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CFPB tees up second funding battle with Supreme Court
Key Insight: Acting Consumer Financial Protection Bureau Director Russell Vought says he cannot request money for the bureau because the Federal Reserve System has not turned a profit since 2022.Supporting Data: While some think the issue could be taken up eventually by the Supreme Court, new data suggests the Federal Reserve may return to profitability in the first quarter.What's at Stake: The current legal battle is part of a larger war waged by the Trump administration to gut the CFPB and get federal employees to leave the agency. The Trump administration has shifted the focus of its legal battle over its ability to shut down the Consumer Financial Protection Bureau from a matter of executive power to a dispute over the CFPB's funding — one that may ultimately reach the Supreme Court. Acting CFPB Director Russell Vought alleged earlier this month that he cannot request funding from the Federal Reserve because the system is unprofitable. Vought anticipates the CFPB will run out of funding in early 2026.The new argument over the CFPB's funding marks another major skirmish in the legal battle over whether the president can effectively eliminate an agency by firing federal employees en masse. The CFPB's union sued Vought in February, and the litigation shows no signs of an easy end. A federal judge ordered Vought and the National Treasury Employees Union to submit arguments to U.S. District Court Judge Amy Berman Jackson on whether a preliminary injunction that she issued in March — which bars Vought from firing employees — remains in effect.The union asked the judge for clarification on the injunction, after Vought said the CFPB was running out of money and would knowingly be in violation of the preliminary injunction. Now both the CFPB and the union also must address the district court's authority to enforce the injunction given that the litigation is pending an appeal. In August, a panel of the U.S. Court of Appeals for the D.C. Circuit ruled in favor of the CFPB, finding that Vought could lawfully fire employees through a reduction-in-force. That opinion was appealed by the union, and the D.C. Circuit court is expected to rule any day now on whether they will rehear the case.Alan Kaplinsky, senior counsel at Ballard Spahr and its longtime consumer financial services practice chair, said that, whatever the legal question is, the case is headed to the Supreme Court. "That issue is now on track to eventually make it to the Supreme Court," Kaplinsky said. "And I would expect the Supreme Court to grant review, because it's such an important issue.Adam Levitin, the Carmack Waterhouse professor of law and finance at Georgetown University Law Center, said it isn't clear which court will hear the funding issue and when. "One possibility is the D.C. Circuit takes this up, but the problem is, this is a new issue that wasn't litigated in the district court," Levitin said. "It's not that it's outside the power of the courts, but a federal court telling a federal agency that it has to draw money from another agency can get very weird."When Vought announced that the CFPB could not request funding from the Federal Reserve, he cited a new interpretive letter issued from the Department of Justice's Office of Legal Counsel, which claimed the Fed lacks "combined earnings" from which to fund the CFPB.At issue is the statutory text in the Dodd-Frank Act that states the CFPB will be funded from the Federal Reserve's "combined earnings," which is not further defined in the statute. The CFPB under Vought has argued that the Fed's earnings means all the money the Fed earns from bonds and securities, interest and fees minus interest expenses. The union claims just the opposite: that combined earnings means money earned before paying out interest.As if the litigation isn't complicated enough, a new wrinkle has emerged, with some experts now predicting the Fed will return to profitability in the first quarter, after losing money since September 2022. "That certainly throws a wrench into the CFPB's argument," said Chris Willis, a partner at the law firm Troutman Pepper Locke. The theory that the CFPB cannot request funding from the Fed gained traction last year, almost immediately after the Supreme Court sided with the CFPB in May on a separate argument against the CFPB's funding. In that case, Justice Clarence Thomas wrote the 7-2 opinion affirming the constitutionality of the CFPB's funding structure and rejecting an argument that it violates the Constitution's Appropriations Clause. The novel theory that the Fed cannot fund the CFPB when it fails to turn a profit has not been decided by any court, but it gained renewed enthusiasm after Harvard Law School Professor Emeritus Hall Scott threw his weight behind the issue in an op-ed in the Wall Street Journal. "The CFPB added this as an argument at the last minute, but they haven't abandoned any of the other arguments — they are just saying that now they don't have any funding," Willis said.Many legal experts are debating whether "combined earnings" in Dodd-Frank means net or gross. Jeff Sovern, the Michael Millemann Professor of Consumer Protection Law at the University of Maryland Francis King Carey School of Law, noted that Vought's stated goal was to put civil servants "in trauma," and to shut down the bureau. "I find the argument that the Fed can't fund the CFPB because it lacks profits unpersuasive, though a court eager to serve the president's goals might nevertheless seize upon it, just as the administration has," Sovern said. "The CFPB's funding doesn't depend on whether the Fed is profitable in a particular quarter or even a particular year."Sovern and others said Congress would not have set up the CFPB's funding to lapse. Plus, the CFPB has accepted the funding since 2022, and it has done so this year under Vought, who waited nine months before raising the issue."It makes no sense that Congress would want consumers to be protected against abusive debt collectors, inaccurate credit reports, deceptive bank practices and the like, only when the Fed's revenues exceed its costs," Sovern said.Kaplinsky said he found it peculiar that the CFPB announced this week that it would start supervising banks again and would subject examiners to a so-called "humility oath," at the same time the agency is warning that it has no funding. The bureau also is continuing investigations and plans to bring enforcement actions."What's surprising is, why didn't they make this argument long ago? It's not as if they didn't know about it," said Kaplinsky. "And what [Vought] is saying about doing more work seems inconsistent with an earlier statement that they are running out of money and he claims there is nothing they can do about it. Who is going to do all the work? How are they going to pay for it and where is the money coming from?"The agency has filed no enforcement actions since February, when Vought took over, and has instead dismissed more than half of pending litigation from the Biden era.In addition, the CFPB is rushing to complete a number of rules including the 1033 open banking rule and the 1071 small business data collection rule. The bureau also has statutory requirements such as publishing the Annual Percentage Offer Rate that provides stability to the mortgage industry. "It's very counterproductive for them to close the agency when they are doing a bunch of rulemakings that the industry would like to see completed," Willis said. Looking forward, many lawyers think Jackson will hold a hearing next week to sort out the immediate issues posed by the Office of Legal Counsel opinion, and the issue will likely wend its way through the court system from there. But in a broader sense, the Trump administration's goal of breaking the CFPB may be realized even if its goal of eliminating the agency is not."Even if the agency still exists at the end of the Trump administration, it will be a hollowed out shell," said Levitin.
Non-prime residential mortgages underpin $298.9 million in RMBS
A pool of first-lien, non-prime mortgages will provide collateral for $298.9 million in residential mortgage-backed securities (RMBS) that Blue River Mortgage is bringing to market.Known as GCAT 2025-NQM7 Trust, the transaction is expected to close on December 3, and has a meaningful concentration of non-qualified mortgages, including 23.6% considered non-QM; 37.7% that are safe harbor; and 2.5% of rebuttable presumption, according to analysts at Kroll Bond Rating Agency.The notes have a final maturity of November 2070, KBRA said, and the deal will repay investors on a combined pro rata and sequential basis. Wells Fargo Securities, Goldman Sachs, ATLAS SP and Barclays Capital are among the initial note purchasers.GCAT will also experience what's known as subordination erosion. If cumulative loss or a delinquency trigger event is in effect, then the deal will distribute principal among the class A notes before any principal allocation the class M1 or class B certificates. So, the dollar amount of subordination credit support will fall for classes A1A, A1B and A2 during the life of the securitization, unless a trigger event occurs.The deal will sell notes through about 11 tranches of classes A, M and B notes, KBRA said. GCAT 2025-NQM7 Trust will issue primarily fixed-rate notes, but the B1 notes could issue either fixed-rate notes or debt priced against a net weighted average coupon (WAC).The A1A notes, rated AAA from KBRA, benefit from credit enhancement level representing 30.55% of the note balance, according to the rating agency. Tranches A1B and A1 also rated AAA, have credit enhancement representing 20.55% of the pool balance.GCAT's pool of assets, which has a cutoff date of November 1, is composed of 550 loans that have an average balance of $543,591, KBRA said. Of the loan pool, the aggregate top five balances represent 4.6% of the total pool, the rating agency said.Borrowers—44.8% of which are self-employed—have a weighted average (WA) debt-to-income ratio of 35.9%, and non-zero WA annual income of $529,022.Aside from the AAA-rated A1 notes, KBRA assigned AA- to the A2 notes; A- to the A3 notes; BBB- to the M1 notes; BB to the B1 notes; and B+ to the B2 notes, KBRA said.
Mortgage rates tick down for first time this month
Mortgage rates inched down this week, and they are likely to remain stable throughout the rest of the year.After three consecutive weeks of upticks, the 30-year fixed mortgage rate dropped 0.3 basis points to 6.23% from last week when it averaged 6.26%. The 30-year rate averaged 6.81% this week a year ago.The 15-year fixed mortgage rate also fell 0.3 basis points to 5.51% from 5.54% last week. It averaged 6.10% this week a year ago."Heading into the Thanksgiving holiday, mortgage rates decreased," said Sam Khater,Freddie Mac's chief economist, in a press release Wednesday. "With pending home sales at the highest level since last November, homebuyer activity continues to show resilience as we near the end of the year."The Federal Reserve cut the federal funds rate by 25 basis at the end of October, yet the three full weeks that followed all saw mortgage rates rise, causing pending home sales and overall activity to stall shortly after. Much of this can be attributed to Chair Jerome Powell's comments at the Federal Open Market Committee Meeting, in which he tampered expectations for a December cut.Pending home sales decreased 0.3% during the four weeks ending Nov. 9, the first drop in four months, according to a report from Redfin."House hunters are sensitive to rates and prices; many are waiting for one or both to drop before buying," said W.J. Eulberg, a Redfin Premier agent in Milwaukee, in a press release earlier this month.But overall activity in the housing market saw a slight bump recently, as mortgage applications increased 0.2% last week from the week prior, despite a 6% dip in refinancing activity, according to the Mortgage Bankers Association's Weekly Mortgage Applications Survey."Despite these slightly higher rates, purchase applications increased over the week and remained at a stronger pace than a year ago, with increases across conventional and government purchase applications," MBA Vice President and Deputy Chief Economist Joel Kan said in a press release Wednesday.With uncertainty surrounding a rate cut next month and delayed data following the government shutdown, mortgage rates are expected to remain relatively stable until next year.
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