NLRB Ruling May Put Mortgage Markets at Risk

By Gretchen Wegrich

Mortgage professionals and lending institutions expected a clear set of rules earlier this month when regulators released the much-anticipated new mortgage standards. Now, a court ruling has placed these rules in jeopardy of being overturned.

The definition of a “qualified mortgage” was released several weeks ago by the Consumer Financial Protection Bureau (CFPB). The Qualified Mortgage rule dictated how banks could limit their legal liability under new regulations that require banks to ensure borrowers are able to repay a mortgage.

Now, the legal authority of the CFPB’s director, Richard Cordray, is called into question because Cordray was appointed by President Obama without confirmation of the Senate during a Senate recess early last year.

A federal court of appeals ruling passed on Friday declared that the president’s recess appointments of several new members to the National Labor Relations Board –made at the same time as Richard Cordray’s appointment –were unconstitutional. Although the ruling does not directly invalidate Cordray’s appointment, it sets a precedent that indicates the court will rule the same way if a similar suit is brought challenging Cordray’s authority.

What to Expect

How will this affect banks and mortgage lenders? As the recent court case involving the new members of the National Labor Relations Board decided, invalidating a recess appointment also removed the authority to conduct business from the agency.

The ruling is expected to follow a similar path if it is applied to Cordray and the CFPB; the Qualified Mortgage rule may not be enforceable if the rule –and Cordray’s appointment –is challenged in court.

The Dodd-Frank Act

However, banks may not be off the hook just yet. The Dodd-Frank Act, which initially gave Cordray the authority to create the new mortgage rulebook, also prepared an alternative set of rules to take effect Jan. 21 if the CFPB had not yet issued any rules.

Until Cordray’s appointment is defined in court –along with the CFPB mortgage rules –banks may need to comply with both sets of rules: the 804 page CFPB rulebook that take effect next year (which banks mostly favored), and the back-up definition established by the Dodd-Frank Act, which was to take effect beginning Jan. 21 of this year (and is generally much more strict for lenders).

Don’t expect any of this to be sorted out overnight. The decision regarding the National Labor Relations Board may be appealed to the Supreme Court, and the Treasury Department could potentially intervene and declare that it had the authority, in the absence of a legitimate CFPB, to finalize any ability-to-repay mortgage rules.

For lasting clarity, lenders are going to have to wait for the courts to decide.

Gretchen Wegrich

Gretchen Wegrich is an editor at Lender411. She specializes in mortgage basics, personal finance and green living. She graduated with a bachelor's degree in writing from University of California, San Diego and previously worked at the Santa Cruz Sentinel. Contact her at gretchen@lender411com.