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Treasury: Gut CFPB, overhaul residential mortgage lending regulation

Here's what the Executive Branch can execute in the financial market

The U.S. Treasury Secretary Steven Mnuchin unveiled the much-anticipated report on the department's assessment of the financial market as ordered by President Donald Trump earlier this year.

[Full report here.]

The report details potential executive actions and regulatory changes that can be immediately undertaken to provide much-needed relief, according to the Treasury. Though, to be sure, the timeline of implementing any actual change is likely to be at least one year away.

The report also makes extensive recommendations on the path to bring back private mortgage investor capital into the secondary markets.

Shortly after taking office, Trump issued an executive order mandating that the Treasury examine financial regulations to determine if they satisfied a set of seven core principles. Those seven principles are generally related to economic growth, prudential regulation and taxpayer protection.

So, for the past four months, Mnuchin and other Treasury officials got to work on this, meeting with stakeholders across the financial ecosystem, including community, independent, regional and large banks, regulators, FSOC members, consumer advocates, academics, analysts and investors.

Through the listening sessions and meetings, the Treasury put together a 150-page report on key problems and potential areas for reform in the financial system, with stimulating economic growth and increasing access to capital and taxpayer protection top priorities.

“Properly structuring regulation of the U.S. financial system is critical to achieve the administration’s goal of sustained economic growth and to create opportunities for all Americans to benefit from a stronger economy,” said Mnuchin. “We are focused on encouraging a market environment where consumers have more choices, access to capital and safe loan products – while ensuring taxpayer-funded bailouts are truly a thing of the past.”

As previously covered in HousingWire, the report includes major changes to the Consumer Financial Protection Bureau, along with the residential mortgage lending market.

The Treasury also noted that the report details the following findings:

  • Community financial institutions – banks and credit unions – are critically important to serve many Americans
  • Capital, liquidity and leverage rules can be simplified to increase the flow of credit
  • We must ensure our banks are globally competitive
  • Improving market liquidity is critical for the U.S. economy
  • The Consumer Financial Protection Bureau must be reformed
  • Regulations need to be better tailored, more efficient, and effective
  • Congress should review the organization and mandates of the independent banking regulators to improve accountability

Changes to the CFPB

The Treasury’s assessment of the CFPB takes up a chunk of the report (Starts on page 79) and explains how the bureau’s “substantive authority is unduly broad, ill-defined, and susceptible to abuse.”

From the report:

Dodd-Frank vests significant power in the CFPB, with few of the traditional checks and balances necessary to restrain regulatory abuses and arbitrary decision-making. The CFPB is led by a single Director who wields unilateral authority to enforce 18 enumerated federal consumer financial laws affecting major consumer decisions—from buying a home to paying for college. Despite this power, the unelected Director does not answer to the President or Congress in any meaningful sense.

The report even references the ongoing landmark case between the CFPB and PHH, stating, “As the D.C. Circuit explained, ‘a single, unaccountable, unchecked Director not only departs from settled historical practice, but also poses a far greater risk of arbitrary decision-making and abuse of power, and a far greater threat to individual liberty, than does a multi-member independent agency.’ This problem is exacerbated by the CFPB’s independence from the Congressional power of the purse.”

Further along in the report, it also subtly notes the PHH/CFPB again, using the case as an example of the CFPB’s “unduly broad” power. The report states, “Remarkably, the CFPB has even sanctioned companies for complying in good faith with an interpretation adopted by a previous agency with respect to conduct that pre-dated the CFPB’s establishment. This lack of clear regulatory standards may lead to excessive risk-aversion among regulated parties thereby undermining innovation and consumer choice.”

The PHH/CFPB case, as a quick refresher, began with CFPB Director Richard Cordray adding a $103 million increase onto a $6 million fine initially levied against PHH for allegedly illegally referring consumers to mortgage insurers in exchange for kickbacks.

PHH fought the fine, arguing that Cordray did not have the authority to increase the fine. Under Cordray’s decision, PHH violated the Real Estate Settlement Procedures Act every time it accepted a kickback payment on or before July 21, 2008. This went far beyond Administrative Law Judge Cameron Elliot’s ruling, which had limited PHH’s violations to kickbacks that were connected with loans that closed on or after July 21, 2008. According to PHH, the CFPB can't retroactively apply the law. 

Similar to the PHH/CFPB, the report discusses adopting structural reforms to make the CFPB more accountable.

“The CFPB’s structure should be reformed to ensure that it is accountable to elected officials and, ultimately, to the American people. The for-cause removal protection for the CFPB Director limits the President’s authority, disperses executive power, and renders the CFPB less politically accountable than other agencies,” the report stated.

“The most straightforward remedy is to make the Director removable at-will by the President. As an alternative, the CFPB could be restructured as an independent multi-member commission or board which would create an internal check on the exercise of agency power,” it continued.

Other recommendations for CFPB regulatory reform that the report mentions includes:

  • Ensuring that regulated entities have adequate notice of CFPB interpretations of the law before subjecting them to enforcement actions.
  • Adopting procedural reforms to curb excesses and abuses in investigations and enforcement actions.
  • Expanding retrospective regulatory review.
  • Improving safeguards for Consumer Complaint Database.
  • Eliminating CFPB’s duplicative and unnecessary supervisory authority.

Residential mortgage lending

Outside of reforming the CFPB, the report also delves into residential mortgage lending, highlighting that “present conditions of continued tight mortgage lending in the private sector warrant a careful study of regulations and the extent to which they may be holding back the supply of mortgage credit.”

In its review of the residential mortgage lending market, Treasury made the following findings:

  • The revised regulatory regime disproportionately discourages private capital from taking mortgage credit risk, instead encouraging lenders to channel loans through federal insurance or guarantee programs, or Fannie Mae or Freddie Mac;
  • Regulatory requirements have significantly and unnecessarily tightened the credit box for new mortgage originations, denying many qualified Americans access to mortgages;
  • Increased regulatory requirements have significantly increased the cost of origination and servicing activities, which, when passed on to borrowers in the form of higher mortgage rates, have decreased the number of Americans that can qualify for mortgages;
  • Some regulatory regimes or approaches are viewed by industry participants as having inadequate transparency and mutual accountability, thus creating uncertainty and risk-aversion among lenders in serving certain market and client segments; and
  • Capital, liquidity, and other prudential standards, in combination with a wide range of capital market regulations, have inhibited both private originate-to-hold lenders as well as lenders focused on origination and secondary sale in the private-label securitization market.

Also noteworthy, the report states that the CFPB’s supervisory authority over nonbanks represents a major shift in regulatory practice – with no clear benefits to justify the additional burdens

“Before Dodd-Frank, these companies were regulated by the states which continue to license them and supervise them in coordination with the CFPB,” according to the report.

The report argues this as an example of how the CFPB’s supervisory powers are potentially duplicative as applied to banking entities, unjustified as applied to nonbanks, and poorly suited to the mission of a consumer protection enforcement agency.

The next steps

Support for the Treasury report is split, much like the Financial CHOICE act, which received completely partisan support. While financial groups such as the Consumer Bankers Association and National Association of Federally-Insured Credit Unions have come out in support, other groups, such as the California Reinvestment Coalition, are adamantly against the recommendations.

“The Treasury Department’s report is an important first step in recognizing how a duplicative and onerous regulatory environment harms banks, the economy, and, more importantly, consumers,” said CBA President and CEO Richard Hunt. “It is imperative to right-size regulation to better promote the strengths of the banking industry, which contribute to economic growth, access to credit, and consumer choice.”

Meanwhile, Paulina Gonzalez, executive director of the California Reinvestment Coalition, said, “This new report reads like a wish list from the banking industry.  We can’t think of a worse messenger for recommendations about loosening bank rules than Treasury Secretary Mnuchin who personally made hundreds of millions of dollars foreclosing on Main Street Americans because of loose bank rules.”

This in-depth report is only the first in a series that will examine the U.S. financial regulatory system, with subsequent reports issued over the coming months.

Mnuchin also acknowledges the work Financial Service Committee Chair Jeb Hensarling, R-Texas, is doing in Congress to overhaul Dodd-Frank, nothing that they can work together to create changes. Just last Thursday, the Housing of Representatives voted to dismantle the Dodd-Frank Act.

“We congratulate the House on passing the Financial CHOICE Act. The report we are releasing today focuses on solutions the Executive Branch can execute through regulatory changes and executive actions. We look forward to working on a parallel track with Congress to provide swift relief, particularly to community banks,” said Mnuchin.

From here, the Treasury and the Trump administration will begin working with Congress, independent regulators, the financial industry, and trade groups to implement the recommendations outlined in the report. 

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