2101 Wilson Boulevard, Suite 610
Arlington, VA 22201
April 27, 2016
Mr. Richard Cordray
Consumer Financial Protection Bureau
1700 G Street, NW
Washington, DC 20552
Dear Director Cordray:
The Community Home Lenders Association (CHLA) writes to offer a number of recommendations regarding CFPB regulation, supervision, and enforcement practices with respect to small non-bank mortgage lender/servicers. These recommendations are designed to provide appropriate due process protections for such lenders – while fully protecting the consumers they serve. We offer these recommendations as the only national association exclusively representing non-bank mortgage bankers.
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. These same community lenders 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.
Therefore, any regulatory policies that have the effect of imposing a disproportionate compliance burden on smaller lender/servicers can accelerate industry consolidation – which in turn can result in fewer consumer choices and less personalized service.
In the wake of the 2008 Housing Crisis, Congress adopted a significant number of mortgage rules that provide important new protections for consumers. Community non-bank lenders are committed to full compliance with these rules.
However, the implementation and enforcement of these rules has had an uneven impact, disproportionately burdening small non-bank lenders compared to many banks and other large mortgage lenders.
There are a number of reasons for this. First, a significant statutory disparity exists between CFPB supervision of bank and non-bank mortgage lenders. While 99% of banks are exempt from CFPB exams, 100% of non-bank mortgage lenders are subject to such exams. Therefore, CHLA appreciates the fact that the CFPB has established a prioritization of exams based on factors that include the volume of business a lender does, reflecting in part the degree of impact on consumers. We also call on Congress to enact a comparable small non-bank lender exam exemption.
Secondly, compliance cost economies of scale favor larger lenders, thus spurring concentration and reducing competition. 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.
Third, the unknowable but potentially significant financial and reputational risk of enforcement action is driving out smaller lenders and creating consolidation within the industry. 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.
Finally, 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.
In establishing 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.
CHLA believes it is equally important for the CFPB to carry out a balanced supervision and enforcement approach that reflects these same small lender/servicer concerns, thus avoiding the negative consumer impacts of industry consolidation.
Thus, CHLA is providing the following suggestions for more explicit due process protections with respect to enforcement actions against smaller lenders – protections that are consistent with fully protecting consumers.
1. MORTGAGE REGULATION BY SUPERVISION AND GUIDANCE LENDERS CAN RELY ON – INSTEAD OF REGULATION BY ENFORCEMENT
CFPB should whenever possible publish detailed guidance for mortgage rules – reserving enforcement actions for unfair, deceptive, or abusive acts or practices.
We appreciate that the CFPB is charged with protecting consumers from unfair, deceptive, or abusive acts or practices. We also 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, we would point out that more so than almost all other products and industries that CFPB regulates, mortgage lenders (both bank and non-bank) are subject to both a large number of consumer protection mortgage rules and to periodic supervision by their regulator (which in the case of a non-bank means every state they do business in). These mortgage rules include, but are not limited to:
• Qualified Mortgage (QM) [Ability to Repay]
• LO Comp – no discrimination in fees charged to different consumers
• RESPA – no unearned fees
• Truth in Lending
• New HOEPA restrictions
• Fair Housing
• Defense to Foreclosure
• Reg Z and Reg X Servicing Requirements
• Numerous other rules
Therefore, CHLA believes that regulation by enforcement, including fines, is not necessary or appropriate for actions and practices that do not meet the unfair or deceptive or abusive standard – but merely reflect a lender not complying with a rule in the way the CFPB believes it should or has minor deficiencies in compliance.
This is particularly important for smaller lenders, for whom fines and the publicity of enforcement actions can have a more severe impact than for the large megabanks whose size and loan volume may make this more of just a cost of doing business.
CHLA encourages the CFPB to focus on providing as detailed mortgage compliance guidance as possible – and believes that such guidance is of greater value to smaller lenders that do not have the compliance economies of scale that larger lenders do.
We appreciate that CFPB has put significant resources into providing guidance on rules, holding webinars on compliance, and creating a process for submission of compliance questions. However, the debate over the TRID rollout has illustrated the challenges lenders face in translating broad rules into compliance solutions that fit a series of individual fact patterns. CHLA believes these concerns go well beyond TRID – covering most mortgage rules, and creating lender concerns that they may be unintentionally failing to follow the rules in the manner that the CFPB believes they should.
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.
2. OPPORTUNITY TO CORRECT PRIOR TO ENFORCEMENT ACTION
Small non-bank mortgage lenders should always be given an opportunity to correct compliance problems – prior to initiating enforcement actions, fines, or consent orders.
While we acknowledge that lenders sometimes make mistakes, we believe that small (and mid-sized) non-bank lenders should always be given the opportunity to correct these mistakes prior to the CFPB initiating any official enforcement action or penalty.
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 think this is a constructive approach that the CFPB should follow to the maximum extent possible.
Similarly, we are also concerned about the potential imposition of significant financial penalties for practices prior to the CFPB identifying to a lender that it has concerns about such a practice.
It is reasonable for the CFPB to assess fines on mortgage lenders that have engaged in unfair, deceptive, or abusive acts or practices. And it is reasonable for the CFPB to assess fines on mortgage lenders that are given an opportunity to correct problems and fail to do so. However, the threat of imposition of fines and other enforcement actions for past practices merely reflecting non-compliance not previously identified poses an undue risk – particularly for smaller lenders for whom a fine is likely to have a proportionately larger financial impact.
Finally, 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 – but if not, such penalties are then appropriate if corrective action is not taken after the practice is identified as being a problem.
3. SAFE HARBOR FOR GOOD FAITH RELIANCE ON CFPB GUIDANCE
The CFPB should provide a safe harbor with respect to enforcement action or fines for any lender that follows CFPB requested guidance in good faith.
CFPB does provide bulletins and guidance on many common compliance issues. 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.
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.
Third, 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. Additionally, firms should have a safe harbor if the CFPB does not provide specific guidance on a specific question, so that firms are not penalized if CFPB responses do not provide a clear roadmap on how to comply on that point.
Thank you for the opportunity to express our views on this important matter.
Community Home Lenders Association
CC: Mr. John Ryan, President, Conference of State Bank Supervisors