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
Just when lenders were expecting the CFPB in Washington to fade silently into the mist of the night, there were rumblings that states were considering enacting their own CFPB organizations and regulations to prevent the Trump Administration from killing consumer protection oversight. Today those rumors have gained serious traction.
According to the New Jersey Mortgage Banker’s Association today, New Jersey’s Attorney General announced that Governor Murphy will nominate Paul R. Rodriguez as Director of the New Jersey Division of Consumer Affairs to fulfill the Governor’s promise to create a state-level CFPB in New Jersey. Attorney General Grewal said that, “As the federal government abandons its responsibility to protect consumers from financial fraudsters, it is more important than ever that New Jersey picks up the mantle to protect its own residents.”
Pennsylvania’s Attorney General has already created a CFPB at the state level and it seems that this could be a trend in other states as well.
Lenders had hoped that a new Trump appointed director at CFPB would begin the move to reduce lender oversight and compliance obligations and early indications were that they may have been correct. With today’s announcement from New Jersey however, and with Pennsylvania as a model, it is a sure bet that other states will soon follow the effort to ensure that stringent oversight remains in place.
What does this means for mortgage lenders? Don’t disband your compliance departments or cancel those compliance tools just yet.