The mortgage industry didn’t need any more uncertainly but it’s here now that a federal appeals court ruling has cast a cloud over Richard Cordray’s appointment last year to be the first director of the Consumer Financial Protection Bureau.
A U.S. District of Columbia Circuit Court has invalidated recess appointments that President Obama made to the National Labor Relations Board—not to the CFPB.
But the decision in Canning v. NLRB raises questions about the legality of Cordray’s recess appointment and validity of the rules he has approved, including the qualified mortgage rule.
The QM rule spells out underwriting standards that lenders must meet to be shielded from litigation. And lenders are generally pleased with the final rule the CFPB issued.
As a quick fix, some are urging the Treasury secretary to re-issue the QM rule as an interim final rule to avoid possible litigation and uncertainty. The Dodd-Frank Act authorizes the Treasury secretary to take certain actions when the CFPB does not have a director.
But there are concerns that such a fix would apply only to banks—not nonbanks. So nonbanks might be subject to QM provisions in the Dodd-Frank Act. And those statutory provisions are vague in many areas when it comes to a safe harbor from litigation and the 3% cap on points and fees.
The statutory QM provisions went into effect Jan. 21, which is creating a lot of litigation risk, according to regulatory consultant Anne Canfield.
“The industry is probably going to move ahead and implement the QM rule,” she told NMN. “The problem is we are likely to be sued.”
The president of Canfield & Associates contends that Congress should act quickly and pass emergency legislation to validate CFPB rules and end this “unneeded uncertainty and litigation.”
But one congressional observer doubts Congress will respond to this issue any time soon. “I don’t expect any quick action by Congress in this regard,” said William Donovan, a partner at the Venable law firm.
However, legislation dealing with the structure of the CFPB is likely to come before the House and Senate banking committees later this year. Many Republican lawmakers want to restructure the CFPB into a five-member commission, which could open the door for a legislative fix. The bureau is currently headed by a single director—Cordray.
Lenders always face the prospect of litigation and legal challenges, according to Larry Platt, a partner at K&L Gates. And he noted that resolution of the recess appointments by the courts will take some time.
Meanwhile, mortgage companies should focus on complying with new mortgage rules.
“I think it would be impudent to delay implementation based on the potential that they will be invalidated,” he said.
Whatever happens in the courts, the industry will end up with the same QM rule as the one the CFPB issued on Jan. 10, according to Jeffrey Taft of Mayer Brown. “It may need to be repromulgated by the Treasury secretary. But it is going to be the rule that everybody is going to have to comply with,” Taft said during a webinar last week.
Taft also said the issuance of the qualified residential mortgage rule by six other regulators is unlikely to be delayed because of the appeals court decision in Canning v. NLRB. “I don’t see that process being delayed at this point,” Taft said.
The QRM rule will set the risk retention requirements for non-QM loans. So the QRM rule must be based on the QM rule.
If the QRM rule closely parallels the QM rule, according to Kevin Petrasic, a partner at Paul Hastings, it will increase the legitimacy of the QM rule. It would indicate “the QM underwriting standards are acceptable to the [six] agencies,” he said.