CFPB Terminations Raise Speculation Of Mortgage Industry ‘Wild West’

A federal appeals judge temporarily halted the termination of nearly 1,500 employees from the Consumer Financial Protection Agency last week – but if those employees are terminated, it could severely hamper mortgage regulation enforcement.

If the terminations occur, the agency’s staffing would be reduced by nearly 90%. The Trump administration announced the cutbacks on April 17, although a federal judge put those terminations on hold the following day pending an April 28 hearing.

A federal appeals court ruled on April 11 that the Trump administration could shrink the CFPB but not dismantle it. The agency was created in the aftermath of the 2008 financial crisis.

For mortgage brokers, the question of what would happen if the CFPB loses a huge majority of its workforce is a difficult one to answer. Yury Shraybman (pictured top), mortgage broker and team lead with Innovative Mortgage Brokers, believes it could cause chaos in the enforcement of mortgage regulations.

“If the CFPB lost about 90% of its workforce, there’s definitely a risk that mortgage regulation could temporarily become less organized and potentially create a ‘Wild West’ scenario,” Shraybman told Mortgage Professional America. “While it may not revert fully to the pre-2008 levels of chaos, we’d likely still see more regulatory gaps than we’ve become accustomed to under CFPB oversight.”

Significant changes have already occurred in the agency since the Trump administration took office. On February 1, Trump fired the CFPB director, Rohit Chopra. The president chose Jonathan McKernan as his replacement, pending Senate approval.

The organization has already backed off on some enforcement, as previously conducted brokerage audits have been halted and look unlikely to resume in the near future.

States not equipped to handle oversight

Shraybman believes that if the CFPB’s workforce is reduced, it would be difficult for other federal agencies to fill the void. This may cause oversight to return to the state level, which creates other problems.

“I’m not certain another federal agency has the immediate capacity or expertise to step into the CFPB’s role,” Shraybman said. “In this scenario, regulatory oversight might shift back to the states. However, state-level implementation would inevitably take time and additional resources, which could be challenging given current budgetary constraints and recent cuts to state programs.”

In addition to the financial challenges of moving oversight to the state level, it could cause major problems if regulations are interpreted differently from one state to another.

“Shifting responsibility to the states could create significant complexity for national mortgage companies,” Shraybman said. “Although products like FHA, conventional, and non-QM loans are standardized nationwide, each state enforcing its own interpretation of regulations might complicate compliance significantly.”

Shraybman doesn’t want to see oversight return to the pre-CFPB days, when questionable lending practices contributed to the 2008 housing crisis.

“Effective federal oversight is critical, especially for large national companies that span multiple states and might evade consistent state-level regulation,” Shraybman said. “The pre-2008 era, with its negative amortization and extremely high LTV products (up to 125%), is a clear reminder of what happens without strong oversight.”

Could be up to brokers to maintain high ethics

For brokers like Shraybman, who remember what mortgage lending was like before the housing crisis, federal oversight has kept many people in line. He worries that those who might take advantage of customers may reemerge without the CFPB.

“Having been in this industry for many years, I’ve seen firsthand how essential strong regulation is,” Shraybman said. “While there are many ethical lenders and brokers, unfortunately, there are also lots of those who engage in deceptive practices. Though the CFPB can’t eliminate every instance of fraud or deception, its presence does help hold originators and lenders accountable, making them think twice before acting inappropriately.

“In the end, maintaining robust consumer protection at the federal level benefits both the industry and consumers alike.”

He knows that many brokers and lenders will continue to operate ethically regardless of the level of federal regulations. However, he cautions that if some of the oversight is moved to the state level, brokers may see shifting guidelines they will need to monitor.

“Regardless of how the oversight landscape shifts, brokers and lenders shouldn’t change how they conduct business,” Shraybman said. “Ethical standards and consumer protection should remain the priority. However, loan originators should proactively stay informed, continually educate themselves, and adapt quickly to evolving state-specific requirements if states assume greater regulatory control. Being informed and proactive will ensure brokers navigate any regulatory changes effectively.”