Tag Archives: Trump Administration

The Budgetary Impact on Housing Finance

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slide by MIT Golub

The MIT Golub Center for Finance and Policy has posted some interesting infographics on The President’s 2019 Budget: Proposals Affecting Credit, Insurance and Financial Regulators:

The White House released the President’s budget proposal for fiscal year 2019 on February 12, just days after President Trump signed a bill extending spending caps for military and domestic spending and suspending the debt ceiling. While the new law has already established government-wide tax and spending levels for the coming fiscal year, the specific proposals contained in the budget request reflect Administration priorities and may still be considered by the Congress. Here, we consider how such proposals may affect the Federal Government in its role as a lender, insurer, and financial regulator.

Between its lending and insurance balances, it is apparent that the U.S. Government has more assets and insured obligations than the five largest bank holding companies combined.

Through various agencies, the US government is deeply involved in the extension of credit and the provision of insurance. It also plays an active regulatory and oversight role in the financial marketplace. While individual credit and insurance programs serve different target populations, they collectively reach into the lives of most Americans, from homeowners to small business owners to bank account holders and students. Note that this graphic does not reflect social insurance, such as Social Security and Medicare/Medicaid.

I was particularly interested, of course, in the slides that focused on housing finance, but I found this one slide about all federal loans outstanding to be eye-opening:

The overall amount is huge, $4.34 trillion, and housing finance’s share is also huge, well over half of that amount.

As we slowly proceed down the path to housing finance reform, we should try to determine a principled way to evaluate just how big of a role the federal government needs to have in the housing finance market in order to serve the broad swath of American households. Personally, I think there is a lot of room for private investors to take on more credit risk so long as underserved markets are addressed and consumers are protected.

The “Humbled” Consumer Financial Protection Bureau

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photo by Lilla Frerichs

The Consumer Financial Protection Bureau is changing directions in a big way under the leadership of Mick Mulvaney as seen in its Strategic Plan for FY 2018-2022. In his opening message to the Plan, Mulvaney writes that the Plan

presents an opportunity to explain to the public how the Bureau intends to fulfill its statutory duties consistent with the strategic vision of its new leadership. In reviewing the draft Strategic Plan released by the Bureau in October 2017, it became clear to me that the Bureau needed a more coherent strategic direction. If there is one way to summarize the strategic changes occurring at the Bureau, it is this: we have committed to fulfill the Bureau’s statutory responsibilities, but go no further. Indeed, this should be an ironclad promise for any federal agency; pushing the envelope in pursuit of other objectives ignores the will of the American people, as established in law by their representatives in Congress and the White House. Pushing the envelope also risks trampling upon the liberties of our citizens, or interfering with the sovereignty or autonomy of the states or Indian tribes. I have resolved that this will not happen at the Bureau.

So how do we refocus the Bureau’s efforts to better protect consumers? How do we succinctly define the Bureau’s unique mission, goals, and objectives? Fortunately, the necessary tools are already set forth in statute. We have drawn the strategic plan’s mission statement directly from Sections 1011 and 1013 of the Dodd-Frank Act: “to regulate the offering and provision of consumer financial products or services under the Federal consumer financial laws” and “to educate and empower consumers to make better informed financial decisions.” We have similarly drawn the strategic plan’s first two strategic goals and its five strategic objectives from Section 1021 of the Dodd-Frank Act. By hewing to the statute, this Strategic Plan provides the Bureau a ready roadmap, a touchstone with a fixed meaning that should serve as a bulwark against the misuse of our unparalleled powers. Just as important, it provides clarity and certainty to market participants. (2)

The subtext of this change in direction is not that “sub” at all. The Trump Administration wants to rein in the Bureau after it aggressively pursued financial services companies for violating a broad range of consumer protection statutes.

The Plan says that the Bureau will now act “with humility and moderation.” What that means is that the it will now be cutting financial services firms a lot of slack. Let’s see how a humbled Bureau works out for consumers.

The Fate of CFPB’s Civil Investigative Demands

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Mick Mulvaney’s Consumer Financial Protection Bureau issued a Request for Information Regarding Bureau Civil Investigative Demands and Associated Processes:

The Bureau is using this request for information to seek public input regarding the exercise of its authority to issue CIDs, including from entities who have received one or more CIDs from the Bureau, or members of the bar who represent these entities.

The issuance of CIDs is an essential tool for fulfilling the Bureau’s statutory mission of enforcing Federal consumer financial law. The Bureau issues CIDs in accordance with the law and in furtherance of its investigatory objectives. The Bureau understands, however, that responding to a CID can impose burdens on the recipients. Entities who have received one or more CIDs, members of the bar who represent these entities, and members of the public are likely to have useful information and perspectives on the benefits and burdens of the Bureau’s existing processes related to CIDs. The Bureau is especially interested in better understanding how its processes related to CIDs may be updated, streamlined, or revised to better achieve the Bureau’s statutory and regulatory objectives, while minimizing burdens, consistent with applicable law, and how to align the Bureau’s CID processes with those of other agencies with similar authorities. Interested parties may also be well-positioned to identify those parts of the Bureau’s processes related to CIDs that are most in need of improvement, and, thus, assist the Bureau in prioritizing and properly tailoring its review process. In short, engaging CID recipients, potential CID recipients, and the public in an open, transparent process will help inform the Bureau’s review of its processes related to CIDs. (83 F.R. 3686 (Jan. 26, 2018))

There is a lot of subtext in this request, of course, because Mulvaney is set on hamstringing the Bureau which he has described as a “sick, sad” joke. A review of CIDs is likely to lead to a decrease in enforcement activity for the financial services companies regulated by the CFPB.

Be that as it may, the Bureau is seeking comments on “Specific suggestions regarding any potential updates or modifications to the Bureau’s practices regarding the formulation, issuance, or modification of CIDs consistent with the Bureau’s regulatory and statutory objectives, including, in as much detail as possible, the potential update or modification, supporting data or other information such as cost information or information concerning alignment with the processes of other agencies with similar authorities . . .” (Id.)

Comments are due by March 27, 2018.

Trump and the Regulation of Real Estate

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I have posted my article, The Trump Administration and Residential Real Estate Finance, which just came out in Westlaw Journal Derivatives to SSRN (and also to BePress). The abstract reads,

An executive order titled “Reducing Regulation and Controlling Regulatory Costs” was one of President Donald Trump’s first executive orders. He signed it Jan. 30, 2017, just days after his inauguration. It states: “It is the policy of the executive branch to be prudent and financially responsible in the expenditure of funds, from both public and private sources. … It is essential to manage the costs associated with the governmental imposition of private expenditures required to comply with federal regulations.” This executive order outlined a broad deregulatory agenda, but it was short on details other than setting a requirement that every new regulation be accompanied by the elimination of two existing ones. A few days later, Trump issued another executive order that was focused on financial services regulation in particular. That order is titled “Core Principles for Regulating the United States Financial System.” It says the Trump administration’s first core principle for financial services regulation is to “empower Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth.” However, it is also short on details.

Since Trump signed these two broad executive orders, his administration issued two sets of documents that fill in applicable details for financial institutions. The first is a slew of documents that were released as part of the Office of Information and Regulatory Affairs’ Current Regulatory Plan and the Unified Agenda of Regulatory and Deregulatory Actions. The second is a series of Treasury reports — titled “A Financial System That Creates Economic Opportunities” — that are directly responsive to the core principles executive order. While these documents cover a broad range of topics, they offer a glimpse into how this administration intends to regulate — or more properly, deregulate — residential real estate finance in particular. What is clear from these documents is that the Trump administration intends to roll back consumer protection regulation so that the mortgage market can operate with far less government oversight.

The FHFA’s Take on Housing Finance Reform

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FHFA Director Watt

Federal Housing Finance Agency Director Watt sent Federal Housing Finance Agency Perspectives on Housing Finance Reform to Senate Banking Chair Michael Crapo (R-ID) and Senator Sherrod Brown of Ohio, the top Democrat on that committee. There are no real surprises in it, but it does set forth a series of housing finance objectives that the FHFA supports:

• Preserve the 30-year fixed-rate, prepayable mortgage;

• End taxpayer bailouts for failing firms;

• Maintain liquidity in the housing finance market;

• Attract significant amounts of private capital to the center of the housing finance system through both robust equity capital requirements and credit risk transfer (CRT) participation;

• Provide for a single government-guaranteed mortgage-backed security that will improve the liquidity of the to-be-announced (TBA) market and promote a fair and competitive funding market for Secondary Market Entities (SMEs);

• Ensure access to affordable mortgages for creditworthy borrowers, sustainable rental options for families across income levels, and a focus on serving rural and other underserved markets;

• Provide a level playing field for institutions of all sizes to access the secondary market;

• Include tools for the regulator to anticipate and mitigate downturns in the housing market, including setting appropriate capital and liquidity requirements for SMEs, having prompt, corrective action authority for SMEs that are weak or troubled, and having authority to adjust CRT requirements as needed; and

• Provide a stable transition path that protects the housing finance market and the broader economy from potential disruptions and ensures that the new housing finance system operates as intended. (1)

The FHFA’s take on housing finance reform seems to be somewhat different from what various members of Congress are reportedly promoting. It is not clear though that the views of the FHFA are all that relevant to the Congressional leaders who are shaping the next housing finance reform bill. Nor do I expect that Director Watt’s views are particularly valued by the Trump Administration, given that he is a former Democratic member of Congress. That being said, Director Watt has always made it clear that it is Congress and not the FHFA that should be charting the path forward for housing finance reform.

While his views on the matter differ from those of some members of Congress, all of the relevant stakeholders seem to agree on the broad contours of what the 21st century’s housing finance infrastructure should look like. There should be an explicit guarantee to support the housing market during liquidity crises.  And the main elements of the current market, such as the thirty year fixed-rate mortgage, should be maintained. Here’s hoping that a bipartisan push can get this done this year.

Trump Wins Round Two At CFPB

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image by Slr722x

Bloomberg Law quoted me in Court Says Mulvaney Can Lead CFPB, but Legal Fight Continues. It opens,

The court battle over the Consumer Financial Protection Bureau’s top leadership has shifted in the Trump administration’s favor, but continued litigation could test its ability to revamp the agency.

Judge Timothy J. Kelly yesterday denied deputy director Laura English’s bid for an order that would have barred Office of Management and Budget Director Mick Mulvaney from serving as acting CFPB director, setting up what many expect to be an appeal to the U.S. Court of Appeals for the District of Columbia Circuit.

Although plenty of questions lie ahead, perhaps the biggest is whether and to what extent ongoing uncertainty raised by the case impacts the administration’s effort to revamp consumer protection regulation at the CFPB.

“This is clearly a win for the administration, but there’s still so much uncertainty,” David Reiss, professor of law at Brooklyn Law School in Brooklyn, N.Y, told Bloomberg Law in a phone interview. “What we’ll see for the next few months is whether that uncertainty makes it harder for Mulvaney to turn the ship.”

Kelly’s 46-page decision, which several attorneys privately described as careful and thorough, is the second such setback for English, who previously lost a bid for a temporary restraining order. Even so, hazards lie ahead for the administration.

University of Michigan Law School Professor Nina Mendelson said an eventual ruling on the merits against Mulvaney could call into question any actions based on authority he now claims, such as final regulations, settlements, or other matters.

“A court could invalidate all of those actions,” Mendelson said on a call hosted by consumer advocates. Mendelson, an expert on administrative law, said she’s taken an independent stance on the case.

New York Challenge

Kelly’s Jan. 10 ruling isn’t the last word, according to Brianne Gorod, an attorney with the Constitutional Accountability Center who also joined the call. “The legal fight here is far from over,” she said.

The decision also may boost the stakes for a separate challenge to Mulvaney in federal court in New York. There, the Lower East Side People’s Federal Credit Union also seeks a court order declaring that English, not Mulvaney, is the CFPB’s rightful acting director. The credit union says the appointment of Mulvaney has thrown the credit union into “regulatory chaos,” because it can’t identify the lawful director of the CFPB.

BTW, I am a signatory on an amicus brief filed in the Lower East Side People’s Federal Credit Union case.