Hello Director Chopra, Goodbye LIBOR
We do this more in business planning and less in compliance overviews, but I always really enjoy a look back on what happened in the last year in the mortgage industry, and also a look ahead to what we may be encountering from a compliance perspective in 2022.
Let’s start with the past year. Namely, we started 2021 off with the inauguration of the 46th President of the United States of America, Joe Biden. Before his inauguration date, President-elect Biden nominated Rohit Chopra, one of two Democratic commissioners at the Federal Trade Commission (FTC), as an ally of Senator Elizabeth Warren, to serve as CFPB Director. Mr. Chopra was one of Senator Warren’s first hires as she constructed the CFPB, and was an aggressive fair lending advocate in the student loan arena, as the bureau’s first student loan ombudsman under former Director Cordray.
Chopra was one in a series of federal agency and department nominees, which included former Federal Reserve Chair, Janet Yellen, as Treasury Secretary, Congresswoman Marcia Fudge, as HUD Secretary, and Connecticut Education Commissioner Cardona, as Secretary of Education.
Under Director Chopra, the CFPB’s Spring 2021 rulemaking agenda included Property Assessed Clean Energy (PACE) Financing, proposed amendments to FIRREA concerning automated valuation models, mortgage servicing COVID-19 relief, and final rules to facilitate the transition from LIBOR.
Completed items by the CFPB in Spring 2021 included the HPML escrow exemption and extending the mandatory compliance date for some QM revisions to October 2022. The CFPB expects to issue a final rule to facilitate the transition from LIBOR in early 2022.
Despite the CFPB extending the mandatory compliance date for revised QM rules, this year lenders found themselves in a Catch-22. The amended Preferred Stock Purchase Agreements (“PSPA”) required that each loan acquired by the GSEs on or after July 1, 2021, be a qualified mortgage under the Revised General QM rule.
The amended PSPA, completed during the final days of the Trump administration by agreement of Treasury Secretary Mnuchin and FHFA director Calabria, dealt the industry another setback when it instituted a limit on the number of mortgages the GSEs can purchase that are “high risk” or that support second homes or investor properties, as well as caps on the use of the cash window. In September of this year, the FHFA suspended these controversial PSPA amendments in regards to these “high risk” mortgages. “This suspension will provide FHFA time to review the extent to which these requirements are redundant or inconsistent with existing FHFA standards, policies, and directives that mandate sustainable lending standards," said FHFA Acting Director Sandra L. Thompson.
Looking ahead to 2022, anyone who has been to the grocery store recently has noticed the price creep happening — inflation. The annual rate of inflation in the United States hit 6.2% in October 2021, the highest in more than three decades, as measured by the Consumer Price Index (CPI). It is very likely to continue well in 2022, and probably will not be the ‘transitory’ event that some were hoping it would be earlier this year.
Federal Reserve changed positions at the end of 2021. As recently as November, the Federal Reserve was intent on keeping its key interest rate near zero. Mid-December brought the news from the Federal Reserve that they project three rate hikes for 2022 and the Fed dropped the word "transitory" to describe inflation, in its policy statement.
Since 2017, the United Kingdom-based regulator of LIBOR, the Financial Conduct Authority (FCA), has been warning market participants that it will stop compelling panel banks to submit LIBOR quotes beginning in 2022. On March 5, 2021, the FCA announced that the publication of 1-week and 2-month US dollar LIBOR will cease after December 31, 2021 and that the publication of all other US dollar LIBOR settings will cease or be deemed unrepresentative after June 30, 2023. FHFA and the GSEs have been phasing out LIBOR and, on December 31, 2020, Fannie Mae and Freddie Mac ceased purchasing LIBOR-based ARMS.
The year 2022 brings inflation, mid-term elections, and rising interest rates. Continuing the COVID-19 recovery and a strong labor market are positive forces going into the next year. In his prepared remarks for his October 27, 2021 testimony before the House Financial Services Committee, CFPB Director Chopra mentioned several key focuses for him and the CFPB going forward: “First, I hope to focus attention on ways to stimulate greater competitive intensity in consumer financial markets.” “Second, I anticipate that the CFPB will sharpen its focus on repeat offenders, particularly those that violate agency or federal court orders.”
As we all plan for 2022 and the years ahead, we should be mindful of Mr. Chopra’s comments. Lastly, Mr. Chopra mentioned his concern about how big data with its automation and algorithms are defining the consumer financial services market. “In some cases, these practices can unwittingly reinforce biases and discrimination, undermining racial equity.” Fair lending and fair servicing will continue to be key topics for the industry going into 2022.