REFinBlog

Editor: David Reiss
Brooklyn Law School

October 6, 2017

Friday’s Government Reports Roundup

By Jamila Moore

  • 2018 fiscal year budget is forging forward. Recently the House of Representatives passed the 2018 fiscal year budget. Their budget is designed not to increase the national deficit; however, the Senate’s competing fiscal year 2018 budget will increase the national deficit by $1.5 trillion over the course of the next ten years. The Senate’s budget causes such a deficit because it promotes the proposed tax reform efforts as well as reduces the corporate tax rate. While the House beat the Senate to moving forward with 2018 budget plans, the Senate will introduce the bill the week of October 16.
  • Today Americans are better suited to lead financially sound lives; however, there are roughly 26 million Americans that are “credit invisible.” The Consumer Financial Protection Bureau (CFPB), recently released a report that studied the effects of this fact. Through the study they found that many minorities are likely not to have a credit score or fail to have a sufficient credit history, thereby making them “credit invisible.” This may seem like a small issue to mitigate, but without such credit scores, their lives as consumers are limited.

October 6, 2017 | Permalink | No Comments

October 5, 2017

Evolution of the CFPB?

By David Reiss

image by Vector Open Stock

The Mortgage Bankers Association has issued a white paper, CFPB 2.0: Advancing Consumer Protection. The Executive Summary reads, in part,

In its first years, the Bureau’s regulatory expertise was largely consumed by the need to meet deadlines on specific rules required under the Dodd-Frank Act, and its supervision program took time to stand up. In its first years, the Bureau spent relatively little time providing guidance to industry on its expectations.

The combination of aggressive enforcement and the absence of regulatory guidance evolved into a regime of “regulation by enforcement.” Director Richard Cordray has argued that the Bureau’s enforcement regime provides “detailed guidance for compliance officers” and that it “would be ‘compliance malpractice’ for the industry not to take careful bearings from [consent] orders about how to comply with the law.” Unfortunately, the reality is that the Bureau’s enforcement program offers only fragmentary glimpses of how the Bureau interprets the laws and regulations it enforces.

This paper explains why authoritative guidance is still needed. Rather than seeking to provide the equivalent of “detailed guidance” through enforcement, the Bureau should simply provide detailed guidance. Such guidance can be provided in a host of forms, including advisory opinions, bulletins, no-action letters, statements of policy, and answers to frequently asked questions. In contrast to enforcement orders, such guidance can be proactive, efficient, clear and comprehensive, and can allow for stakeholder input and revision when facts and circumstances warrant. (v)

It is hard to argue with the MBA that it is better to regulate by supervision than by enforcement as that allows regulated companies to design policies that meet with their regulatory requirements. As the CFPB matures, I would expect that this would happen naturally. Indeed, the white paper acknowledges the challenges of standing up the CFPB in its first few years of existence that led to the early emphasis on enforcement.

I wonder a bit about the timing of this report. The MBA describes the CFPB as being at a “crossroads.” (19) That crossroads may refer to the Republican control of Congress and the Executive Branch, it may refer to the soon-to-be ending term of Director Cordray, or it may refer to both of those developments. So I wonder if this report is meant to provide some intellectual cover to bigger changes that would reduce the CFPB’s role as America’s consumer protection sheriff. Let’s see where the MBA comes down on those bigger changes once their floated in the coming months. Are they advocating tweaks to the way the CFPB does business or are they looking for some kind of revolution in the regulation of consumer protection?

 

October 5, 2017 | Permalink | No Comments

Thursday’s Advocacy & Think Tank Roundup

By Jamila Moore

  • The federal government wants to lower the number of sexual harassment occurrences in the nation’s housing sector. As a result, the United States Department of Justice (DOJ), recently launched an initiative to decrease the amount of sexual harassment in housing practices. The DOJ’s initiative seeks to protect women from unruly landlords, property managers, security guards, and other housing employees. The Department of Justice, Civil Rights division will lead the initiative through the enforcement of the Fair Housing Act.
  • In 2012, 44% of middle class families could afford the inventory of homes being sold. Four short years later, the percentage of middle class families able to afford the inventory of homes decreased by 12% in 2016. In order to aid in the decline, Trump’s Administration must support middle class mortgages. In doing so, the administration will encourage economic growth because middle class families will have the mobility to move to areas that offer better jobs and housing options. Further, many of the nation’s largest metropolitans will become more diverse.

October 5, 2017 | Permalink | No Comments

October 4, 2017

FHFA’s Strategic Plan for Fannie and Freddie

By David Reiss

The Federal Housing Finance Agency released its Strategic Plan for fiscal years 2018-2022 for public input. As discussed in yesterday’s post, Director Watt is very focused on maintaining the health of Fannie Mae and Freddie Mac. The Strategic Plan reiterates that focus:

As conservator of the Enterprises, FHFA will also promote stability by working to preserve and conserve the Enterprises’ assets and business operations. Additionally, FHFA will encourage the Enterprises and the housing industry to adopt standards and practices that promote market and stakeholder confidence. (8)

The Plan goes into depth to describe the FHFA’s role as conservator:

The Enterprises were placed into conservatorships in September 2008 in the midst of a severe financial crisis. Their ongoing participation in the housing finance market has been an important factor in maintaining market liquidity and stability. Conservatorship permitted the U.S. Government to take greater control over management of the Enterprises and gave investors in the Enterprises’ debt and MBS confidence that the Enterprises would have the capacity to honor their financial obligations. As conservator, FHFA establishes restrictions and expectations for the Enterprises’ boards and for their managements while authorizing them to conduct the Enterprises’ day-to-day operations.

As detailed earlier, FHFA’s authority as both regulator and conservator of the Enterprises is based upon statutory mandates. FHFA, acting as regulator and conservator, must follow the mandates assigned to it by statute and the missions assigned to the Enterprises by their charters. Congress may choose to revise the statutory mandates governing the Enterprises at any time.

*      *     *

The Enterprises are also parties to PSPAs with the Treasury Department. Under the PSPAs, the Enterprises are provided U.S. taxpayer backing with explicit dollar limits. The PSPA commitment still available to Fannie Mae is $117.6 billion and the commitment still available to Freddie Mac is $140.5 billion. Additional draws would reduce these commitments, and dividend payments do not replenish or increase the commitments under the terms of the PSPAs. Starting in 2013, the PSPAs provided each Enterprise with a capital buffer of $3 billion to protect each Enterprise against making additional draws of taxpayer support in the event of an operating loss in any quarter, and the PSPAs provide mandated declines of $600 million each year to these capital buffers. On January 1, 2017, each Enterprise’s capital buffer declined to $600 million and the capital buffer is scheduled to decline to zero on January 1, 2018.

FHFA continues to encourage Congress to complete the important work of housing finance reform. FHFA has reiterated the urgency of reform and that it is up to Congress to determine what future, if any, the Enterprises will have in the future housing finance system. (16-17)

Reading between the lines, I see the FHFA under Watt doing whatever it has to in order to maintain stability and liquidity in the mortgage markets. If Congress does not act, if the Treasury does not act, I think that Director Watt will go it alone and do what it takes to maintain Fannie and Freddie’s reputation with mortgage lenders and MBS investors.

October 4, 2017 | Permalink | No Comments

October 3, 2017

Watt’s Happening with Fannie and Freddie?

By David Reiss

FHFA Director Watt

Federal Housing Finance Agency Director Watt testified before the House Committee on Financial Services today and gave a good overview of the decade-long conservatorship of Fannie and Freddie.  He also gave some sense of the urgency of coming up with at least a stopgap measure before the two companies’ capital buffer drops to zero at the end of the year pursuant to the terms of the Senior Preferred Stock Purchase Agreements (PSPAs) that govern the two companies’ relationship with the Treasury. He stated that it would

be a serious misconception for members of this Committee, or for anyone else, to consider any actions FHFA may take as conservator to avoid additional draws of taxpayer support either as interference with the prerogatives of Congress, as an effort to influence the outcome of housing finance reform, or as a step toward recap and release. FHFA’s actions would be taken solely to avoid a draw during conservatorship.

This signifies to me that he is planning on doing something other than reducing the capital buffer to $0.  As far as I can tell, Watt is playing a game of chicken with Congress — if you do not act, I will.

It is not clear to me clear how much authority Watt has or thinks he has to change the rules relating to the capital buffer. Does he think that he could act inconsistent with the PSPAa and withhold capital?  I have not seen a legal argument that says he could.  Is he willing to do it and be sued by Treasury?  These are speculative questions, but I do think that he has laid the groundwork for taking action if Congress and Treasury do not.

It does not seem to me that he was much wiggle room according to the terms of the PSPAs themselves, except perhaps to delay making the net worth sweep at the end of this year by converting it to an annual sweep or by some other mechanism.  That will be a short-term fix.

Given his strong language — “FHFA’s actions would be taken solely to avoid a draw during conservatorship” — I think he might be prepared to take an action that is inconsistent with the plain language of the PSPAs in order to act in a way that he thinks is consistent with his duty as the conservator.  This is less risky than it sounds because the only party that would seem to have standing to sue would be the Treasury, the counter-party to the PSPAs.  One could imagine that the Treasury would prefer to negotiate a response with the FHFA or await Watt’s departure rather than to have a judge decide the issue.  One could also imagine that Treasury would go along with the FHFA without explicitly condoning its actions, particularly if its actions soothed a turbulent market for Fannie and Freddie mortgage-backed securities.

Watt has consistently signaled that he will act if no other responsible party does and he emphasized that again today.

October 3, 2017 | Permalink | No Comments

Tuesday’s Regulatory & Legislative Roundup

By Jamila Moore

  • Years after the nation’s last recession, lower socio-economic workers are now reaping the benefits of a stronger economy.Though this is great, wealthier Americans still are gaining the most benefits from an upward flowing economy. A study found in 2016, 38.6% of America’s total wealth was controlled by 1% of households. However, within three years, the net worth of the average American family increased 16% to, $97,300.
  • The Consumer Financial Protection Bureau is under judicial scrutiny again. A number of financial groups came together to file a lawsuit against the agency’s arbitration rule. Groups supporting the lawsuit include the U.S. Chamber of Commerce, American Bankers Association, Texas Association of Business, and nine chambers of commerce in Texas. Further, the group asserts the rule is invalid for four varying reasons.

October 3, 2017 | Permalink | No Comments