When the Consumer Financial Protection Bureau was first being discussed in Washington there was little emphasis — if any—on its role in regulating residential servicing. But in the wake of the nation's “robo-signing” scandal all that has changed.
It is now clear to the industry that the CFPB will be the first federal agency with the authority to monitor and regulate all mortgage servicers, or so says its de facto director, Elizabeth Warren.
President Obama's pick to get the agency up and running by July 21, Warren recently clarified to members of Congress that the CFPB will have enforcement authority over all bank servicers—nonbank as well as depositories.
Warren said the current servicing "scandal" illustrates the importance of fair and consistent enforcement of servicers.
If the new consumer protection agency were created six years ago, "the problems in mortgage servicing would have been exposed early and fixed while they were still small—long before they became a national scandal," she said.
"We need a cop on the beat," Warren testified last week before a House Financial Services, saying the CFPB will be that cop.
Although the former Harvard law professor will not be heading the agency, she serves as a special advisor to the Treasury Department and is said to be pulling the strings behind the scenes as head of its implementation team. She told the congressmen that the president is planning to nominate a director soon to run the bureau.
The new consumer protection agency also has the authority to set national servicing standards, which is why Treasury secretary Timothy Geithner asked her to work on the issue as it applies to any type of global settlement between servicers and the states. (As a technical matter, the CFPB will not will not be a party to the formal settlement with AGs.)
The Department of Justice, federal regulators and state attorneys general are negotiating with the nation's top five servicers to settle allegations of shoddy foreclosure and loss mitigation practices. Republican lawmakers have complained that Warren, a political appointee, should not be a participant in those talks.
Members of the GOP have linked her to a draft term sheet that DOJ presented the servicers. The draft includes tough servicing standards, which one securities trade group called "unprecedented in its scope and prescriptiveness."
The draft also requires servicers to employ principal writedowns, which some industry officials liken to "cramdowns" that Congress rejected in 2009.
Sen. Richard Shelby, R-Ala., recently called for an immediate committee inquiry into this "regulatory shakedown by the new Bureau for Consumer Financial Protection…led by Elizabeth Warren."
Last week, Warren testified before a congressional committee for the first time since her appointment by President Obama last September. Several House Financial Services Committee Republicans committee questioned her about her role in the settlement negotiations.
The leader of Treasury's CFPB implementation team insisted she is not involved in the negotiations. "We do not negotiate with private parties," Warren said at one point. "We have been asked for advice," she said, by DOJ and other federal agencies.
"When asked for advice we have given our advice," Warren testified. "And we are proud to be helpful."
Meanwhile, it appears negotiations are not going well. Not all the state AGs are on board with the draft settlement. There are disagreements among federal regulators regarding the amount of the penalties, which could range from $20 billion to $30 billion. Most of the penalty money is expected to go toward principal reductions.
But the nation's megabanks are pushing back. If the settlement talks break down, they could face the prospect of lawsuits from up to 30 state attorneys general, according to Sen. Jack Reed, D-R.I. the Senate Banking Committee member warned that mortgage bond holders and even homeowners harmed by foreclosures could pursue additional litigation.
"The legal process would take several years to determine multiple cases of liabilities and responsibilities," Sen. Reed said. "That itself would have a significant impact on the market—both the value of these companies and their ability to move forward and more robustly contribute to the recovery."
Geithner chimed in that, "All the parties have a stake in bringing this to resolution as quickly as possible."
Mortgage servicers may be wary of entering into a global settlement since the agreement may not be binding on the CFPB since it is not open for business quite yet. The agency can issue cease and desist orders for past violations and require restitution and payment for damages along with civil money penalties.
"The bureau will have broad authority to write servicing rules," according to Anne Canfield, president of Canfield & Associates. "Servicers may not see any advantage in agreeing to restrictions that could change soon," the Washington consultant said.
