The sleeping giant that is the Consumer Financial Protection Bureau (CFPB) has been awakened as a result of the recess appointment of Richard Cordray to be the CFPB’s new Director. Many things have been on hold pending that appointment, and it is likely that the pace of new developments and new regulations will now accelerate. With the Director in place, the CFPB can set about regulating those entities that have not thus far been regulated and examined the way banks have been. Mortgage lending is one of the initial areas of interest.
Last week, the CFPB issued new Exam Procedures for Mortgage Origination. While the compliance function of mortgage loan origination has not been changed, the focus of these exam procedure has. The emphasis now is on protecting the consumer, rather than making sure that the lender uses all of the right forms, crosses all of the “t’s” and dots all of the “i’s.” Banks that originate loans secured by a borrower’s residence will be covered, as will the previously less regulated mortgage companies.
An examination of these new Guidelines reveals a number of things.
First, CFPB has identified residential mortgage lending, all lenders and all products, as a primary area of focus. That is not surprising given the subprime mortgage crisis of only a few years ago, the underwriting deficiencies that were allowed to take place, the resulting foreclosure rate for residential mortgages, and the severe impact all of that had, and is having, on the American consumer.
In response to the foregoing problems, and as result of demands from an angry Congress and U.S. citizenry, the Federal Reserve, the Department of Housing and Urban Development, and other regulatory agencies enacted a number of changes aimed at better protecting consumers. But those late responses were not enough. The power to write and enforce those consumer protection regulations was stripped away and given to the CFPB. The CFPB’s reaction has been predictable, and even may be beneficial.
The laws and regulations that relate to mortgage lending have been on the books for 35 or more years. They have been amended from time to time, but always with the same regulatory mindset. Now the CFPB has taken the reins and not surprisingly they have shaken things up.
Where in the past the bank regulators have looked at the consumer protection laws and regulations in much the same way that banks have, now the CFPB is taking a new and “holistic” approach. They are no longer just looking at TILA requirements as a disclosure issue, RESPA requirements as a loan closing issue, and Fair Lending as a possible discriminatory loan underwriting or loan pricing issue. Instead, they are attempting to look at the entire process of obtaining mortgage loan financing (first lien, second lien, home equity, etc.) as it relates to the consumer and the protection of consumers in all areas. In some ways this new, fresh look may be a good thing.
These new exam procedures list the following exam objectives:
- To assess the quality of a bank’s compliance management system and its mortgage origination business;
- To identify acts or practices that materially increase the risk of violations of federal consumer financial laws, and associated harm to consumers, in connection with mortgage origination;
- To gather facts that help determine whether a bank engages in actual practices that are likely to violate consumer financial laws in connection with mortgage origination; and
- To determine whether a violation of a federal consumer financial law has occurred and whether further supervisory or enforcement action would be appropriate.
The new procedures then list seven different Modules to be reviewed:
- Module 1 — Company Business Model.
- Module 2 — Advertising and Marketing.
- Module 3 — Loan Disclosures and Terms.
- Module 4 — Underwriting, Appraisals and Originator Compensation.
- Module 5 — Closing.
- Module 6 — Fair Lending.
- Module 7 — Privacy. Let’s look briefly at each of these Modules.
Company Business Model. This first Module requires examiners to interview the managers of a bank’s various real estate lending areas to gather information regarding the different channel(s) by which the bank makes or acquires mortgage loans (retail operations, broker relationships, wholesale or correspondent relationships, etc.). Examiners will then gather details about the compliance management system in place to assure that each of these channels is compliant with consumer protection laws and regulations when it originates mortgage loans. Each channel will be reviewed for the products that it offers, the audit, underwriting and appraisal practices in place. Compensation arrangements and training for staff will also be reviewed.
Advertising and Marketing. Examiners will review all marketing and advertising materials for compliance with the requirements of Regulation Z (TILA), RESPA, the Equal Credit Opportunity Act (Regulation B), and the SAFE Act registration requirements. This component of the exam procedures has a heavy UDAAP feature to it, looking for any information given to a consumer that could be false, misleading or just confusing.
Loan Disclosures and Terms. At this stage, examiners will look at the bank’s practices and procedures and do sample testing of the various loan products. This Module looks a lot like the traditional compliance exam function. Portions of the Module also deal with Regulation Z (TILA) RESPA, ECOA (Regulation B), and the Fair Credit Reporting Act disclosure requirements. Again, it may be refreshing to see all of these disclosure requirements reviewed in an organized and holistic way, rather than as parts of several different regulations.
Underwriting, Appraisals and Originator Compensation. This Module goes hand in hand with the Module 6 Fair Lending Module. It looks at loan underwriting practices, procedures and policies. It looks at recent changes to TILA and Regulation Z as they relate to the requirement to determine a borrower’s ability to repay. It looks to compensation of mortgage loan originators and any influence sale or production units might have on a mortgage loan originator’s independence. Any subprime or non-traditional loan products or programs will be reviewed. Issues of steering customers to less favorable or more expensive products are also taken into account. Issues related to appraiser independence (Regulation Z) and furnishing appraisal information to consumers (Regulation B) are also covered.
Closing. Procedures and practices for complying with RESPA and TILA (Regulation Z) disclosure requirements will be reviewed.
Fair Lending. Fair Lending will always be a key issue. At this stage, HMDA data reporting requirements will be examined, and in most instances a regression analysis will be performed to look for patterns of discrimination.
Privacy. This final Module looks at the privacy and information sharing requirements under the Gramm-Leach-Bliley Act and Regulation P.
In summary, this is a new and more efficient way of looking at a number of traditional compliance requirements. It emphasizes all of the recent changes to regulations that have been made to protect consumers. And it looks at issues (e.g., business models, compensation arrangements, etc.) that have not traditionally been reviewed.
We will cover these new exam procedures in greater detail at the February meeting. That review will serve as a refresher on the various changes we have discussed from time to time at other Quarterly Meetings.