an individual have the opportunity to know the conduct that will be prohibited or will be permitted. [00:03:41] Speaker 04: What the agency did here was make an abrupt turn [00:03:45] Speaker 04: and a complete 180 with respect to the interpretation of the statute, giving no warning whatsoever. [00:03:53] Speaker 04: So the imposition of this $109 million substantial penalty took place in the context of a clear rewriting of the statute and an overturning of settled expectations. [00:04:09] Speaker 04: The agency went on then and to the statute of limitations, and I'm only going to have time to mention a few of the ways which we've elaborated in our briefs that this director of the CFPB ignored statutes, rewrote statutes, changed things on the spot with respect to the decision. [00:04:31] Speaker 04: the statute of limitations in Section 8, and it clearly says, proceedings for violation of this section, Section 8, shall be subjected to a three-year statute of limitations. [00:04:45] Speaker 04: That's clearly in the statute in 2614. [00:04:49] Speaker 04: And the director ignored that statute of limitations and basically said, because I'm bringing an action in an administrative capacity, I can ignore that statute of limitations and pretend it doesn't, it completely doesn't exist. [00:05:03] Speaker 04: Then on top of throwing out [00:05:06] Speaker 04: that statute limitations, which is clearly in the statute, clearly applicable to alleged violations of Section 8. [00:05:14] Speaker 04: The director then went on to decide that instead of the clearly judicially recognized [00:05:21] Speaker 04: interpretation of the statute of limitations, which is in the Snow decision, which is mentioned in the brief, which the ALJ in the proceeding below recognized as a judicially binding interpretation, then said the violation, if one occurs, isn't when the deal was closed, at the closing of the transaction, [00:05:43] Speaker 04: when the reinsurance, which is what is involved in this case, was issued. [00:05:48] Speaker 04: But instead, every time subsequently, a premium was paid, thus multiplying the decision of the administrative law judge, which was a 6.4 million dollars. [00:06:00] Speaker 02: May I back you up a little bit about the statute of limitations? [00:06:03] Speaker 02: Yes. [00:06:04] Speaker 02: Let's suppose you're wrong. [00:06:06] Speaker 02: that it's not clearly applicable, that it applies only to courts. [00:06:09] Speaker 02: That doesn't end the analysis, though, does it? [00:06:12] Speaker 02: If this were a federal court case, and there was no statute of limitations since the 1800s, [00:06:21] Speaker 02: what the federal courts do is borrow a statute of limitations, the principle being that there has to be something. [00:06:27] Speaker 04: There has to be some statute of limitations. [00:06:29] Speaker 02: So there's a clear statute, the statute that's also clear is a candidate for borrowing. [00:06:36] Speaker 02: Do you know of any administrative law case [00:06:40] Speaker 02: where there's no statute of limitations and the administrative agency therefore borrows either a state statute of limitations or an analogous federal statute of limitations? [00:06:51] Speaker 04: Well, I don't – I can't think of an administrative law case. [00:06:54] Speaker 04: The Supreme Court dealt with this, of course, in the securities field when it overturned the borrowing of state statutes and borrowed another – a federal securities law. [00:07:05] Speaker 04: statute, that's the lamp versus plebe case in the Supreme Court of the United States. [00:07:10] Speaker 04: The courts have been borrowing state statutes of limitations, which resulted in uneven application of statutes of limitations of the securities laws. [00:07:19] Speaker 04: And so the Supreme Court found that another borrowing under statute of limitations in the securities law was the right [00:07:26] Speaker 04: But the point was, and I think this is consistent with what the thrust of your question is, Your Honor, there's got to be a statute of limitations. [00:07:34] Speaker 04: But here, Section 8D is quite clear that here's the – you bring an action for violations that is described in 8D, and then Section 2614 describes the statute of limitations in clear language. [00:07:50] Speaker 04: This is any action. [00:07:52] Speaker 04: any action brought pursuant to Section 8. [00:07:56] Speaker 04: Now, and 8D is the one that says, for violations, you bring an action. [00:08:01] Speaker 04: So the director and his agency brought an action, and then Section 2614 prescribes the three-year statute of limitations. [00:08:09] Speaker 04: But it was compounded. [00:08:10] Speaker 04: The administrative law judge specifically said, we're bound by the decision in Snow, which says that a violation [00:08:18] Speaker 04: if one occurs, occurs at the closing of the transaction. [00:08:23] Speaker 04: And that's when the so-called violation of RESPA occurred. [00:08:27] Speaker 04: That's when the referral fee, if it's illegal, would have occurred. [00:08:31] Speaker 04: But instead, the director [00:08:34] Speaker 04: looked beyond that to every premium that was ever paid, inconsistent with decisions of this court that said that you don't construe, even if there was an ambiguity, which there isn't here, you wouldn't construe a statute of limitations to vastly expand [00:08:51] Speaker 04: the limitations period and vastly expand the amount of the penalty or damage that might occur with respect to the limitations period. [00:09:01] Speaker 04: There are several cases from this circuit and throughout the United States that stand for that proposition, and it's important to remember here that this is a criminal statute. [00:09:11] Speaker 04: The Supreme Court just a few years ago in the Freeman v. Quicken Loans case addressed a separate provision of RESPA, and this was a unanimous decision written by Justice Scalia that pointed out that this is a criminal statute. [00:09:26] Speaker 04: The rule of lenity applies so that any ambiguities whatsoever must be construed in favor of the party against whom penalties would be assessed. [00:09:35] Speaker 04: So that was another violation of clear law. [00:09:41] Speaker 04: And then when the director went to a statute that says he has the power, this is AD, the power to bring an action to enjoin violations, then threw that limitation out and decided that we could impose a disgorgement penalty, which multiplied what the ALJ did from $6 million to $109 million. [00:10:03] Speaker 04: And then there's an injunction, as this court knows, there's an injunction that basically says, don't violate the law, and goes beyond the notice of violations. [00:10:14] Speaker 03: These are just some of the- I could just back you up, because you've got a lot. [00:10:17] Speaker 03: We'll give you time, of course, to cover everything. [00:10:20] Speaker 03: Thank you. [00:10:21] Speaker 03: And we'll give both sides time to cover everything. [00:10:23] Speaker 03: But to back you up to the beginning here on your constitutional argument, I think their response is, well, what's the difference between a single-headed, [00:10:33] Speaker 03: independent agency and a multi-member commission that we've historically had. [00:10:39] Speaker 03: What's the problem? [00:10:40] Speaker 03: Why draw the line there? [00:10:41] Speaker 04: Well, one of the obvious differences, let me say that the separation of powers and checks and balances problems with respect to this statute are multiple. [00:10:53] Speaker 04: Not only are there restrictions on the president's removal power, but to get to your question, it is vested in a single individual [00:11:00] Speaker 04: At least in Humphrey's executive, the power was disbursed. [00:11:04] Speaker 04: And you know all the reasons why that case is different than this case. [00:11:07] Speaker 04: That was quasi-legislative, quasi-judicial. [00:11:10] Speaker 04: And the Supreme Court said in the free enterprise fund, we're basically going to limit [00:11:15] Speaker 04: that case to the type of circumstances in that case, the vice of putting all of that power instead of separating it is the same thing that happens here. [00:11:27] Speaker 04: When you have to make a decision, there are three of you or at least two of you that – or if it's an en banc, a wider number of – the decision-making power is dispersed among individuals. [00:11:38] Speaker 04: Here it is concentrated in a single individual. [00:11:41] Speaker 04: The president doesn't have any control to remove that individual. [00:11:45] Speaker 02: Well, if the president did, then it would be constitutional. [00:11:49] Speaker 02: Pardon me? [00:11:49] Speaker 02: If the president did have that power to remove, not restricted by cause. [00:11:56] Speaker 04: no your honor because there are so many other problems with the creation of this agency it doesn't have to go to congress for its funding it takes its money out of the federal reserve without an appropriation of congress it has the power to write its own rules and regulations [00:12:12] Speaker 04: It has the power, irregarding other federal laws, to hire and fire people and set people's salaries. [00:12:18] Speaker 04: It doesn't have to go through the Office of Management and Budget with respect to proposed regulations, as every other agency does. [00:12:25] Speaker 04: In connection with communications with Congress, it doesn't – the President can't say, we want to know what you're proposing with respect to proposed legislation. [00:12:34] Speaker 02: I may be wrong about this, but I thought in free enterprise, the accounting agency – excuse [00:12:41] Speaker 02: Didn't have to go to Congress either. [00:12:43] Speaker 02: I thought their finances were paid by the fees of the people there regularly. [00:12:47] Speaker 04: Yes, and I think that that is not, that's not an insignificant concern. [00:12:53] Speaker 04: But when you have it all piled together in an agency like this, you could take these things one at a time. [00:13:00] Speaker 04: But here, the President and the Congress have no control over this agency. [00:13:05] Speaker 04: You have a super executive agency with the power to bring actions like this. [00:13:11] Speaker 04: The only check, the only check on this agency is right here. [00:13:15] Speaker 04: If it isn't for the judiciary, this agency can do anything it wants. [00:13:21] Speaker 04: It can interpret statutes. [00:13:23] Speaker 04: It can impose penalties such as this. [00:13:25] Speaker 04: And we saw here where the statutes were being ignored, statute limitations were being ignored, limitations on its remedial powers are being ignored. [00:13:34] Speaker 04: Penalties out of the blue, disregarding previous administrative decisions, were set aside. [00:13:41] Speaker 04: I could go on and on, but they're- So what's the remedy? [00:13:44] Speaker 04: The remedy is that this agency is unconstitutional. [00:13:47] Speaker 04: This is, first of all, is exceedingly important that I hope that the court will address the substantive factual issues of RESPA that were violated here. [00:13:58] Speaker 04: It's very, very important because this is an entire industry [00:14:01] Speaker 04: that's listening to what's happening here today. [00:14:05] Speaker 04: But the bottom line to answer your question, Judge Cavanaugh, is that this agency is unconstitutional. [00:14:11] Speaker 04: The decisions of this director in this case have to be overturned. [00:14:15] Speaker 04: This decision has to be vacated. [00:14:17] Speaker 04: I hesitate to go any further than that, because if I were in your shoes, I might be very, very tempted to write an opinion [00:14:24] Speaker 04: And it would be entirely justified that Congress cannot create an agency like this that ignores all of the rules with respect to separation of powers. [00:14:34] Speaker 04: As many scholars have pointed out, many judges of this court and the Supreme Court have pointed out, the separation of powers is what protects our liberty as individuals in this country. [00:14:46] Speaker 04: And it is – we can write all sorts of [00:14:48] Speaker 04: Bill of Rights on Parchment, but it's the separation of powers. [00:14:52] Speaker 04: And it goes right back to the Federalist Papers. [00:14:55] Speaker 04: The very definition of tyranny is to concentrate all powers, legislative, judicial, and executive, in a single agency. [00:15:05] Speaker 04: This agency has more power, I submit, than any other agency ever created by Congress. [00:15:09] Speaker 02: If the only issue were fair notice, which is the lead argument that you make, at least the first argument you make, [00:15:17] Speaker 02: What's the remedy for lack of fair notice is to make this decision prospect of own? [00:15:24] Speaker 04: Well, it would be to vacate this decision with respect to – I submit that if it was only that, you could decide that, well, this agency has the power to make that interpretation of the statute disregarding everything that came before. [00:15:42] Speaker 04: But everything that came before was an interpretation of the statute, a criminal statute, [00:15:48] Speaker 02: And I submit that just making it prospective wouldn't solve the problem because the agency doesn't have the power to reach this interpretation of the statute. [00:16:08] Speaker 02: It was a rule in the sense that if it were a rule, then it couldn't be overturned by adjudication. [00:16:20] Speaker 02: It would have to be done by rulemaking. [00:16:23] Speaker 04: The HUD letter in and of itself wasn't a rule, but the interpretation of the statute was embodied in court decisions and in other interpretations. [00:16:37] Speaker 04: There's communications back and forth from Congress with respect to the Culpepper decision of the 11th Circuit, where Congress said, can you imagine what's going on here? [00:16:46] Speaker 04: And that ultimately got corrected. [00:16:48] Speaker 04: I do believe that an adjudicative decision can overturn a rule if it's arbitrary and capricious and against the law, which is this was. [00:16:58] Speaker 04: So there's no way you can read Section C2 of – or Section C and specifically C2 of Section 8. [00:17:07] Speaker 04: which says, notwithstanding any other provision of this section, it shall not be prohibited to do X. This is a part of the statute. [00:17:16] Speaker 04: So any rule that comes to an opposite decision is arbitrary, capricious, and a violation of the law. [00:17:23] Speaker 04: Now, I don't want to abuse the courtesy that you've extended to me. [00:17:27] Speaker 04: I do think in summary, and I presume I have the five minutes I was hoping to rebut, for rebuttal, in summary, [00:17:36] Speaker 04: This is an unprecedented, unconstitutional agency that has more power than Congress and the President put together. [00:17:45] Speaker 04: If there ever was an agency created by Congress that violated separation of powers, this is it. [00:17:51] Speaker 04: And the perfect example of what happens [00:17:55] Speaker 04: when that kind of an agency is created is this decision where rule after rule, statute after statute, interpretation after interpretation is thrown out of the book and all of a sudden an agency that's been relying on those interpretations is fined [00:18:11] Speaker 04: This disgorgement remedy wasn't permitted. [00:18:14] Speaker 04: And by the way, there's many things wrong with the disgorgement remedy because they just took all the premiums. [00:18:19] Speaker 04: They didn't deduct any profit. [00:18:21] Speaker 04: It wasn't a profit I could go on and on. [00:18:24] Speaker 04: So everything about this decision, the legal interpretation, the remedy, the statute of limitations, everything else is wrong. [00:18:32] Speaker 04: This is a decision that is riddled through with legal capricious errors. [00:18:39] Speaker 04: Thank you. [00:18:51] Speaker 01: may please the court. [00:18:53] Speaker 01: Since counsel for PHH ended with a constitutional issue, I'll begin there. [00:18:59] Speaker 01: Their primary argument with respect to the constitutionality is that the Bureau is unconstitutional because its director can be removed only for cause. [00:19:10] Speaker 01: In that, the Bureau's for-cause removal provision is no different from the for-cause removal provision that applies to the Federal Trade Commission? [00:19:18] Speaker 03: But they're commissions. [00:19:20] Speaker 03: That's the difference. [00:19:21] Speaker 03: Historically, independent agencies have been multi-member on the theory that they're nonpartisan or bipartisan. [00:19:27] Speaker 03: This is a novel structure with very few precedents that I've found, and almost none that are historical, very few in recent years. [00:19:36] Speaker 01: There are a few, Your Honor. [00:19:37] Speaker 01: The Social Security Administration went back 20 years. [00:19:40] Speaker 01: Right. [00:19:40] Speaker 03: And by the way, when that was created, President Clinton issued a signing statement saying there are severe constitutional problems with that agency. [00:19:47] Speaker 01: Yes, but he didn't explain what those constitutional problems were. [00:19:51] Speaker 01: And President Obama didn't indicate that there were any constitutional problems with respect to the bureau. [00:19:55] Speaker 03: Just pointing out, there are very few precedents here. [00:19:58] Speaker 03: And the reason for the commission structure [00:20:01] Speaker 03: was that this is an exception or a difference from the usual control the president has over the executive branch. [00:20:07] Speaker 03: And if we're going to have that kind of structure, we want it to be a group that's going to be nonpartisan or bipartisan. [00:20:16] Speaker 03: You can't have that with a single person. [00:20:18] Speaker 03: You're concentrating in a single person a huge amount of power, and the president has [00:20:23] Speaker 03: has no authority over that. [00:20:25] Speaker 03: I assume the current director can serve out his or her term regardless of what the next president [00:20:33] Speaker 03: once in terms of consumer financial protection, right? [00:20:38] Speaker 01: Unless removed for cause, Your Honor. [00:20:39] Speaker 01: Yes, but as the Supreme Court noted in the free enterprise case, one of the concerns is diffusion of power. [00:20:48] Speaker 01: Diffusion of power leads to diffusion of accountability. [00:20:52] Speaker 03: Diffusion of power from the president. [00:20:53] Speaker 03: The president's the person who Article II makes [00:20:57] Speaker 03: assigns the sole power to run the executive branch. [00:21:01] Speaker 03: Humphrey's executive area is an historical exception to that, which we accept, of course. [00:21:05] Speaker 03: But it's always been commissions. [00:21:08] Speaker 03: It's always been multi-member bodies with very rare exception. [00:21:11] Speaker 03: And the reason for that, as I articulated, is the liberty reason, because it's very dangerous in our system to put such huge power in a single person, whether it's courts, whether it's independent agencies. [00:21:25] Speaker 01: But Your Honor, in free enterprise, the court touted the virtue of a clear chain of command. [00:21:31] Speaker 01: There's no clearer chain of command than there is here with respect to the Bureau. [00:21:35] Speaker 01: All decisions of the Bureau are the responsibility of the Director. [00:21:38] Speaker 03: But that adds to the problem from the perspective of free enterprise. [00:21:41] Speaker 03: Why not help it because the clear chain of command was to the President who was elected by the people and who's in turn [00:21:48] Speaker 03: accountable to the people. [00:21:50] Speaker 03: That was the theory in Free Enterprise Fund. [00:21:52] Speaker 03: But here the clear chain of command is also to the President. [00:21:57] Speaker 03: So could Congress tomorrow make the SEC and the FCC and the Federal Trade Commission all headed by one person? [00:22:05] Speaker 03: Could Congress say the FCC is now going to be headed by one person? [00:22:10] Speaker 03: The FCC is going to be headed by one person. [00:22:12] Speaker 03: The Federal Trade Commission is going to be headed by one person. [00:22:15] Speaker 03: The NLRB is going to be one person. [00:22:17] Speaker 01: That certainly isn't an issue that we've addressed in this case, but Congress has made the Social Security Administration headed by one commissioner. [00:22:25] Speaker 01: The Office of Special Counsel is headed by a special counsel. [00:22:28] Speaker 01: The Federal Housing Finance Administration [00:22:30] Speaker 01: is headed by one director. [00:22:33] Speaker 01: Congress has made agencies headed by a wide variety of constructions. [00:22:40] Speaker 01: The old Interstate Commerce Commission for many years was headed by 11 commissioners. [00:22:44] Speaker 01: There are many commissions that are headed by five member commissions. [00:22:49] Speaker 01: The NCUA, the National Credit Union, NCUA is headed by three. [00:22:54] Speaker 01: members. [00:22:55] Speaker 01: Congress has its choice. [00:22:56] Speaker 01: And yes, it can create an agency headed by one commissioner, because the president's authority to remove is very important, but courts have held that it is not illimitable. [00:23:11] Speaker 01: But nonetheless, the president has sufficient control when he has the power to remove. [00:23:17] Speaker 01: Now, PHH here complains that the Bureau is headed by [00:23:21] Speaker 01: one director, but at page 48 of their brief, they also complain that the Bureau is hydro-headed. [00:23:27] Speaker 01: The Bureau is headed by one director, Richard Cordray. [00:23:30] Speaker 01: I saw him last week. [00:23:31] Speaker 01: He's not hydro-headed. [00:23:32] Speaker 01: There is no constitutional problem in constructing the Bureau this way, nor is there a problem that the Bureau is funded outside the appropriations process. [00:23:43] Speaker 01: Many other agencies [00:23:44] Speaker 01: are funded. [00:23:46] Speaker 03: On that issue, you're right, there are a number of agencies who have that. [00:23:50] Speaker 03: On the single-headed independent agency, not so much. [00:23:52] Speaker 03: Not so many. [00:23:54] Speaker 01: But the concern, there should be no concern there because the President has sufficient control [00:24:04] Speaker 01: when he has the power to remove, even if it's removal for a cause, that is not a sufficient restriction. [00:24:09] Speaker 03: I don't understand that. [00:24:10] Speaker 03: You already said the next president, this president, if they don't agree with the direction of the agency, it's being too lenient. [00:24:19] Speaker 03: They want to push harder. [00:24:20] Speaker 03: It's being too aggressive. [00:24:22] Speaker 03: They think it should be more prudent. [00:24:24] Speaker 03: You're saying the president can't change for that reason. [00:24:27] Speaker 01: The Commissioner Cordray, Director Cordray's term expires in early 2018. [00:24:34] Speaker 01: And at that point, the president will, the new president will be free to, according to whoever he chooses. [00:24:41] Speaker 03: Well, it's an unusual structure. [00:24:43] Speaker 03: Yes. [00:24:44] Speaker 03: You've cited the ones I found as well. [00:24:46] Speaker 03: There aren't any other examples? [00:24:47] Speaker 01: We found no other, sir. [00:24:51] Speaker 01: And PHH also suggests that because of a wide variety of other factors, they refer to it in their brief, that the Bureau was somehow, this Court should take a holistic approach to the constitutionality of the Bureau and consider a wide variety of factors. [00:25:06] Speaker 01: I know of no case that supports this holistic, I know it when I see it, approach to the unconstitutionality of an administrative agency. [00:25:16] Speaker 01: The Bureau structure is not so different from the Federal Trade Commission, whose structure was upheld by the Court. [00:25:24] Speaker 03: Now, on the question we asked in the order, I assume your preferred remedy, if there is a problem, is to sever the forecause, or am I wrong about that? [00:25:33] Speaker 01: No, that would be our preferred remedy, would be to sever the forecause. [00:25:36] Speaker 01: That's the remedy that this Court has applied in other situations where it's discovered similar problems, and to remand the matter to the Commission, to the Bureau, rather, for consideration by a Bureau with a director who is, at that point, removable for cause. [00:25:53] Speaker 02: recovery, the disgorgement? [00:25:55] Speaker 02: Yes, Your Honor. [00:25:56] Speaker 02: Some million dollars? [00:25:57] Speaker 01: Yes. [00:25:58] Speaker 01: Who gets that? [00:25:59] Speaker 01: That goes to the Treasury, Your Honor. [00:26:01] Speaker 01: It goes to the government. [00:26:02] Speaker 01: And it's a totally appropriate award here because over the years, PHH received hundreds of millions of dollars in connection with this kickback arrangement that it set up. [00:26:16] Speaker 01: Now, it contends [00:26:17] Speaker 01: that it did not have fair notice that its conduct would violate RESPA. [00:26:22] Speaker 01: This court has explained in the Clark-Cowlitz v. Ferck case that agencies may, in administrative adjudications, clarify ambiguous statutes and imply those interpretations retrograde. [00:26:34] Speaker 03: But the agencies here, the relevant agencies, had issued definitive statements saying that this activity was legal. [00:26:42] Speaker 03: And there were repeated statements [00:26:44] Speaker 03: saying this much. [00:26:46] Speaker 01: No, your honor, and I'll go through them one by one. [00:26:48] Speaker 01: The number one that they wrote the number one statement they rely on is that 1997 HUD staff letter regarding reinsurance. [00:26:57] Speaker 01: It's at page 251 of the joint appendix right there on page one of that letter in the middle of the page. [00:27:04] Speaker 01: It says that [00:27:07] Speaker 01: a mortgage insurer may purchase reinsurance from a lender if the payments are solely for reinsurance. [00:27:17] Speaker 01: The problem for PHH here is that the payments it was receiving from the mortgage insurers were not solely for reinsurance. [00:27:24] Speaker 01: They were quid pro quo for referrals. [00:27:26] Speaker 01: And the quid pro quo, that's exactly what RESPA seeks to prohibit, kickbacks for referrals of real estate settlement service. [00:27:35] Speaker 01: PHH, in its brief, [00:27:37] Speaker 01: two times or three times, cites a paragraph on page three of that letter. [00:27:43] Speaker 01: It's a one-sentence paragraph kind of in the middle of the page. [00:27:47] Speaker 01: I think if they read that paragraph very carefully, if they parsed the words, if they picked up elements of style and understood that that is... You're asking them to do something, the entire industry, [00:28:03] Speaker 03: had the opposite reading of it confirmed repeatedly by HUD. [00:28:09] Speaker 03: No, it was not. [00:28:09] Speaker 03: In the treatises, everyone understood what the deal was. [00:28:13] Speaker 03: And if you want to change it going forward, we can talk about the statutory issue, whether you have authority to do that. [00:28:19] Speaker 03: But to pull the plug, change it going backwards is very problematic, at least under the Supreme Court's presence. [00:28:26] Speaker 03: Explain why it doesn't mean what I think it means. [00:28:29] Speaker 01: Well, you could parse through that letter. [00:28:31] Speaker 01: You could parse through that paragraph, pick up the elements of style, and realize that that is a defining pronoun. [00:28:36] Speaker 01: But forget the grammar lesson here. [00:28:39] Speaker 01: I want the grammar lesson. [00:28:40] Speaker 01: What is that? [00:28:42] Speaker 01: That is a defining pronoun there. [00:28:44] Speaker 01: And it indicates, as the letter does in the very next paragraph, which they don't get down to, but the very next paragraph says that it's OK if the lender's affiliate, lender's reinsurance affiliate, actually performs reinsurance services. [00:29:04] Speaker 01: And the compensation that it receives is bona fide. [00:29:08] Speaker 01: and does not exceed the value of the reinsurance. [00:29:13] Speaker 01: Two things that are required of the compensation. [00:29:16] Speaker 01: It must be bona fide and not exceed the value of the reinsurance. [00:29:20] Speaker 01: The director explained the meaning of bona fide, and in fact, his explanation was consistent with the Supreme Court's in McDonald versus Thompson at 305 U.S. [00:29:32] Speaker 01: page 263 at page 266. [00:29:34] Speaker 01: Supreme Court explained that to determine whether a business operation is bona fide, you have to determine whether it's conducted for purposes of evasion. [00:29:45] Speaker 01: Here, PHH set up this reinsurance affiliate atrium solely for the purpose of getting kickbacks to get around the restriction of Section 8A of RESPA. [00:29:55] Speaker 01: Section 8A of RESPA clearly prohibits kickbacks for referrals. [00:30:00] Speaker 01: So PHH asks this court to interpret Section 8C2 to allow it to take kickbacks as long as it sets them up as payments for goods or facilities or services. [00:30:15] Speaker 03: But correct me if I'm wrong, everyone was doing this. [00:30:18] Speaker 01: Many people were, because it was very profitable. [00:30:21] Speaker 03: Oh, it's blatantly illegal. [00:30:23] Speaker 03: We're just going to do it anyway. [00:30:25] Speaker 03: I mean, I just don't think that was going on throughout the industry. [00:30:27] Speaker 03: They thought, they asked, and maybe they didn't parse the grammar correctly, but there was a widespread understanding, wasn't it, that this was legal. [00:30:38] Speaker 01: It certainly was a widespread practice. [00:30:40] Speaker 01: It was very profitable for them, Your Honor, as this case shows. [00:30:43] Speaker 01: But whether they knew it was legal, there was nothing in that letter that indicated that HUD would have said that it was okay for parties to enter into agreements or understanding requiring the payment of kickbacks for being shot. [00:30:55] Speaker 03: But was there any indication before this decision that this widespread practice that was going on [00:31:01] Speaker 03: throughout the industry and seemingly, I understand your point, but seemingly blessed by agency positions was somehow viewed as illegal. [00:31:11] Speaker 03: It was never blessed by agency positions. [00:31:14] Speaker 03: Put that aside, was there anything that said actually this arrangement is illegal before the director's decision? [00:31:22] Speaker 01: because nobody ever suggested to HUD, nobody ever raised the question with HUD. [00:31:28] Speaker 01: Well, we're going to enter into an agreement requiring the payment of kickbacks for reinsurance, but we're going to set it up so that the payment is equal to the value of what we're providing. [00:31:37] Speaker 02: What's your definition of a kickback? [00:31:40] Speaker 01: A kickback is exactly what happened here. [00:31:42] Speaker 01: No, no, no, I mean in general. [00:31:45] Speaker 01: And kickbacks in many other parts of the economy are not legal. [00:31:49] Speaker 01: I wash your hands, you wash mine. [00:31:51] Speaker 02: If somebody is providing a service at fair market values, can that be a kickback? [00:31:56] Speaker 01: Yes, it absolutely can, Your Honor, and here's a good example. [00:32:00] Speaker 01: Why? [00:32:01] Speaker 01: Because imagine that any company making referrals in the real estate business simply went out and just bought at wholesale a warehouse full of Xerox paper and then told the company receiving the referrals, every time we make a referral to you, you've got to buy a pallet of Xerox paper at retail price. [00:32:22] Speaker 01: That's very profitable business for the company making referrals. [00:32:26] Speaker 01: That's a kickback. [00:32:26] Speaker 01: It distorts the market. [00:32:28] Speaker 01: The problem here is, with respect to mortgage insurance, borrowers don't shop for it. [00:32:34] Speaker 01: They're dependent on lenders to refer them. [00:32:38] Speaker 01: The lender isn't going to try and make the best decision for the borrower. [00:32:42] Speaker 01: The lender is going to try and make the best decision for the lender. [00:32:44] Speaker 01: And that's why the practice went on in the industry. [00:32:48] Speaker 01: All the lenders saw that mortgage insurers were making big bucks as the housing industry boomed, and they wanted to get in on it. [00:32:58] Speaker 01: So they set up these captive reinsurance businesses, and it was very, yes. [00:33:02] Speaker 01: The question was fair market value, right? [00:33:04] Speaker 01: Yes. [00:33:05] Speaker 01: So once they get fair market value, [00:33:07] Speaker 01: In my example, with the Xerox paper, they sold the Xerox paper, they bought it wholesale, they sold it retail, they made a lot of money out of it. [00:33:16] Speaker 01: The mere fact that it's fair market value doesn't mean they're not getting kickback. [00:33:20] Speaker 02: And in fact- But they see- Go ahead. [00:33:22] Speaker 02: The burden of your position is that, but for the arrangement, the insurers would not have purchased reinsurance. [00:33:32] Speaker 01: They absolutely would not, of your honor, and that was the evidence in the case. [00:33:35] Speaker 01: We cited in our brief a mortgage insurance executive testified and explained that they didn't want the reinsurance, but they had to buy it. [00:33:47] Speaker 01: Because if they didn't buy the reinsurance, they lost the referrals. [00:33:51] Speaker 01: That's the only reason they bought it. [00:33:52] Speaker 01: If they had really wanted reinsurance, there would have been a market out there. [00:33:57] Speaker 01: Companies like Lloyds of London, Swiss Reinsurance, there would have been others out there who were not captive reinsurers. [00:34:04] Speaker 01: There would have been other reinsurance out there offering the product to mortgage lenders, but they weren't. [00:34:10] Speaker 01: And the reason Lloyds of London couldn't sell reinsurance was because Lloyds of London couldn't give referrals, which is what? [00:34:18] Speaker 01: which is what the mortgage insurers wanted. [00:34:23] Speaker 01: The mortgage insurers depend on referrals for their business. [00:34:27] Speaker 01: Borrowers, as I said, do not select the mortgage insurer. [00:34:31] Speaker 01: There's no gecko out there marketing mortgage insurance to consumers. [00:34:35] Speaker 01: Borrowers don't even know how to shop for mortgage insurance. [00:34:38] Speaker 03: But the problem for you, and you talked about 8A, but I'm turning to the statute itself, 8C2, [00:34:44] Speaker 01: it's a true nothing in this section nothing in this section shall means nothing nothing means nothing shall be construed to prohibit any person from accepting a bonafide payment for goods or facilities or services actually provided or performed director [00:35:03] Speaker 01: in his decision recognizes that this provision is ambiguous. [00:35:07] Speaker 01: He actually said it's not entirely clear as to what the provision means. [00:35:12] Speaker 01: Bonafide means in good faith. [00:35:15] Speaker 01: Bonafide, as the Supreme Court explained, means not for evasion. [00:35:19] Speaker 01: And as regulation X, [00:35:23] Speaker 01: explains in a provision that we include in the addendum to our red brief at, I don't know if you still get red briefs, but addendum at page addendum six. [00:35:37] Speaker 01: It's a provision that's currently codified at 12 CFR 1024.5 B7. [00:35:46] Speaker 01: The regulation explains that to determine whether a mortgage transfer is bona fide, you look to the real interest of the parties. [00:35:56] Speaker 01: The real interest of the parties here is kickbacks for referrals. [00:36:01] Speaker 03: Is there anything like that interpretation of bonafide in the prior agency pronouncements on this subject? [00:36:09] Speaker 01: The other agency pronouncements, the other agency pronouncements that actually, and no, with respect to the HUD letter, one thing I didn't say about that is that [00:36:18] Speaker 01: HUD specifically cautioned in its regulations, in a provision that we include in the addendum to our brief at page four, HUD specifically cautioned that informal staff letters, such as this HUD letter that were never published in the Federal Register, do not provide a defense to liability. [00:36:37] Speaker 01: We include HUD's regulation in there. [00:36:40] Speaker 01: HUD had it at 24 CFR 3500.4b. [00:36:46] Speaker 01: Letters such as this one do not provide a defense to liability, but PHH also claims that it relies on more formal HUD policy statements that were in fact published in the Federal Register. [00:37:00] Speaker 01: The problem for PHH with respect to the statements that were published in the Federal Register is that none of them deals with a situation where there was a clear agreement between the parties to require the payment [00:37:12] Speaker 01: of kickbacks for referrals. [00:37:14] Speaker 01: All that those policy statements deal with, and they're all very similar, they deal with slightly different factual permutations, but the logic of them is- The Supreme Court case law on the fair notice has not required some formal regulation. [00:37:26] Speaker 03: 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. [00:37:34] Speaker 03: That's what it seems like happened here, which is you had this, and there are subsequent letters, this blessing to go ahead, [00:37:42] Speaker 03: And then it's $109 million. [00:37:45] Speaker 01: It's not a blessing to go ahead. [00:37:47] Speaker 01: It's a letter that HUD cautioned not to rely on. [00:37:50] Speaker 01: And we don't know what the incoming for that letter was. [00:37:52] Speaker 01: We don't know what countrywide described and what HUD was going to do there. [00:37:56] Speaker 03: Why did HUD say what it said and then say, but just kidding? [00:37:59] Speaker 03: They didn't say, but just kidding, Your Honor. [00:38:02] Speaker 03: When you say, don't rely on this, the vernacular for that is just kidding. [00:38:06] Speaker 01: No, no, no, Your Honor. [00:38:07] Speaker 01: That's not what that is. [00:38:08] Speaker 01: HUD received a letter from Countrywide. [00:38:11] Speaker 01: And we don't know what Countrywide said. [00:38:13] Speaker 01: But presumably, if HUD tried to sue Countrywide, that letter might be a defense for Countrywide. [00:38:21] Speaker 01: regulated parties frequently approach agencies and agencies can respond to their practices without providing a formal pronouncement or statement of policy. [00:38:31] Speaker 01: Here, the statement of policies, none of them involves a situation where there's a clear agreement between the parties to require the payment of kickbacks for referrals. [00:38:42] Speaker 01: What they do deal with instead is they explain when HUD would [00:38:47] Speaker 01: a violation of Section 8A based solely on the price paid by the party that had received referrals for services that it was purchasing from the party that made referrals. [00:39:01] Speaker 01: When HUD would infer a violation based on the price, here we don't need to infer an agreement because there is clear evidence in the record and it's described [00:39:09] Speaker 01: in the director's opinion at pages four and five, it's four and five in the joint appendix, describes the evidence that showed that there was a clear agreement. [00:39:21] Speaker 01: The mortgage insurers understood that if they didn't buy the reinsurance, they were off of PHH's dialer. [00:39:28] Speaker 01: There was an example in there showing where a mortgage insurer said, we're no longer buying the reinsurance, and immediately [00:39:34] Speaker 01: its referrals were cut more than 99% and then later on it said, okay, we've changed our mind, we're going to buy reinsurance again. [00:39:41] Speaker 01: Six minutes later the instruction goes to put that company back on PHH's favored list. [00:39:50] Speaker 03: Why isn't the most natural reading of bona fide [00:39:54] Speaker 03: equivalent to fair market value. [00:39:56] Speaker 01: Because, Your Honor, if you read it that way, it renders Section 8C1, surplusage, as the Director explained, and also... Redundancies. [00:40:06] Speaker 03: Congress is often redundant in covering the waterfront and making sure things are either prohibited or exempt when they're doing things like that. [00:40:13] Speaker 03: I don't... That's very common. [00:40:15] Speaker 01: When Congress, when that statute says for services actually provided, it says that in a number of places without the use of the modifier bonafide. [00:40:26] Speaker 01: It says it in section 8B. [00:40:28] Speaker 01: 8B becomes virtually meaningless. [00:40:31] Speaker 03: But if you didn't have bonafide, then [00:40:33] Speaker 03: you could have salaries or compensation that weren't fair market value. [00:40:37] Speaker 03: No, Your Honor. [00:40:37] Speaker 03: And try to get exempt. [00:40:38] Speaker 03: The reason Congress presumably put bona fide in was to ensure that it reflected a real salary, real compensation, which is usually determined by fair market value. [00:40:49] Speaker 01: No, Your Honor. [00:40:50] Speaker 01: Section 8B, for example, which prohibits splits of real estate charges, says splitting a fee for a settlement service [00:41:02] Speaker 01: violates RESPA, except for services actually provided. [00:41:07] Speaker 01: There's no bona fide, they don't use the words bona fide in that section. [00:41:13] Speaker 01: Your interpretation might suggest that if one party could receive a split, so long as it provided nothing more than a peppercorn's worth of services, that can't be right. [00:41:25] Speaker 01: That would render that provision virtually, would render that meaning absurd. [00:41:31] Speaker 01: There's no [00:41:32] Speaker 01: There's no justification for that. [00:41:34] Speaker 01: Your Honor, there are more than 110 cases that repeat the Supreme Court's admonition that when interpreting statutory provisions, it's simply inappropriate to extract an elephant from a mousehole. [00:41:47] Speaker 01: Congress does not hide elephants in mouseholes. [00:41:49] Speaker 01: But that's what PHH is asking this court to do. [00:41:53] Speaker 01: It's asking it to interpret Section 8C2 of RESPA to undermine [00:41:59] Speaker 01: completely undermine a central purpose of the act, the prohibition of kickbacks. [00:42:05] Speaker 02: What was the evidence regarding the cost of not reinsurance but insurance by the companies that were dealing with PHH? [00:42:13] Speaker 02: Was it higher than otherwise? [00:42:16] Speaker 01: No, no, well, yes or no, Your Honor. [00:42:19] Speaker 01: No, in that there is evidence that the costs in the industry were more or less the same, but two things. [00:42:26] Speaker 01: One, everybody was doing it. [00:42:27] Speaker 01: So everybody's, you know, all prices, all boats rose as the water rose there. [00:42:34] Speaker 01: But two, there was some evidence, which we cite in our brief, that [00:42:41] Speaker 01: PHH was starting to get, I believe it's by 2011, they were beginning to get complaints from borrowers who said, yeah, you're referring us to mortgage insurance companies, but we did actually do a little due diligence here, and we did find mortgage insurers who were less expensive. [00:42:58] Speaker 01: Why weren't you referring us to those mortgage insurers? [00:43:01] Speaker 01: And I guess there's a third piece of evidence here, and that is that [00:43:07] Speaker 01: PHH not only originated loans, it also bought loans from other lenders. [00:43:13] Speaker 01: It referred to them as its correspondent lenders. [00:43:15] Speaker 01: It packaged these and it sold them in the secondary market. [00:43:18] Speaker 01: If one of those loans required mortgage insurance and if [00:43:24] Speaker 01: correspondent lender, the borrower, whatever, didn't get mortgage insurance from one of PHH's favored mortgage insurers, PHH upped the rate on that loan. [00:43:34] Speaker 01: It charged a certain percentage more, a substantial percentage more with respect to the rate of that loan. [00:43:42] Speaker 01: That seems to indicate that there's certain, not only is there real value in that, but that there were cheaper prices out there. [00:43:49] Speaker 01: The evidence is a little mixed on that point. [00:43:53] Speaker 02: So who's getting protected by the director's decision? [00:43:57] Speaker 02: If it's not the borrowers, because the cost of insurance is fairly uniform, who is getting protected by this decision? [00:44:05] Speaker 01: Your Honor, ultimately, it is the borrowers. [00:44:07] Speaker 01: In this specific case, there simply isn't evidence that the borrowers paid a higher price, because that's not required. [00:44:15] Speaker 01: In the regulations currently at 14 [00:44:21] Speaker 01: It says it is irrelevant in determining whether there's a violation to identify that there's actually been a price increase to borrowers. [00:44:34] Speaker 01: But the fact of the matter is, Your Honor, kickbacks [00:44:37] Speaker 01: are inherently market distorting. [00:44:41] Speaker 01: In this market, with respect to the reinsurance, everything was so badly distorted as it was because everybody was doing the same thing, so there simply wasn't clear evidence because everybody was paying the higher price, so we can't. [00:44:54] Speaker 01: compare, we can't compare the pristine market with the distorted market. [00:45:00] Speaker 03: You want to talk about the statute of limitations? [00:45:02] Speaker 03: In particular, is there one? [00:45:04] Speaker 03: Could something like this be brought 20 years after the fact, 30 years after the fact? [00:45:09] Speaker 03: No, Your Honor, there is no statute of limitations with respect to... So you can bring this as far in the future and go back as far as you want? [00:45:19] Speaker 01: The Consumer Financial Protection Act authorizes the Bureau to pursue cases in court or administratively. [00:45:28] Speaker 01: The provision in section 1054, which I believe is at 12 USC 5564, says with respect to court actions, there is a statute of limitations. [00:45:41] Speaker 01: There is no statute of limitations provision [00:45:45] Speaker 01: in the Bureau's authority to bring administrative actions. [00:45:49] Speaker 03: And the Bureau was not... How common is it for there to be no statute of limitations for an agency to seek major sanctions like this? [00:45:58] Speaker 01: Your Honor, I can't say that I know for sure, but I do know that there's no statute of limitations in the Federal Trade Commission's authority to bring administrative adjudications. [00:46:09] Speaker 01: And I believe this was modeled after one of the Banking Acts, which also has no statute of limitations here. [00:46:19] Speaker 01: Now, here, it's not, we're not bringing, we're not challenging anything that happened 20 years ago. [00:46:26] Speaker 03: The director carefully... I know, I'm talking about, as we must do, what your theory would allow. [00:46:31] Speaker 03: We can't just think about this case. [00:46:33] Speaker 03: Your theory would allow the agency, the director, the single director to go back decades [00:46:41] Speaker 03: I'm not saying this will happen often, but this is what we have to think about. [00:46:43] Speaker 03: Go back decades and impose major liability on someone for something that happened a long time ago, which we don't usually see. [00:46:51] Speaker 01: there is no statute of limitations in the provision. [00:46:53] Speaker 03: And I would note that with respect to statute of limitations... But there was a stat... On these provisions before the Bureau was created, there was a statute of limitations when HUD enforced, correct? [00:47:03] Speaker 01: Yes, because HUD had no choice except to... HUD had no choice except to bring actions in court. [00:47:10] Speaker 01: And if the Bureau brought an action to enforce in court, [00:47:15] Speaker 01: It would also be subject to that same three-year statute of limitations. [00:47:20] Speaker 01: But Congress amended RESPA to allow the Bureau to enforce it. [00:47:26] Speaker 01: It passed the Consumer Financial Protection Act. [00:47:30] Speaker 01: It could have amended RESPAB to provide that the statute of limitations also applied in administrative adjudications, but it didn't. [00:47:40] Speaker 01: Are you aware of any – go ahead. [00:47:43] Speaker 02: How do you distinguish the long line of cases that I mentioned to Mr. Olson, dating back to the early 1800s? [00:47:51] Speaker 02: that when there's a judicial action brought by a federal official and the governing statute does not have a statute of limitations that the courts borrow, either a state statute of limitation or a federal one, [00:48:06] Speaker 02: And I can't think of all the names of the cases, but they do date back to the 1800s. [00:48:12] Speaker 02: And the court says it would be an abomination to have a federal official not bound by a statute to be allowed to bring in action decades after the event. [00:48:24] Speaker 01: I mean, I think, Your Honor, perhaps that if the Bureau tried to do that at some point, the Court could address that issue as to whether the Bureau's action had crossed the abomination threshold. [00:48:36] Speaker 01: But it doesn't here, because PGH even concedes that the Bureau can pursue conduct going back as far as January 2009. [00:48:46] Speaker 01: The only dispute is between July. [00:48:48] Speaker 02: It has an effect on the amount of liability. [00:48:50] Speaker 02: Beg your pardon? [00:48:50] Speaker 02: It has an effect on the amount of liability, does it not? [00:48:53] Speaker 01: It has some impact, yes. [00:48:55] Speaker 01: But they calculate liability differently than we do. [00:48:59] Speaker 01: They contend that liability attaches only when loans close. [00:49:06] Speaker 01: But that's simply wrong. [00:49:08] Speaker 01: And the reason that's wrong is because that's not the way PHH set it up in its contracts with the reinsurers. [00:49:14] Speaker 01: All four of the contracts between PHH and the reinsurers are in the record in this case. [00:49:19] Speaker 01: They're not in the joint appendix, but they're in the record. [00:49:22] Speaker 01: And none of those contracts makes any mention of closing whatsoever. [00:49:27] Speaker 01: What they all do provide is that every quarter, the reinsurers, the mortgage insurers, excuse me, every quarter, the mortgage insurers are required to do an accounting to determine how much they received in premiums from borrowers who were referred by PHH during that preceding quarter, and then pay over a percentage of that [00:49:48] Speaker 01: to PHH. [00:49:50] Speaker 01: The director found that every time PHH accepted one of those payments, it violated RESPA, because RESPA says that no person shall accept any fee, kickback, or thing of value pursuant to an agreement or understanding, oral or otherwise, that business incident or to a part of a real estate settlement service shall be referred. [00:50:10] Speaker 03: That's what happened. [00:50:11] Speaker 03: On the statute of limitations, are you aware of why Congress might, under your view, have wanted no statute of limitations on administrative actions? [00:50:21] Speaker 01: I don't know of any legislative history with respect to that provision. [00:50:24] Speaker 03: No statements from anyone acknowledging and expressing support for this discrepancy? [00:50:29] Speaker 01: Not that I know of, Your Honor, but it may be. [00:50:31] Speaker 03: There is a statute of limitations on court proceedings. [00:50:34] Speaker 03: Under your view, there is none on administrative. [00:50:38] Speaker 01: But the Consumer Financial Protection Act [00:50:42] Speaker 01: adopts and adapts sections from a variety of other acts. [00:50:45] Speaker 01: And as I said, agencies like the Federal Trade Commission have no statute of limitations with respect to their administrative proceedings. [00:50:52] Speaker 02: Can they collect fines? [00:50:55] Speaker 02: Can they collect forfeitures? [00:50:57] Speaker 02: Can they collect civil penalties? [00:50:59] Speaker 01: They actually can collect fines if they can show that the practice they have, and it's under section, I believe it's 5M of the FTC Act, they can. [00:51:10] Speaker 01: Well, if they can. [00:51:12] Speaker 01: They have to, yes. [00:51:14] Speaker 01: They have to go to court. [00:51:15] Speaker 02: They have to show that there is a statute of limitations. [00:51:18] Speaker 02: It's 28 U.S.C. [00:51:21] Speaker 02: 2462 that covers it. [00:51:24] Speaker 02: It covers every agency in the federal government, unless Congress provides otherwise. [00:51:31] Speaker 02: And silence has never been construed as providing otherwise. [00:51:35] Speaker 02: Otherwise, the statute would make no sense, right? [00:51:38] Speaker 01: But in the BP America case, which we cited in our brief, the court there distinguished on that general statute of limitations. [00:51:44] Speaker 01: It distinguished between court actions and administrative proceedings. [00:51:48] Speaker 01: And it said that that provision, that statute of limitations provision, does. [00:51:53] Speaker 02: In your view, is the reason for a statute of limitations? [00:51:58] Speaker 01: There can be lots of reasons for a statute of limitations. [00:52:02] Speaker 02: Give me three. [00:52:03] Speaker 01: Give you three? [00:52:05] Speaker 01: It can be that there's difficulty obtaining evidence. [00:52:08] Speaker 01: Again, this has not been part of the case. [00:52:11] Speaker 01: Evidence becomes stale. [00:52:12] Speaker 01: People forget. [00:52:12] Speaker 02: There ought to be republics. [00:52:13] Speaker 01: People forget. [00:52:14] Speaker 02: Yes. [00:52:15] Speaker 02: Which one of those reasons doesn't apply to an administrative agency? [00:52:18] Speaker 01: They all might apply to an administrative agency, Your Honor. [00:52:21] Speaker 02: So why would Congress put a statute of limitations only on a judicial proceeding and not on one within the agency? [00:52:28] Speaker 01: But that's what Congress did, Your Honor. [00:52:30] Speaker 01: That's what it did. [00:52:31] Speaker 02: Well, that's the question, isn't it? [00:52:33] Speaker 02: Whether it did that. [00:52:35] Speaker 01: Yes, I suppose so, Your Honor. [00:52:37] Speaker 01: But the fact is that it is quite conspicuous that there is a statute of limitations in the provision dealing with court proceedings. [00:52:48] Speaker 01: And there is no statute of limitations in the section dealing with administrative proceedings. [00:52:57] Speaker 03: But on congressional intent, again, the original idea for this, then Professor Warren proposed an idea for a consumer – for a financial product safety commission, it was going to be a commission as originally proposed. [00:53:12] Speaker 03: Do you know why Congress changed that idea from a multi-member commission to a single director? [00:53:20] Speaker 01: I do not, Your Honor. [00:53:21] Speaker 01: I haven't researched that point. [00:53:24] Speaker 01: The fact is that a single-member agency remains constitutional. [00:53:29] Speaker 01: It is a choice. [00:53:30] Speaker 01: As I said, Congress has structured various agencies in various different ways. [00:53:35] Speaker 01: Social Security Administration, one commissioner, NCOA 3, Federal Trade Commission 5, the old ICC 11. [00:53:44] Speaker 01: That was Congress's choice with respect to this specific agency. [00:53:49] Speaker 01: Now, PHH has suggested that because RESPA can be criminally enforced, this court must interpret all ambiguity in its favor, applying the rule of lenity. [00:54:06] Speaker 01: But this court and the Supreme Court have both said that the rule of lenity applies only if, after considering the text, the structure, the context, the purpose [00:54:15] Speaker 01: of a statute, grievous ambiguity remains the director. [00:54:20] Speaker 03: Well, with footnote nine of Chevron says that we're supposed to use all the tools of construction before we go to step two. [00:54:27] Speaker 03: And the rule of lenity is one of those tools of construction, correct? [00:54:31] Speaker 03: I would say it's a rule of construction that applies after all the other rules have been applied, except, Your Honor, I would note that this Court in the United... But Footnote 9 of Chevron talked about the traditional tools of construction, and the rule of lenity, as Justice Scalia most prominently has said many times, the rule of lenity is foundational. [00:54:50] Speaker 01: But this court has said in 2012 in the United States versus Burwell, you only apply the rule of lenity if grievous ambiguity remains. [00:54:59] Speaker 01: And this court recognized that there are a few statutes out there that do have ambiguous provisions in them. [00:55:06] Speaker 01: That ambiguity itself is not enough to... So Judge Seidman's opinion, you disagree with that? [00:55:12] Speaker 01: I do, Your Honor, I do disagree with Judge Sutton's opinion, and I think it would have real consequences here. [00:55:18] Speaker 01: The Consumer Financial Protection Act directs the Bureau to enforce 18 consumer financial laws. [00:55:27] Speaker 01: of those laws can be criminally enforced, including the Truth in Lending Act, the Fair Credit Reporting Act, the Electronic Funds Transfer Act, the Interstate Land Sales Act, Fair Credit Billing Act. [00:55:39] Speaker 01: Some courts hold that all of these statutes have to be interpreted to achieve their remedial purpose, but no court holds that these statutes have to be all strictly construed in favor of defendants, and in fact, [00:55:52] Speaker 01: In warning versus family publications, a Supreme Court case where the Supreme Court was asked to consider the Truth in Lending Act, and again, that's one of the statutes that the Bureau enforces, and it can also be criminally enforced. [00:56:05] Speaker 01: The Supreme Court rejected an argument that truth in lending had to be strictly interpreted because it could be criminally enforced. [00:56:13] Speaker 01: Instead, the agency deferred to the reasonable interpretation of the agency. [00:56:19] Speaker 01: There was an argument? [00:56:20] Speaker 02: In mourning about the rule of lenity? [00:56:24] Speaker 02: I argued the case. [00:56:25] Speaker 02: I don't recall that. [00:56:26] Speaker 01: In mourning? [00:56:30] Speaker 01: There was a discussion in the opinion about the rule of lenity. [00:56:32] Speaker 01: Yes, there was, Your Honor. [00:56:34] Speaker 01: There was a discussion about whether the, I'm not sure that the words rule of lenity ever apply were used, but there definitely was a discussion as to whether the statute had to be strictly construed because it could be criminally enforced. [00:56:46] Speaker 01: And the court absolutely rejected that argument. [00:56:49] Speaker 03: But the reason for that is that it's fundamentally unfair due process type concern to interpret an ambiguity in a criminal statute or a statute that can be criminally enforced against an individual. [00:57:04] Speaker 03: It's foundational to individual liberty and ambiguity is not going to be used against you. [00:57:09] Speaker 01: But in this case, in the United States versus Kanchanalik, that was a criminal case where this court had to determine whether certain restrictions in the FECA applied to soft money. [00:57:23] Speaker 01: The court rejected applications, criminal case, rejected application of [00:57:28] Speaker 01: the rule of lenity and instead applied the agency's interpretation cited to Chevron and to the Supreme Court's case in Babbitt v. Sweet Home, which we cite in our brief. [00:57:41] Speaker 01: The director correctly held that PHH violated the Real Estate Settlement Procedures Act. [00:57:48] Speaker 01: He had ample authority to impose injunctive relief and disgorgement here. [00:57:52] Speaker 01: And with respect to this disgorgement, granted it's a substantial disgorgement award, but this is money that PHH, a multi-billion dollar company, wrongly received and has had the use of for many, many years. [00:58:07] Speaker 02: The enforcement authority in your agency, [00:58:11] Speaker 02: You don't have to go to court to enforce an order, is that right? [00:58:15] Speaker 01: I believe we would, Your Honor. [00:58:17] Speaker 01: To enforce our orders, I believe we would. [00:58:20] Speaker 02: Okay, you're not like the NORB, though, that you need an enforcement order from a court of appeals before any of the court's sayings. [00:58:29] Speaker 01: I don't believe so, Your Honor. [00:58:30] Speaker 01: I may be incorrect on that. [00:58:31] Speaker 01: If so, I'll correct it afterwards. [00:58:34] Speaker 01: But, so we would ask this court to, I see I've gone over my time, we would ask this court to uphold the director's decision and to affirm. [00:58:44] Speaker 03: Thank you. [00:58:44] Speaker 03: Thank you. [00:58:46] Speaker 03: Mr. Olson, we'll give you five minutes for rebuttal. [00:58:50] Speaker 04: Thank you, Your Honor. [00:58:51] Speaker 04: Let me start with Freeman v. Quickenloans. [00:58:53] Speaker 04: That is a unanimous decision of the United States Supreme Court on the subject of Section 8 of RESPA. [00:59:01] Speaker 04: It's a 19 – it's a 2002 opinion, unanimous. [00:59:05] Speaker 04: It says a number of things. [00:59:07] Speaker 04: First of all, RESPA is a criminal statute, and the rule of lenity applies to interpretation of the statute. [00:59:15] Speaker 04: and the court was very, very clear about that because the agency that the person supporting the interpretation of RESPA that was rejected by the Supreme Court was saying, well, the purpose of RESPA is to do certain various different things. [00:59:30] Speaker 04: And Justice Scalia made it very clear that arrest specifically prohibits certain specific acts and not other things. [00:59:39] Speaker 04: And he said specifically, this is a very, very poor case to bring up the purpose of the statute. [00:59:45] Speaker 04: It's a criminal statute. [00:59:46] Speaker 04: It has to be narrowly construed. [00:59:48] Speaker 04: We've heard our opponent use the word kickback. [00:59:50] Speaker 04: a number of times, a score of times here during this argument. [00:59:54] Speaker 04: It must be 30 or 40 or 50 times in the brief that they filed. [00:59:58] Speaker 04: What we're talking about here is a specific statute that says something might be must be prohibited. [01:00:04] Speaker 04: Section C two specifically says nothing [01:00:08] Speaker 04: in this section, nothing in this section shall be construed as prohibiting a fee for actual services, compensation for actual services rendered. [01:00:21] Speaker 04: That's clearly in the statute. [01:00:22] Speaker 04: They're putting a lot on bona fide. [01:00:24] Speaker 04: Pardon me? [01:00:25] Speaker 04: They're putting a lot of weight on bonafide. [01:00:26] Speaker 04: They're putting a tremendous amount of weight on bonafide. [01:00:29] Speaker 04: But it was that the agency did explain in the HUD letter, which was to a lender, which they understood was going out to the industry, being followed by the industry. [01:00:41] Speaker 04: It's picked up in Reg X. Reg X specifically says, refers to that provision. [01:00:48] Speaker 04: And this is it. [01:00:49] Speaker 04: CFR 1024.14 specifically says, with respect to that, if the reasonable relationship in the market value of the goods or services provided, then the excess, if there's no reasonable relationship to the market value, then the excess, so this regex, [01:01:12] Speaker 04: which was interpreted by the Schutte court and the Glover court. [01:01:16] Speaker 04: So it's not just agency interpretations, it's industry understanding and reliance, it's communications back and forth with Congress after that Culpepper case, it's the 11th Circuit and the 9th Circuit that interpreted, it's REG X, [01:01:31] Speaker 04: It goes on and on and on. [01:01:33] Speaker 04: It wasn't any question. [01:01:35] Speaker 04: There was no understanding anywhere out there that the interpretation that the director came up with in this proceeding would be the interpretation of the statute. [01:01:44] Speaker 04: Now, we're told that, well, we have something in that letter that says, don't trust us. [01:01:49] Speaker 04: That's as if the agency would put, you said, well, don't believe us or take your own chances. [01:01:55] Speaker 04: It's if the agency put on this door, they might as well put on this door of this agency, don't believe anything that we say, that when the agency came into existence, it specifically put out a regulation [01:02:06] Speaker 04: saying it would adopt the previous policies and petitions and interpretations of the agencies that it superseded. [01:02:13] Speaker 04: And that included HUD, and that included the statute, and here there is no showing that there's in any excess of anything beyond a reasonable relationship to fair market value. [01:02:24] Speaker 02: I thought there was an alternative holding. [01:02:26] Speaker 04: The alternative holding. [01:02:28] Speaker 02: It disappeared somehow. [01:02:29] Speaker 04: It disappeared, and if you look at page [01:02:33] Speaker 04: Fourteen of the agency's brief, a footnote five, it says the discussion of burden to which PHH refers to is in a section of the decision that addresses an alternative theory of liability, a theory that was relied on by the ALJ but that did not form the basis of the director's decision. [01:02:55] Speaker 04: That's as clear as it could be. [01:02:57] Speaker 04: That was a position that may have been in the ALJ's thinking, but it was abandoned by the director and it was abandoned by the agency and the briefs that are filed in this court. [01:03:06] Speaker 04: So that is not before this court. [01:03:08] Speaker 04: This is a clear interpretation of the statute, that if you read the language of the statute, you don't have to do anything else. [01:03:17] Speaker 04: But you not only have the language of the statute, [01:03:20] Speaker 04: But you have the interpretation that was uniformly followed for years and years and years. [01:03:25] Speaker 04: Then the defense that the agency puts forward is we have something in our regulations say don't trust us. [01:03:31] Speaker 04: You know, any agency can put that any out there, put a warning label [01:03:35] Speaker 04: on the front of this agency, and by the way it should be on the front of this agency, don't trust us. [01:03:41] Speaker 04: Because that does not exonerate them from the due process clause of the Constitution, which requires fair warning that an individual that is going to be subject to regulations must have a basis with ascertainable [01:03:55] Speaker 04: certainty. [01:03:56] Speaker 04: That's the Christopher versus Smith Klein case, another United States Supreme Court decision. [01:04:01] Speaker 04: And I don't have to repeat for this court again and again and again decided by the Supreme Court that an individual who is going to be subjected to a substantial penalty or any [01:04:12] Speaker 04: fine or anything like that has to have the opportunity for ascertainable certainty as to what is prohibited and what is not. [01:04:20] Speaker 04: The statute of limitations issue is another thing that is really quite remarkable on what the agency has done. [01:04:27] Speaker 04: Section D of the statute specifically says that proceedings for violation of this section by the Bureau [01:04:37] Speaker 04: This refers specifically to the Bureau. [01:04:41] Speaker 04: It shall be brought pursuant to this section. [01:04:43] Speaker 04: And then section 2014 says any action pursuant to the provisions of section 2014. [01:04:52] Speaker 04: 2008-2608 of this statute shall be subject to this statute of limitations. [01:04:58] Speaker 04: So it is quite clear in Section 8, in the statute itself, that an action brought by the agency, which is what was brought here. [01:05:07] Speaker 04: Now, what the agency is now saying, well, the word action doesn't mean stuff we do. [01:05:14] Speaker 04: It only means if we go to court. [01:05:16] Speaker 04: Well, you can't find that in the statute anywhere. [01:05:18] Speaker 04: What they brought was an action [01:05:20] Speaker 04: pursuant to Section 8D and actions brought pursuant to Section 8D are subject to Section 2014. [01:05:29] Speaker 04: So that statute of limitations is right there. [01:05:32] Speaker 04: So the fact is [01:05:35] Speaker 04: that this agency, and I won't go spend any more time with respect to the systematic violations of clear provisions of the statute, clear agency provisions, clear court decisions with respect to the interpretation of the statute. [01:05:48] Speaker 04: Out of the blue, a $109 million penalty brought down on this entity, this agency, this industry, this company that was pursuing a legitimate activity, charging reasonable fees for services, it's in the briefs, [01:06:03] Speaker 04: They paid out $156 million in claims. [01:06:06] Speaker 04: We hear that reinsurance is some kind of a racket. [01:06:10] Speaker 04: It's a very profitable thing, as long as there's not a disaster. [01:06:15] Speaker 04: As soon as there's a disaster, then the insurance companies have to pay a lot of money. [01:06:20] Speaker 04: And the people that bought insurance, and there's testimony in this record, that the lenders were saying, well, thank God, that sort of saved us. [01:06:27] Speaker 04: Because when the housing market went to [01:06:30] Speaker 04: pieces in 2008 all of a sudden in a handbasket. [01:06:40] Speaker 04: All of a sudden, that reinsurance was very valuable. [01:06:43] Speaker 04: There were premiums charged and profits made by any other industry, particularly in the insurance industry. [01:06:50] Speaker 04: You make money until a disaster occurs. [01:06:52] Speaker 04: When a disaster occurs, and there isn't any doubt that a disaster in the housing industry occurred, this company paid out $156 million in claims. [01:07:01] Speaker 04: $85 million went into trust funds. [01:07:04] Speaker 04: for claims here. [01:07:06] Speaker 04: And then this disgorgement took the entire premiums to say it's all unjust enrichment. [01:07:11] Speaker 04: It wasn't all unjust enrichment. [01:07:13] Speaker 04: That came out of the blue, too. [01:07:14] Speaker 04: So that's another thing that's wrong. [01:07:16] Speaker 04: And this goes back to the constitutional questions. [01:07:20] Speaker 04: We're told that there are single director agencies. [01:07:25] Speaker 04: Yes, there are. [01:07:26] Speaker 04: But they're very limited. [01:07:29] Speaker 04: And we were criticized just a moment ago for suggesting that a holistic approach to separation of powers is appropriate. [01:07:37] Speaker 04: Morrison versus Olson, that is what the Supreme Court of the United States did, is apply a holistic approach and talk about the fact that the independent counsel there was appointed to a limited term for a limited purpose. [01:07:52] Speaker 04: And whether or not that decision is right or wrong in retrospect [01:07:55] Speaker 04: There was a very careful constraint by the Supreme Court of we have to look at the entire picture. [01:08:02] Speaker 04: Well, let's look at the entire picture in this case. [01:08:04] Speaker 04: You have an agency run by a director that doesn't have to consult with anybody else. [01:08:10] Speaker 04: The FTC and some of those other agencies can only have three people from one party. [01:08:15] Speaker 04: in the agency. [01:08:16] Speaker 04: There's a division of authority. [01:08:18] Speaker 04: There's separation. [01:08:20] Speaker 04: There's appointments at various different times. [01:08:22] Speaker 04: So this is all power concentrated in one person. [01:08:26] Speaker 04: The president does not have the power to remove except for inefficiency, malfeasance, or some violation of the law or something like that. [01:08:34] Speaker 04: The president can't remove this individual. [01:08:36] Speaker 04: The next president can't. [01:08:37] Speaker 04: until his term is over. [01:08:39] Speaker 04: If there can't be an appointment, he continues on. [01:08:42] Speaker 04: He doesn't have to go to Congress with respect to his funds. [01:08:46] Speaker 04: He doesn't have to consult with the executive branch with respect to communications of Congress. [01:08:51] Speaker 04: He can hire people that are in ways that are independent of restrictions on federal employees. [01:08:58] Speaker 04: and can fire people and can set their salaries. [01:09:01] Speaker 04: This is, if you wanted power to run this country, and this agency took over the responsibility of something like a score of different other agencies with statutes all the way across the book. [01:09:14] Speaker 04: So it's very broad authority. [01:09:16] Speaker 04: It's not like the Social Security Commission. [01:09:18] Speaker 04: It's not like the FHFA, which is a limited [01:09:22] Speaker 04: The degree of authority, and let's share it with the Board of Advisors, including the Secretary of Treasury and so on and so forth, and a limited scope with respect to the GSEs. [01:09:38] Speaker 04: over many many different statutes to one individual who doesn't have to pay any attention to the President or the Congress can do anything you want and what we see here is a violation systematically of statute after statute after statute to impose a 109 [01:09:56] Speaker 04: million dollar penalty out of the blue on this industry and this company that was following the law. [01:10:01] Speaker 04: That is unconstitutional. [01:10:03] Speaker 04: It's an unconstitutional agency and the steps that were taken are unconstitutional. [01:10:08] Speaker 04: The decision of this director cannot be upheld [01:10:12] Speaker 04: The decision must be vacated and I do hope that the court will weigh in on these statutory violations because it's very, very important to this entire industry. [01:10:21] Speaker 04: Reinsurance is a very legitimate business. [01:10:24] Speaker 04: It is very important to certain people. [01:10:27] Speaker 04: The existence of reinsurance is not against the law. [01:10:30] Speaker 04: It's not prohibited by [01:10:32] Speaker 04: and referrals are not prohibited only where there is not compensation for actual services. [01:10:39] Speaker 04: So it's very, very important that the court pronounce where there's a violation of the statute by this director, there was a violation of the statute and the director who was appointed by the president pursuant to a provision that we submit is unconstitutional. [01:10:56] Speaker 04: He cannot hold that job. [01:10:58] Speaker 04: You cannot strip the removal provisions [01:11:01] Speaker 04: and then say, go back and keep doing it, because he was appointed to a position that had those removal restrictions on it. [01:11:08] Speaker 04: If they're unconstitutional, he cannot hold that office. [01:11:12] Speaker 04: Someone else will have to be appointed to an agency that Congress should come back and create in a constitutional way. [01:11:19] Speaker 04: Thank you. [01:11:21] Speaker 03: Thank you, counsel. [01:11:22] Speaker 03: Thank all counsel for excellent briefs and arguments, including all the amicus briefs, which were very helpful cases submitted.