Unintended Consequences of Standing Down the CFPB

The DOGE approach to "reforming" government agencies is a sledgehammer. That's because it doesn't have the knowledge or patience to use a scalpel. But there are real costs to using a sledgehammer in terms of unintended consequences that are going to blow up on all consumers, be they MAGA supporters, Democrats, or Whigs. Let me highlight just one.

The Dodd-Frank Act, enacted in response to the 2008 financial crisis, prohibits lenders from making mortgage loans without verifying the borrower's ability to repay. The CFPB has a regulatory safeharbor, however, known as the Qualified Mortgage Rule.  If a mortgage is a Qualified Mortgage, it is deemed to satisfy the ability-to-repay requirement. To be a Qualified Mortgage, a mortgage loan must have an interest rate that does not exceed the "Average Prime Offer Rate" by more than a specified level. Sounds go so far, right? Basically, if a mortgage isn't priced too much higher than the average mortgage rate, we're going to assume that it's not problematic.

But here's the catch:  the "Average Prime Offer Rate" is a number determined by the CFPB. It isn't self-executing. Instead, CFPB personnel need to collect and analyze data and then periodically publish the Average Prime Offer Rate. If CFPB personnel are not permitted to work, the Average Prime Offer Rate will not update. (You can thank the Trump 1.0 CFPB for adopting this methodology instead of a debt-to-income ratio...) In a falling interest rate environment, that won't matter much. But if rates rise, then the Average Prime Offer Rate will be stuck at too low of a level, so more mortgages will fall out of the Qualified Mortgage safe harbor, thereby exposing lenders to legal risk. What could cause rates to rise? Well, tariffs for one thing, particularly if the Fed is concerned about keeping inflation in check. Hmmmm.

So what are lenders likely to do with the APOR being stuck at its current level should rates rise? They can't raise the rates on the mortgage that are above the APOR much higher. So they can either just not make loans or raise the rates on loans that are below the APOR, meaning that all borrowers will bear the costs or they can eat the costs themselves. If they don't make the loans or raise the rates, that will push down home values for existing homeowners and cut off credit for marginal borrowers. In other words, shutting down the CFPB does not reduce regulation. It actually increases it because it results in the regulatory safe harbor being miscalibrated.

I've been blogging a lot these last few days from a position that is generally supportive of letting the CFPB continue its basic operations. But let me underscore that I haven't agreed with all of the CFPB's actions over the past few years. I've had my qualms about several recent rulemakings and have questioned certain legal interpretations, even when I agree with the underlying policy. (It has not always been easy to raise these concerns with folks who work in the progressive policy world.) Suffice it to say that I don't think the agency gets it right 100% of the time. But those are things one fixes in a targeted fashion. Sledgehammer reform just results in the baby getting thrown out with the bathwater. DOGE may not care, but I wonder if the mortgage industry does.