By Markell Corpus
Periodically, the CFPB publishes Supervisory Highlights to inform relevant entities of key findings from supervisory oversight. The most recent publication was Spring 2022. The report covered many different areas from auto servicing to debt collection to student loan servicing and many things in between. It is important to be aware of the findings by the CFPB as they may affect the way some processes are currently being conducted and help lenders understand what they need to do to maintain compliance.
The first area covered that relates to the mortgage industry is 2.6, Mortgage Origination. The mortgage origination operations of entities were assessed by the CFPB. A few violations of Regulation Z were uncovered in the assessment. The most notable violation was around compensation of mortgage loan originators. It was also discovered that in some circumstances, not enough documentation had been gathered for changed circumstances. In a third observation by the CFPB, it was revealed that disclosures occasionally failed to reflect the terms of legal obligation to the signers.
Compensating Loan Originators Differently Based on Product Type
Regulation Z doesn’t allow mortgage loan originators to be compensated differently for different transaction terms.1 This prohibition was explored in depth in the preamble to the Bureau’s 2013 Loan Originator Final Rule.2 The bureau explains in the final rule and through Regulation Z that compensation based on the type of credit product isn’t allowed because products are just a bundle of particular terms.3
Examiners found that in some cases, loan originators were being compensated at higher amounts when Fannie Mae conforming fixed rate loans loans surpassed a threshold percentage of the total loans closed by the loan originator. The act of charging a higher amount for compensation based on credit product type violates the Loan Originator Rule. As consequence of these findings, lenders have agreed to change compensation plans in order to be in compliance with the Loan Originator Rule.
Insufficient Documentation for Changed Circumstances
The second key finding detailed in the report is a reminder that lenders must retain sufficient documentation when a changed circumstance comes into play. The estimates disclosed on the Loan Estimate document must be made in good faith. If a change in circumstance arises during the loan process and a new higher estimate is given, that change in circumstance must be properly documented.4
It was discovered that some lenders had not been gathering or retaining sufficient documentation to prove the validity of a change in circumstances. The specific violation mentioned is disclosing an appraisal fee on the Loan Estimate and later adding an appraisal rush fee on revised loan estimates. In these circumstances, lenders claimed the rush was at the customer’s request, but failed to maintain documentation proving that was the case. In some cases, the documentation showed evidence that the rush was requested by the loan officer or by the appraisal management company. The report pointed out that it was the practice of some loan officers to simply check a box saying the customer requested the rush appraisal and did nothing else to verify the need for the increased fee. This practice was deemed insufficient.
As a result of these findings, lenders agreed to remediate customers that were affected and revise policies and procedures in the future to follow Regulation Z.
Disclosures Failed to Reflect the Terms of Legal Obligation
According to Regulation Z, any closed-end disclosure must reflect the terms of the legal obligation to both parties.5 Examiners found violations to this rule on the Closing Disclosures of some entities. In some cases, lenders had failed to convey the fully-indexed-rate as required by the promissory note. This error was due to a miscalculation of the lender’s software, which was rounding only up to the nearest one-eighth percent despite the promissory note’s instructions to round up or down.
As a result of this discovery, lenders agreed to update the rounding method of their calculation and ensure that more monitoring of this issue would be conducted in the future.
Supervisory Program Developments
Another topic discussed in the Supervisory Highlights centers around the announcement on April 25, 2022 which states that the CFPB is invoking a previously rarely used legal provision which allows them to examine nonbank financial companies that post a risk to consumers in an effort to “help protect consumers and level the playing field between banks and nonbanks”. This includes nonbank entities in the mortgage industry. Historically, only banks and credit unions have been subject to federal supervision , but with the passing of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the CFPB does have the authority to oversee non-bank entities as well.
Many other topics were discussed which may be interesting to some entities serviced by Docutech, but those detailed above are the most relevant.