|June 10, 2013|
Previously published on June 7, 2013
On June 4, 2013, the Consumer Financial Protection Bureau (CFPB) released updated examination procedures intended to test loan originators’ and servicers’ compliance with the Truth in Lending Act (TILA Update) and Equal Credit Opportunity Act (ECOA Update).
This is the CFPB’s update to its Supervision and Examination Manual (Manual) released in October 2012. The 900-page Manual describes how the CFPB supervises and examines originators and servicers to determine if companies are complying with consumer financial protection laws. In January 2013, the CFPB issued multiple new origination and servicing regulations, many of which were directed by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.
These updated examination modules show that the CFPB will be probing into every nook and cranny of TILA and ECOA compliance systems, including not only written policies but also actual practices and procedures. The updated TILA section is 170 pages in length, and the ECOA section is 48 pages in length, and these are likely to be the first of multiple updates of the examination procedures for CPFB’s new regulations issued in January 2013. To highlight a few examples, the CFPB will be examining loan originators and servicers in the following areas:
Key TILA Examination Procedures:
- Loan originators’ and servicers’ policies and procedures used daily to detect TILA errors and violations promptly: the CFPB examiners’ review will include organizational charts, process flowcharts, policies and procedures, loan documentation and disclosures, checklists, worksheets, and even computer programs. (TILA Update, pp. 69-70).
- Loan originators’ and servicers’ internal controls: the CFPB will examine whether steps are taken to follow up on previously identified deficiencies; whether the work performed is accurate; whether significant deficiencies, and the root cause of the deficiencies, are included in reports to management/board; and whether corrective actions are timely and appropriate. (p. 70).
- Transactional testing: in addition to examining policies and procedures, the CFPB examiners will review sample closed-end and open-end transactions to ensure accuracy and completeness. (p. 132).
The CFPB emphasizes that showing of a bona fide error defense under TILA “could be difficult if the financial institution is unable to produce evidence that explicitly indicates it has an internal controls program designed to ensure compliance. The financial institution’s demonstrated commitment to compliance and its adoption of policies and procedures to detect errors before disclosures are furnished to consumers could strengthen its defense.” (p. 65).
Key ECOA Examination Procedures:
- Policies, procedures, and internal controls pertaining to the taking of loan applications: the CFPB examiners will review application forms (including scripts for telephone applications and screen shots of online applications), disclosures, training materials, and a sample of loan files. The examiners will also conduct loan officer interviews to determine whether they show an understanding of the regulatory requirements and that policies and procedures are consistently applied. (ECOA Update, pp. 20-22).
- Policies, procedures, and internal controls pertaining to the evaluating and pricing of applications for credit (including, but not limited to those regarding loan servicing, modifications, collections, and loss mitigation): The CFPB will examine training materials and will conduct loan underwriter interviews to determine their understanding of the regulatory requirements and consistent application of policies and procedures. (pp. 22-25).
- Focus Areas in Compliance Management Review: according to the CFPB, in reviewing the originators’ and servicers’ practices and procedures, it will pay “special close attention” to the areas, such as: whether the creditor’s credit operations vary by any of the prohibited bases (e.g., lack of presence in minority neighborhoods); whether underwriting or pricing guidelines contain any unusual criteria that could have a possibly negative disparate impact on a protected class (e.g., underwriting or price models that use ZIP codes); and whether creditor’s policies, procedures, or guidelines are vague or unduly subjective. (pp. 14-15).
The updated TILA and ECOA examination procedures not only reflect the introduction of the CFPB as an examiner of the loan originators’ and servicers’ policies and procedures but also will be a springboard towards the enforcement of the new requirements, including prohibition against steering incentives, dual compensation, mandatory arbitration clauses, and waiver of consumer rights.
Loan originators and servicers should seek professional advice to ensure compliance with the CFPB’s origination and servicing rules set forth in the Manual and its updates.