The Major Conflict Of Interest Behind The CFPB’s Seasoned QM Rule Announcement

COMMENTARY Markets and Finance

The Major Conflict Of Interest Behind The CFPB’s Seasoned QM Rule Announcement

Mar 3rd, 2021 9 min read
COMMENTARY BY

Former Director, Center for Data Analysis

Norbert Michel studied and wrote about financial markets and monetary policy, including the reform of Fannie Mae and Freddie Mac.
In November, the Washington Post reported that President Biden’s transition team included “a number of fierce advocates for Wall Street regulation.” ANGELA WEISS / Contributor / Getty Images

Key Takeaways

The group’s website makes it very clear that Thompson was opposed to pretty much everything that the Bureau did during the Trump administration.

Diane Thompson, prior to rejoining the CFPB, was publicly advocating against the seasoned QM rule!

Ms. Thompson's writings and actions clearly indicate that her mind is unalterably closed on the subject of the seasoning QM rule.

In November, the Washington Post reported that President Biden’s transition team included “a number of fierce advocates for Wall Street regulation.” The group included MIT professor Simon Johnson, a long-time advocate of breaking up large banks, as well as Leandra English, the former Consumer Financial Protection Bureau (CFPB) deputy director.

English, of course, is famous for suing the Trump administration, claiming that she was the Bureau’s “rightful acting directorafter Trump appointed Mick Mulvaney. The Biden team put English in charge of reviewing the CFPB’s operations, and her group included a former acting assistant CFPB director named Diane E. Thompson.

After leaving the Bureau in 2019, Thompson founded the Consumer Rights Regulatory Engagement and Advocacy Project, a group whose goal is “economic advancement by strengthening” the CFPB. The group’s website—along with Thompson’s Twitter feed—makes it very clear that she was opposed to pretty much everything that the Bureau did during the Trump administration.

She was upset with changes to the Bureau’s organizational structure and mortgage disclosure rules, she opposed regulatory cost-benefit analysis, advocated for harsher CFPB overdraft regulations, and called for more consumer protections during COVID. She also wants the Bureau to “explicitly re-center its antidiscrimination mandate and address itself squarely to fostering racial and economic equity.”

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Thompson will now have the chance to do much more than advocate, because she is back at the Bureau and (apparently) in charge of the Research Markets and Regulation division as a Schedule C employee. Essentially, that means the Bureau will now have an outspoken political advocate in charge of overseeing their rule-making process.

Ironically, Thompson herself once warned about “the damage that political interference with the norms of evidence-based rulemaking does to our democracy.”

In a perfect world, the Washington Post (and other news outlets) will take as much interest in Thompson’s reappointment to the Bureau as it did in the Trump administration’s early efforts to staff the Bureau. Some good old-fashioned investigative journalism is in order here, especially since the Bureau just announced that it “is considering whether to initiate a rulemaking to revisit the Seasoned QM Final Rule.”

The seasoned QM rule, of course, is a new category of the (Dodd-Frank created) qualified mortgage. Under this new category, lenders can use a borrower’s actual payment experience, over the course of three years, to obtain the qualified mortgage status for a loan. In other words, after a borrower demonstrates the ability to repay their loan, the lender can be officially relieved of any mistakes in gauging the borrower’s ability to repay.

As one of my previous columns argued, this concept makes perfect sense. At some point during the term of a loan, any borrower default would be the result of an unforeseeable change in the borrower’s circumstances, so it makes little sense to threaten the lender with penalties (for a faulty initial assessment) for the duration of the loan.

Many consumer advocacy groups disagree with this principle, but that’s probably not a story that would get most investigative journalists’ juices flowing. What should pique their interest, though, is the fact that Diane Thompson, prior to rejoining the CFPB, was publicly advocating against the seasoned QM rule!

Here she is on September 30 (with a helpful video): “How do we stop the CFPB's seasoned QM proposal that would allow lenders to make high-priced loans to people without checking to see if they have ability to repay?”

Here she is again, this time comparing the seasoned QM to subprime lending: “Remember when subprime lending sparked foreclosure crisis & global recession? CFPB's seasoned QM proposal meant to encourage subprime lending. Only fixed rate loans that perform for 3 years, but still subprime.”

Separately, she released a call to action for people to submit public comments opposing the seasoned QM. As far back as August, Thompson panned the seasoned QM, arguing that it is bad for consumers because “if someone manages to scrape together the money to pay it for 3 years, the homeowner can't challenge the loan.”

She also referred to the seasoned QM as “dumb” and “illegal,” and intimated that “Black and Brown communities” stand the most to lose under the new rule.

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At the very least, the public record dictates that Thompson recuse herself from any new rulemaking involving the seasoned QM. Still, given the timing of her rehiring and the Bureau’s announcement, her involvement in the rulemaking process represents a clear prejudgment risk to the agency.

Under the Administrative Procedure Act, reviewing courts can set aside any agency action that is "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with the law." (See 5 U.S. Code 706(2)(A).)

Separately, the D.C. Circuit has found that in the rulemaking context, "[d]ecisionmakers violate the Due Process Clause and must be disqualified when they act with an 'unalterably closed mind' and are unable to rationally consider arguments." (See 663 F.3d 476, 487–88 (D.C. Cir. 2011).) Moreover, they found that administrators should be disqualified from a rulemaking "when there has been a clear and convincing showing that the ...member has an unalterably closed mind on matters critical to the disposition of the proceeding" (same case citation).

The U.S. Supreme Court also found a similar pretext argument persuasive in its recent decision in the U.S. census citizenship question case, Department of Commerce v. New York.

Ms. Thompson's writings and actions clearly indicate that her mind is unalterably closed on the subject of the seasoning QM rule. Who can possibly believe that she will carefully weigh public comments submitted in connection with a new rule proposal, or that she will meaningfully weigh alternatives to the proposal or conduct a true 1022 cost-benefit analysis?

The Bureau's General Counsel thus faces an unenviable choice: force one of President Biden's political appointees to be recused from the QM rulemakings, or defend a process that is already compromised by her participation.

It would be nice to believe that this episode is not a sign of things to come at the Bureau, but that’s probably wishful thinking.

This piece originally appeared in Forbes https://www.forbes.com/sites/norbertmichel/2021/03/01/the-major-conflict-of-interest-behind-the-cfpbs-seasoned-qm-rule-announcement/?sh=360c3e944be2

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