A sign at the Consumer Financial Protection Bureau (CFPB) headquarters in Washington, DC
Andrew Kelly | Reuters
A court last week overturned rules made by the Consumer Financial Protection Bureau for Payday lenders, saying the agency’s funding was unconstitutional and therefore lacking the ability to curb the industry.
The US Court of Appeals for the Fifth Circuit has struck down a CFPB rule that prohibits payday lenders from debiting the accounts of customers who fail to pay without their prior consent. The ruling applied only to that regulation, but financial services attorneys say it could disrupt the agency’s authority and upend all the rules.
“The Fifth Circuit decision may call into question all the rules, guidance, and orders issued by the CFPB, as they all trace their origins to the CFPB’s unconstitutional self-financing structure. write Holland & Knight regulatory attorneys Anthony DiResta and Luis Garcia. In a note to clients on Tuesday.
Undermining the legal authority of government agencies could have a serious impact on the mortgage market.
“Anything that disrupts the mortgage market could make it more difficult for homebuyers to qualify for a loan,” said Patricia McCoy, a law professor at Boston University.
McCoy allowed loan originators and loan purchasers to seek punitive damages after Georgia passed a law in 2002 aimed at protecting consumers from predatory loans. After that, I pointed to Georgia. This has expanded the potential damage not only to Wall Street banks, but also to mortgage investors Fannie Mae and Freddie Mac.
Top credit rating agencies have rejected ratings for mortgage-backed securities pools containing loans originating in Georgia, leading to a downturn in the MBS market. Fanny and Freddie, who buy mortgages, package them as securities and sell them to investors, have stopped buying mortgages in the state. The following year, the Georgia Legislature changed the law and rescinded the liability provision.
“The Fifth Circuit Court’s decision threatens to paralyze mortgage lending in Mississippi, Louisiana, and Texas. Lenders lose certainty about the laws that apply to future mortgages they make. from,” McCoy said, referring to states within the Fifth Circuit. She was part of her CFPB’s first leadership team during the Obama administration.
Founded after the 2008 financial crisis, the CFPB created a set of rules for the mortgage industry, including criteria for “eligible mortgages” based on a borrower’s ability to repay a loan. These two rules give mortgage investors and lenders legal protection against borrowers who claim they were tricked into not getting a loan, as long as they meet their criteria.
If the Fifth Circuit’s decision is upheld, it could call into question long-term mortgage rules.
Many legal observers expect that the decision will eventually be appealed to the Supreme Court. Although the High Court is not required to litigate, this raises serious constitutional questions. It could be a years-long process, and it could be delayed until other challenges to the CFPB’s mandate are stopped or the case is resolved.
It will take some time before the appeal is successful. The Mortgage Bankers Association is informing its members that the current ruling is limited to her CFPB’s payday loan rules.
“We’re looking at several ways to get a mortgage,” Robert Broekschmidt, president and CEO of the Mortgage Bankers Association, told the association’s annual meeting. I don’t want it to go away all together, but he vowed to continue fighting what he called the agency’s regulatory overreach. Now is not the time to force us to hire more attorneys to try and understand what the Bureau is doing.”
Industry groups have filed lawsuits against some CFPB rules, but losing repayment ability and eligible mortgage rules would be “catastrophic,” said law firm Ballard Spur’s Mortgage Practice Group. Richard Andreano, an attorney who leads the
“The loss of CFPB mortgage regulation and the impact on the market is devastating,” Andreano said. He believes the potential consequences mean that the courts or Congress will rectify the situation before it has any impact. will increase,” he said.
The protections provided by the Ability to Repay and Qualified Mortgage Rules also apply to the mortgage market, where mortgages are packaged into securities and sold to investors. With no set guidelines, the ruling raises questions about how credit raters and mortgage investors treat loans.
“They don’t want to put high liability-risk loans in their lending pool because investors who buy securitized bonds could also be harmed,” McCoy said.
S&P Global Ratings and Moody’s Investors Service declined to comment, but Fitch Ratings said it would be watching for changes that would have an immediate impact on the mortgage market.
“Originators and servicers in the mortgage market are subject to the rules and regulations of myriad governing bodies at the state and federal levels,” said Roloff Slump, head of operational risk for structured finance at Fitch. “Any change in the CFPB’s financing method is unlikely to have an immediate impact on the mortgage market.”
The root of the problem is how the CFPB is funded by the Federal Reserve rather than Congress. This design was intentional — to free agencies from political pressure. However, the court said the funding was unconstitutional because the agency did not respond to the public or Congress.
“We believe the court’s decision regarding the illegality of the CFPB’s funding mechanism is just as correct as its governance structure,” said the Federal Depository, which ran bank regulators during the savings and loan crisis of the 1980s. Bill Isaac, former head of the insurance corporation, said. “It is difficult to predict what that might mean regarding the legality of past actions by the CFPB.”
Andreano expects the courts to find an interim solution, but ultimately believes Congress will need to change the CFPB’s funding structure, saying, “A fix needs to be made. It’s true, but lobbyists will be very busy for some time.”
Jarrett Sayberg, managing director of Cowen Washington Research Group, told investors this week that if the Nov. 8 election brings Republicans control of one or both Houses of Representatives, they will be forced to raise funds for government agencies. Efforts to fix it could be complicated, he said.
In fact, he said the Republican Party could try to pay it off entirely.
“We know the industry is frustrated with the CFPB, but the law still applies, so it could be worse if the agency loses money, but financial companies are the defense against lawsuits. Guidance and safe harbors on which the United States relies may be invalidated,” he wrote.
The CFPB, meanwhile, said the ruling would not end its crackdown on consumer lenders.
“The CFPB will continue to fulfill its statutory mandate to enforce federal law and protect Americans from predatory financial institutions. We will hold them accountable,” the agency said in a statement. .