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If there are winds of change at the Consumer Financial Protection Bureau (CFPB), small and midsized nonbank mortgage lenders are hoping to slip the clutches of the consumer watchdog they say is, in many ways, duplicitous and unnecessary.
In a letter sent Wednesday to CFPB acting director Russell Vought, the Community Home Lenders of America (CHLA) offered four recommendations to streamline the supervision of independent mortgage banks (IMBs).
- The CFPB should exempt smaller IMBs from exams, pursuant to the Dodd-Frank statutory
requirement to tier supervision by firm size, volume, and risk — and limit exams of larger
IMBs to gaps in state exam schedules or to state requests for the CFPB to conduct an exam. - The CFPB should end regulation by enforcement, a practice that disproportionately harms smaller IMBs and their borrowers. Moreover, CFPB fines and orders should be based on the severity of the violation and should be clearly defined and be of finite term.
- The CFPB should increase LO Comp Rule flexibility — to help consumers by increasing competition and removing impediments to State HFA bond loans and IMB brokered loans.
- The CFPB should immediately suspend court order registry requirements for IMBs and withdraw its proposed form contracts rule. Both are redundant and unnecessary for IMBs.
The trade group pointed to the Trump administration’s Jan. 31 executive order, which said that overregulation “stops American entrepreneurship, crushes small business, reduces customer choice, and discourages innovation.”
Compliance costs for smaller IMBs is “particularly onerous, as such lenders lack compliance cost economies of scale compared to large lenders,” the CHLA argued. “Federal banking regulators have long followed a policy of streamlined regulation for small banks in recognition of this act. The CFPB should do the same for nonbank mortgage lenders.”
The CHLA noted that the Trump administration has already concluded that the CFPB’s supervisory authority is duplicative and unnecessary. State supervisors, the administration said, should have jurisdiction, and the CFPB shouldn’t have oversight of small and midsized lenders.
In terms of streamlining supervision of IMBs, CHLA said that nonbanks are already subject to a host of regulations — including the Fair Housing Act, the Equal Credit Opportunity Act (ECOA), the Real Estate Settlement Procedures Act (RESPA), the Qualified Mortgage (QM) rule and many more.
Every loan officer who works for an IMB must meet SAFE Act testing, prelicensing and continuing education requirements, and independent background checks. But bank LOs are exempt from the SAFE Act and also avoid broader CFPB supervision.
Exams are another pain point for CHLA’s members. While larger IMBs are subject to more exams than smaller IMBs, “the failure to provide a formal and transparent exemption under this specific statute to smaller IMBs creates significant CFPB compliance costs on small IMBs,” the letter reads. They must spend tens or hundreds of thousands of dollars to prepare for exams that may never occur.
“Therefore, the CFPB should publicly announce and follow a policy that it will not conduct exams for smaller IMBs, establishing a threshold with regard to size and/or loan volume that exempts at least a comparable percentage of IMBs as are excluded under the $10 billion bank exemption threshold.”
If this were to occur, the CHLA argues that the CFPB could still conduct an exam of a smaller IMB if a state requests that the bureau do so, or if the bureau receives a disproportionate number of complaints about a particular lender. The CHLA added that the bureau should limit exams of larger IMBs based on need.
“Many larger IMBs are subject to exams by numerous states, including in some cases a multi-state exam process,” the letter reads. “The CFPB should be cognizant of state exam efforts and eschew conducting exams for larger IMBs except where there are gaps in state exams of the firm or where specific states are asking the CFPB to conduct an exam (e.g., due to a lack of capacity). This approach is consistent with conclusions in the 2017 Treasury Report.”
Another frustration of the mortgage industry is the CFPB’s predilection for regulation by enforcement. The CHLA argues that the goal of mortgage rules should be compliance, not fines or penalties, and the CFPB should allow IMBs to fix problems before imposing significant fines.
“Regulation by enforcement disproportionately affects smaller IMBs, because smaller IMBs lack the loan volume and revenue economies of scale that large lenders have to pay outside attorneys and lobbyists to stay current on how the CFPB might interpret its rules,” the CHLA wrote.
“Regulation by enforcement also disproportionately affects smaller IMBs, because unlike when fines are levied against large corporations (where shareholders merely pay the fine and absorb them as a cost of doing business) fines levied against smaller IMBs end up being paid by individuals as owners, where even a relatively smaller fine can have a significant financial impact on an individual and their business.”
Finally, the CHLA took aim at the 486-page court order rule, which it calls redundant since IMBs are already required to provide the information to the Nationwide Multistate Licensing System (NMLS). Similarly, the proposed form contracts rule adds costs and serves no consumer purpose, the trade group argued.
