SVB Failure Starts Aggressive Regulation Talk in Washington, IMBs Take NotePresident Trump will Likely NOT Eliminate the CFPB and Remove Borrower Consumer Protections

February 21, 2018
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

Immediately after Donald Trump was elected President in November 2016, the election the mortgage industry was buzzing with articles predicting that a Trump Presidency would mean the death knell for the Consumer Financial Protection bureau (CFPB).  It will never happen for several reasons.

First, Mr. Trump did not campaign on a platform to decrease consumer protections in financial transactions.  Commentary about less regulations and business growth might be a signal to reduce some of the industry’s regulatory morass to help reduce costs and increase lending opportunities.  However if Mr. Trump’s campaign taught us anything, he was not a typical conservative Republican, but rather a more nationalist/populist candidate.  His appeal went beyond typical business/corporate interests to working and middle class Americans concerned about the economy, about government expansion, and “ruling elites”, among other issues.  Eliminating an agency whose stated purpose is to protect consumers from unfair, unethical and self-serving finance industry practices is not a populist position.

Second, the jury is still out on whether a President Trump can legally remove CFPB Director Cordray and exert influence over how the CFPB will operate.  While the recent PHH decision signaled that at least one court considered the independent management structure of the Agency unconstitutional, in that it concentrated too much power into the hands of one person, unelected and without executive branch supervision, that decision is presently being appealed and an affirmation of the lower court ruling is not guaranteed.

Third, the CFPB actually does some really good work.  While we may not want thousands of pages of new regulations, and occasionally the Bureau has acted as if it has little practical understanding of how the mortgage industry operates, the truth is that consumers have been better off with the Bureau in place.  The CFPB has addressed real issues regarding lack of transparency, spotty accountability and quality lending practices that in a moment of honest reflection seasoned industry professionals must agree made sense.

From where we sit in the ivory tower of SSI, this also means that vendor management rules are unlikely to change.  Even the most recent “clarifications” regarding third party servicer provider risk management have not changed the basic premise that lenders who expose their funds and a consumer’s NPPI to strangers must be accountable for doing so.  This means knowing who your vendors are, monitoring them for risk and cutting off harmful relationships before a consumer suffers injury or loss.

While Trump Presidency will undoubtedly bring us many interesting and unexpected moments, the elimination of the CFPB and its focus on consume protection will not be one of them.  You heard it here first.

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