October 17, 2016
Comment Letter – CFPB Proposed Rule – TRID
Docket No. CFPB – 2016 – 0038
Mr. Richard Cordray
Director, Consumer Financial Protection Bureau
1700 G Street, NW
Washington, DC 20552
Dear Director Cordray:
The Community Home Lenders Association (CHLA) is pleased to submit this comment letter in response to the August 15 proposed rule on Amendments to Federal Mortgage Disclosure Requirements under the Truth in Lending Act (also known as “TRID”)
The rule says its purpose is to integrate some of the CFPB’s existing informal guidance and propose revisions to portions of the regulation text and commentary. CHLA has written the CFPB to press for more detailed guidance on TRID implementation and to fix the Black Hole problem – and we appreciate that CFPB has done both of these. Thus, we will not be commenting on specific provisions except as noted at the end of this letter- where we urge the CHLA to address unnecessary delays resulting from the redundancy on refis of delivering a CD 3 days before closing plus the 3-day right of rescission
Instead, CHLA would like to take this opportunity express a broader concern – that the existence of the CFPB as a dual regulator along with state supervision of non-bank lenders, combined with the regulatory impact on these small businesses, is exacerbating the consolidation of community lenders to the detriment of consumers.
CHLA believes the goal of community non-bank mortgage lender compliance with mortgage rules can be achieved with an approach that emphasizes CFPB guidance and balanced enforcement, instead of retroactive fines and enforcement action against community mortgage lenders. Therefore, CHLA writes to recommend that:
(1) CFPB should not impose retroactive fines or take enforcement action against community non-bank lenders prior to giving such lenders an opportunity to correct compliance errors brought to their attention;
(2) CFPB should provide a safe harbor to a community non-bank mortgage lender when it requests guidance on a specific compliance issue, provided that: (a) the lender carries out good faith compliance consistent with specific guidance given by CFPB or (b) the CFPB fails to provide specific guidance;
(3) CFPB should not: (1) conduct exams for small community non-bank lenders, or (2) initiate enforcement action on such lenders without a referral from a state or some other federal regulator.
Why are Community Non-bank Mortgage Lenders Important to Consumers?
Non-bank mortgage lenders have led the market in recent years in providing access to mortgage credit, assuming a significantly higher share of the market as many big banks exited mortgage markets or imposed credit overlays. As noted in a September National Mortgage News article, an analysis of HMDA data showed that non-bank mortgage lenders’ market share is at a two-decade high, rising from 27% of total mortgage originations in 2010 to 42% in 2014. Similarly, Ted Tozer, President of GNMA, has publicly noted that the non-bank share of GNMA issuance has grown significantly over the last few years, leading him to conclude about non-bank mortgage lenders that “The housing market would be a lot worse off without them.”
Moreover, community lenders, including non-banks, also service the loans they originate in a more personalized manner than the big money center banks or specialty servicers that utilize large centralized servicing centers. Community lenders did a better job than the large mega-servicers in working with distressed borrowers and implementing loss mitigation outcomes for borrowers in the aftermath of the 2008 Housing Crisis.
Regulatory Impact on Community Non-bank Mortgage Lender/Servicers
In establishing and implementing mortgage rules, Congress and the CFPB have recognized the value of smaller community lender/servicers and created certain targeted exemptions, such as certain Reg Z and Reg X exemptions for smaller servicers.
However, these exemptions generally are targeted towards community banks and credit unions, and legislation pending in Congress is almost completely targeted to these depository institutions. Moreover, community non-bank mortgage lenders generally are more regulated than their bank counterparts – including an extensive array of individual mortgage loan originator requirements (which banks are completely exempt from) and CFPB exam and primary enforcement authority (which 99% of banks are exempt from).
The result is a discernible trend towards consolidation of community non-bank mortgage lenders into large firms – a trend which is bad for consumers. As noted in a National Mortgage News article from this last January, “Independent mortgage lenders are bracing for a wave of consolidation prompted by heavy compliance costs and a tepid housing recovery.” The article cited increased CFPB scrutiny of independent mortgage lenders as topping the list of their worries, and concluded that “As many as 20% to 25% of independent mortgage companies could change hands or simply shut down in the next 12 to 18 months, according to one estimate.”
Community non-bank lenders are happy to make every effort to diligently comply with mortgage rules and procedures. However, there are regulatory factors that affect these small businesses that contribute to a proportionately greater burden on smaller lenders, i.e.:
(1) ECONOMIES OF SCALE. Compliance cost economies of scale favor larger lenders, thus spurring concentration and reducing competition. In contrast, small community lenders do not have the economies of scale and resources to hire expensive law firms or lobbyists in Washington that specialize in the understanding how CFPB regulates and enforces a myriad of rules.
(2) THREAT OF FINES. The unknowable but potentially significant financial and reputational risk of enforcement action is driving out some smaller lenders to sell their firms to larger lenders. A multi-million-dollar fine may be just a cost of doing business for a mega-bank; for a community lender, it can have a significant or crippling financial impact. We would also note that concerns that a firm will be found in technical non-compliance with complicated rules can divert resources from loan origination and drive up the cost of mortgage loans.
(3) DUAL REGULATORY SUPERVISION. Non-bank community mortgage lenders generally are not portfolio lenders; instead the great majority of loans they originate are GNMA, FHA, RHS, VA, and GSE (FHFA). Thus, they are subject to rigorous financial requirements, as well as operational requirements. Additionally, non-bank community mortgage lenders are supervised and regulated by every state in which they do business. But, unlike 99% of banks, non-bank community lenders are also subject to the dual regulation of the CFPB – including exams, and to primary enforcement. This dual regulatory supervisory regime adds significantly to compliance costs and risks.
(1) CFPB should not impose retroactive penalties or take enforcement action against community non-bank lenders prior to giving such lenders an opportunity to correct compliance errors brought to their attention
Because of the complexity of TRID and other mortgage rules, and the lack of guidance on certain specific compliance issues, it is inevitable that there will be instances when mortgage lenders’ compliance efforts are not consistent with what the CFPB believes is the proper compliance procedure.
It is reasonable for the CFPB to assess fines on mortgage lenders that have engaged in demonstrably unfair, deceptive, or abusive acts or practices in and of themselves. And it is reasonable for the CFPB to assess fines on mortgage lenders that are given an opportunity to correct problems brought to their attention and fail to do so. However, our concerns relate to retroactive penalties and enforcement actions against community lenders that are trying to comply with mortgage rules in good faith.
We note last week’s court case involving PHH, where a fine for practices going back to 2008 was reversed, with the ruling turning on both CFPB’s potential re-interpretation of RESPA, and on statute of limitations issues. While the retroactivity issue highlights our general concerns, we believe the issues go beyond these two specific issues. CHLA concerns focus more broadly on areas where CFPB rule guidance is not clear, and our also focus on the disproportionate impact that CFPB fines and enforcement action against community lenders can have.
Specifically, the threat of imposition of fines and other enforcement actions for past practices merely reflecting non-compliance not previously identified by the CFPB or other regulators poses a disproportionate financial risk for smaller community lenders, as explained in the previous section. In practical terms, just the risk of fines can be a factor in community lenders deciding whether to affiliate with or sell out to larger firms.
Therefore, CHLA recommends that the CFPB follow a policy in which a community non-bank mortgage lender is always given an opportunity to correct compliance problems prior to assessing fines or taking enforcement action.
This is an approach that is similar to that taken by bank and credit union regulators. Banking regulators generally work with banks to get them to correct problems, including compliance, before taking enforcement actions.
We would point out that the consumer is fully protected going forward under this approach of giving a small or mid-sized lender/servicer an opportunity to correct practices before taking enforcement action. A firm can be expected to correct their practices, to avoid financial penalties – and should be penalized if they do not.
We understand that in some cases the CFPB believes it needs to make an example of certain firms in certain industries – through significant fines, consent decrees, or other major enforcement actions. However, since community lenders serve a relatively smaller number of consumers, the impact to consumers of not assessing retroactive penalties prior to a determination of non-compliance is much less significant than in the case of a large financial institution.
(2) CFPB should provide a safe harbor to a community non-bank mortgage lender when it requests guidance on a specific compliance issue, provided that: (a) the lender carries out good faith compliance consistent with specific guidance given by CFPB, or (b) the CFPB fails to provide specific guidance
CFPB does provide bulletins and guidance on many common compliance issues. However, following are specific recommendations to improve guidance and compliance.
CHLA would recommend an online FAQ that is kept up to date and provides these types of specific, detailed guidance on mortgage questions that are clearly in need of more clarification. Two obvious areas are MSAs (RESPA) and unresolved questions surrounding TRID. CHLA also believes that guidance should be issued with the involvement and authority of the Enforcement Division. Guidance is of limited value if it does not directly reflect the way CFPB Enforcement will be carried out.
CFPB has also established a process under which lenders can submit specific compliance questions to CFPB. However, as others have noted, it is our experience that the guidance received is of limited value in addressing many specific compliance questions – a point accentuated in the TRID rollout process. There are things CFPB can do to help:
First, while questions must be posed to the CFPB in writing, the CFPB commonly does not provide answers in writing. As such there is no ability of lenders to legally rely on such verbal guidance, or to provide assurances to other parties, such as investors or aggregators, that the firm is complying as the CFPB intends it. Therefore, the CFPB should provide responses to specific compliance questions in writing.
Secondly, the guidance should be more specific than is currently provided. References back to the statute or regulations that are relevant are of little value. If a firm submits a specific compliance question, the CFPB should provide specific guidance to resolve that question.
Most importantly, when firms avail themselves of this CFPB feedback process and comply in good faith based on the CFPB response, there should be a safe harbor with regard to any fines or enforcement actions. Alternatively, firms should also have a safe harbor if the CFPB does not provide specific guidance on a specific compliance question posed to the CFPB.
(3) CFPB should not (a) conduct routine exams for small community non-bank lenders, or (b) initiate enforcement action on such lenders without a referral from a state or some other federal regulator
Congress created an exemption from CFPB exams and primary enforcement for 99% of banks and credit unions – those below $10 billion in assets. Separately, CHLA is urging Congress to expand this exemption to include small community non-bank mortgage lenders that do a limited volume of loan origination and servicing.
However, in the absence of Congressional action, CHLA would urge CFPB to establish a formal policy that it will not conduct exams of these smaller community non-bank lenders. We understand that CFPB to date has generally not conducted exams for such size lenders. However, just the possibility a firm will have an exam commonly leads to community lenders spending resources on consultants conversant in exams, so the lender will be ready. Secondly, it is our impression that something as small as a single complaint from an employee, consumer, or even competitor can precipitate an exam. Third, it is not clear as CFPB continues to expand staff whether it will start to routinely conduct exams for smaller lenders.
Regarding enforcement actions, as noted non-bank community lenders are supervised and subject to supervisory action by every state they do business in. Therefore, CFPB suggests that CFPB should not initiate enforcement action against such lenders. However, CHLA believes it would be appropriate for the CFPB to initiate enforcement actions against a community lender based on a referral from one of their state primary regulators – or some other federal regulator.
Finally, as noted at the beginning of this letter – we would like to suggest that CFPB address the redundancy inherent in the TRID rule requiring a CD at least three days prior to closing – combined with the 3 day right of rescission on refinance loans. The effect of these two provisions is to create a six day period before a loan can be closed – which we believe is excessive, and can interfere with a borrower’s ability to quickly close a refinance loan. Therefore, we suggest that CFPB either waive the 3-day advance CD requirement – or waive the 3-day right of rescission – in the case of a refinance loan.
Thank you for the opportunity to express our views on this important matter.
Community Home Lenders Association