Is the Mortgage Industry Safe with CFPB Under Fire?

Dave:
Hey everyone, I’m Dave Meyer and welcome to On The Market. Today we’re tackling the looming question, what happens if the Consumer Financial Protection Bureau is dismantled or limited in scope and what it means for the real estate industry? Because if you’re unaware, the CFPB played a big role in regulating the mortgage industry after the 2008 crash and changes could mean big changes for the mortgage industry and housing market altogether. Joining me today is Chris Willis, partner at Troutman Pepper and host of the Consumer Finance Podcast to give his insights into how the CFBs fate could reshape real estate financing. Let’s jump in. Chris, welcome to On the Market. Thank you for joining us today. It’s my pleasure. Thanks for having me on. I’m really excited about our discussion today. Me too. I am eager to learn from you about this important topic. So I’m hoping we can start with the origins of the CFPB. Can you just tell us a little bit about when and how it was created?

Chris:
Sure. It’s a pretty new agency. Actually. It didn’t exist 15 years ago. It was created by a piece of legislation in 2010 called the Dodd-Frank Wall Street Reform and Consumer Protection Act or something like that. And that was a statute that Congress passed in 2010 in the aftermath of the subprime mortgage crisis and the recession that we had starting in around 2008, the Dodd-Frank Act was 2000 plus pages long, but one portion of it created this new federal agency called the Consumer Financial Protection Bureau, and it was intended to do a couple of things. One is to transfer the primary authority for consumer financial protection away from the federal banking regulators who had had it prior and consolidated into a new agency, but also to give the agency powers over non-bank consumer financial services companies too. So it was supposed to cover both banks and non-banks.
And so it really was designed to cover the entire waterfront of consumer financial protection in the United States with the theory behind it being that we had that recession in 2008 because of irresponsible lending behavior by mortgage lenders, which caused a real estate bubble, and then the recession that we all lived through starting in 2008, and that we needed a very powerful, very well-funded and well-equipped regulator to prevent something like that from happening again. That was the concept of Dodd-Frank. So the statute was passed in 2010 and the CFPP began its operations a year later in July of 2011.

Dave:
Alright, great. And what protections specifically were in mind here?

Chris:
So there were one specific to mortgage lending, but then the drafters of the legislation didn’t stop there. They essentially thought about every potential thing that consumer advocates would want an agency to be able to do, and they put all that in the legislation. So specific to mortgage, there was a whole section of Dodd-Frank that imposed new requirements on mortgages, most specifically a requirement of having an ability to repay analysis. In other words, you can’t make a mortgage loan to someone unless you figure out and document that they have the income to repay the loan. That was one of the faults that everybody thought had led to the subprime mortgage crisis before. But the CFPP had much more power than that. It had the authority to take enforcement actions against all the preexisting federal consumer protection statutes, which cover a lot of areas, credit reporting, debt collection, electronic fund transfers, everything.
It had the ability to engage in rulemaking, it had the ability to do supervisory exams to come into companies and do these very thorough examinations of their operations. And then overall, it also was given a brand new power and that was the power to conduct both enforcement and rulemaking and supervision with respect to any practice that the agency deemed unfair, deceptive, or abusive. So it had really a license to seek out any behavior in the market that it felt was harmful to consumers and take action against it, whether there was a specific law prohibiting it or not, and it could impose enormous fines on industry players for violating any of those laws, including this unfair and deceptive practices stuff.

Dave:
Okay. So it seems like, and correct me if I’m wrong, Chris, in summarizing this, that there is two sort of things going on. The first was a consolidation. It sounds like there was previous regulators who were doing some of the loan protections and some of the more banking related things, and then the new part of the CFPB was this regulation and enforcement of fairness within the consumer finance world.

Chris:
That’s right. Yeah. The regulatory scheme was fragmented between the federal banking regulators, like the OCC has authority over some banks. The FDIC has authority over others. The Federal Reserve has authority over others, and then non-banks were really governed just by the Federal Trade Commission, and so they consolidated those powers in an agency and then increased its powers a whole lot.

Dave:
Okay. So this was 14 years ago. What has the CFPB been up to in those 14 years and has it been

Chris:
Effective? Sure. So the bureau has had three different directors. So the way the bureau works is there’s a single director who’s appointed by the president and confirmed by the Senate who is the one and only leader of the agency. So the original leader of the agency from 2011 to 2017 was a man named Richard Cordray. He had previously been the Attorney General of Ohio, then he was the CFPB director. Then when President Trump was elected and took office in 2017, there was an acting director and then another permanent director named Kathy Kraner. And then during most of the period of the Biden administration, the director of the CFPB was a man named Rohit Chopra, who had formerly been an FTC commissioner before that. And so the agency has focused on different things in different administrations, as you might expect of any federal regulatory agency during its early days.
Right after it stood up, there were a lot of required rulemakings that the CFPB had to do. They were ordered by Congress, for example, to do a comprehensive set of mortgage related regulations, and they had to do those at the very inception of the agency. So they wrote those rules, but then started taking a lot of pretty aggressive enforcement actions because again, it was a democratic administration and Rich Cordray was a pretty vigorous consumer advocate during the Trump administration. The agency continued to do all of its work and still was doing a lot of supervision and a lot of enforcement, both with respect to banks and non-banks, but there was a little less sort of fury around it, I would say. And then during the Biden administration with Rohit Chopra as the director, the agency became very, very aggressive towards industry in terms of creating a lot of new requirements and duties that were said to be required by law, which the agency was just sort of coming up with and calling them unfair or deceptive or abusive practices. And the agency had a very sharp tongue, I would have to say, in its public statements towards industry. Now you ask whether the agency’s been effective. So that’s kind of an ideological question.

Dave:
Sure. Yeah.

Chris:
So certainly the consumer advocates in this country would say it’s been extremely effective in providing protections to consumers and getting money refunded from financial services companies who allegedly violated the law. But there’s also a cost side to the agency. If you look at it from the industry standpoint, the agency imposes a huge amount of cost on the industry and creates a lot of uncertainty when it gets in these very aggressive posture like we’ve had for the last four years, because a financial institution can get afraid to do anything to launch a new product to anything for fear of how the CFPB may react to it. And it does stifle a lot of innovation and product availability and makes the products more expensive. So it kind of depends on which side of the ideological camp you want to be on in terms of saying was the agency effective or not.

Dave:
Got it. Okay. I do want to get to in a couple of minutes the current situation and what’s going on with the CCF PB now, but let’s just imagine it was a couple months ago before all of the current changes are going into place with the Trump administration, how has the CFPB in recent years been involved specifically in housing? Because really what our audience here on the market is most interested in probably. Sure, of course.

Chris:
And the ccf PB isn’t really a housing regulator, like HUD is a housing regulator. The CFP B’S touch with housing is really because they’re a consumer financial regulator, is on the mortgage lending
Business and everything related to mortgage lending. So the CFPB, as I said early in its existence was required by Congress to promulgate a big series of mortgage lending related rules. And so if you got a mortgage loan before 2010 and then you get one today, you’ll notice there’s a pretty big difference in the underwriting process and all the documents you have to sign and the disclosures and all the information you have to provide to your lender. Those are all required by the CFPB mortgage regulations that were passed in an effort to make sure mortgages weren’t made to people who can’t afford to pay them. And so the CFPB did a lot there. And then they also did a lot of rulemaking with respect to mortgage servicing. So remember in 2010 when the agency was created, we were having a lot of mortgage foreclosures in this country. And so there was a great desire to create more protections for consumers whose houses might be foreclosed on. And so there’s a whole series that’s called Regulation X of mortgage servicing regulations that are designed to create alternatives to foreclosure for people to avoid having them lose their homes if there’s any way they can reach some sort of accommodation or a payment plan or things like that. And so in the mortgage world, the CFPB was responsible for creating and then monitoring for compliance with those mortgage lending rules.

Dave:
So let’s shift gears now to talk a little bit about what’s going on with the current administration and the CFPB, but we do have to take a quick break. We’ll be right back. Hey everyone. Welcome back to On the Market. I’m here with Chris Willis. We’re talking about the CFPB, and Chris gave us an exceptional background about the CFPB. Chris, I’d love to now just talk to you a little bit more about what’s going on with the current administration. Can you fill us all in?

Chris:
Sure. Well, and actually the situation is somewhat fluid and still changing,
And even today the day we’re recording this, there was a preliminary injunction hearing in a court in the District of Columbia where the two sides were arguing about what the administration is actually doing with the CFPB, with the CFPB employees union, saying essentially that the administration is trying to completely shut the agency down, which they claim is illegal because it was provided for by an act of Congress versus the administration saying, no, we’re not really shutting it down. We may have said something like that at the beginning, but now we have decided we’re going to keep the agency open, we’re just going to rightsize it and make it more efficient and focus it more on what its actual statutory mission is. So there’s mixed signals being sent.
What has happened so far is all of the CFPs probationary employees that is people who’ve been hired within the last two years have been laid off. That happened a couple of weeks ago, and the CFBs staff was told also a couple of weeks ago just to stop working on almost everything. And so the agency’s not doing anything right now or hardly anything. They’re not answering their emails, they’re not answering the phone, you can’t get them. And all the matters that we have with them are just sort of sitting in limbo. They seem to be dismissing some of their enforcement cases and not dismissing others. And supervisory examinations are on hold right now, and the administration is certainly reevaluating a number of the rulemaking efforts that the CFPB did in the past couple of years, none of which is mortgage related, but they’re revisiting those as well.
So it’s not clear exactly how all of that is going to come out. But the administration has nominated Jonathan McKernan to be the director of the CFPB. He had his senate committee hearing last Thursday and said he wasn’t going to shut down the agency and he would follow the law and running the agency. Our suspicion is he came from the FDIC, so he’s already a regulator, is that he’ll run the agency more like what we saw during the last Trump administration, which didn’t involve a shutdown of the agency at all, but just having the agency prioritize on more mainstream enforcement of the laws that we have rather than creating a lot of new duties and requirements for industry like we saw during the past four years.

Dave:
I see. So it seems like it’s going back to sort of the ideological breakdown that you mentioned earlier, that perhaps they’re just installing someone who’s more ideologically aligned with the Trump administration,

Chris:
But it doesn’t look to me like the agency’s going to go extinct as a result of what’s going on, although there was some indication or threat of that in the early days of the administration change, but even in the litigation, in the preliminary injunction hearing today, the government lawyers came in and said, no, we’re not shutting the agency down. We realize it has to exist. We’re just making it smaller and more efficient, essentially.

Dave:
Okay. Yeah, I was seeing the same things. I think honestly, when we reached out to you to bring you on as a guest, there were a lot of headlines out there that were saying that the CFPB was essentially being dismantled, whether legally or in practice, that a lot of these rules would go away, but it seems like perhaps it’s just being narrowed in scope.

Chris:
I think that’s right. And another thing to keep in mind too is let’s say the agency is reduced in size, that doesn’t necessarily mean the rules go away, particularly the mortgage related rules that your listeners will be most interested in, because keep in mind, those rules weren’t discretionary by the CFPB. They were mandated by Title 14 of Dodd-Frank. The CFPB had to enact those rules, and moreover, the mortgage lending industry needed them because if you just look at the law in Title 14 of Dodd-Frank, it imposes these various requirements, but it doesn’t give the details that are necessary to allow industry to actually comply with it. And so there’ve been a couple of cases where the constitutionality of the CCF PB was challenged in the US Supreme Court, and in those instances, the Mortgage Bankers Association filed a statement with the Supreme Court saying, we can’t afford to have the CFBs mortgage regulations go away. We rely on those to do business. And so not only because they’re mandated by statute, but also because they’re needed by industry regardless of what downsizing or whatever happens to the CFPB with the administration, we shouldn’t anticipate that those mortgage lending rules will vanish as if they were never in existence.

Dave:
That’s when I was reading about this was one of my primary concerns was I will be honest, I think that a lot of the mortgage changes that went into place with Dodd-Frank were necessary. If you just study what happened in 2008 in the housing market, so much of it was due to a lack of rules in the mortgage lending. And you fast forward to today where a lot of people do have fears about a housing market crash, but if you look one level deeper and you look at the quality, the credit and the mortgage delinquency rates, it’s nothing like what it was in 2008. That’s the quality of mortgages and the ability of the average American mortgage holder to pay their mortgage is so much better now than it was 15 years ago.

Chris:
And

Dave:
I’m sure there are trade-offs to that, but I think a wholesale removal of those rules would at least increase the risk of bubbles forming again in the housing market.

Chris:
But that can’t happen because the thing is, even if there was no CFPB title 14 of Dodd-Frank is the law in this country, and it requires that ability to repay analysis. The CFPB just provided the details of how to do it in its regulations, but Congress mandated it and you couldn’t do away with that without amending Dodd-Frank and nobody’s got the votes to do that in the

Dave:
Senate. Okay. So I know this is just trying to read the tea leaves, but has the administration offered any ideas on what parts they would try and scale back? Is it more of that discretionary fairness stuff that is not designated by law or have they not provided that level of detail yet?

Chris:
Not a lot of detail, just sort of broad brushes. So if you were to listen to Mr. Kernans testimony in a Senate hearing last week, he characterized the CFBs behavior over the last four years as being significantly outside its jurisdiction where the agency tried to regulate a lot of stuff and make industry do a lot of things that it really didn’t have jurisdiction to do, and it strayed from the mandate that was given to it in Dodd-Frank and he pledged to sort of bring it back to what it was intended to do. That’s sort of the broad brush of what he said, and to be honest, my perspective is the CCF PB did a lot of stuff that was outside of its jurisdiction over the last four years and was very cavalier about it. But the thing is, again, going back to mortgage, those are within the CF PB statutory mandate. It’s right there in Dodd-Frank. So no, they haven’t been specific about specific things, but the general idea is to bring the CFPB back to the mainstream of what it was intended to do.

Dave:
Are there any ways outside of mortgage regulation that you think our listeners or the average American are touched by the work of the CFPB?

Chris:
Lots of places, actually. So I’ll give you a couple of examples. One thing that you may have seen over the past couple of years is that a lot of large banks have stopped charging overdraft fees for their checking account holders.
And so that was an area of significant pressure by the CFPB on depository banks. They basically took the position that those overdraft fees were unfair and they pressured industry to get rid of them and took a couple of enforcement actions and did a lot in supervision with respect to that and the current state of play with regard to overdraft fees as a result of that pressure that was applied to industry, that’s one of the things that everyday Americans probably experienced because we all have checking accounts. Another area that I think has been significant in terms of the activities of the past four years is there was a huge federal initiative across all the agencies, not just the CFPB, but like the federal banking regulators and the Department of Justice relating to redlining this idea that mortgage lenders might exclude majority minority areas from their mortgage lending.
And the way that the regulators applied this over the past four years was basically to say, for any given mortgage lender, are you making fewer loans in these majority minority areas than your peer lenders are? And if you were, then you were guilty of redlining. What that did was it created a lot of regulatory pressure for mortgage lenders to try to get as many loans as possible in those high minority areas. And so they started introducing a lot of special programs devoted to essentially subsidizing loans in those areas, mainly with down payment or cash to close assistance. And that was a direct result of the redlining pressure that was brought about by the last administration. That’s something that’s probably going to change under the due administration, but that’s something that a number of real estate investors might’ve experienced because it created more affordability for owner occupied single family homes in those high minority areas in cities across the country.

Dave:
What about credit cards? Are those types of things also regulated by the CF PPA

Chris:
Hundred percent, absolutely. Any consumer financial product or service is in the CFBs jurisdiction. So it’s credit cards, auto loans, mortgage loans, student loans, money transmission, like when you send a friend a money through a money payment app or something that’s within their jurisdiction too. Credit reporting is also within their jurisdiction. All of that stuff falls within their jurisdiction. Credit cards was an area that they did a lot of work in. Obviously, they had a rule that they finalized towards the end of this administration to try to limit the late fees on credit cards to I think $8, something like that. Previously the limit had been $35 and the bureau proposed a rule and then finalized it to reduce that to $8. But then that rule was subject to a legal challenge by industry and never went into effect, and now the agency is going to decide whether it wants to continue defending that rule or not.

Dave:
Okay. I do, Chris, want to shift our conversation to help our audience understand what they should keep an eye out for in the coming months as some of this information unfolds. But we do have to take one final break. We’ll be right back. Welcome back to On the Market. We’re here with Chris Willis talking about the CFPB. We’ve gotten a great history lesson and some context from Chris here. Chris, I’m hoping that you can help me and our audience understand what comes next. I know a lot of this is unfolding, so what should we be keeping an eye out for just as ordinary Americans, but also as real estate investors? Because the CFBB does have a big hand in the mortgage industry.

Chris:
I mean, I think in general what I’m watching, and therefore what I think other people would be interested in watching is exactly what changes do take place, especially after a permanent director is confirmed to lead the CFPB. As I said, Jonathan McKernan is the nominee. I’m expecting that he’ll be confirmed by the Senate within the next couple of weeks. He’ll then take office and then we’ll start to see what the CFPB does. My guess is you’ll see them start to roll back some of the more aggressive actions of the last administration of the bureau under Rohit Chopra. And a lot of that is not mortgage related. There was not really a lot of action on mortgage towards the tail end of the administration.
So you could see things like the credit card, late fee rulemaking go away, but all that means is people have the same credit card, late fees that they have today. It never changed actually. But I think to me, the biggest potential impact on real estate investors was what I was mentioning before about this sort of subsidization of owner occupied housing in majority minority census areas in cities across the United States. That was a major product of a big initiative by the last administration that I think is unlikely to be continued. And so there could be a reduction in the affordability of those houses because those cash to close subsidies may go away and they were getting quite large towards the tail end of the administration.

Dave:
And where’d those subsidies come from? Who was paying for those?

Chris:
The banks or mortgage lenders were paying them.

Dave:
Oh, okay. So it was self-selected because as you said, there was fear by the institutions that they wouldn’t be meeting this minimum. Correct. And so they were willing to subsidize buyers in these neighborhoods to make sure they hit that quota.

Chris:
And the thought was, and this I think is correct, they understood the mistake of reducing the underwriting criteria for the loans because then that just gives you a loan that’s likely to default.
So they weren’t really relaxing the income credit, other types of requirements for mortgage loans, but they were subsidizing the cash to close, figuring that if I help somebody with cash to close, but they have the income to make the monthly payment, the loan’s less likely to default. And I think that was a smart way to do those programs, honestly. But I think for people who needed that extra cash to close in those areas, I think that is going to sort of wither away in terms of its availability because the regulatory push that caused it is also likely to go away.

Dave:
I’m curious, are there other areas of consumer finance protection regardless of current policy changes that you think our audience should be paying attention to?

Chris:
Well, another one that people experience all the time themselves is auto finance. People buy cars and most people don’t pay cash for cars. They buy cars on credit.
That was another area that the CFPB was very active, but also state regulators as well. And the Federal Trade Commission had actually just promulgated a rule that required a lot of disclosures associated with the auto purchase and auto finance process. It was a rule directed at auto dealers. That rule was the subject of illegal challenge, again, by industry, by the auto dealer associations. And a court just set the rule aside on procedural grounds. That means the FTC would be free to revisit it if it fixed the procedural problem, but it’s an open question as to whether the FTC is actually going to do that or not. But it had in it, for example, in any advertisement, the dealer was going to have to advertise the full all in price of the car except for taxes. So anything like dealer dock fees or other stuff like that that you’d be required to pay would’ve had to have been included in the price in that regulation. And although I think the FTC is not likely to revisit that, the California assembly just introduced a bill to make those same requirements in the state law in California. So you may see states take some of these things that the CFPB was trying to do and enact them at the state level. Not all states, of course, but states like California or New York or Illinois or Massachusetts may have some of those come into play.

Dave:
Well, Chris, this has been super helpful. I have learned a lot, and honestly, it eased some of my fears a little bit. It sounds like some of the major mortgage regulations that came from Dodd-Frank, it does not sound like really anyone’s talking about rolling those back.

Chris:
No, no, they’re not only because they’re required by law. But again, the industry needs them and the industry has said so publicly on numerous occasions. This is the Mortgage Bankers Association. It’s not just some random person. So I do not think those are at risk. And so I don’t think we’re going to return to the days of teaser rates or interest only mortgages or no dock mortgages. I don’t think that can happen again.

Dave:
Okay. Yeah. And of course, I’m sure audience people fall on different parts of that ideological spectrum, but I think as real estate investors, people generally tend to agree that the strength of the mortgage industry is important for our industry. And so I’m sure people will be glad to hear that. Chris, thank you so much for joining us today. We really appreciate it. It’s my pleasure. Thanks for having me on. And thank you all so much for listening to this episode of On The Market. We’ll see you next time.