2014: The Year The CFPB Loses Power?

If I could make one bold prediction for the coming year, it would be that the Consumer Financial Protection Bureau (CFPB) will begin 2014 at the height of its powers and wind up 12 months later facing the end of its viability as a regulatory force.

Why would I say such a thing? Because market and political forces are not aligned in the agency’s favor. If these forces set off a specific socioeconomic chain reaction, they will result in the CFPB at the end of next year in a very different place.

For starters, next month will see the official launch of the CFPB’s new rules governing home loan origination, most notoriously the qualified mortgage (QM) aspect. Very few people believe that these rules will spur a new wave in originations. Indeed, the major lenders in this space spent a good chunk of this year cutting down on their origination operations – and no one is rushing in to fill the void they are leaving.

These rules will have one positive impact: it will spur many lenders to aggressively pursue the non-QM market. But this sector will be pursued by default rather than design, and there is only a finite number of deep-pocketed consumers eager to seek out jumbo mortgages.

Complicating matters will be the trends that promise (or threaten, depending on your outlook) to reshape the housing market: rising interest rates, the dramatic decline in affordable housing, a stagnant economy, an employment picture that favors low-wage/part-time job creation, and the financial disruptions being created in the Obamacare debacle. And I hate to imagine what will happen if the Fed tries to wean the economy off its QE-Forever policy.

Then, there is a real wild card: Mel Watt at the Federal Housing Finance Agency (FHFA). It is no secret that Watt – or, to be honest, the Obama White House that will tell Watt how to behave – wants to reverse the FHFA’s positions on principal reduction. Whatever flaws Edward DeMarco had as the FHFA leader, he was on target in ignoring the political pandering that fueled calls for aggressive principal reduction. If Watt changes course on this action, this could easily create new convulsions in a housing market that is attempting to stabilize.

Furthermore, there is the question of Richard Cordray, the CFPB’s director and a former attorney general in Ohio. There has been plenty of buzz in Ohio that Cordray is considering a run for the governorship. Although most people in Ohio seem comfortable with the Republican incumbent, Gov. John Kasich, Cordray is reckless enough to try for this job. (Lest we forget, Cordray shamelessly ran the CFPB after being shoehorned into the job via a presidential recess appointment process that federal courts declared to be unconstitutional – it is a bit odd for a former attorney general to happily break the law in order to get a job.)

If Cordray stayed on at the CFPB, he could plan to run in 2016 against Ohio’s Republican Sen. Rob Portman. However, he would also be stuck on what could be a political sinking ship. And being associated with the Obama administration for any extended period is hardly a sure-fire vote generator.

And, finally, there is the question of the state of the nation in 2014. If there is a continuation of our current situation – or, if things get worse – it would be a no-brainer to see the Republicans maintain control of the House of Representatives and win the Senate come Election Day. (People will forget the government shutdown idiocy earlier this year and blame the president and his apologists for an endlessly crummy economy.) This, of course, hinges on the GOP’s ability to field candidates that don’t make utter fools of themselves on the campaign trail via stupid talk on social issues – I suspect the party finally learned the lesson there.

If Republicans control both chambers of commerce by strong majorities, one can easily expect to see significant changes to the Dodd-Frank Act and the position of the CFPB in the federal system in the next Congress While a full repeal of Dodd-Frank is unlikely, major tinkering can be expected in 2015, including the ouster of the CFPB director in favor of a commission to govern the agency, more direct CFPB accountability to Congress, and changes in how the CFPB is funded. These changes will weaken the CFPB considerably, to the point that the agency will limp through 2015 as a shadow of its current state.

Of course, these are only my predictions. And I have been known, on occasion, to be a little off-base in predicting the near-future. But if anything, 2014 won’t be a boring year!

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