Saturday, August 8, 2015

CFPB's Supervisory Highlights: Where Do Mortgage Lenders Fall Short in Compliance?

Recently the CFPB issued its 2015 Summer Supervisory Highlights to highlight the areas of compliance concerns revealed through its examination of supervised entities.

With respect to mortgage loan origination, the CFPB highlighted following compliance failures it noticed during its supervisory examination of mortgage lenders:

1.  Loan Originator Compensation Rule

In complying with the Truth-in-Lending Act and Regulation Z, mortgage lenders are required to establish and maintain written policies and procedures designed to ensure and monitor employees' compliance with TILA and Reg. Z.  The key component of the Loan Originator Compensation Rule under Reg Z is the prohibition against varying loan originator compensation based on loan terms.  Varying loan originator compensation based on loan terms may cause loan originators to steer consumer to costlier mortgage loans.

The CFPB noted that mortgage lenders written policies and procedures, if any, do not specifically instruct employees on how to comply with such policies and procedures.  In other words, the policies and procedures are defective, incomplete, incomprehensive, or impractical.

In my experience, I have seen lengthy written policies and procedures that either summarize or regurgitate laws or regulations.  Such policies and procedures do not meet lenders' needs because they have little practical value.  If written policies and procedures were purchased "off the shelf" without regard to the the lender's unique size and operational characteristics, they are hardly effective in accomplishing the ultimate goal of establishing and maintaining written policies and procedures -- to ensure and monitor compliance by each and every loan originator and officer of the entity.  Therefore, written policies and procedures must be tailor made, and they must address not only what the law is but also how to spot and avoid a violation.    

2.  Common RESPA Violations

A.  Untimely GFE

RESPA mandates that a lender must provide a good faith estimate of the fees and charges associated with a mortgage loan within three business days after the lender's receipt of a loan application.  Unfortunately, due to technical glitches or inadequate training of loan originators, many lenders fail to comply with this strict timeline consistently.

Lenders should be mindful that the same three-day requirement will apply to mortgage loan applications received by lenders on or after October 3, 2015, and they must deliver a Loan Estimate instead of the GFE in connection with covered loan transactions.

B.  Untimely Revised GFE

With respect to fees subject to the 0% or 10% tolerance, lenders may issue a change of circumstance disclosure and revised GFE within three business days of receiving the information constituting a change of circumstance.  This time restriction is critical to reset the applicable tolerance baseline.  Once the TRID Rule becomes effective, the same time restriction will apply to properly document a legitimate change of circumstance.

C.  Failure to Include All Fees on the GFE

The CFPB also noticed that lenders often fail to include all fees on a GFE.  This failure may cause an inaccurate estimate of fees to be paid by consumers at closing.

Under the TRID Rule, the disclosure of all fees and charges on the Loan Estimate is subject to the good faith standard.  Good faith requires a lender to accurately estimate and disclose loan-related fees and charges based on the best information available to the lender at the time of disclosure.  Good faith may require a lender to exercise due diligence to obtain information in order estimate certain fees and charges, including fees related to optional services, such as home warranty or inspection.

3.  Failure to Provide the Homeownership Counseling Disclosure

Effective since January 10, 2014, lenders are required to provide a list of homeownership counseling agencies within three business days of receiving a loan application for a RESPA-covered mortgage loan.  The disclosure must contain a list of at least 10 counseling agencies located nearest to the borrower's location (current residence zip code).  The list of counseling agencies must be accompanied by the following pieces of information related to each agency: name, phone number, street address, city, state, zip code, website URL, email address, services provided, and languages spoken.

These supervisory highlights offer lenders an opportunity to review  their own policies and procedures, and initial disclosures with respect to the above areas to determine whether they are in compliance with the applicable regulations.


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