The CFPB's Mortgage Originations Agenda in 2016John P. Kromer, Michelle L. Rogers
Now more than ever, financial services firms need to proactively focus on issues of concern identified by the CFPB and ensure that they are engaged in industry best practices that are clearly identified and carefully monitored. In the mortgage originations sphere, the new TRID/ KBYO rule, MSAs, LO compensation, UDAAP, and fair lending are all issues for companies to focus on in the coming year.
Compliance with the new TILA-RESPA Integrated Disclosure/Know Before You Owe (TRID/KBYO) rule will likely be an area of Bureau concern in 2016. The rule took effect on October 3, 2015 and does not include a “hold harmless” period for errors as lenders implement the new disclosure requirements, although letters from the OCC, FDIC, and CFPB have clarified that regulators will focus in the beginning on institutions’ implementation plans, training, and handling of early technical problems. It is likely that the CFPB will require remediation back to the rule’s compliance date when it identifies tangible consumer harm, but it is unlikely that the Bureau will bring enforcement actions initially based on technical issues where there is no tangible consumer harm.
GSEs have also issued letters stating they will not perform TRID/KBYO compliance file reviews at the beginning of the implementation period. The GSEs further stated that it will not exercise its repurchase and other remedies unless (1) a required form is not used or (2) a practice would impair its enforcement of its rights against borrowers. In contrast, the FHA has stated that it expects lenders to comply with “all federal, state, and local laws, rules, and requirements applicable to the mortgage transaction as outlined in [the] FHA Handbook….”
MSAs and RESPA Enforcement
The CFPB set forth a strong position in October 2015 regarding Section 8 of RESPA, which generally prohibits kickbacks in connection with the referral of settlement services. Through enforcement actions, the CFPB has taken a broad interpretation of the term “thing of value,” finding that the opportunity to participate in a business—even if market rates are paid for services—can itself constitute a thing of value sufficient to create Section 8 liability for kickbacks.
This calls into question the legality of marketing services agreements (MSAs) generally. While the CFPB has stated that it does not view MSAs as per se illegal and has acknowledged that it does not have the authority to declare them per se illegal without a formal rulemaking process, it is possible that the Bureau may pursue further public enforcement actions regarding MSAs if it does not see institutions pulling back from using them. State examiners are also aware of the issue and may refer nonbank entities that they supervise to the CFPB if they see issues with MSA usage. Courts are getting the opportunity to weigh in on these RESPA issues, through the appeal to the D.C. Circuit of the PHH enforcement action and the 9th Circuit’s reversal of the district court’s refusal to certify the class in Edwards v. FAC.
LO Compensation Rule
The CFPB has been aggressive in applying the Federal Reserve Board’s LO Compensation rule, as amended by the CPFB. While the rule was passed to avoid steering of borrowers into certain products, the CFPB does not need to establish steering to prove a violation and instead tends to build cases based on technical non-compliance with the rule. In bringing cases under the rule, the CFPB often names individuals as well as companies. It should be noted that the CFPB views payments to LLCs controlled by producing branch managers based on mortgage profits as illegal compensation under the rule. In examinations, the CFPB typically looks for a written compensation plan and cites institutions that do not reflect their compensation practices in their plan, even if those practices are legal.
Examination Enforcement Trends and UDAAP
The CFPB has heighted its focus on vendor management, scrutinizing vendor products and services during examinations (including the marketing of these products and services as well as the value they add), and will bring enforcement actions or court cases where it finds issues. Biweekly payments are one area of heighted scrutiny, as the CFPB has been skeptical of the value added by this service. The Bureau has also focused on loss mitigation contracts that suggest that a borrower has waived rights in connection with receiving the modification.
“What’s old is new again” in 2016 fair lending – issues such as pricing, discretion, and the charging or waiving of fees remain important. Regulators will remain focused on redlining and access to credit. The September 24, 2015 Hudson City Savings Bank enforcement action, requiring the bank to pay $27 million, focused on the role of brokers in redlining. The CFPB’s Office of Fair Lending and Equal Opportunity is a hybrid examination and enforcement division, which provides insight into the CFPB’s approach to fair lending. The CFPB also will look at nonbanks’ fair lending and bring enforcement actions against these institutions to the extent it finds problems.