Feelings about the CFPB are strong, mixed and often divided along partisan lines. The Consumer Financial Protection Bureau was created in July of 2011 as a part of the Dodd-Frank financial reform statute after the wake of the worst economic recession in United States history since the Great Depression.
Protecting consumers, especially homebuyers pursuing the American Dream, is a noble cause. The CFPB has taken steps to ensure that a subprime mortgage crisis that triggered the Great Recession won’t happen again. Unfortunately, many people in the finance and settlement industry see their approach as heavy-handed and punitive instead of collaborative and instructive.
President Trump has made his feelings clear about the CFPB, and now the Supreme Court will decide the regulatory agency’s fate sometime in the summer of 2020 -- in the middle of a presidential campaign.
Here are some of the possible outcomes of that SCOTUS hearing, how the CFPB is trying to soften its approach, and how states are stepping in.
CFPB goes to the Highest Court
The CFPB’s leadership and constitutionality have been challenged numerous times since its inception.
At the heart of the most current lawsuit, Seila Law v. Consumer Financial Protection Bureau, is the argument that the structure of the CFPB is unconstitutional because the bureau’s director can’t be removed by the president without good cause. The president’s limited authority in this matter violates the Constitution’s separation of powers provision.
That stance has been repeatedly asserted by defendants in CFPB enforcement actions for the past five years. One of the most well-known cases making this assertion is PHH v. CFPB.
In response to Seila’s petition for Supreme Court review and the merits brief the Department of Justice filed earlier this month, Congress says it would have opted for a CFPB with a director who is accountable to the president over no consumer agency at all.
However, Seila argues that it’s not the purview of the Supreme Court to assume what the past Congress might have done. Instead, Seila insists that it’s not the job of the Supreme Court to rewrite legislation and providing a remedy to the structural problem would be tantamount to drafting new legislation.
Amicus briefs from 22 business groups, trade associations, and think tanks, are urging the Supreme Court to rule only on the issue of constitutionality. A ruling in favor of Seila should subsequently result in striking down the CFPB in its entirety. After that, it’s the job of Congress to decide how to restructure the CFPB.
The lone amicus brief in support of removing the provision insulating the CFPB director arguing that any other approach “would immediately cause significant disruption to the American economy” came from the Mortgage Bankers Association and other real estate trade groups.
If the Supreme Court rules to maintain the CFPB under the condition that the director can be removed at the pleasure of the president and a Democrat wins the 2020 election, we may see current director Kathy Kraninger replaced.
A Friendlier Approach
It should come as no surprise that those who have been defendants in lawsuits by the CFPB accusing them of “abusive” practices filed amici emphasizing the Supreme Court only rule on the issue of constitutionality. Ultimately, hoping that the Supreme Court will strick down the CFPB in its entirety.
That may be why the CFPB is now taking a friendlier approach to claims of financial abuse. What qualifies as “abusive” was vague and difficult to comply with.
In the past year, the bureau, at first under the direction of Mick Mulvaney and now Kathy Kraninger, has promised to deliver more certainty and clarity regarding the abusive standard. The bureau says it will now pursue “abusive” actions in the following ways:
- Focusing on citing or challenging conduct as abusive in supervision and enforcement matters only when the harm to consumers outweighs the benefit
- Generally avoiding “dual pleading” of abusiveness and unfairness or deception violations arising from all or nearly all the same facts, and alleging “stand-alone” abusiveness violations that demonstrate clearly the nexus between cited facts and the Bureau’s legal analysis
- Seeking monetary relief for abusiveness only when there has been a lack of good-faith effort to comply with the law, except the Bureau will continue to seek restitution for injured consumers regardless of whether a company acted in good faith
Under President Trump, the CFPB has pulled back on its role as a financial watchdog. The peak of its enforcement activity was in 2015. Since then, there’s been an 80% drop according to this report from the Consumer Federation of America. It also found that average monetary relief was down 96%.
Clearly, the balancing act between enforcement and protecting consumer’s interest has been largely influenced by partisan politics. Given the makeup of the Supreme Court, it’s unlikely that the friendlier approach to enforcement will stop the agency’s structure from being ruled unconstitutional.
California creating their own version of the CFPB
While the fight to dismantle the CFPB on the federal level wages, one state is launching its own CFPB. Some see the value of regulatory oversight with the aim of protecting consumers. The New York Department of Financial Services is often derided (or praised depending on your perspective) for its role in overseeing financial services and products. Now, California will reportedly rival the NYDFS in terms of clout, reach, and scope of regulation.
This effort to establish its own consumer agency is seen as a direct response to the Trump’s administration’s efforts to hinder the CFPB’s regulatory power.
The state of Pennsylvania also launched a Consumer Financial Protection Unit in 2017 to “focus on lenders that prey on seniors, families with students, and military service members, including for-profit colleges and mortgage and student loan servicers.”
The Impact on the Title and Real Estate Industry
The National Association of Realtors filed an amicus brief with the Mortgage Bankers Association and the National Home Builders Association. This was the only brief arguing that invalidating the CFPB completely would cause “undue economic turmoil and instability.”
NAR President Vince Malta stated, “Dodd-Frank was designed with an explicit intent to ‘promote financial stability,’ a benefit its authors believed would extend to U.S. consumers and our nation’s economy. If that mission is to remain consistent, the Supreme Court should honor the wishes of Congress and act deliberately to avoid unnecessary market disruption. Drastic action to invalidate the CFPB could have broad impact on U.S. consumers extending far beyond the question of bureau leadership.”
Overall, the consensus among title and real estate trade associations seems to be that while some “minor tweaks” are needed to the CFPB’s TRID rule, consumers’ understanding of the loan terms has improved and the closing experience has improved. Additionally, the real estate industry has made significant investments to comply with the CFPB’s new rules and regulations.
The amicus brief states, “Striking down [its] entirety, or declaring it unconstitutional without addressing severance, would eliminate detailed, technical regulations that govern past and future real estate transactions… Such an outcome would cause significant disruption to the American economy, overturning regulatory guideposts, upsetting settled expectations, and creating substantial regulatory uncertainty in our housing markets… The courts should avoid causing such harm.”
What do you think the fate of the CFPB will be?