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The Mortgage Bankers Association, a trade group for mortgage companies, is concerned about rules under the purview of the threatened Consumer Financial Protection Bureau.
The top trade group for mortgage companies is engaged in an effort on Capitol Hill to safeguard against, and potentially capitalize on, a future Supreme Court ruling that could render the Consumer Financial Protection Bureau’s funding mechanism unconstitutional. The Prospect has confirmed that the Mortgage Bankers Association (MBA) is circulating a document in Congress that includes rules it would like to see turned into statutory law, protecting safe harbors and other benefits for mortgage companies that would go away if the CFPB were invalidated.
Critics charge that the MBA’s effort reveals private anxiety over the Supreme Court upholding a Fifth Circuit ruling made by three Trump-appointed judges last October, even though the trade group’s official response has been relatively muted. It shows how mortgage and other financial players actually welcome the CFPB’s role in making markets function smoothly, no matter how much they rail against them in public. The behind-the-scenes action also reveals the quiet terror financial companies and lobbyists are feeling over the court case, though they have not openly sided with the CFPB.
Despite its desire for CFPB rulings to be protected, sources indicate that the MBA is asking for more than just a straightforward codification of the CFPB rules—its proposals include several “banker-friendly” tweaks.
The Supreme Court has not yet agreed to hear the case, Community Financial Services Association v. CFPB, but they are expected to do so, potentially ruling on it before the end of the current term in June.
The MBA, while confirming the Capitol Hill document, did not answer a question about exactly what changes they want, saying only that they were engaged in an education/awareness campaign. “CFSA v. CFPB has the potential to significantly impact the regulatory landscape impacting consumers,” MBA vice president for communications Adam DeSanctis told the Prospect. “In advance of a potential Supreme Court decision before the end of the current term, MBA is educating members of Congress and other stakeholders on the importance of mitigating potential disruptions to consumers and the mortgage market.”
AS THE PROSPECT HAS WRITTEN, the Fifth Circuit ruling in October accepted the arguments of the top lobbying group for the payday lending industry and an affiliate in Texas, which argued that the CFPB’s funding structure violates the Constitution’s separation of powers clause. The CFPB gets its funding from the Federal Reserve (inside which it is technically housed) rather than congressional appropriations. Though a number of financial regulators and other federal agencies are funded outside of Congress through mechanisms like industry assessments, the Fifth Circuit ruled that Congress has “exclusive power over the federal purse,” rendering the CFPB’s funding arrangement unconstitutional.
Currently, the CFPB gets no other funding, so invalidating the Federal Reserve transfer of funds would make every dollar CFPB uses unconstitutional. That means that every consumer financial regulation that CFPB oversees, even if it were originally instituted by another agency, would be illegal to administer.
That includes numerous rules that banks actually like, or at least would not want to see eliminated. Many of them involve mortgage markets. For example, the Dodd-Frank financial reform law created an “ability to repay” standard for mortgages, where companies must assess that borrowers can actually meet the payments. The CFPB’s rule gave “qualified” mortgages with certain characteristics an exemption from that requirement. If the CFPB’s funding used to create that rule were unconstitutional, that exemption would go away, and all borrowers with a qualified mortgage could file legal challenges on the grounds that they were not assessed for an ability to repay.
The Fifth Circuit accepted the argument that the CFPB’s funding structure violates the Constitution’s separation of powers clause.
Other rules depend on the hitting of a particular interest rate, creating a “high-cost” mortgage. But the entity setting that interest rate is the CFPB, and its absence would lead to uncertainty about what qualifies as high-cost.
Patricia McCoy, a law professor at Boston College, said that lenders could be opened up to broad liability in the wake of the Supreme Court ruling. “One reason is that secondary market buyers will not want to buy loans with that uncertainty,” she said. “Lenders worry they will lose that market.” Overall, the impact on mortgage markets would be “catastrophic,” as CNBC (taking the position of mortgage bankers) termed it last fall.
Of course, CFPB enforcement actions, subpoenas, and its consumer complaint database would also be invalidated. And conservatives could potentially extend the argument to cover Medicare, Social Security, and any other program that gets funded outside of traditional congressional appropriations. A determined judge could easily use the logic of the Fifth Circuit to make all mandatory spending illegal.
“All of the regulations that organize daily financial transactions for 300 million people were just called into question,” University of Utah professor and former CFPB official Christopher L. Peterson told the Prospect last year. “It’s going to be a mess.”
THE MBA’S EFFORT ATTEMPTS to clean up that mess, at least for mortgages. The document circulating on Capitol Hill is just a list of mortgage-related rules under the CFPB’s purview. It includes the qualified mortgage rule, but also the “know before you owe” rule that governs mortgage disclosures, the mortgage servicing rule that sets standards for the companies collecting mortgage payments, and rules involving mortgage originator compensation, appraisal requirements and disclosures, and escrow and homeownership counseling requirements for higher-cost loans.
MBA lobbyist Ethan Saxon has been showing this document around Capitol Hill, according to sources, seeking codification of those rules and possibly others, along with an ask for “tweaks” that would make the rules somewhat friendlier to industry interests.
McCoy said that while she had no insight into what the MBA might be pushing for, in the past lenders had been interested in lowering the threshold for a qualified mortgage, thereby exempting more loans from the ability to repay rule. Lowering documentation for qualified mortgages could also be a line of attack, along with allowing mortgages to qualify after a period of holding the loans.
“Most of these lines of attack would be under the banner of increased access to credit for people of color,” McCoy said. “That’s obviously an important area of concern, but I’m always worried when that is raised for the purposes of adding mortgage volume.”
The MBA has certainly not said out loud that they fear the loss of these rules if the Supreme Court affirms the Fifth Circuit. The trade group did not issue a press release after the Fifth Circuit ruling in CFSA v. CFPB, and has not issued an amicus brief to the Supreme Court laying out its concerns.
MBA president and CEO Robert Broeksmit told the group’s annual conference last October that “We do like to settle rules that give us some safe harbors for the way that we make mortgages and we don’t want that to all go away.” CNBC also reported that the MBA has been telling members that the Fifth Circuit ruling is limited to payday lending, which is technically true but impossible to contain, since if the Supreme Court agrees, all CFPB funding would be seen as suspect.
Generally speaking, Broeksmit has been bashing the CFPB for overwhelming regulatory overreach and high compliance costs. He complained at the annual conference that the CFPB has made it “very difficult for firms to understand their legal obligations.”
“They don’t love the CFPB but they want to maintain some certainty,” said Adam Levitin, a law professor at Georgetown University. “If there’s a wacky decision, they’d like to have a plan B.”
Some financial reform groups were more critical of the tactic. “The mortgage bankers are playing a disgraceful double game,” said Carter Dougherty, communications director with Americans for Financial Reform. “They want the leverage of a potentially adverse Supreme Court decision to try to force structural change at CFPB that the financial services lobby hasn’t been able to ram through Congress in the last 12 years. But they won’t speak openly and honestly about how a decision that destroys the CFPB funding mechanism would shake the financial system at its core.”
THE MBA DID ISSUE AN AMICUS BRIEF more than three years ago in a separate case battling over the CFPB’s existence, known as Seila Law. In it, the trade group said that “a ruling abolishing the CFPB or undoing its past actions—or even just calling the legitimacy of its past actions into doubt—could destabilize critical segments of the national economy.”
But in that case, they offered an out: The Supreme Court could sever the provision that disallowed the president to only fire the CFPB director for cause from the rest of the law, allowing rules to go forward. That’s exactly what the Supreme Court did, ironically allowing President Biden to fire Trump CFPB appointee Kathy Kraninger and install aggressive enforcer Rohit Chopra.
However, this time there isn’t such an escape hatch. If all CFPB funding is ruled unconstitutional, it’s hard to limit that to only certain rules. The MBA doesn’t have a clever way to support the status quo here, and thus far they haven’t. “I would be surprised if they end up filing a brief supporting the CFPB in any way,” Levitin said. “If they showed up and argued that the sky was going to fall, that argument’s a lot more effective coming from the MBA than from Adam Levitin.”
The CFPB sought Supreme Court review in November. So far, the payday lending group has responded to the CFPB’s brief, but the Court has not yet said it will take the case. If they wait too much longer, it could spill over into the next term, with no ruling until perhaps 2024.
That actually plays into the hands of financial firms. CFPB enforcement actions could be stayed pending the ruling on the constitutionality of the agency’s funding. It means that some number of enforcement actions would ultimately become ineffective, at least for a period of time.
It’s not that surprising that the MBA under its current leadership would be concerned about the potential loss of safe harbors. President and CEO Broeksmit was the former head of B.F. Saul Mortgage Company, a division of Chevy Chase Bank which, after it was acquired by Capital One, was hit with allegations over lending discrimination and securitization fraud during the subprime mortgage era.
