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
Today the United States Supreme Court, in a 5-4 decision, declared that the structure of the directorship of the Consumer Financial Protection Bureau (CFPB) is unconstitutional. The decision addressed the “only for cause” removal provision created by Congress which had effectively made its single-directorship above checks and balances because it prevented the Executive Branch, namely the President, the ability to remove the CFPB director at will.
The majority decided that there was an unconstitutional violation of separation of powers in a structure that concentrated enormous power in a single person who could not be removed except in extreme circumstances. Although the issue has been brewing for years, having been raised early on during civil litigation proceedings by lenders who were subject to significant fines and penalties following a CFPB audit or investigation, the matter became more significant when Presidential Donald Trump attempted to replace the agency head with his own pick, Nick Mulvaney, without alleging the “for cause” basis but as a matter of right.
Lenders seeing today’s headline might be rejoicing in a false interpretation of the ruling should they believe this means the death of the agency itself. It does not. The Supreme Court separated the issue of the directorship removal clause from the balance of the provisions creating the agency, leaving it fully functional and intact.
Accordingly no lender should expect that any ruling or directive previously issued by the CFPB governing their operations will now suddenly become moot. Compliance officers can rest easy, as they are still a valuable asset to lenders in interpreting and managing CFPB regulatory and compliance expectations and rules governing mortgage and banking operations.