Plenty of people expect the regulatory environment to change under the new Administration. Plenty of experienced lenders, however, know that a certain amount of regulation was, and is, called for - the trick is in creating make-sense rules and appropriately enforcing them. And at the center of this is the Consumer Finance Protection Bureau, having garnered plenty of legal attention with the recent PHH vs. CFPB case.
The D.C. Circuit has entered an order directing PHH Corporation to file a response to the CFPB's petition for rehearing en banc in CFPB v. PHH Corporation. The order, filed November 23, requires PHH to file its response within 15 days. It also invites the Solicitor General to file a response to the petition for rehearing en banc, expressing the views of the United States, but does not set a date by which the Solicitor General must file any response. One can expect the Solicitor General to support the CFPB's petition and given the impending change in Administrations, to file a response promptly. The order states that absent further order of the court, the court will not accept a reply to the responses.
Put another way, the full D.C. Circuit ordered PHH to respond to the CFPB's petition for en banc review of the October 2016 three-judge panel decision in PHH Corp. v. CFPB. The CFPB's November 18 petition challenged, among other things, the conclusion by the majority of the panel that the CFPB's structure was unconstitutional and that, to remedy this defect, the Director must be removable at will by the President. PHH's response, which is due by December 8, would not have been permitted without the court's order. Similarly, the CFPB is not permitted to file a reply unless ordered by the court. Importantly, the en banc court also "invited" the U.S. Solicitor General "to file a response to the petition" to "express the views of the United States." The Dodd-Frank Act does not allow the CFPB to petition the Supreme Court for review without the approval of the Attorney General (12 USC § 5564(e)).
Obviously the CFPB is not without its fans. Americans for Financial Reform (AFR), the Center for Responsible Lending (CRL), and other civil rights and consumer advocacy organizations, as well as 21 members of Congress submitted amicus briefs to the U.S. Court of Appeals for the District of Columbia Circuit in the case of PHH Corporation v. CFPB, in support of the CFPB. The groups and members of Congress urged the full court to grant the CFPB's petition for a rehearing of a 2-1 panel decision last month, which they believe incorrectly ruled that the President may remove the CFPB Director without cause. They also underscored the need to maintain a strong and independent CFPB, as Congress intended, free from political and outside industry influence. "By invalidating the CFPB director's for-cause removal protection, the panel decision topples Congress's design for this critical new agency and imperils its ability to function as intended. Worse still, the panel's one-hundred-page opinion reaches this result without even once addressing why Congress took such care to structure the CFPB as it did or how the CFPB's design is so critical to its proper functioning...This structure allows the Bureau to make decisions that protect consumers-even when those decisions are opposed by intense lobbying,' wrote AFR and CRL. 'Since the CFPB began operating in July 2011, it has proven to be highly effective in identifying violations of consumer protection law and remedying the problems with precision and agility. The CFPB's effectiveness, and its ability to respond to unlawful practices quickly, is attributable in part to its leadership by a single director and its insulation from political influence and industry capture.'"
The CFPB is not sitting on its hands by any stretch of the imagination, and is expected to speed up any changes ahead of the new Administration. It, the Federal Reserve Board, and the Office of the Comptroller of the Currency (OCC) have issued a final rule regarding future adjustments to the threshold for appraisal exceptions for higher-priced mortgage loans. Remember that Dodd-Frank amended the Truth in Lending Act, adding a requirement that lenders get a written appraisal based on an interior inspection of a home's interior. Loans for $25,000 or less were exempted from this requirement with a provision that the exemption level be revisited annually and revised on January 1 to reflect increases in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
Ballard Spahr's Barbara S. Mishkin wrote, "The CFPB has adopted changes to its Reg Z commentary to memorialize the calculation methods used each year to adjust the thresholds for exempt consumer credit transactions and for transactions exempt from the special appraisal requirements for higher-priced mortgage loans and to its Reg M commentary to memorialize the calculation method used each year to adjust the threshold for exempt consumer leases. The Fed and OCC have adopted corresponding changes to their commentaries. The changes are effective January 1, 2017.
Without miring you down in the technicalities of determining the process or index, lenders tuned in to the fact that using current calculation methods, the agencies have made no changes to the three exemption thresholds. Effective January 1, 2017 through December 31, 2017, these exemption thresholds remain: smaller loans exempt from the appraisal requirement for "higher priced mortgage loans," $25,500 consumer credit transactions exempt from Truth in Lending Act/Regulation Z, $54,600 (but loans secured by real property or personal property used or expected to be used as a consumer's principal dwelling and private education loans are covered regardless of amount).
Turning to the capital markets, many are thinking that with the run up in rates and less regulation non-QM loans will become fashionable, two non-agency MBS deals totaling $815 million and made up of seasoned nonprime mortgages are anticipated to be issued in the next few weeks. Cerberus Capital's FirstKey Mortgage is planning to issue the $551 million. "The loans have seasoned for an average of nearly 10 years and 71.0 percent of the collateral has a clean payment history for the past two years, per Fitch Ratings." And New Residential Investment is preparing the $264 million New Residential Mortgage Loan Trust 2016-4. Affiliates of the issuers plan to use vertical retention to meet risk-retention requirements for the MBS.
Will those bonds be less valuable with the increase in rates? Or more valuable given the solid payment history of the loans? Stay tuned. But rates dropped a little Tuesday despite a strong Q3 GDP number - the market is seeing the demand outpace supply, and lower volatility. And don't forget that the Conference Board's Consumer Confidence Index jumped to its best level since August 2007. The Case-Shiller 20-city index of U.S. home prices rose 5.1% year over year in September.
This morning we've already had a bevy of economic news. The MBA's Mortgage Index for last week quantified what lenders already knew. Apps fell over 9%, with refis taking it on the chin being down 16%. November ADP Employment Change was strong: +216k. October Personal Income and Spending was +.6% and +.3%. And October Core PCE Price Index was . Coming up are the November Chicago PMI, October Pending Home Sales, and November Fed's Beige Book (14:00 ET)
Yesterday the 10-year note improved .125 in price (2.30%) and the 5-year Treasury and current coupon agency MBS prices also rallied about .125. It's all been given back this morning: the 10-year is up to 2.36% and agency MBS prices are worse .250-.375 versus last night.