Wow! Could many of the regulatory actions taken by the Consumer Financial Protection Bureau during the past year with potentially far-reaching impacts on real estate — the "Qualified Mortgage" (QM) standards, new mortgage servicing requirements, appraisal and loan officer compensation rules, and the real estate disclosure and settlement changes under RESPA now moving through the agency, to name just a few — be suddenly thrown into doubt?
Could a decision by a Washington, D.C., appellate court last Friday that found President Obama’s three recess appointments to the National Labor Relations Board (NLRB) were unconstitutional now upset the apple cart at the CFPB, whose director, Richard Cordray, received his recess appointment on the same day last year as the labor relations board appointees?
Recess appointments traditionally occur when the Senate has declared itself no longer in session. The members go home, and the business of providing "advice and consent" to the president on nominees to major administration positions comes to a halt.
But the three-judge appellate panel in Washington ruled last week that when President Obama made the labor board appointments on Jan. 4, 2012, the Senate was technically still in session. It was meeting on a "pro forma" basis in order to officially keep the floor open, but it was not in recess.
U.S. Circuit Judge David Sentelle wrote that "considering the text, history and structure of the Constitution, the appointments (to the labor relations board) were invalid from their inception."
Though the case before the court did not extend to the recess appointment of Cordray — whose nomination had been bitterly opposed and blocked by Republicans — there is widespread agreement in Washington legal circles that the same principles would apply to his situation.
This, in turn, could challenge the validity of dozens of regulations and activities of the CFPB last year and into 2013, since the Dodd-Frank law that created the bureau requires that a director be in place before certain types of rules and examinations by the CFPB can take legal effect.
Isaac Boltansky, a Washington policy analyst specializing in mortgage issues for Compass Point Research and Trading, cites a joint report issued by the inspectors general of the Federal Reserve and Treasury in July 2011 that concluded that a confirmed director would be needed before the new agency could prescribe rules and model disclosure forms for services or financial products the CFPB regulates — real estate and mortgage services and products represent a significant body of the agency’s early rule-making and model disclosure form drafting — and could legally prohibit "unfair, deceptive or abusive acts or practices" in connection with consumer financial products.
George Mason University law professor Todd Zywicki told the Federalist Society last week that "the assumption has been that (the labor board and Cordray appointments) rise or fall together. If the NLRB appointments were invalid, he said, then Cordray’s was."
Senate Minority Leader Mitch McConnell, R-Ky., said the appellate court decision "casts serious doubt on whether" Obama’s recess appointment of Cordray "is constitutional." Richard Hunt, head of the Consumer Bankers Association, believes that the potential illegality of the Cordray appointment "creates chaos in the marketplace."
The CFPB itself denied in a statement Friday that there is any direct connection between the appellate court’s ruling on the labor board appointees and Cordray’s appointment. The White House said it disagrees with the court’s reasoning, but has not decided whether to appeal to the U.S. Supreme Court.
Meanwhile, there is a possibility that one or more financial service companies will file suit challenging the Cordray appointment, citing the appellate court’s reasoning to challenge actions taken by the CFPB during the past year. At the National Labor Relations Board, dozens of decisions taken by the members whose appointments have been found illegal are expected to be challenged by employers in the coming weeks.
So what might all this mean for real estate and mortgage industry interests? If Cordray’s appointment is found to be illegal, then under some interpretations of the Dodd-Frank law, the Qualified Mortgage (QM) standards and servicing regulations announced earlier this month could be struck down — throwing that important project into limbo. Ditto for the recently announced loan officer compensation rules, appraisal disclosures and credit industry examination procedures.
Since the CFPB’s rewrite of the HUD-1 real estate settlement and good faith disclosure forms have not yet been issued, presumably they would not be affected, though they could be delayed.
The long-awaited QRM (Qualified Residential Mortgage) rules that govern how much "skin in the game" lenders must retain in securitizations also will not be affected; they involve six other regulatory agencies and not the CFPB. However, since the QRM rules are expected to seek conformity with key QM standards, they could be delayed as well.
All of this will depend heavily on whether and when the White House appeals to the Supreme Court, and whether separate suits are filed charging that Cordray’s appointment was illegal, thereby invalidating actions taken since he arrived. Meanwhile, Obama has renominated Cordray for a full four-year term as director. But don’t count on an early confirmation by the Senate.
Ken Harney writes an award-winning, nationally syndicated column, "The Nation’s Housing," and is the author of two books on real estate and mortgage finance.
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