Mortgage order adds more rules to diminished CFPB's load

• Key insight: An executive order encouraging the Consumer Financial Protection Bureau to modify two of its mortgage rules would add a considerable load to the agency's already overloaded agenda, and at a time when its rulemaking capacity is greatly diminished. 
• Expert Quote: "The CFPB has a bigger agenda than they've ever had with a smaller staff and a lot less-experienced people." — David Silberman, senior advisor, Financial Health Network  
• Supporting data: Modifying the rules alone could take several years, and the agency already has 24 rules on its unified agenda. 

President Donald Trump's executive order directing the Consumer Financial Protection Bureau to reduce costs for small banks would add a considerable regulatory endeavor onto an already busy agenda. That could delay any final rule changes for years, making the odds of any broad and durable changes to the rule remote. 
The March 13 executive order is a deregulatory effort aimed at tailoring complex mortgage rules for smaller banks with assets of less than $100 billion, and for community banks with assets under $30 billion. It also seeks broad reforms to bring more banks back into the mortgage market.

The order directs the CFPB to consider changes to two of the most consequential mortgage rules to emerge from the 2008 financial crisis: the Ability-to-Repay rule and Qualified Mortgage rule. The CFPB also will consider providing a broad QM "safe harbor" for loans that banks hold in portfolio, that shields lenders from borrower lawsuits, and consider modifications to a cap on points and fees for smaller "QM" loans.  

It is unclear whether the order anticipates minor tweaks to CFPB's existing rules to accommodate smaller banks or broader rules for the entire market. But Richard Horn, co-managing partner at Garris Horn and a former CFPB senior counsel and special adviser, said any potential changes could make mortgage compliance more expensive.

"The mortgage industry has put a lot of money and effort into implementing these rules, and it's hard to unmake the omelet," Horn said. "We don't know what's going to replace them, and implementing something entirely new would involve a lot more cost."

The rulemaking process is also complex and time-consuming for the agency, and would be undertaken at a time when the agency's rulemaking capacity is greatly diminished. 

The CFPB has lost one-third of its employees in the past year, largely in response to the Trump administration's concerted efforts to eliminate the agency, including firing up to 1,400 employees. The CFPB employees union sued Vought last year, claiming the orders amounted to an attempt to dismantle the agency without congressional approval. A federal appeals court is deciding whether the CFPB can move forward with a reduction in force. In the meantime, the CFPB has shifted enforcement to the states, eliminated all nonbank oversight and moved to remote supervision of large banks. Within the deregulatory backdrop, some employees are still being paid not to work.

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Though the order only orders the CFPB to consider changing the rules, the order itself says that compliance with the QM and ATR rules are one of the factors that have contributed to banks' declining market share in the mortgage market. Federal bank regulators have also been working toward that goal, having issued proposed risk-based capital requirements last week that would reduce risk weights associated with mortgages and mortgage servicing. Those changes are meant to encourage banks to reenter the mortgage lending market, which has been dominated by nonbanks since the 2008 financial crisis.

Brian Hale, CEO and senior advisor at Mortgage Advisory Partners, a Newport Beach, California, consulting firm, said changes to the QM and ATR rules are part of the puzzle to increase banks' market share in mortgage lending. But the market forces keeping banks away from the market may be more than regulatory changes alone can overcome.

"I could see changes being made there would be helpful for banks, and might be combined with the Basel III issues [regulators are] working on to try to encourage the banks to be able to hold, not only whole loans, jumbo loans, but also to be buyers or holders of [mortgage servicing rights]," Hale said. "I generally think it would be good for the markets. 

"The big question is, do we think the banks will come back into the mortgage business?" Hale added. "My answer is no." 

Heavy regulatory docket

Compounding the issue is that the CFPB already has a crammed rulemaking agenda. The agency listed 24 rulemakings in its most recent unified agenda that includes writing five final rules, 10 proposed rules, 9 pre-rules and one long-term item. 

David Silberman, senior advisor at Financial Health Network, and a former CFPB associate director, said it is unclear whether the CFPB will use its own employees or will tap staff from the Office of Management and Budget to write the rules. Vought serves as the OMB director in addition to being acting CFPB director. But either way, the agency has a lot of work cut out for it.

"They already have a huge rulemaking agenda. The CFPB has a bigger agenda than they've ever had with a smaller staff and a lot less-experienced people," Silberman said. "Somehow they're gonna have to live up to that agenda. They're gonna have to put out a whole lot of stuff which has the CFPB's imprimatur on it."

Mark McArdle, senior vice president of regulatory affairs and public policy at Newrez LLC, a Fort Washington, Penn.-based mortgage loan originator and servicer, said the regulatory agenda would be daunting to the CFPB in the best of times.

"Even fully staffed, it's unlikely the CFPB could do more than two mortgage rulemakings in the remaining three years," McArdle said. 

McArdle, a former assistant director of mortgage markets at the CFPB, said any changes may be confusing for nonbank mortgage lenders if the CFPB tailors the QM rule for smaller banks and community banks, essentially creating two sets of standards.

The executive order would also require the CFPB to consider changes to the entire mortgage market including the TILA-RESPA Integrated Disclosure, known as TRID, or "Know Before You Owe" rule. TRID requires lenders to provide standardized Loan Estimate and Closing Disclosure forms to ensure borrowers receive final loan terms and costs at least three business days before a loan's closing. 

There are some areas of agreement for reform in this area, however, that could be completed more easily. One area of agreement would be to expand the eligibility for streamlined refinancing beyond Federal Housing Administration and the U.S. Department of Veterans Affairs loans to all QM mortgages. McArdle said those kinds of low-hanging tweaks are what banks are most likely to seek out of any rule changes. 

"The industry will push for targeted, sustainable changes like a streamlined refinance exception that applies to everyone," McArdle said.