Many of you have seen or heard reports of the action taken last week by the U.S. Court of Appeals for the D.C. Circuit which held that appointments to the National Labor Relations Board, made by President Obama in January of 2012, were unconstitutional. Of course, President Obama made a similar recess appointment of Richard Cordray to be the new Director of the CFPB, on the same date and invoking the same authority, which raises the question of whether or not actions taken by the CFPB and issued under Director Cordray’s authority are valid.
Undoubtedly this decision will be appealed, and there is authority to uphold regulations issued in good faith and reliance upon the authority of a regulatory agency; however, there is an even more cogent argument for wanting the CFPB’s new regulations to be upheld.
The Dodd-Frank Act amended a number of laws in very significant ways. It codified a duty of care for mortgage loan originators. It expanded the concept and application of the Ability-to-Pay Rule. It called for regulatory action to define a Qualified Mortgage, which would give lenders some level of protection in the form of either a safe harbor or a presumption of compliance. It placed limits on mortgage loan originator compensation, but left to the CFPB the task of filling in the details. But at the end of the day, the Dodd-Frank Act provided that these changes in law would become effective 18 months after passage, whether regulations are in place or not.
Of course, this explains the CFPB’s rush to issue the several Final Rules that are discussed elsewhere in this edition of the Quarterly Report.
Everyone should be aware that banks need the certainty and the guidance that these regulations give. Without those regulations, banks will know that there are requirements, but will lack the necessary guidance and flexibility when it comes to meeting those requirements.
Don’t be confused by political rhetoric about using this ruling to repeal the Dodd-Frank Act or to significantly change the structure and function of the CFPB. Repeal of Dodd-Frank will not happen. Too much water is under the bridge. Some reform might occur, but implementation of items such as the Qualified Mortgage Rule must begin now. Waiting to see the final outcome of appeals and political wrangling will only leave your bank without enough time to make the important changes that will be necessary.
Everyone should hope that this is one football that the Republicans and Democrats in Congress do not decide to run with. Too much uncertainty would result.