The Consumer Financial Protection Bureau (CFPB) maintains regulatory enforcement authority over independent mortgage banks, depositories, fintechs and the reverse mortgage industry at the national level, and has seen a couple of specific developments related to its interactions with the reverse mortgage business specifically as well as a new, existential threat emerge in the form of a Fifth Circuit U.S. Court of Appeals ruling.
Recently, the CFPB issued a request for information (RFI) on mortgage refinances, loss mitigation, and forbearance to determine ways that mortgage refinances might be facilitated for people who can most benefit from them, and how to mitigate risks for consumers who have the ability to pay their mortgage balances interrupted.
The RFI specifically requested input from older Americans and the financial services that cater to them, and servicers are preparing to offer input to the Bureau according to conversations with RMD.
Additionally, the Fifth Circuit ruling has created a new challenge to the Bureau’s constitutionality, which could impact the regulatory climate that the reverse mortgage industry operates in.
The RFI, servicers respond
In a statement released alongside the RFI from the CFPB’s Office of Older Americans, the actions that come out of it could have a potential impact on mortgage policy that is aimed at seniors even though the cohort is not specifically referenced in the actual RFI document itself.
“Older adults account for an increasing share of people with mortgages, and more of them are carrying mortgages into retirement while relying on fixed incomes,” the statement reads. They also hold a wide range of mortgage products including home equity loans and reverse mortgages.”
Additionally, the senior cohort is among a larger group of borrowers who are known to refinance their mortgages, which means that the input that could come from seniors and other stakeholders who may serve the senior community specifically within the mortgage sector could make for welcome feedback.
Reverse mortgage servicers are absorbing the RFI currently and are preparing to offer substantive responses, according to National Reverse Mortgage Lenders Association (NRMLA) President Steve Irwin.
“The Bureau has published a request for information looking for ways to improve loss mitigation, and our servicers are ready to submit responses to that RFI,” Irwin told RMD in an interview. “We look forward to opening the dialogue on enhancing loss mitigation opportunities in the FHA-insured HECM reverse mortgage space.”
For the part of servicing companies, reverse mortgage subservicer Celink confirmed that it is a part of the conversation and is working with the trade association to offer up the requested information.
“This is still being actively worked on by the servicers and NRMLA,” said Ryan LaRose, chief client and industry relations officer at Celink. “NRMLA will then aggregate the industry responses and will submit the final comments to the CFPB.”
New constitutionality challenge
The Fifth Circuit U.S. Court of Appeals last week found that the “design of the CFPB violated the Constitution because it receives funding through the Federal Reserve, rather than appropriations legislation passed by Congress,” according to a story on the decision by Politico. “Democrats established the structure when they created the CFPB in the 2010 Dodd-Frank law as a way to shield the bureau from political pressures that could impact its oversight of the finance industry.”
The panel also vacated a 2017 small-dollar lending rule, a longtime target of payday lender advocates, though portions of that rule had previously been impacted by the different enforcement philosophy of the Trump administration under the previous director Kathleen Kraninger in 2019.
The rule was conceived as a way of protecting financially vulnerable borrowers of payday loans from large amounts of debt that can quickly accumulate through the use of those kinds of loans.
This is the second major challenge to the CFPB’s constitutionality over the past few years, as the previous major challenge went all the way to the U.S. Supreme Court which ultimately found that the single-director structure was unconstitutional, but the Bureau itself was allowed to stand.
What the ruling could mean for the reverse mortgage industry and borrowers
In terms of the potential impacts the loss of the CFPB could mean for the reverse mortgage industry and senior borrowers, RMD reached out to reverse mortgage subject matter expert and National Consumer Law Center (NCLC) Attorney Sarah Bolling Mancini.
“Regulations issued over the past eleven years by the CFPB are all at risk if the Fifth Circuit decision is allowed to stand,” she told RMD. “These regulations have provided important clarity to financial institutions, including reverse mortgage lenders and servicers. Making all of these regulations obsolete would create upheaval in the reverse mortgage market as in the broader mortgage market.”
One key example she cites revolves around adjustable-rate Home Equity Conversion Mortgage (HECM) loans, which could still interact with the outgoing London Interbank Offered Rate (LIBOR) index.
“Adjustable rate HECM loans tied to the now-defunct LIBOR index would no longer be protected by the CFPB rules that provide a safe harbor for lenders who substitute a specific alternative index for the LIBOR in existing consumer contracts,” she said.
There would also potentially be a lack of clarity for reverse mortgage lenders in terms of how to comply with the Truth in Lending Act (TILA), and the Real Estate Settlement Procedures Act (RESPA) at loan origination if CFPB regulations disappear, she said.
“The outcome from the Fifth Circuit three-judge panel is harmful to both consumers and financial institutions,” she concluded.
Settlement of the issue will likely take some time, so all entities under the CFPB’s purview will have to continue complying with all applicable regulations until a final decision is reached, which could be years away according to experts who have spoken to RMD. Companies that are currently dealing with enforcement actions may have an opportunity to bring the recent ruling up in their own cases, however.
This was a tactic recently employed by consumer credit reporting giant TransUnion in its own suit with the CFPB according to reporting at Law360. However, the Bureau has fired back and issued critical words regarding the ruling in that case, telling an Illinois federal judge it does not “make sense” and does not provide a reason for TransUnion to escape enforcement, the Bureau reportedly argued.