Daily Archives: November 11, 2016

Consequences of Election

The trade associations and the trade journals have all made their prognostications as to the consequences of a Trump administration with a Republican majority in both the House (solid) and Senate (slim). The following is a review of the potential actions that could result from this new regime.
CFPB. While we would all like to put that genie back into the bottle, unwinding the agency appears unlikely to me. To create it, the Fed, FTC, and HUD all dismantled their consumer compliance rulemaking and interpreting sections. Some experts retired while some moved over to the CFPB. All of the rule-making functions were shifted to the CFPB. I suspect that it is unlikely that this function will be de-centralized with all of those divisions re-created. Also, I am skeptical that the Fed would get back its consumer regulation writing authority given some of the animosity that Trump has expressed toward the Fed! However, there are several other possible scenarios that seem very likely.
First, President Trump could take the DC Court of Appeals at its word and dismiss Director Cordray, with or without cause. The PHH decision “cured” the constitutional defects in the organization by concluding that the president should be able to remove him without cause. Alternatively, perhaps the extremely high-handed approach taken by this director could support a finding of “cause” to remove. The refusal to acknowledge the statutes of limitation applicable to various laws and the punitive use of penalties as well as retroactive changes in the game rules all are highly offensive and might support a “cause” finding.
Second, a Republican majority Congress could finally enact meaningful change to the agency by replacing the single director with a multi-party commission, more accountable to Congress.  In addition, the open pocket book should be slammed shut!
Executive Orders. Trump has promised to rescind Obama’s Executive Orders on “day one.” There are several relating to federal contractors that have been troubling to banks. These include rules relating to minimum wage and diversity rules. Not all applied to banks, however.
Employment Issues. The Obama DOL reversed the Bush DOL on the rules for exemption of mortgage loan officers. I could envision this interpretation swinging back around. In addition, DOL significantly increased the salary test for the exempt categories. I could see those getting cut back at least somewhat. The banking regulators have been asking banks with more than 100 employees for their diversity plans. That was part of the Dodd Frank Act but is not well articulated.  I would like to see that de-emphasized as well.
Arbitration. The CFPB clearly does not like arbitration. Its rule-making would eviscerate this remedy, arguably in contravention of the Federal Arbitration Act. The Dodd Frank Act only prohibits mandatory pre-dispute arbitration in residential mortgages and authorizes a study of other scenarios. This is another area that should be reined in.
Overdraft Programs. The CFPB has this on its agenda but has done very little work on it as of this writing. In a meeting I participated in this spring in Washington, it was painfully clear that Cordray doesn’t understand the difference between an ad hoc program and an automated one. It is also clear that the CFPB wonks don’t grasp the fact that their rules (like the small dollar loan proposal) would actually reduce credit availability and make it more costly. Similarly, strict limits on overdraft privilege would eliminate a cheap source of credit for many.
Residential Mortgage Rules. This area is extremely complex. The CFPB actually put into place rules with more flexibility than the statute. They could do this under their authority to create flexibility where appropriate. And integrating Truth in Lending and RESPA disclosures instead of having two sets of inconsistent documents is not a bad thing. Industry has invested millions of dollars and untold time into making TRID work. Unraveling it at this point would be hugely expensive.
By contrast, implementing more flexibility in the ability to repay rules would make sense. Both the statute and the rules make it hard for self-employed and high net worth customers to qualify for credit!
Basel III. It appears that European banks may thumb their collective noses at the changed and increased capital requirements. Thus, it doesn’t make sense for American banks to be hamstrung by these rules. While many of the pending Fed rules would primarily apply to the largest banks, the existing HVCRE requirements are having a negative impact on interim construction financing, hurting both lenders and the economy.
Taxes. This appears to be the area of greatest potential for meaningful reform. The changes in brackets and rates would be straight-forward, real relief. And, this has the potential to stimulate meaningful economic activity.
Fair Lending. Although the US Supreme Court held that the Fair Housing Act enforcement can use statistical analysis to find “disparate impact,” it has not applied this to the Equal Credit Opportunity Act-which has different statutory language. I believe that there is an opportunity here to rein in arbitrary actions by the banking regulators and the Department of Justice. Again, these have had the perverse effect of restricting credit availability in the pursuit of “cookie cutter” lending standards and terms.
Recent redlining rulings-which have been agreed to without trial-have forced banks to put branches in locations identified by the regulators or DOJ. This is antithetical to the concept that banks must also answer to their shareholders. It effectively converts banking into a kind of utility. All of this is the result of prosecutorial privilege rather than clear rules. This could be dialed back with appropriate appointments, I think.
ADA. Banks are being threatened with lawsuits over accessibility of their websites by the blind and visually impaired. Yet DOJ has stated that it will not provide rules for such websites until sometime in 2018. Right now industry doesn’t know which standards will be imposed, but they are liable for failing to meet them! DOJ has supported these lawsuits with amicus briefs but has not supported business by providing answers. Again, the right appointments could clarify this murky source of liability.
Conclusion. With judicious appointments and repeal of certain executive orders, Trump can significantly reduce some of the regulatory burden that is a headwind, slowing economic growth. For more information contact: Karen Neeley.