On June 8, the House approved the latest attempt at reforming the regulatory structure of the financial industry by passing the Financial CHOICE Act. The bill aims to dramatically revise the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act that was instituted after the 2008 housing market crash.
One of the most controversial changes introduced by Dodd-Frank was the creation of the Consumer Financial Protection Bureau (CFPB), an agency tasked with ensuring the fair and responsible treatment of consumers by financial institutions. The CFPB drew criticism for its broad reach – being responsible for both enacting and enforcing regulations – as well as its unprecedented independence from Congressional oversight.
Over the past seven years, the CFPB implemented hundreds of new regulations such as the Qualified Mortgage (QM) standards, loan originator compensation and TILA/RESPA Integrated Disclosure rule (TRID). While the Financial CHOICE Act would not directly impact all of these rules, the bill’s authors want it to reduce the regulatory burden.
Although the Financial CHOICE Act could pass on a simple partisan vote of 52-48, it is highly unlikely to pass through the Senate as is. However, in looking through the proposed changes, there are three proposals within the bill that would be beneficial to the mortgage industry: CFPB would have more congressional oversight, the structure of funding would improve and binding written guidance would be provided for financial institutions.
From the very beginning of the CFPB, one of the biggest complaints was the lack of Congressional oversight afforded to the organization. Currently, the CFPB is run by a single director, which is the only position that can be reviewed by the Senate. In addition, the CFPB’s rulemaking is not subject to the same oversight processes that many government agencies must follow to ensure there is proper vetting of the proposal.
The proposed changes in Congressional oversight to the CFPB will help ensure that new regulations and rules the Bureau want to enact will be in check. However, the act still keeps a single director who serves at the President’s pleasure, as opposed to now where the director can only be removed “for cause” by the President.
Structure of Funding
Related to the accountability issue is the source of the CFPB’s funding. Today, the bureau is allotted more than $600 million from the Federal Reserve with no oversight as to how they spend it. This created a bureau with a single director with a great deal of unchecked power.
Under the CHOICE Act, the bureau’s funding would be determined as part of the annual appropriations and budgeting process, which requires submitting a budget for approval to Congress.
Guidance and Regulation
It would be beneficial if the Bureau were to give written, formal opinions from a centralized source which can be used by all creditors.
Right now, lenders can ask the CFPB for guidance in complying with written regulations and any one of their staff can give nonbinding verbal guidance. This can lead to lenders receiving guidance they cannot rely on in any litigation setting as well as obtaining conflicting instruction from each other, due to different individuals from the Bureau providing different answers.
The CHOICE Act would require the CFPB to provide these binding, written opinions, which would eliminate some of the confusion and inconsistencies in applying regulation across the industry.
More than likely the CHOICE Act will not make it through the Senate, but there are certainly take-a-ways that the financial industry needs to take into serious consideration when it comes to a regulating body for the system.