Dead on Arrival: New Mortgage Rules to Protect Americans

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NEW YORK ( TheStreet) -- Uncertainty over the confirmation of Richard Cordray to the Consumer Financial Protection Bureau may call into question recent mortgage rules proposed by the agency.

A federal court ruled last week that President Obama's recess appointments to the National Labor Board were unconstitutional. That affects Obama's recess appointment of Cordray, a former Ohio state attorney general, to the CFPB as well.

Obama made that appointment in January 2012 deeming the Senate to be in recess. Republicans who had blocked Cordray's confirmation to the Senate were furious over the move, calling it unconstitutional because the Senate was technically in session -- the House of Representatives was having someone bang the gavel every three days to keep Congress in session.

"Since the legal principles in both cases are the same, based on today's case, Mr. Cordray's appointment could be struck down as unconstitutional and invalid," KBW analyst Brian Gardner wrote in a report. "In our view, if a party wanted to sue the CFPB, there is a good chance the CFPB's rules, which have been implemented by Director Cordray, would be struck down as invalid."

Read more on the implications of the ruling here .

The analyst says if Cordray's appointment was overturned, the acting director of the CFPB would have to re-propose all the prior rules and have a new rule-writing process.

"In our view, the uncertainty stemming from such a process would be unsettling to the markets and hamper economic activity," he said.

The CFPB recently proposed a number of new rules that are expected to shape the future of the mortgage market. The most significant was the qualified mortgage rule, which clearly defines what kind of mortgages could be made in the future and to whom, and gives banks that make qualified mortgages enhanced legal protection.

The agency also proposed new servicing standards that servicers will have to comply with when dealing with delinquent borrowers.

The rules are expected to prevent the predatory lending practices that dominated the boom years as well as the foreclosure-law abuses that followed in its aftermath.

Since the recess appointment, scheduled to last through 2013, is invalid, KBW says the Senate will block Cordray's nomination to a full term. That will also give Senate Republicans leverage to demand changes in the CFPB's management structure, requiring a five-member commission and subjecting the agency to the Congress' budget process rather than receiving funding from the Federal Reserve.

"This could result in a watering down of the CFPB's ability to act in the future," the analysts wrote.

-- Written by Shanthi Bharatwaj in New York

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