No one saw it coming. The surprise victory of Donald Trump in the presidential election ignited a host of questions about what his presidency, combined with the Republican control of Congress, will mean for everything from immigration to the economy.
For those in the mortgage industry, Trump’s victory prompted a very particular set of questions, because while Trump has been vague about many issues, there is one area about which he has been very clear — his desire to roll back the banking regulations mandated by the Dodd-Frank Act.
Trump targeted banking regulation early on in his campaign and never let up. Although the evils of Wall Street were regularly invoked by both sides during the campaign season, Trump managed to deride Big Bank excess while also vowing to undercut banking regulation.
Since the election, the Trump transition team website has affirmed Trump’s earlier position on deregulation: “The Financial Services Policy Implementation team will be working to dismantle the Dodd-Frank Act and replace it with new policies to encourage economic growth and job creation.”
In another section on regulatory reform, the transition website also states that this reform effort will include “a temporary moratorium on all new regulation, canceling overarching executive orders and a thorough review to identify and eliminate unnecessary regulations that kill jobs and bloat government.”
The biggest question for the mortgage industry is what will happen to its newest regulator, the Consumer Financial Protection Bureau. The CFPB was created by the Dodd-Frank Act — the very legislation Trump has vowed to dismantle — and has aggressively pursued mortgage finance reform through rulemaking and enforcement actions in lending and servicing.
One of those enforcement actions — a final order that required PHH to pay $109 million — landed the CFPB in court in October when PHH sued the agency (see story by Digital Risk's Debbie Hoffman, here). The court’s ruling in that case declared that the CFPB’s leadership structure was unconstitutional and put the bureau’s director under the authority of the president. Previously, the director could only be removed “for cause.”
At the time, when Hillary Clinton was expected to win the election, that decision was important but not earth shattering. Now, under a President Trump, all bets are off on the bureau’s future.
The CFPB appealed the ruling in the PHH case on Nov. 18, asking for an en banc review of the case by the full Court of Appeals. The CFPB’s petition lays out just how important this case is, stating that the court’s original decision “sets up what may be the most important separation-of-powers case in a generation.” The bureau also said that the panel “overstepped” its role and that if the ruling stands, it would be easy for lenders to disguise kickbacks.
A lot hangs in the balance
While other state and federal regulatory bodies overlap in their regulation of the mortgage industry, the very particular consumer focus of the CFPB is not duplicated by any other body. Will deregulation mean a return to the Wild West lending atmosphere that led to the financial crisis? What happens next?
We asked John Socknat, partner at Ballard Spahr, to weigh in on what mortgage lenders and servicers can expect from a Trump administration.
Do you think Trump’s desire to ”dismantle” Dodd-Frank means he will abolish the CFPB altogether, or revamp it along the lines of some of the recommendations Republicans included in the CHOICE Act?
I think the likelihood of the CFPB being abolished is pretty low – it would take significant effort, which would be met with a fair amount of resistance. The easier path will be revamping its governance structure. That can play out a couple different ways.
One is through congressional legislation installing a commission structure and subjecting the CFPB to congressional oversight and appropriations. The Financial CHOICE Act, for example, includes such a proposal.
Another would be through Cordray’s departure or ouster and replacement, subject to Senate confirmation, with someone perceived to be more industry friendly.
How quickly after inauguration do you expect these changes to happen?
It is unlikely that Cordray will leave voluntarily, which points to change happening less quickly. The status of the appeal of the PHH Corp. v. CFPB case also will dictate how quickly things might change. As long as the PHH decision is stayed pending further appeals, Cordray can only be removed essentially for cause. And legislative change is not something that happens quickly, as we well know.
Do you think lenders in particular see Trump’s election as an opportunity to cut back on their compliance spending/efforts for 2017? If so, do you think that is a wise path?
For a variety of reasons, cutting back on compliance efforts in 2017 would not be wise. For one, until such time as new legislation is passed or new regulations are issued, compliance with existing federal statutes and regulations is required.
For another, while the CPFB receives a lot of attention, there are a host of other regulators that the industry must continue to answer to – state regulators, state attorneys general, the FTC and for the depository institutions, the OCC, the FDIC, the Federal Reserve and others. To the extent that the CFPB dials back its efforts, you can expect others to step in and fill the void, and the consumer advocates will be vocal in their demands that consumers continue to be protected.
What should those in the mortgage industry plan for as far as enforcement in 2017?
I think that we will continue to see enforcement actions brought not only the CFPB, but also state banking agencies, state attorneys general and the FTC. With regard to the CFPB, we may see more of a focus on pursuing those that are perceived as violating specific regulations, rather than bringing actions on UDAAP theories.
What part of the regulatory environment will not change under a Trump administration?
I don’t know that any part of the regulatory environment won’t change. It is very likely that other regulatory agencies will step up there regulatory and enforcement efforts, and we know that, ultimately, there will be change at the CFPB.
Exactly how that ultimately plays out will be incredibly interesting to watch.