States Likely to Fill Enforcement Void If CFPB Dials Back

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State mortgage regulators and attorneys general are likely to step up enforcement of lending rules if the Consumer Financial Protection Bureau takes a less activist stance in the Trump administration.

During its brief five year history, the agency has been out in front when it comes to enforcing mortgage regulations. For example, it took an enforcement action against three reverse mortgage lenders earlier this month, and took the lead in crafting regulations that implemented new mortgage disclosures.

Yet there are some that speculate that if President-elect Donald Trump and Republican lawmakers have their way, the CFPB will eventually be forced to dial back its activities.

"If we assume that the bureau is going to take a step back once new leadership is in place and enforce less aggressively in some areas, it's very reasonable to conclude that the states will move back to the forefront," said Ben Olson, a partner at BuckleySandler and a former CFPB deputy assistant director.

How soon that could happen is unclear. Many anticipate that Trump may seek to fire CFPB Director Richard Cordray soon after the president-elect takes office, a move that will spark a legal battle, while Republicans in Congress will seek to restructure the agency’s leadership.

While the political process plays itself out, lenders are less likely to cut a deal with the CFPB, according to Brian Gardner, an analyst at Keefe, Bruyette & Woods. Instead they may dig in and fight more aggressively than they did in the past.

"But that doesn't mean that the litigation risk has gone away and the risk of an enforcement action has gone away. States can step into that breach," he said.

To be sure, some states lack the resources, expertise and manpower to pursue all bad actors, particularly in a multistate coordinated effort. But aggressive prosecutors in New York, California and Massachusetts may be able to keep lenders on their toes even if the CFPB steps back, Gardner said.

"There are various cross-currents at work here that make it a little tougher than it would be normally to figure out where all of this is going. Old templates and old way of looking at things might not necessarily be helpful this time around," Gardner said.

But some see the states as willing to step into the breach.

"Most local and state law enforcement people are elected and they want to position themselves as champions of the people," said Ann Fulmer, an industry consultant. "If there is a problem I hope somebody would step up and deal with it."

State regulators have always seen themselves as being strong on the consumer protection side, so it wouldn't be a surprise to see them act if the federal government backs off, said E. Robert Levy, executive director of the Mortgage Bankers Association of New Jersey and the former chairman of the industry advisory council of the American Association of Residential Mortgage Regulators.

But since the CFPB came into being, it has become the dominant player in enforcement and regulation, he said.

"The industry has been pretty much been only focused on federal law and not as interested as it had in the past talking about and asking about what the states were doing in terms of regulation and supervision," he said. "Prior to the existence of the CFPB, [state regulators] had a constant exchange of information and questions from the industry dealing with state law, state regulation and interest in what the states were planning to do.

Now the group doesn't get members asking "questions about what the states are doing, about what the latest regulations are on a state level or are there changes being made to state law. The focus on issues, questions, discussions, have all been about the CFPB and other federal laws, many of which are now enforced by the CFPB," he said.

When Trump gets control of the CFPB, it's unclear in what direction he will guide it. Since his election, he’s made reform of the Dodd-Frank Act a priority, saying that regulations are holding back the economy.

The unknown is "what will the federal government be doing?" said Levy. "What will the CFPB look like? We have to wait and see before we know what the states will do. What is less speculative is the states would certainly want to fill any voids they see."

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