CHLA/CMLA Letter to CFPB Acting Director Mick Mulvaney – 2/13/18

 

February 13, 2018

 

The Honorable Mick Mulvaney

Acting Director

Consumer Financial Protection Bureau

1700 G Street, NW

Washington, DC 20552

 

Dear Acting Director Mulvaney:

The Community Home Lenders Association (CHLA) and the Community Mortgage Lenders of America (CMLA) are writing jointly to ask the CFPB to carry out streamlined supervision of smaller independent mortgage bankers (IMBs), through risk-based supervision, as is required by statute under Dodd-Frank.

As you know, IMBs are subject to supervision and enforcement of federal (as well as state) consumer protection laws by their primary regulator(s) – which is every state in which they originate or service mortgage loans. In addition, every IMB, no matter how small or how few loans they originate, is subject to exams and enforcement actions by the CFPB of all federal consumer protection laws.

In contrast, smaller depository institutions (the 99% of depository institutions that are below $10 billion in assets) are exempt from CFPB exams and enforcement actions.  There are also other factors that contribute to an un-level regulatory playing field between bank and non-bank mortgage lenders, such as the fact that all mortgage loan originators that work at non-banks are subject to a SAFE Act test and SAFE Act pre-licensing and continuing education requirements – while all banks are exempt from all these requirements.

The Trump Administration has made balanced regulatory reforms a cornerstone of its economic agenda, arguing that unnecessary regulation imposes unnecessary costs and burdens, particularly on smaller financial service providers.  Community mortgage lenders are small businesses that originate and service mortgage loans, and are major job creators.  Therefore, they should be included in this focus.

Last June, the Treasury Department released a comprehensive report on regulatory issues, which highlighted unnecessary regulatory burdens and made recommendations to address them. A major conclusion of that report was that “The CFPB’s supervisory authority is duplicative and unnecessary.”

The 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 further underscores 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 concludes by calling on Congress to repeal the CFPB’s duplicative supervisory authority – specifically 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.”

Obviously CFPB does not have the power to adopt such legislation.

However, we would call on the CFPB to fully comply with its responsibilities under Dodd-Frank to provide for regulatory streamlining based on certain factors.  Specifically, subsection 1024(b)(2) of the Dodd-Frank legislation that created the CFPB requires the CFPB to carry out “risk-based supervision,” as follows:

(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.

We believe a model for an appropriate approach to carry out this legislative mandate with respect to IMBs is to establish formal policies consistent with H.R. 1964, the “Community Mortgage Lender Regulatory Act of 2017,” a bill introduced by Rep. Williams (R-TX).  That legislation would provide for streamlined, risk-based CFPB regulation of qualified community mortgage lenders, defined under the bill as a non-bank with net worth of less than $50 million and that originated fewer than 25,000 mortgage loans the previous year.

For such qualifying smaller IMBs, we believe the CFPB should have a formal policy under which it will not conduct an audit or exam or take enforcement action 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 take any such action.

This approach would establish regulatory exemptions for smaller IMBs that are in some way comparable to the exemptions that already exist for smaller banks and other depository institutions. However, to provide a backstop to ensure full consumer protection, this approach would also permit the CFPB to take action if a state regulator asks the CFPB to do so or to assist in regulatory supervision.

This approach is completely consistent with the requirements of Subsection 1024(b)(2).  The suggested $50 million net worth threshold corresponds to the “asset size” risk factor in subsection (2)(A).  The suggested loan volume threshold corresponds to the transaction volume risk factor in subsection (2)(B) and to the “risks to consumers” risk factor in subsection (2)(C).

Finally, the deference to state regulators corresponds to the criteria in subsection (2)(D) – which is the extent to which these firms are “subject to oversight by state authorities for consumer protection.”  We believe that among all types of non-bank financial service providers, mortgage lender/servicers are the most highly regulated financial service providers at the state level – and are subject to more detailed consumer protections (both at the federal and state level) than any other non-bank financial service provider.

Consumers benefit from both the personalized service of community-based independent mortgage bankers and their commitment to mortgage loan origination through good economic times and bad.  Unfortunately, smaller IMBs do not have the economies of scale for dual compliance with the CFPB and their primary regulator(s) which larger lenders have.  The result is that the relatively higher compliance burdens and costs for smaller IMBs can make it increasingly difficult to compete, as these costs are amortized over a much smaller loan base.

The result of this continued dual regulation for smaller IMBs is likely to be an acceleration of existing trends towards industry concentration, in which smaller IMBs sell out to larger lenders.  This is a bad result for consumers who will be hurt by reduced competition in the mortgage industry.

For all these reasons, we ask for consideration of this request.

Sincerely Yours,

COMMUNITY HOME LENDERS ASSOCIATION        COMMUNITY MORTGAGE LENDERS OF AMERICA

Actions