A major loss for the Administration’s policy occurred last week in the failure of a most significant enforcement of post-mortgage-crisis legislation, but not in the organic constitutional way that garnered much attention, but rather in the field of specific rights and administrative law. A new challenge was filed to another Administration signature regulation – in this case, a combination of Executive Orders, regulations, guidance, and contract clauses – and poses a multitude of issues. Finally, a late agency rule under specific deadlines may illustrate confusion over the regulatory typology.
Mortgage Lending Enforcement Failure: Last Tuesday, the United States Court of Appeals for the District of Columbia Circuit dealt a heavy blow to the enforcement docket of the Consumer Financial Protection Bureau (CFPB) in PHH Inc. v. CFPB. Much has been written about the lengthy discussion of the CFPB’s unusual structure (independent Director) that the D.C. Circuit found to be unconstitutional and less about the bulimic remedy of severing the “for cause” requirements for removing the Director, thus giving the President of the United States (POTUS) essentially the same authority as he possesses over other appointees. One could even expend much effort on whether constitutional or statutory issues should have been decided first, on which
the panel disagreed. The issues may be important, but of little effect.
Far more critical is the court’s unanimity on more prosaic issues. First, the D.C. Circuit concluded at Chevron step 1 that Real Estate Settlement Procedures Act (RESPA) plainly permits a mortgage company to reinsure mortgage insurance through their own captive reinsurance arrangement – RESPA was unambiguous under the norms of statutory interpretation. The court agreed with PHH that RESPA allows captive reinsurance arrangements so long as the amount paid by the mortgage insurer for the reinsurance does not exceed the reasonable market value of the reinsurance (ergo, the home buyer does not overpay for mortgage insurance). Moreover, the court noted:
Our interpretation of the [RESPA] text accords with the longstanding interpretation of [HUD]. For decades, HUD explained to mortgage lenders that captive reinsurance arrangements where reasonable market value was paid were entirely permissible …. Indeed, [the Department of Housing and Urban Development (HUD), and CFPB’s predecessor] adopted a rule, Regulation X, under which captive reinsurance arrangements were permitted so long as the insurer paid reasonable market value for the reinsurance. …. That regulation remains in place as a CFPB regulation. …. Yet in its decision here and its argument to this Court, the CFPB has not adhered to the regulation. On the contrary, the CFPB now says the opposite of what HUD’s prior interpretations and Regulation X all say.
The CFPB not only failed to abide by extant regulations that were transferred to it, but went even further. In a stated alternative, the panel summarized:
Even if the CFPB’s interpretation … were permissible, it nonetheless represented a complete about-face from the Federal Government’s longstanding prior interpretation …. Agency change is not a fatal flaw in and of itself, so long as the change is reasonably explained and so long as the new interpretation is consistent with the statute. …. But change becomes a problem – a fatal one – when the Government decides to turn around and retroactively apply that new interpretation to proscribe conduct that occurred before the new interpretation was issued. Therefore, even if the CFPB’s new interpretation were consistent with the statute (which it is not), the CFPB violated due process by retroactively applying that new interpretation to PHH’s conduct that occurred before the date of the CFPB’s new interpretation.
Accordingly, the CFPB could not challenge a substantial amount of PHH’s conduct before it announced a change in position, a point of both the Administrative Procedure Act (APA) and due process rights under the Fifth Amendment to the United States Constitution.
Third, the court determined that the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) incorporated RESPA’s statutes of limitations in administrative proceedings (not just judicial proceedings) – a three-year limitation that likely cuts off much of the CFPB’s case against PHH.
► The CFPB and the Department of Justice (DOJ)’s Solicitor General may be tempted to seek review from the United States Supreme Court (SCOTUS) on the constitutional authority issues, but past lack of success and the minimal remedial “loss” should weigh heavily against seeking such a course. Indeed, POTUS gained and it seems unlikely that the Solicitor General would seek to undo that new authority.
Again more critical is the effect of the RESPA / retroactivity / statute of limitations set of issues – further review would need to overcome all three issues to warrant substantial relief because each issue removed a substantial amount of the possible violations from the CFPB’s purview. The court’s remand order leaves the CFPB with a major investment and no return, and unlikely significant returns in the future. The latter issues reflect the true problems of creating an agency with so few checks and balances. This case is likely over.
Labor Complaints Contract Clause: At the other end of litigation, Associated Builders and Contractors of Southeast Texas v. Rung, in the United States District Court for the Eastern District of Texas, challenges the Federal Acquisition Regulation; Fair Pay and Safe Workplaces final rule and associated actions that will require federal contract bidders to report and federal contracting officers to determine whether an alleged violation of any of 14 labor, employment, and discrimination laws should disqualify contractors from being awarded or continuing to perform government contracts. As critical background, federal contract clauses are adopted through a regulatory notice and comment process, albeit one indigenous to contracting, by the Department of Defense (DOD), General Services Administration (GSA), and National Aeronautics and Space Administration (NASA) acting jointly. This Federal Acquisition Regulations (FAR) final rule explicitly incorporates by reference Department of Labor (DOL) Guidance for contracting officers in determining whether a contractor is disqualified by a labor, employment, or discrimination violation.
This suit paints broadly seeking to declare unlawful and set aside Executive Order 13673, as amended, which directed the agencies to develop the rule and the DOL Guidance incorporated by reference in the final rule. Three substantial issues seem likely to focus the courts’ attention:
- Whether the FAR rule, and DOL Guidance violate a potential contractor’s or contractor’s compelled speech rights under the First Amendment to the United States Constitution as to controverted labor disputes that may be pending or settled without resolution of the claimed violations.
- Whether the FAR rule violates a potential contractor’s or contractor’s due process rights under the Fifth Amendment by potentially disqualifying them from contracts for alleged violations of 14 labor, employment, and discrimination laws that have not been adjudicated under the regimes Congress established to determine such violations, but by contracting officers applying the DOL guidance that is “incorporated by reference” in the final rule.
- Whether the Executive Order and FAR rule prohibition of contractors entering into pre-dispute arbitration agreements with employees on title VII of the Civil Rights Act of 1964, or any tort related to or arising out of sexual assault or harassment (other than within a collective bargaining agreement) conflicts with the Federal Arbitration Act (FAA) – a repetitive statutory interpretation issue raised by broader Administration policy.
Phase-in of the FAR clause and DOL guidance are set to begin October 25, 2016, and plaintiffs have requested a preliminary injunction.
► The rule and guidance reflect a continuation of the Administration’s broad disclosure / dissuasion / anti-arbitration policy implementation, and, candidly, reflect the result of significant long-range planning. The issues remain problematic in their repetitive nature – and litigation will continue long after this Administration departs. The broad implications of the FAR rule – and again the Administration’s ongoing challenge to the Federal Arbitration Act in particular – pose substantial issues that will require some court action in the next few weeks.
Pipeline Emergency Confusion: The Department of Transportation (DOT)’s Pipeline and Hazardous Materials Safety Administration (PHMSA) published a Pipeline Safety: Enhanced Emergency Order Procedures interim final rule (IFR) last Friday to establish procedures for issuance of emergency orders under the Protecting our Infrastructure of Pipelines and Enhancing Safety Act (aka PIPES). In short, PIPES authorizes PHMSA to issue pipeline industry-wide emergency orders in limited circumstances without executing a normal notice and hearing process when a pipeline condition poses an imminent hazard to life, property, or the environment.
PIPES, enacted June 22, 2016, required PHMSA to issue temporary regulations not later than 60 days of enactment and final regulations not later than 270 days of enactment; PIPES provides that the temporary regulations expire upon promulgation of final regulations, i.e. within 270 days of enactment. The IFR, on the other hand, purports to solely affect PHMSA enforcement procedures, but asserts separately that advance notice and an opportunity for public comment under the Administrative Procedure Act (APA) is impracticable under the 270-day deadline and therefore claims good cause to bypass those APA requirements. The public is provided with a 60-day comment period on the IFR.
► A number of issues are immediately apparent from the IFR. First, the first set of regulations are clearly late, and PHMSA disingenuously suggests that it did not know the content of the enactment until after it was signed. Second, PHMSA has issued an IFR, not a temporary rule – a genre all its own that is directly required by the PIPES enactment – and fails to state its expiry. Third, the IFR sounds like a procedural rule exception to the APA notice and comment requirements, while PHMSA argues an emergency good cause exception to notice and comment. At best, PHMSA seems to be procedurally confused, but it may not matter when examining the substance of the rule and the process it creates. Nonetheless, public expectations of the agency should be higher.
The post Monday Morning Regulatory Review – 10/17/16: Mortgage Lending Enforcement Failure; Labor Complaints Contract Clause & Pipeline Emergency Confusion appeared first on Federal Regulations Advisor.