It did not take long after the Silicon Valley Bank failure for politicians in Washington to rush to the next available microphone and lament the “loosening of bank regulations”. Instinctively the finger pointing began, and in many quarters ended up in the direction of the prior administration’s policy to generally roll back stringent business regulations and allow free market decisions to govern various industries. Chief among the complainants (no pun intended) was Sen Elizabeth Warren, who emerged out of the 2008 crisis as an architect and advocate for the Wall Street Reform Act and the creation of the vaunted Consumer Financial Protection Bureau ( CFPB), which she briefly directed. Just yesterday in DC’s The Hill publication, Sen Warren was reported as blaming the the collapse of Silicon Valley Bank on Republicans in Congress, which in 2018 helped pass a law to ease bank regulations put in place following the 2008 financial crisis. “No one should be mistaken about what unfolded over the past few days in the U.S. banking system: These recent bank failures are the direct result of leaders in Washington weakening the financial rules,” Warren is quoted as saying. According to The Hill piece, Warren, who voted against the 2018 bank deregulation bill, said that the crises would have been avoided if the banks were required to hold more liquid assets because the bill exempted banks with less than $250 billion in assets from rigorous Fed stress tests. Warren and other Democrats say the old rules could have caught the issues at SVB sooner. Given that politicians generally “never let a crisis go to waste,” many now suspect that the banking industry is about to be slammed with heightened regulatory scrutiny, tighter operational rules, more audits and exams, and larger and very public fines, penalties and consent orders. What does this mean for independent mortgage bankers (IMBs)? It means that they have to get back to the compliance mindset they were frightened into adopting between 2008 and 2018, and before the bottoming out of interest rates led everyone to believe that easy money was here to stay and that self-regulation meant hiring more loan officers. Keep those risk management officers and compliance directors close by folks, we are all in for a bumpy ride on the regulatory
Th election of President Donald Trump signaled for many in the mortgage industry that finally something would be done to reign in federal regulation and allow lenders to make more loans. There was also a secret desire that the potential elimination of the super federal regulator would mean that the millions spent on building out compliance programs and purchasing compliance software would mercifully come to an end.
Like many other things we have learned about President Trump, one cannot easily predict his actions. Today nearly 500 days into a Trump presidency the CFPB is still alive and well, albeit with a new director, and although some of the most cumbersome regulations, those attaching “too big to fail” labels on lenders who clearly were not that big, have in fact been watered down or eliminated altogether, the King is not yet dead.
The bulk of the CFPB’s regulations and their regulatory oversight functions remain firmly in place. So what does this all mean? What does a Trump presidency actually mean when it comes to the CFPB and the environment of heightened regulations lender’s have experienced over the past decade?
What it means is that no one in government is about to allow lenders to retreat back to the heady days of unfettered and unprincipled lending activities. Quality loan origination and consumer protection rules are not easily removed once in place because the public has a long memory of the financial meltdown that occurred between 2007 and 2008. Dodd-Frank was a reaction to a serious problem, perhaps an overreaction in hindsight, but it was an honest attempt to address real operational flaws.
CFPB where for art thou? Still sitting comfortably in Washington DC with millions of dollars in its operating budget and thousands of staff members including investigators who remain committed to preventing the next mortgage meltdown.
So for now, lenders, it would be advisable not to lay off your compliance staff or terminate your compliance vendors.