On January 4, 2012 President Obama appointed Richard Cordray to be the first director of the CFPB. Now that the CFPB has a director, per the Dodd-Frank Act, it has authority to regulate nonbank mortgage companies, among other nonbank financial services entities. On January 5, the CFPB announced its federal nonbank supervision program, which is similar to the CFPB’s bank supervision program launched in July 2011. The nonbank supervision program is designed to ensure that nonbanks do not violate federal consumer financial laws, including RESPA , TILA, ECOA, HMDA, provisions of the Gramm-Leach-Bliley Act (i.e., privacy rules), the SAFE Act, FCRA and the Mortgage Acts and Practices – Advertising Rule (MAP Rule).
Further, on January 11, the CFPB issued the Mortgage Origination Examination Guidelines. The guidelines focus on the review for violations of federal consumer financial law in connection with mortgage origination.
These Mortgage Origination Examination Procedures consist of modules covering the various elements of the mortgage origination process. Each module identifies specific matters for review. Examiners will use the procedures in examinations of mortgage brokers and mortgage lenders.
The procedures are broken down into the following seven modules:
Module 1 Company Business Model
Module 2 Advertising and Marketing
Module 3 Loan Disclosures and Terms
Module 4 Underwriting, Appraisals and Originator Compensation
Module 5 Closing
Module 6 Fair Lending
Module 7 Privacy
The procedures also direct examiners to look at other risks to consumers in connection with reverse mortgages, including:
• whether the entity offers other financial products, like an annuity or long-term care insurance, with the proceeds of the reverse mortgage, and if so, whether the entity provides timely, clear and understandable information about these products;
• whether the entity provides timely, clear and understandable information about the costs and relative risks of reverse mortgages;
• whether the entity provides timely, clear and understandable information about the requirements to pay property taxes, insurance, utilities, maintenance and other expenses after obtaining a reverse mortgage;
• whether the entity provides timely, clear and understandable information about the circumstances under which the borrower may be required to pay the loan in full; and
• whether the entity has adequate safeguards against improper marketing of reverse mortgages to seniors who have medical or cognitive problems or in situations raising concerns about undue influence by third parties.
The hope and expectation from the mortgage industry was that the CFPB would be an information-based, driven agency. However, based upon the above guidance to examiners, it appears the CFPB is engaged in a form of “backdoor” rulemaking without the benefit of notifying the mortgage industry, leaving no opportunity for the industry to comment. Of particular concern is the directive that examiners review and determine whether the entity has adequate safeguards against improper marketing of reverse mortgages to seniors who have medical or cognitive problems or in situations raising concerns about undue influence by third parties. This requirement does not appear to be based in law or regulation. While the CFPB does have rulemaking authority over reverse mortgages, as provided by the Dodd-Frank Act, such rulemaking has not yet been initiated or undertaken. One can only hope that this subjective and less formal approach to regulation by the bureau is an early aberration, and a more reasoned approach to regulation and rulemaking in the reverse (and broader) mortgage industry will ultimately prevail.
Further, the procedures also direct examiners to review whether a creditor originates reverse mortgage loans, and if so, to assess compliance with TILA provisions concerning those loans. For more information, the procedures make a cross reference to the examination procedures under the newly recodified TILA, 12 CFR § 1026.33, now under the auspices of the CFPB per the transfer of power mandated by the Dodd-Frank Act, effective on the designated transfer date of July 21, 2011.
The CFPB has also been tasked with finalizing a number of new regulations in order to implement the Mortgage Reform Act, enacted as Title XIV, part of the Dodd-Frank Act. With its first director in place, the CFPB is fully functional. 2012 is expected to be a busy year for the bureau and for the regulatory compliance functions within the mortgage industry.