The battle over the Consumer Financial Protection Bureau’s (CFPB’s) right to exist has begun.
We recently reported on the plans of President-elect Trump to dismantle or overhaul the CFPB once he takes office in 2017. The first step in defanging the CFPB is to replace the current CFPB director, Richard Cordray, with someone more amenable to Republican policies of deregulation, which Republicans planned to do once President-elect Trump takes office.
But now it seems they will have to wait a bit longer.
What happened? It all started with a fine the CFPB levied against mortgage lender, PHH, back in 2015. Here is a timeline of events:
- In June 2015, the CFPB director required PHH to pay a $109 million fine due to kickbacks PHH received for referring clients to mortgage insurers. This amount was higher than the initial fine handed down in 2014 by a judge, which held PHH responsible for kickbacks made on mortgages closed after the Real Estate Settlement Procedures Act (RESPA) went into effect in July 2008. The $109 million fine imposed by the CFPB held PHH additionally responsible for all kickback payments received after RESPA took effect — even if the mortgage transaction had closed prior to RESPA’s rule prohibiting kickbacks.
- In October 2016, PHH won their appeal against the CFPB’s $109 million fine. The court determined that not only was the fine too high, since it held PHH responsible for kickbacks on mortgages originated before the 2008 rule, but it also ruled the CFPB’s leadership structure unconstitutional. This is because the CFPB director is virtually answerable to no one, since the U.S. President can only remove the director for cause. Other government agencies have leadership supervised and led by the U.S. President and can be replaced at will by the President. The new decision made the CFPB structure function as other agencies do, with leadership supervised and replaceable at any time by the President.
- In November 2016, following the presidential election, the CFPB filed an appeal against the court’s decision to restructure CFPB leadership. In its petition, the CFPB claims the court’s decision puts other independent agencies headed by a single director in jeopardy, including the Federal Housing Finance Agency (FHFA) and the Social Security Administration.
The moment they filed the appeal, the October decision was placed on hold until the court can revisit the matter. Therefore, when Trump takes office in January, he won’t be able to replace the current director at will. He will need to find cause — until the court makes a final decision.
Legal experts expect the CFPB’s petition to make it to the Supreme Court. The estimated time for the appeals process to run its course is two years or longer, according to a New York Times source. During that time, the current director is safe from removal without cause. In other words, Trump can’t fire him when he takes office just because he disagrees with his policies.
Regardless of how leadership is structured at the CFPB, first tuesday is supportive of the CFPB’s current agenda to educate and inform borrowers, and take enforcement actions against lenders that violate RESPA.
The fact is, if the President is given unilateral authority to replace CFPB leadership at will, the CFPB’s policy agenda is likely to change with every new administration. In the case of the next, pro-deregulation administration, not only is this detrimental to the CFPB’s goal to regulate lending, but it’s also going to be plain confusing for mortgage and real estate professionals.
Since its inception in 2011, the CFPB has made numerous consumer financial protection laws, including changing how lenders and mortgage loan originators (MLOs) do business. A new director appointed by Trump will undoubtedly follow Trump’s plan, which is to halt new regulation while he figures out how to completely “dismantle” the Dodd-Frank Wall Street Reform and Consumer Protection Act, which created the CFPB. This will include getting rid of the many reforms, mortgage forms and laws made in the past five years.
Trump wants a return to the deregulated years of the Millennium Boom, which led to a disastrous rise in adjustable rate mortgages (ARMs), predatory lending, home equity lines of credit (HELOCs) — and ultimately the foreclosure and financial crises. Sure, banks and homeowners profited immensely during the early to mid-2000s, but the aftermath was damaging for the entire nation and the economy is still recovering today.
Change is ahead for financial regulation. Whatever happens, first tuesday will keep you informed of shifts in the mortgage and housing market.