Letter to CFPB Director Cordray – Bank Mortgage Loan Originator Testing Exemption – 1/20/16

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2101 Wilson Boulevard, Suite 610
Arlington, VA 22201
(571) 527-2601

January 20, 2016

Bank Mortgage Loan Originator Testing Exemption

Mr. Richard Cordray, Director
Consumer Financial Protection Bureau,  Washington, DC   20552

Dear Director Cordray:

On the three-year anniversary of the adoption of the CFPB LO comp rule, the Community Home Lenders Association (CHLA) writes to renew our call for the CFPB to end the exemption bank and other depository institution mortgage loan originators have from basic mortgage testing requirements, and to inquire about CFPB’s “continued study” of “whether further qualification requirements are warranted.”

Specifically, the CHLA writes to inquire:
(1) What steps has the CFPB taken to address the fact that thousands of bank mortgage loan originators have failed (and never passed) the basic SAFE Act competency test, and thus do not seem to meet the Dodd-Frank requirement that all loan originators be “qualified”?

(2) Has the CFPB conducted any cost-benefit analysis regarding a SAFE Act test requirement for all mortgage loan originators – comparing the test cost of around $125 with the benefits of significantly enhanced consumer protections?

(3) What steps has the CFPB taken in the last three years to study whether further qualification requirements are warranted for bank loan originators, particularly since only 4% of bank loan originators have even taken the SAFE Act test?

(4) What training requirements have banks put in place specifically to demonstrate compliance with the Dodd-Frank requirement that all loan originators be qualified?

Section 1402(b)(1)(A) of Dodd-Frank requires that all mortgage loan originators – including the 400,000 working at banks and other depository institutions – must be “qualified.” This provision augmented more stringent requirements already imposed on non-bank mortgage loan originators, and was adopted in light of the evidence that securities firms originated hundreds of billions of dollars of risky, anti-consumer subprime mortgage loans and marketed them through loan originators working at their bank affiliates.

Three years ago, the CFPB finalized the LO Comp rule, which implemented this new requirement, with an implementation date one year later. Unfortunately, the rule did not impose any of the basic qualifications requirements that are imposed on all non-bank mortgage loan originators, which are:
• Passing the SAFE Act mortgage competency test before originating any loans,
• Passing an independent background check before originating any loans,
• Completing 20 hours of SAFE Act pre-licensing courses before originating any loans, and
• Completing 8 hours of SAFE Act continuing education courses each year.

We would also note that 99% of banks (banks with assets less than $10 billion) are exempt from CFPB exams – further diminishing the level of oversight of bank mortgage loan originators.
As the only national association exclusively representing non-bank mortgage lenders, CHLA acknowledges that we are in part guided by the conviction that the significant disparity in mortgage loan qualification requirements between banks and non-banks is unfair. However, in light of the significant role faulty mortgage loan origination played in the 2008 housing crisis and the great harm it did to consumers, CHLA also believes it is critical that all loan originators meet high uniform standards, in order to maximize consumer confidence in their qualifications.

Exemptions Enjoyed by Bank/Depository Institution Mortgage Originators Are Unique

Individuals working at banks that sell securities products to consumers must be federally licensed, pass a Series 6 or 7 exam, and complete periodic continuing education. Individuals working at banks that sell insurance to consumers must be licensed in the state they do business, pass a test, and complete periodic continuing education. Yet, individuals working at banks that do mortgage originations, arguably a product equally important and in need of strong consumer protection, are exempt from these requirements.

Moreover, bank mortgage originators are virtually the only professionals involved in real estate transactions that are not subject to these basic requirements. Specifically:

* Real estate brokers must be licensed, tested, and complete annual continuing education in all 50 states.

* Individuals that perform appraisals on mortgage loans must be licensed, tested, and complete annual continuing education in all 50 states.

* Individuals that do home inspections must be licensed and tested in 32 states and a majority of states require them to complete periodic continuing education.

* Finally, as previously noted, all mortgage originators that work at non-bank mortgage firms must be licensed, pass an independent background check by the state, complete 20 hours of pre-licensing courses, pass a mortgage competency test, and complete at least 8 hours of continuing education each year.

Following is background on each of the questions posed at the beginning of this letter:

1. What steps has the CFPB taken to address the fact that thousands of bank mortgage loan originators have failed (and never passed) the basic SAFE Act competency test – and thus do not seem to meet the Dodd-Frank requirement that all loan originators be “qualified”?

As of April 30, 2014, there were 1,415 individuals working at banks or other depository institutions that failed (and never passed) the SAFE Act test. These individuals are registered as “mortgage originators” and thus are permitted to work with consumers to originate loans.

CHLA does not understand how individuals that have failed the basic SAFE Act competency test are allowed to originate loans, since their objective failure to pass the SAFE Act test would seem to be conclusive evidence that they are not “qualified” to act as mortgage originators, as the statute requires. At a minimum, it would seem appropriate to immediately suspend such an individual’s status as a registered mortgage loan originator unless and until they are able to pass the SAFE Act test.

Of course, it may seem arbitrary to take such actions only against individuals that have taken and failed the SAFE Act test (typically only those individuals that intended to work for a non-bank mortgage lender, and when they failed the test, were only able to work for a bank, because qualifications standards are lower). That is part of the reason why CHLA believes that every mortgage loan originator should be required to pass the SAFE Act test. As CHLA noted in its December 2014 letter on this subject, extrapolating SAFE Act pass/fail rates to the approximately 385,000 depository institution mortgage loan originators that have not taken the test would result in projections that anywhere from 36,000 to 120,000 existing depository institution loan originators would fail the test if required to take it.

2. Has the CFPB conducted any cost-benefit analysis regarding a SAFE Act test requirement for all mortgage loan originators – comparing the test cost of around $125 with the benefits of significantly enhanced consumer protections

The one-time cost of taking the SAFE Act mortgage competency test is only around $125, and the time it takes to take the actual test is only 3 hours. If an existing bank mortgage originator is qualified, as the statute requires, the time for preparation for taking the test should be minimal. Since the bank incurs no other compliance costs, the regulatory compliance cost and burden on banks is small. In contrast, there would be a substantial consumer benefit from requiring the existing tens or hundreds of thousands of unqualified bank loan originators to practice for, take, and pass the test – in the process learning about mortgage rules and regulations and ethics requirements.

3. What steps has the CFPB taken in the last three years to study whether further qualification requirements are warranted for bank loan originators, particularly since only 4% of bank loan originators have even taken the SAFE Act test?

In declining to impose a standardized test on ALL mortgage loan originators, the final rule implementing Section 1402(b)(1)(A) stated that “the Bureau does not at this time have evidence to show that combining existing bank practices with the new training requirements contained in this final rule will be inadequate to ensure that the knowledge of depository loan originators is comparable to that of loan originators who pass the standardized test.” However, the rule noted the “short rulemaking timeline imposed by the Dodd-Frank Act” and therefore stated that “it is prudent to continue studying the issue to determine if further qualification requirements are warranted.”

Therefore, please indicate what substantive work the CFPB has undertaken to study whether further requirements are warranted, including the empirical results of such study. In addition, please indicate whether there is any difference in qualifications among mortgage loan originators that work for different types of depository institutions (large banks, smaller banks, and credit unions) – which might suggest adding requirements to some subset of depository institutions with lower overall qualification levels.

We would point out the proliferation of subsequent bank settlements involving risky, anti-consumer loan originations. In July 2014, the Department of Justice announced a $7 billion settlement with a major bank for origination of mortgage loans which it knew were destined for default. The bank admitted that it knew that “significant percentages” of sample loans did not comply with underwriting guidelines – including borrower income being exaggerated, with borrowers being placed in a loan product that was beyond their ability to repay. In 2012, the US Attorney’s Office in the Southern District of New York announced settlements with two banks, relating to poor underwriting in the origination of FHA mortgage loans.

In addition, the original complaint in the action brought by the federal government and 49 states, resulting in the multi-billion dollar National Mortgage Settlement with five major banks alleges that “In the course of their origination of mortgage loans in the Plaintiff states, the Banks have engaged in a pattern of unfair and deceptive practices. Among other consequences, these practices caused borrowers in the Plaintiff states to enter into unaffordable mortgage loans that led to increased foreclosures in the States.”

4. What training requirements have banks put in place specifically to demonstrate compliance with the Dodd-Frank requirement that all loan originators be qualified?

In lieu of a SAFE Act test requirement, the Final Rule merely required the depository institution to establish a training program specifically designed to comply with the Section 1402(b)(1)(A) requirement that all loan originators be “qualified.” We are interested in understanding CFPB’s oversight rule in determining whether all banks are complying with this requirement.

Mortgage loan originator requirements under the SAFE Act and Section 1402(b)(1)(A) were established not just for safety and soundness reasons (which bank regulators typically focus on) but also for consumer protection. Therefore, we would like to learn the extent to which banks have established training programs under the Final Rule with rigorous requirements related to consumer protection issues, such as loan steering, loan suitability, and ethics.

The CHLA appreciates your attention to these requests.

Sincerely,
COMMUNITY HOME LENDERS ASSOCIATION

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