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Richard Cordray
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The appointment of a leader for the
Consumer Financial Protection Bureau marks a new and important step in the long, drawn-out process of Dodd-Frank reforms, according to
Stephen Ornstein, partner at
SNR Denton. The CFPB was established with the signing of the Dodd-Frank Act in July of 2010, but has been more or less inactive without the appointment of a director. Now, with
Richard Cordray at the helm, the bureau can begin to function as a powerful, far-reaching regulator with authority over not just banks, but non-depository institutions as well. “The show starts now for non-depository institutions,” Ornstein said, noting that the CFPB will sweep securitization deal parties like servicers and mortgage companies further into the regulatory fray.
The delay over the appointment of a director to head up the new regulatory body has been blamed on political maneuvering. Elizabeth Warren, Harvard University Law Professor and Special Advisor to the CFPB, was the long-time favorite to head the bureau, but there was considerable pushback from those that saw her as too anti-business. Warren’s advocates often cited the “we are the 99%” phrase that was the rallying cry of the “Occupy” movements in promoting her as a pro-consumer, anti-big business figure.
“People were afraid of Elizabeth Warren,” said Ornstein. “The business community felt like they wouldn’t get a hearing with her.” But Cordray, a former state attorney general from Ohio, has a track record of taking a hardline against banks and the mortgage industry, and Ornstein noted that his appointment is not doing much to calm the business community’s fears.
State attorneys general have suddenly emerged as major players in the securitization world, as state AGs have begun halting foreclosures in recent years across the U.S. Cordray was active as a state AG in the fight against robo-signing and other allegedly faulty foreclosure practices. Market participants say these halts in foreclosures by state AGs are making it difficult for residential mortgage-backed securities investors to model foreclosure timelines, an important part of determining the bonds’ value. Ornstein said that he sees a functioning foreclosure process—rather than sudden state-by-state freezes in foreclosures—as an essential part of getting the housing market back on track.
In October 2010, Cordray said he would file suit against Ally Financial, the frequent securitization issuer and former mortgage finance arm of GMAC. This was one of the first suits filed by a state AG over robo-signing, and is credited with leading the charge of state AGs to halt foreclosures. Cordray, speaking at a press conference at the time of announcing the planned suit, said he would seek civil penalties of up to $25,000 per violation of foreclosure procedure. “Some ugly revelations have recently come to light about how foreclosures are being processed in this country,” Cordray said at the press conference. “I’m deeply concerned that GMAC’s unlawful procedures for filing foreclosure are being used by other major servicers in the market.”
Ornstein explained that the CFPB is a uniquely powerful regulator, and not just because of its scope of regulating non-depository institutions. “It’s an enormously powerful bureau because it has its own funding source and a single director,” Ornstein said. “Congress could overrule CFPB decisions, but that isn’t too likely in this age of Congressional gridlock.” Members of Congress filibustered to try to prevent Cordray’s appointment to head the bureau, but President Barack Obama made use of a recess appointment to install Cordray, a move that drew additional partisan objections to Cordray’s leadership.
Beyond the issues raised by the newly active CFPB, Ornstein highlighted the evolving definitions of qualified mortgages and qualified residential mortgages as important regulatory changes for the market to watch out for in the New Year. A qualified mortgage, or QM, is a new standard for mortgage lending. Some of the parameters that make up a QM are already contained in the Dodd-Frank statute. A QM requires verification of borrower income, prohibits payments from exceeding the principal, and bars points and fees from exceeding 3% of the principal amount, among other lending provisions. But the Dodd-Frank Act also lays out the concept of a qualified residential mortgage, or QRM, which would define what kind of mortgage is safe enough to be exempt from the coming risk retention rule. This would mean the issuer of a securitization made up entirely of QRM collateral would not have to hold a 5% slice of the deal on its books.
“It’s hugely important, because I would think if a loan is not a QRM loan it’s not going to be made,” Ornstein told SI. He said the evolving definitions of QRMs coming out from regulators required a pristine loan with an extremely high threshold of credit. “The proposals for QRMs are stringent guidelines,” he said. “The question is, who is going to make these loans? It doesn’t bode well for a more varied marketplace.”