New CFPB Questions Leave Lenders in Limbo

The Consumer Financial Protection Bureau has taken an interesting course in its short life as the chief financial regulator for consumer products and services—to say the least.

First, it was led by CFBP “architect” and now-Senator Elizabeth Warren who held a role as special advisor to the president. But as specified under the Dodd-Frank Act, the agency wouldn’t become an enforcement powerhouse until an official director was confirmed. Finally through a recess appointment by President Obama in January 2012, the CFPB got its full “teeth,” and has been operating under the leadership of Director Richard Cordray with its full power potential, much to the dismay of Republican members of Congress who have long opposed the CFPB and its leadership structure.

 

And the plot thickens due to an almost-unrelated court decision announced last week.

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For the lender community including non-banks, the CFPB has a close watch on all financial products and services from student loans to mortgage servicing. For the past year, it has held full enforcement capabilities over all financial institutions, large and small. This has had vast implications for reverse mortgage lending as it investigates and monitors the marketing campaigns, disclosures and consumer complaints relating to reverse mortgages.

Now, all that could stand to change.

An appeals court, in deciding the recess appointments of two members of the National Labor Relations Board were unconstitutional unexpectedly calls into question not just the CFPB’s director’s position, but as a result, everything the CFPB has done—and continues to do—under his and its watch.

“There is a question of what the CFPB has done in the past versus what it will do in the future. There’s a certain authority without a director,” says Chris Willis, partner with Ballard Spahr LLP. But the extent of that authority remains an unknown.

In theory, if the director status is not recognized, it could mean that the whole last year of CFPB rulemaking—which includes more than a dozen mortgage-related rules, is subject to question. That could impact decisions made on loan originator compensation, mortgage servicing rules and an overhaul of mortgage disclosure documents. The CFPB has also published a lengthy study of the reverse mortgage industry and has issued warnings regarding reverse mortgage advertising materials. A take back of the actions would undo months and months of work both on the part of the agency and the lenders that it oversees.

It may not be black and white as to whether the CFPB rule stands or does not stand, however, Patton Boggs attorneys wrote following the decision. Even if it is decided Cordray’s directorship does not hold true, some of the rules made under his watch may still be subject to enforcement.

“For example, certain provisions of Dodd-Frank might be interpreted to say that certain powers conferred on the Bureau could be exercised only by a validly installed Director…. if courts finally decide that Cordray’s appointment was invalid, it is possible that they will invalidate some of the actions that the Bureau took, but not all.”

The lending community has seen past iterations of the bureau dating back to Warren’s tenure and the limited capability of the agency under her watch.

“There are all kinds of questions and not a lot of easy answers,” Willis says.

As a conservative measure, reverse mortgage lenders may be best served to continue “business as usual” pending any decision from the courts.

“Lenders should continue to plan to implement the CFPB rules as finalized, as it is uncertain how the court case(s) or legislative action will work out,” says Jim Milano of Weiner Brodsky Kider PC.

This approach stems from the chance the government will appeal the case, seeking positive resolution on the recess appointments in question, a process which would begin within 45 days of the initial court decision. Yet some believe the outcome could take a much more political route, giving some power to Republican members of Congress who have, since the CFPB’s inception under Dodd-Frank, questioned its leadership structure and refused to approve the director’s appointment in the first place.

“Most likely, this will bring the president to the bargaining table with the Republicans,” Willis says. “They’ll reach some accord that will give the Republicans one or more things in exchange for confirmation.”

FHA’s reverse mortgage product may already have experienced the result of such bargaining following an agreement of sorts between now-FHA Commissioner Carol Galante and Senator Bob Corker (R-Tenn.). Following criticism by Corker of Galante’s leadership as acting commissioner, Galante penned a letter to the senator pledging to make FHA program changes including a reverse mortgage fixed rate standard moratorium; a measure sought in a Senate hearing in late 2012. Within weeks, Galante was confirmed and the fixed rate product changes have been made.

If they do go to the negotiating table rather than a court of appeals on the NLRB hearing, Republicans could go after what they’ve been asking for through the entire duration of the CFPB’s existence—a bipartisan leadership committee to limit the unprecedented power the bureau currently wields.

“I don’t think the administration gets out of this by saying ‘We’re going to the Supreme Court,’” Willis says. “For Republicans, time is on their side.”

This edition of the RMD Report is sponsored by national appraisal management company Landmark Network.  

Written by Elizabeth Ecker

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  • The failure of this President to appoint Senator Warren to the post in a Senate recess when Republicans were not following the example created by Senator Reid during the end of the G. W. Bush Administration of having pro forma sessions during congressional recesses was a huge error. As a former Constitutional professor, it seems the President wanted to challenge the issue of who has the right to determine if the Senate is in session, the President or the Senate. If that was his goal, he is now in the midst of that battle.

    Why the President chose the CFPB to play this game is hard to understand. If the Administration challenges the other appointments which were ruled on as expected, we could see the issue tied up in the Roberts Court for months.

    If the Supreme Court rules against the legal opinion of AG Holder and the President, expect a battle royal over almost anything that the CFPB has ruled on, mandated, or issued such as the reverse mortgage study. The smartest position is to follow the most stringent rule in effect at the time until this whole thing works itself out; of course in some cases that could take years.

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