The U.S. Court of Appeals for the District of Columbia handed PHH Mortgage an early Christmas present in their strongly-worded, 110-page decision vacating a $103 million fine and finding the structure of the Consumer Financial Protection Bureau (CFPB) unconstitutional. Lenders nationwide let out a sigh of relief when the news broke, but experts call the decision just a small step in the right direction and say more change is needed to rein in the CFPB.

The decision is widely expected to be appealed.

Here in Massachusetts, lenders and originators are eyeing the decision and contemplating the outcome, but it’s still pretty much business as usual.

“You have to look at this as one court decision,” said David Lazowski, branch manager of Fairway Independent Mortgage. “Pendulums tend to swing. This might be a sign the pendulum might be swinging back toward the center. We’re listening and watching. This court decision hasn’t changed anything for us.”

Lazowski and the agents he manages operate as if they know everything they do is going to be audited by the CFPB, especially with regard to the controversial MSAs.

“It’s a relatively new agency, so we’re all learning how to interact with it and understand what we have to do to be compliant,” Lazowski said. “We think the CFPB is a good thing, but good things take time to mature.”

The decision “gives us comfort on a macro level, but we’re not changing anything we’re doing based upon this,” said Brian Koss, executive vice president and head of production at Mortgage Network. “The culture of eliminating MSAs will still exist. We did use them once upon a time, but we don’t anymore. They’re too much risk.”

The 1,800-page TRID regulations were poorly written, and the recently issued 400-page clarification wasn’t any better, he said; mortgage lenders can’t afford to let up at all on their efforts to write flawlessly compliant loans, especially with the CFPB’s history of assessing fines in the millions of dollars.

“It doesn’t really matter because lenders have to play by the rules. So if you’re selling loans to Chase or Fannie Mae or anyone else, you have to be perfect,” Koss said. “It’s the boogey man, you worry about it every night. If you want to make a loan that is liquid, you have to meet these standards.”

The industry was initially encouraged by the decision, but there will likely be no appreciable impact on the way lenders do their jobs going forward, said conveyancing attorney Susan LaRose of Doucette & LaRose, and 2016 president of the Real Estate Bar Association for Massachusetts.

“It takes away a little bit of the omnipotence of the CFPB,” LaRose said. “It opens up a few doors. Other lenders who have thought about bringing actions against the CFPB may feel more empowered to do so now.”

La Rose said the fact that CFPB director Richard Cordray can be removed for cause is a good, even if only temporary, change.

“The media loved the headline that the structure of the CFPB is unconstitutional, but the reality is that it’s still there and still has the same structure,” LaRose said. “Only now Cordray is serving at the will of the president, at least until it’s appealed and goes up to a higher court. We have to see what’s going to happen.”


Future Outcomes

The current situation at the Supreme Court will need to be resolved before a decision could be made by that august body – and that resolution will be affected by the outcome of the upcoming presidential election.

“The Supreme Court would probably be tied 4-4 on this issue,” Benjamin Giumarra, a mortgage lending consultant with Spillane Consulting, wrote in an email to Banker & Tradesman. “If [Hillary Clinton] wins and appoints a like-minded justice, then the U.S. Supreme Court might very well overrule this and give the CFPB back its power. Even if the ruling stands, we wouldn’t expect [Clinton] to change the CFPB in any meaningful way whatsoever.”

Even with a strong political will to put a leash on the CFPB, Koss thinks change will be slow.

“There are quite a few Republicans trying to unwind the CFPB,” Koss said. “But it would take a long time to unwind and we’re not going to go back to where we were. Lenders don’t want that. It’s just a shame because loan costs are so astronomical due to a lack of clarity. TRID is poorly written legislation, which adds to the overall cost to everybody, especially disadvantaged consumers. So you’re adversely affecting the people who need the most help.”

Aside from the PHH decision, lenders are rightly concerned that the CFPB’s pledge to go easy on enforcing the TRID rules during the initial implementation is bound to end relatively soon, since the new rules are now over a year old, LaRose said.

“I think lenders are still going to be cautious,” she said. “We still haven’t seen the enforcement phase of the TRID regulations yet. On post-audit they’re finding 90 percent of transactions have some kind of errors and deficiencies in them.”

Since TRID became effective on Oct. 3, 2015, the CFPB has said it would not punish lenders for small or clerical errors. However, that grace period will eventually come to an end and the CFPB’s ability to assess huge fines has lenders trying hard not to make any mistakes.

“Every lender – from the locals to the big guys – still has a sense of unease,” LaRose said. “They all think they’re doing it right, but they’re all doing things differently, so they can’t all have it right. We’re still seeing software errors. There are still technical issues that make clerical errors. It’s an entirely new responsibility on the lenders that not all handle well.”

Between now and the ultimate end of the light enforcement period, Koss said would like to see the CFPB step back and analyze the practical implications of how the agency and TRID are functioning in the practical world.

“We need a pause to assess what’s happened and see what we can improve,” he said. “That’s where the checks and balances come in. To have an agency that’s so far above reproach is a little frightening for all of us. There’s got to be something in the middle.”




The ABA Responds

The American Bankers Association in a press release encapsulated the financial community’s collective response to the decision in two paragraphs:

“We’ve long believed that a five-member, bipartisan commission, as originally proposed, would strike a reasonable balance between independence and accountability. A commission would broaden the perspective on any rulemaking and promote fair enforcement activity at the Bureau, and it would provide necessary and appropriate checks and balances in the exercise of the CFPB’s authority, consistent with the court’s decision.”

“We also appreciate the court’s ruling that due process bars the CFPB from retroactively applying a new interpretation of law, as well as the court’s finding that the agency has to apply the statute of limitations applicable to all underlying statutes it enforces in administrative proceedings. We will continue to monitor this case as it progresses through the courts.”

Court Finds In Favor Of PHH In CFPB Case

by Jim Morrison time to read: 5 min