Could Recess Appointment Ruling Curtail Mortgage Lending?

The recess appointment raises some questions about some key regulatory developments. Image: Fotolia.

The uncertainty that has fallen over the mortgage market due to a federal court’s ruling that some of President Obama’s recess appointments are invalid could be accentuated by the mechanics of the qualified mortgage provisions in the Dodd-Frank Act, according to a report obtained by NMN.

The Consumer Financial Protection Bureau recently issued the final QM rule and it is slated to go into effect in January 2014.

This one-year delay is designed to give lenders breathing room to implement the complex rule which establishes ability-to-repay standards that lenders must follow. Without a QM rule, the statutory provisions of the DFA kick in which include severe penalties for QM violations.

“Without the regulation, the market will be in turmoil,” according to an analysis by a consulting firm that did not want to be identified.

The U.S. District of Columbia Circuit Court’s ruling in Canning v. National Labor Relations Board did not specifically address the recess appointment of Richard Cordray to be the first CFPB director.

But it casts doubt on the legality of Cordray’s appointment and validity of the rules he has approved—including the QM rule, which prominent mortgage executives have praised for relieving some of the uncertainty in the market.

If the QM rule is challenged in court, it could lead to the statutory provisions going into effect. “The statute is vague in many areas,” the analysis says, when it comes to a safe harbor from litigation and the 3% cap on points and fees.

“Lenders will drastically curtail their mortgage lending in the absence of both a safe harbor and clear definition of QM.”

It will probably take a year for the courts to sort of the legality of the recess appointments. In the meantime, Congress must act quickly. “A legislative fix is imperative,” the analysis says.