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As we noted in our strategic analysis of the Supreme Court’s CFPB decision, Chief Justice Roberts hued a very careful line as he sought to put the President fully in charge of independent agencies without at the same time shutting them down altogether as his own inclinations and the demands of more conservatives justices would have it.  Instead, the decision targets only independent-agency directors who, if their positions and agencies meet certain conditions, are independent no more.  The CFPB’s director was the first to feel the guillotine and FHFA’s may be next.  However, the Court’s scythe may strike down more independent-agency officials even without new decisions – it all depends on how vigorously a President chooses to use the formidable weaponry even this careful compromise places in his hands.

With the Court now laying out the parameters for which independent-agency officials must be dismissible at will, a president – whether it be Mr. Trump or Mr. Biden in 2021 – may well feel emboldened to go after once-independent officeholders, including the chairman of the Fed.  The specifics in the Roberts majority decision most clearly apply to independent agencies with a single head, but much in the discussion as well as the side-opinion from Justices Thomas and Gorsuch raises issues pertinent to all independent agencies.

I am no lawyer, but the Roberts decision against the CFPB director takes firm stands that, while in some instances expressly limited only to agencies with a single director such as the CFPB and FHFA, in …

Shortly after assuming office, the Acting Comptroller of the Currency finalized a proposal with no substantive changes establishing that interest rates governing loans made by national banks are those valid when the loan is made, not based on to whom a loan is subsequently sold as recent litigation declared.  The FDIC issued a separate but largely similar proposal at approximately the same time as the OCC and is now finalizing its own standards governing preemption for state-chartered banks.  This codifies longstanding practice and thus gives state-chartered banks a still firmer legal basis from which to expand intrastate with their own offerings or those of third- parties, including nonbanks.

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As we detailed earlier today, the Supreme Court’s CFPB decision sheds long-awaited, merciless light on Fannie and Freddie’s future.  Mark Calabria correctly said yesterday that “it does not directly” affect FHFA.  That said, it sure could.  Were the Court to use the reasoning in the CFPB case, then FHFA would stand as an agency, but the President – this one or the next – would govern who serves as director.

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Yesterday’s Supreme Court decision has far-reaching and immediate impact on pending actions by the CFPB and, by inference, on the FHFA, and perhaps even on the OCC, FRB, FDIC, CFTC, and SEC.  Indeed, the case bears on the entire construct of post-crisis regulation should Joe Biden win the White House and use this decision to challenge at least some Trump Administration financial regulatory hold-overs.  The Court decision does not go as far as agency critics initially hoped, ruling against an effort to deem the CFPB unconstitutional in its construct in part on grounds that the Dodd-Frank Act permits the Court to sever consideration of the agency from that of its director.

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As detailed in our in-depth analysis of the CFPB’s proposal to remove the QM patch, we think it’s here to stay for a while.  Although the NPR fulfills Director Kraninger’s commitment to switch the general QM definition from DTIs to pricing, the proposal is by the Bureau’s own reckoning “preliminary” and by ours often tentative and even contradictory.  The CFPB has set itself an ambitious schedule to finalize the new definition and lift the patch by the beginning of the second quarter of 2021.

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Building on an advance NPR, the Bureau of Consumer Financial Protection is proposing a permanent fix to the definition of a “qualified mortgage” eligible for the QM safe harbor and from a rebuttable presumption of protection from enforcement risk under provisions in the Dodd-Frank Act designed to enhance consumer protection in this critical sector.  Moving away from the current focus on debt-to-income (DTI) ratios, the CFPB proposes instead a price-based methodology based on the expectation that higher-priced loans are more likely to be risky from the borrower’s point of view.

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As we noted earlier today, the Fed stood fast on the side of securing bank market capitalization when it concluded its stress-test round by allowing limited dividend payments.  This is far from an indefensible stand – see for example Larry Summers’ analysis showing how essential robust market cap is to franchise viability.  It is, however, a deeply unpopular position as well as a dangerous one.  CCAR was already becoming a technocratic exercise in amplifying correlation risk; now, stress testing may have lost all the critical credibility it gained when the 2009 exercise rescued the banking system.  I doubt any dividend payments will scuttle any large U.S. bank, but the Fed has now positioned itself to take the fall should any of them tremble under continuing macroeconomic stress or market fragility.  In 2008, the banking crisis was the banks’ fault; this time, folks will say it’s the Fed’s.

First to CCAR’s credibility gap.  Last night, former FRB Governor Tarullo posted a blistering indictment of the Fed’s actions.  As the uber-authority over the post-crisis rules, this blast might seem like just disgruntlement about changes to his handiwork.  But I think it’s considerably more than that.

When FRB Vice Chairman Quarles announced the 2020 CCAR construct last Friday, he described the COVID-sensitivity test in general terms and then announced not only that its results would be withheld, but also that big-bank performance would be judged by pre-COVID CCAR stresses.  This drew automatic fire on two counts, both of which redoubled in ferocity yesterday …