The CFPB wants to get to know you – well. But it’s not a prelude to a kiss.
On January 12, 2012, the CFPB released its new Mortgage Origination Examination Procedures Governing Banks and Nonbanks (the “Procedures”). The release of the Procedures follows close on the heels of the CFPB’s October 13, 2011 release of its mortgage servicing examination procedures (see The CFPB Mortgage Servicing Examination Procedures Fail to Harmonize – Isn’t It Ironic? ), and its January 5, 2012 announcement of its nonbank supervision program (see CFPB Officially Launches Nonbank Supervision Program).
Mr. Cordray, the Director of the CFPB who President Obama appointed via a controversial “recess appointment,” described the CFPB’s nonbank supervision program (which also includes student lending and payday lending) as one of its top three priorities. He also told reporters that the CFPB expects “to have people on the ground in the next month or two” to start implementing the Procedures through examinations. Examinations are typically a prelude to enforcement. But with a former state Attorney General at the helm (Mr. Cordray was the Ohio AG before being appointed Director of the CFPB), the line between supervision and enforcement is likely to be blurred, with supervision potentially serving as pre-discovery for enforcement. In fact, even before the Procedures were released, the CFPB started exercising its enforcement muscles by initiating an investigation of bank and nonbank mortgage companies, alleging violations of RESPA’s kickback provisions. This may be a presage of what to expect from the CFPB’s exercise of its nonbank examination process. As explained below, some of that exercise will focus on issues to which most nonbank mortgage brokers and lenders have not previously been examined, including the amorphous unfair, deceptive and abusive acts and practices provisions and fair lending that are part of the CFPB’s purview.
CFPB examiners are instructed to use the newly issued Procedures in examinations of both mortgage brokers and mortgage lenders, including those that have no affiliation with depository institutions. The Procedures outline the CFPB’s supervisory approach to ensure mortgage lenders and brokers comply with federal consumer financial laws. They also describe the types of information that the CFPB’s examiners will gather to evaluate mortgage originators’ policies and procedures, assess whether originators are in compliance with applicable laws, and identify risks to consumers throughout the mortgage origination process. The examination manual tracks key mortgage originator activities, from initial advertisements and marketing practices to closing practices. The information that examiners are instructed to obtain and review is comprehensive, and is likely more extensive than that to which many nonbank lenders are accustomed.
The Procedures consist of modules covering the various elements of the mortgage origination process, with each module identifying specific matters for review. Each examination will cover one or more of the following modules:
• Company Business Model
• Advertising and Marketing
• Loan Disclosures and Terms
• Underwriting, Appraisals, and Originator Compensation
• Fair Lending
A significant portion of the Procedures is spent on what can fairly be referred to as “Residential Lending Compliance 101.” For example, the procedures identify and describe the differences between types of loans and loan products, e.g., the differences between first and junior priority mortgage loans, fixed rate mortgages and adjustable rate mortgages, open end and closed end, prime and subprime, etc. The Procedures then provide a 30,000 foot view of the alphabet soup of consumer protection laws, including RESPA, TILA, ECOA, HMDA, GLBA, FCRA, the MAP Rule (mortgage advertising rule) and the SAFE Act.
There are a few issues to which mortgage brokers and lenders should pay particular attention – specifically, the sections addressing the CFPB’s new unfair, deceptive and abusive acts and practices authority, fair lending, and privacy. Because nonbank lenders have not traditionally been examined on these issues, they should start preparing themselves now for the CFPB’s focus on these issues.
The Procedures are likely just an opening salvo in the CFPB’s exercise of its authority to regulate nonbank consumer lending activities. As Director Cordray noted, “We have the opportunity now, we’re aggressively moving forward with non bank supervision . . . .”