2101 Wilson Boulevard, Suite 610
Arlington, VA 22201
April 2, 2018
Re: Request for Information Regarding Bureau Enforcement Processes;
Docket No. CFPB-2018-0003
Attention: Monica Jackson
Office of the Executive Secretary
Consumer Financial Protection Bureau
1700 G Street, NW
Washington, DC 20552
The Community Home Lenders Association (CHLA) appreciates the opportunity to submit these comments on CFPB supervision and enforcement. CHLA writes on behalf of our community-based mortgage lender/servicers and also as the only national association exclusively representing Independent Mortgage Bankers (IMBs).
On February 13, 2018, CHLA and the Community Mortgage Lenders of America (CMLA) jointly wrote the CFPB to advocate for appropriate regulatory streamlining for smaller IMBs, through adoption of a formal and publicly transparent policy or rule to exempt smaller IMBs from CFPB exams and also to exempt such entities from CFPB enforcement action unless there is a referral from their state regulator or some other federal regulator.
We write today to re-state the suggestions made in that February 13 letter and to make additional comments on enforcement policies. While the CFPB issued separate Requests for Information (RFIs) on Enforcement and on Supervision, our suggestions involve a holistic approach to both.
Therefore, we are responding today to the RFI, due April 13, on Enforcement Processes – but also including comments in this letter about supervision, the subject of the second RFI, due May 21, 2018. We intend to formally resubmit this same letter later for the Supervision Program RFI.
Statutory Basis and Rationale for Streamlining of Regulation of Smaller IMBs
The Trump Administration has make balanced regulatory reform a cornerstone of its economic agenda, with a focus on eliminating or streamlining regulations that impose unnecessary costs and burdens, particularly on smaller financial service providers. Community-based IMBs are small businesses that originate and service mortgage loans. They are major job creators and are active in their local communities. Consumers benefit both from the personalized service of community IMBs and their commitment to mortgage loan origination through both good economic times and bad.
IMBs are subject to supervision and enforcement of both federal and state consumer protection laws by their primary regulator(s) – i.e. every state in which they originate or service mortgage loans.
However, while 99% of banks (those under $10 billion in assets) are exempt from CFPB supervision and enforcement, every IMB – no matter how small or how few loans it originates – is also subject to exams and enforcement actions by the CFPB regarding all federal consumer protection laws.
Such dual regulation leads to duplicative and costly burdens that have a disproportionate impact on smaller IMBs.
Last June the Treasury Department released a detailed report on regulatory issues, which highlighted unnecessary regulatory burdens, making recommendations to address them. A major conclusion of the Treasury report was that “The CFPB’s supervisory authority is duplicative and unnecessary.”
The Treasury report noted that CFPB supervisory authority extends to state-licensed nonbanks that neither enjoy special status under federal law, “nor is regulation needed to address moral hazard created by deposit insurance.” The report also underscored the effectiveness of state supervision, noting that state supervisors “were often leaders in identifying consumer protection problems during the financial crisis and have a unique perspective into the financial services available and needs in their communities.”
The report concluded by calling on Congress to repeal the CFPB’s duplicative supervisory authority, recommending that “Supervision of nonbanks should be returned to state regulators, who have proven experience in this field and an existing process for interstate regulatory cooperation.”
Additionally, CFPB Acting Director Mulvaney was recently quoted as saying that the CFPB is exploring allowing prudential regulators to take the lead more on supervisory matters, to reduce duplication and ease the regulatory burden of exams.
In fact, the Dodd-Frank Wall Street Reform and Consumer Protection Act which created the CFPB requires this type of regulatory streamlining for smaller IMBs. Specifically, Subsection 1024(b)(2) of the Dodd-Frank legislation, which deals with CFPB regulation of non-bank financial services firms, requires the following:
(2) RISK-BASED SUPERVISION PROGRAM. The Bureau shall exercise its authority under paragraph (1) in a manner designed to ensure that such exercise, with respect to persons described in subsection (a)(1), is based on the assessment by the Bureau of the risks posed to consumers in the relevant product markets and geographic markets, and taking into consideration, as applicable—
(A) the asset size of the covered person;
(B) the volume of transactions involving consumer financial products or services in which the covered person engages;
(C) the risks to consumers created by the provision of such consumer financial products or services;
(D the extent to which such institutions are subject to oversight by State authorities for consumer protection; and
(E) any other factors that the Bureau determines to be relevant to a class of covered persons.
Arguably, the CFPB has implicitly followed such a policy to some degree, as it appears to be focusing exams more on larger mortgage lenders than smaller lenders. However, the failure to provide a formal and transparent exemption to smaller IMBs creates significant CFPB compliance costs on small IMBs, which may spend tens of thousands or hundreds of thousands of dollars to prepare for CFPB exams that may never occur or to hire lawyers or lobbyists to divine CFPB interpretations of mortgage rules – interpretations that may differ from that of their state regulators.
These costs have a disproportionate impact on smaller IMBs that do not have the economies of scale that larger lenders do to spread these costs over a larger loan volume. This makes it significantly harder for smaller IMBs to compete, contributing to consolidation as some smaller IMBs shut down operations or sell to a much larger firm. This reduces competition, to the detriment of consumers.
CHLA’S SUPERVISION PROGRAM RECOMMENDATIONS
As noted, the statute dealing with CFPB supervision of non-banks requires the CFPB to exercise that authority taking into consideration the asset size and loan volume of the firm, the risk that the loan product poses to consumers, and the extent to which the firm is subject to consumer oversight by state regulators. Consistent with this statutory requirement, the CHLA recommends that:
The CFPB should adopt a formal policy or rule that exempts smaller IMBs from being subject to CFPB exams or audits.
We would call attention to legislation that has been introduced along these lines – H.R. 1964, the “Community Mortgage Lender Regulatory Act of 2017,” a bill introduced by Rep. Williams (R-TX). H.R. 1964 would provide for streamlined, risk-based CFPB regulation of qualified community mortgage lenders, defined under the bill as a non-bank mortgage lender with a net worth of less than $50 million and that has originated fewer than 25,000 mortgage loans the previous year.
We believe it would be reasonable to establish significantly higher threshold levels for a CFPB exam exemption for IMBs. Lenders originating more than 25,000 loans annually are generally examined by multiple state regulators each year. Therefore, CFPB exams are also redundant for such mid-sized lenders and a CFPB exam or audit should not be necessary except under special circumstances.
A servicing threshold (e.g. of 200,000 loans) is also appropriate, so mega-servicers are not exempt.
This approach is consistent with the requirements of Subsection 1024(b)(2). A net worth threshold corresponds to the “asset size” risk factor in subsection (2)(A). A loan volume threshold corresponds to the transaction volume risk factor in subsection (2)(B). Notwithstanding the role that mortgages played a role in the 2008 Crisis, this approach is consistent with the “product risk” criteria in Section 2(C), in light of the fact that IMBs generally do not originate portfolio loans but instead predominately originate federal agency loans, which are highly regulated and financially sound.
Finally, the deference to state regulators corresponds to the criteria in subsection (2)(D) – the extent to which these firms are “subject to oversight by State authorities for consumer protection.” Of all the different types of non-bank financial service providers, mortgage lender/servicers are among the most highly regulated entities at the state level. Additionally, mortgage lender/servicers are subject to more detailed consumer protections (both federal and state) than any other non-bank financial service provider – a fact attested to by the proliferation of new mortgage rules under Dodd-Frank.
We would also note that every IMB mortgage loan originator must meet SAFE Act testing and pre-licensing and continuing education requirements, as well as independent background checks– while all bank and credit union mortgage loan originators are exempt from all of these requirements.
ENFORCEMENT PROCESS RECOMMENDATIONS
With regard to enforcement, in order to comply with Section 1024(b)(2) of the Dodd-Frank statute and consistent with the provisions of H.R. 1964 and arguments above, the CHLA recommends that:
The CFPB should adopt a formal policy or rule under which it will not take enforcement action against smaller IMBs unless the IMB’s primary regulator (i.e. any state in which they do business) or a federal regulator provides a referral for the CFPB to investigate and take action.
Regarding appropriate size thresholds, the levels in H.R. 1964 (IMBs with net worth of less than $50 million and fewer than 25,000 mortgage loan originations a year) would be a good starting baseline. CHLA believes higher thresholds would also be reasonable – both since this approach still allows a state referral for the CFPB to take action and since there are other ways for the CFPB to coordinate with and show more deference to states as the IMBs’ primary regulator(s). A servicing threshold of 200,000 loans, as proposed above for the CFPB exam exemption, is also reasonable.
This approach would establish regulatory exemptions for smaller IMBs that are consistent with, but much lower than, the $10 billion asset level exemption thresholds for banks and credit unions. It also provides more consumer protections than for small banks – through the CFPB referral option.
GENERAL COMMENTS ABOUT ENFORCEMENT PROCESSES
CHLA would recommend that the CFPB:
(1) Refrain from using a so-called “Enforcement First” policy,
(2) Provide more explicit guidance on mortgage rules and regulations, which lenders and servicers can rely on in the enforcement process, and
(3) Provide formal safe harbors for good faith compliance when putting in place new rules.
Many observers have argued that the CFPB has carried out a policy of taking excessive enforcement actions to correct violations without first giving a firm the opportunity to correct compliance issues or problems the CFPB identifies. Regardless of the degree to which this is empirically true, the perception that such a policy exists can have a chilling effect on smaller IMBs. For such IMBs, a CFPB enforcement action represents a significant financial risk, particularly since IMB owners as individuals typically have “skin in the game” – unlike banks where it is shareholders that pay fines.
Therefore, CHLA recommends that the Bureau adopt a formal or informal policy of allowing a firm the opportunity to correct the identified violation prior to imposing fines or taking enforcement action. Such an approach should mirror that of other financial regulators such as the Federal Deposit Insurance Corporation, which uses memorandums of understanding (MOU), a common informal agreement used to obtain a commitment from a bank’s board of directors to implement corrective measures. Other informal actions that the CFPB could consider, include board resolutions, letter agreements, and other forms of bilateral agreements or actions.
Regarding guidance, CHLA wrote the CFPB on April 27, 2016 to make a number of specific recommendations to improve the reliability of the guidance it provides, including:
- CFPB should provide responses to all compliance questions sent by mortgage lender/servicers,
- Guidance, as well as responses to such questions should be more specific than is generally been provided (e.g. mere references back to the statute or regulation are of little value), and
- A safe harbor from enforcement action should be provided when a firm complies in good faith with a CFPB response to a question or when the firm receives no clear answer to a question.
Finally, the experience of TRID was troubling to many lenders, where questions to vexing problems such as the so-called “Black Hole” seemingly went unanswered for extended periods of time. When rolling out a new rule or regulation, the CFPB should always provide a formal safe harbor for firms that are trying in good faith to comply with such new regulations.
The actions taken by the CFPB in December 2018 with regard to new HMDA data requirements is very encouraging – and is a good example of how this should be handled.
We appreciate consideration of these comments and suggestions.
COMMUNITY HOME LENDERS ASSOCIATION