With CFPB gutted, what’s next for mortgage compliance?

Mortgage lenders shouldn’t interpret the downsizing of the Consumer Financial Protection Bureau (CFPB) as a green light to ease compliance, despite potential mass layoffs and a shift in priorities, industry experts told HousingWire.

As part of the Trump administration’s latest moves, more than 1,400 employees, out of 1,700 total, were told they were laid off from the CFPB on Thursday. A source told HousingWire that the entire mortgage markets team has received reduction-in-force notices. (The CFPB did not immediately reply to a request for comments.) 

However, the mass termination is already facing legal challenges in court. Judge Amy Berman Jackson scheduled a last-minute hearing on Friday that temporarily blocked the layoffs and prevented the agency from cutting off the employees’ computer access as planned. Another hearing is planned near the end of the month.

A significant reduction in staff could leave entire CFPB offices reduced to a single employee or eliminated altogether. With just about 200 employees remaining, it is unknown how they will handle the CFPB’s 87 statutory duties, 13 of which require specific offices. 

“Under the Constitution, the administration does not have the authority to dismantle an agency if it’s funded by Congress, which is not the case for CFPB” Colgate Selden, a founding member of the CFPB and an attorney at SeldenLindeke LLP, said in a statement. 

“However, the Congress also passes laws creating agencies for a mission and the president has to execute that mission. If he tries to do things that stop that mission, he’s violating the Constitution. Now, can a court say we need at least 40 people to achieve the mission? That’s where it gets gray.”

Congresswoman Maxine Waters (D-CA) applauded the judge’s decision to “block” the attempt to lay off nearly all of the agency’s employees.

“Under the lawless Trump Administration, financial institutions are free to scam, exploit, and abuse consumers so long as it boosts their profits. But just as we did in the D.C. District Court the first time, Democrats will keep fighting to block these harmful and unlawful actions,” Waters shared in a statement.

The regulatory pendulum 

The proposed cuts follow a memo circulated to staff on Wednesday outlining the bureau’s new priorities. The document states a renewed focus on consumer harm, particularly among service members, military families and veterans. However, it signals a shift back toward oversight of banks, with mortgages remaining the agency’s top priority.

“The states are going to get very active to fill the void, just like prior to 2011 when the Dodd-Frank Act took effect. I spent the majority of my career up until that time responding to state law issues. It seems like the pendulum is swinging back again to where it was,” said Nanci Weissgold, a consumer finance attorney specializing in mortgage lending at Alston & Bird.

Many state licensing laws for nonbank lenders incorporate federal law, which means states can enforce federal violations. However, attorneys say that this proves challenging since states may come up with inconsistent interpretations.

“My message to companies – and particularly mortgage companies – is now is not the time to go light in compliance. If anything, I would use this time as an opportunity to double down and make sure that you have appropriate controls in place,” Weissgold said. “I’ve told my clients this period is a gift—until the states really start gearing up.”

According to Selden, states have already started to “come up with their own rule interpretation.”

“Under the loan officer compensation rule, one state was trying to say overrides are prohibited – where the branch manager gets 20 basis points of every loan that’s originated out of the branch – which is pretty widespread in the industry,” Selden explains. “That could become the most costly thing for IMBs.” 

Less day-to-day pressure?

Selden said his clients are “still proceeding as if it’s the old CFPB,” due to ongoing uncertainty, while simultaneously revisiting regulations to ensure compliance, particularly at the state level.

David Krebs, principal broker at DAK Mortgage, expects the CFPB’s staff cuts and narrowed focus will “likely mean less day-to-day regulatory pressure for lenders and brokers.”

“That said, it’s more important than ever to stay vigilant about compliance and consumer protection, especially as oversight shifts to the states,” Krebs said. “While that could ease some compliance burdens, it also opens the door to inconsistent standards and the risk of questionable practices, issues we saw before 2008.”

Krebs’ message to the broker community: “The recent shakeout in the industry has created more opportunities to serve clients who value expertise and integrity.”

What to prioritize — and what not to

While the CFPB will focus on loans to veterans and service members, unauthorized fees and debt collection issues, fair lending enforcement appears to be moving down the priority list. “That’s an area of less focus,” Weissgold said. “The Bureau said it won’t pursue novel interpretations of the law — they’ll take a stricter reading of the statute.”

Experts also expect the CFPB to roll back some of its previous advisory opinions and guidance. For instance, on April 11, the agency announced it was rescinding a rule from the prior administration that required nonbank financial service providers to register certain enforcement actions and court orders in a new federal database — a regulation widely criticized by the mortgage industry.

Michael Metz, VIP Mortgage’s operations manager, said the lack of clarification is one roadblock lenders are dealing with. “Our biggest thing is asking questions and trying to get clarification, because even some of their comments that I’m reading seem to be almost contradictory. They mentioned that they’re shifting away from non-depository institutions, but they’ve also mentioned that they’re still going to focus on tangible consumer complaints and with the focus on mortgages,” he shared. “But non-depository institutions are the majority of the mortgages.”

“Cautious record-keeping”

Metz said that he’s prioritizing “cautious record keeping” since it’s unclear whether the CFPB will shift responsibility to the states. 

“I don’t think the states are quite geared up yet for this,” Metz said. “There are a lot of states where they have been more minimally staffed for quite some time, and they’ve been hustling just to try to keep up. Now, if this is happening…I think that’s going to be difficult, because if now they are in charge of supervisory and regulatory affairs, and they’re also training new people to try to keep up with that demand.”

Metz also imagines that the CFPB’s dissolution would actually bring cost increases for lenders rather than decreases. 

“You’re going to have a lot more in-state regulatory action and audit costs and making sure you comply with all the various state-level requirements, versus one centralized federal agency telling you what to do,” he said. 

James Kleimann contributed to this article.