CFPB raises the bar on fair lending, other mortgage issues

Jonathan Foxx, Managing Director of Lenders Compliance Group, Long Beach, N.Y. Foxx is a 30-year veteran of the mortgage industry and founder of the Association of Residential Mortgage Compliance Professionals. Foxx is interviewed by Justin Dullum of the CFPB Journal staff.

How is the CFPB’s currently influencing the regulation of mortgage lending?

The most influential change with respect to residential mortgage is the CFPB Supervision and Examiner Manual. The results of those examination formats require all the non-banks such as mortgage brokers to comport with specific and very precise examination guidelines. So that’s a whole new layer of logistical requirements.

Are there any specific requirements that strike you as particularly important?

Derived from the mission of the CFPB itself as an advocacy agency and the examination requirement therein, one that requires a considerable review in respect to the consumer and the lender, I would say, is the consolidation and review of the fair lending requirements. That is one of the most salient issues that the CFPB will take under review during an examination, on top of the state lending requirements that are in place. It’s not that fair lending hadn’t been previously applied to financial institutions, it is that the CFPB is in effect prioritizing it and making it a central focus of their mission, which obviously benefits both the lender and consumer. Virtually all lenders want to comply with fair lending guidelines, so it benefits both.

Are there provisions you think are lopsided toward the benefit of the consumer or the lender?

Anytime you start up a new agency you are going to incur costs at different levels. There is a Federal cost for the taxpayer. But for lenders, they have to take on more due diligence. The CFPB requires a rather rigorous examination now. The cost involved to put together the appropriate type of applications, software, due diligence and many other factors like training, testing, and monitoring has to be borne in some way by somebody. Necessarily some of that cost will be transferred to the consumer in terms of pricing. That does not mean that the pricing to the consumer is going to be onerous. It does not mean that the pricing to the consumer is going to cause major changes to competitive environments and markets, but it does mean that some amount needs to be passed on for a financial institution to function. Not that those considerations weren’t always applied assiduously by the regulators, but more so now because the CFPB is acting on a central focus.

What should lenders be looking a year or two ahead toward?

This is a very compelling question because we’re looking at a very dynamic environment with respect to the CFPB. The question is ultimately, what is on the CFPB scope? The CFPB, having now worked through the authorities that it has received, is providing proposed rules in various areas, so over the next few months those proposed rules will come into a final stage.

For example, mandatory escrow requirements are under review. Confidential treatment is under review right now. That’s very significant with respect to privilege. There are final rules for appraisals for high risk mortgages coming up. Then there are the mortgage origination standards expected by January of 2013 with respect to loan originator confirmation, and they’re looking to promulgate a final rule with respect to the ability to repay, and I haven’t touched upon the rules that are still in earlier stage of review, such as mortgage servicing rights. So there is a lot on the table now, let’s put it that way.

I think if the question would be reduced to what we tend to hear at my firm and take notice of, I would say that firms are preparing in any way they can for a CFPB exam. That means over the next year as new changes come about they will add to their understanding of how to comport with guidelines. We find there is a considerable increase amongst our clients for conducting CFPB specific compliance examinations.

We provide a proxy exam using the templates provided by the CFPB, but we developed our own as well. We determined that the exams require more nuance than the models currently provided by the CFBP. If the question is, what specific item or two are most lenders concerned about, this is a difficult thing to predict, but I would be sure to look at loan originator compensation as a very big factor and, again, I would certainly put fair lending in there. Non-banks have already accepted the new good faith lending requirements in addition to what they’ve got now. But there is also a certain amount about how the regulations will prevent the lenders and non-banks from having to absorb the cost of complying with the CFPB.

Fredrikson & Byron Law