- CFPB Goes After Mortgage Industry; Other Nonbanks Are Next
- January 17, 2012 | Authors: David N. Anthony; Virginia Bell Flynn; Alan D. Wingfield
- Law Firm: Troutman Sanders LLP - Richmond Office
Five days after the Consumer Financial Protection Bureau (CFPB) obtained its full power to regulate nonbanks through the controversial recess appointment of Richard Cordray as Director, the CFPB made its first public move against the mortgage industry. An investigation was launched against a private mortgage lender and servicer based on alleged kickbacks it allegedly paid to banks in exchange for the banks to steer business to them.
This investigation comes at a time when the CFPB is putting much of its time and focus on the mortgage servicing and origination world. Namely, on January 11, the CFPB released its Mortgage Origination Examination Procedures. Upon this release, Director Cordray stated that “the mortgage market cannot work well for consumers if the spotlight shines only on one part of it, while the rest is left in darkness. Our supervision program will illuminate the entire marketplace by making nonbanks play by the same rules as the banks.”
Mortgage Origination Examination Procedures
These procedures describe the types of information that the agency’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 also tracks key mortgage originator activities, from initial advertisements and marketing practices to closing practices.
The procedures focus on:
- Company business model,
- Advertising and marketing,
- Loan disclosures and terms,
- Underwriting, appraisals, and originator compensation,
- Fair Lending, and
Specifically, the CFPB is attempting to discover the “riskiness” of a mortgage business. We have seen riskiness defined in other aspects based upon the number of complaints a company receives. How a company handles these complaints, however, is vital. Moreover, the CFPB will be reviewing a company’s documents, board minutes and reports while interviewing management, staff, and, potentially, customers.
What Does This Mean Now?
The CFPB has made it clear that the mortgage industry is a top priority. With the release of this manual and the very recent investigation of a private mortgage lender, mortgage companies should have an implemented compliance program in order to deal with customer complaints. Nonbanks, such as debt collectors, payday lenders, student loan providers, and check cashers are next on the chopping block. All of these groups should be doing the same.
However, with pending investigations comes a potential for advance notice. This early warning process allows the subject of an investigation to respond to potential violations before the legal action is commenced. This notice, unsurprisingly, is not mandatory.
Another significant concern is the power the CFPB has to regulate Unfair, Deceptive, and Abusive Acts and Practices (UDAAP). The procedures specifically address UDAAP with respect to mortgage originators’ interactions with consumers. Although the CFPB broadly defines “unfair,” “deceptive,” and “abusive,” the procedures give some insight as to practices which are looked unfavorably upon:
- When quality control, underwriting, and appraisal functions do not operate independently of the sales unit;
- Some incentive programs for employees and third parties;
- Failure of the company to implement appropriate procedures for resolving complaints;
- Offering reverse mortgages to seniors who have medical or cognitive problems; and
- Failing to offer a customer a prime loan product when they qualify.
The CFPB continues to give vague descriptions of UDAAP behavior in the mortgage industry. This creates a danger zone as the regulators begin to define these terms through case decisions.
In sum, the CFPB is giving ample warning of broad thrusts of its regulatory efforts and is beginning to advance on multiple fronts. Businesses are on notice that complaint procedures, “early warning” procedures and “unfair” business practices will be important. The question for potential targets is whether they start work now to put themselves in a position to respond quickly, knowledgeably and effectively when the CFPB comes knocking.