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From Banking and Finance Law Daily, January 13, 2014

CFPB provides mortgage exam procedures as rules take effect

By Katalina M. Bianco, J.D.

The Consumer Financial Protection Bureau has published mortgage origination and servicing examination procedures for the 2013 mortgage rules that took effect on Jan. 10, 2014.

Mortgage origination. The mortgage origination exam procedures consist of eight modules that cover various elements of the mortgage origination process. Each module identifies specific matters for review by examiners in examinations of mortgage lenders and brokers.

Depending on the scope, and in conjunction with the compliance management system review, including consumer complaint review, each examination will cover one or more of the following modules:

  1. Company Business Model;
  2. Advertising and Marketing;
  3. Loan Disclosures and Terms;
  4. Underwriting, Appraisals, and Loan Originators;
  5. Closing;
  6. Fair Lending;
  7. Privacy; and
  8. Examiner Conclusions and Wrap-Up.

The objectives of a mortgage origination examination are outlined by the CFPB in the procedures. As stated, the objectives are to:

  • assess the quality of a supervised entity’s compliance management systems in its mortgage origination business;

  • identify acts or practices that materially increase the risk of violations of federal consumer financial law, and associated harm to consumers, in connection with mortgage origination;

  • gather facts intended to help determine whether a supervised entity engages in acts or practices that are likely to violate federal consumer financial law in connection with mortgage origination; and

  • determine, in accordance with CFPB internal consultation requirements, whether a violation of a federal consumer financial law has occurred and whether further supervisory or enforcement actions are appropriate.

The procedures provide background on the mortgage business and applicable federal consumer financial requirements under consumer compliance statutes, and their implementing regulations, such as: Truth in Lending Act (TILA); Real Estate Settlement Procedures Act (RESPA; Equal Credit Opportunity Act (ECOA); Gramm-Leach Bliley Act; Fair Credit Reporting Act (FCRA); and others.

The procedures also explain the various types of mortgages and corresponding rules. The ability-to-repay and qualified mortgages rule is included in the discussion.

Mortgage servicing. The bureau’s mortgage servicing exam procedures, like the origination exam procedures, contain a number of modules that, depending on the scope of the exam, will be covered. These modules are grouped by similar requirements. Under Routine Servicing, the modules are:

  • Servicing Transfers, Loan Ownership Transfers, and Escrow Disclosures;

  • Payment Processing and Account Maintenance;

  • Consumer Inquiries, Complaints, and Error Resolution Procedures;

  • Maintenance of Escrow Accounts and Insurance Products;

  • Credit Reporting; and

  • Information Sharing and Privacy.

Default Servicing includes:

  • Collections and Accounts in Bankruptcy; and

  • Loss Mitigation, Early Intervention, and Continuity of Contact.

Module 9 is Foreclosures, and Module 10 is Examiner Conclusions and Wrap-Up.

The procedures describe servicer actions and requirements as well as the federal consumer compliance laws, and their implementing regulations, that apply to mortgage servicing, such as: TILA; RESPA; Electronic Funds Transfer Act; Fair Debt Collection Practices Act; FCRA; ECOA; and others.

The examination process also will include assessing other risks to consumers that are not governed by specific statutory or regulatory provisions. These risks may include potentially unfair, deceptive, or abusive acts or practices (UDAAPs) with respect to servicers’ interactions with consumers.

Cordray on mortgages. In remarks at the Phoenix Field hearing, attended by housing counselors and legal aid attorneys, Richard Cordray, Director of the CFPB, discussed the mortgage rules that became effective on January 10. In particular, he outlined the back-to-basics approach of the rules. First, the rules will help consumers avoid “debt traps” that occur when consumers “assume that the lender will not lend them money unless the lender is confident they will be able to repay the loan. This is where the ability-to-repay rule, explained in the mortgage origination exam procedures, applies. Under the rule, lenders must make a reasonable, good-faith determination that the consumer can actually afford the mortgage before they make the loan.

Another back-to-basic approach concerns the mortgage servicing industry “which performed so poorly in recent years,” Cordray said. The CFPB director said that there was a “fundamental disconnect between servicers and consumers” that was evident by the “tsunami of delinquencies” during and after the financial crisis. “To fix this broken system, the central principles of our mortgage servicing rules are no surprises and no runarounds,” Cordray said. The new rules are intended to “clean up the servicing market” and help consumers “know where they stand,” he said.

MainStory: TopStory CFPB DebtCollection FairCreditReporting Loans Mortgages Privacy RESPA TruthInLending

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