Going after the Big Cheese (PHH takes on CFPB’s Director)

As many of you know, I have been following the PHH dispute with the CFPB virtually from its inception. Although PHH is a large organization, let’s face it, this is still like a mouse (PHH) squeaking at an elephant (CFPB)! The bite, in this instance, happens to be a $109 million penalty that the CFPB is assessing against PHH.

Reduced to the least common denominator, this is a fight against the authority vested in the Director of the CFPB, or, better said, the authority that the Director presumes to have vested in himself versus a play at arrogating to himself certain authority that he simply does not have.

Going after the Big Cheese himself is no mean feat!

But PHH has assembled a highly skilled and prominent legal team.

And there are amici curiae on both sides.

Let me back up a few steps and give a wider angle. PHH appealed to the DC Circuit Court because the Bureau’s Director Richard Cordray raised a $6 million penalty for mortgage insurance kickbacks - such penalty issued by an administrative law judge - to a whopping $109 million.

To ensure that the information presented at bar was applicable to Dodd-Frank, the hearing judges required the Bureau to provide answers in oral arguments regarding substantive provisions as to the president’s authority to remove the CFPB director only for cause, and, importantly, about how the Court should view an administrative agency led by a single director rather than the more typical commission structure.

Today is the day for those oral arguments!

Here’s one bottom line that may come from the foregoing aspects of the dispute: if the Bureau loses, the Director may find that his authority, presumed or otherwise, will be vitiated.

An access point to the litigation is to challenge the constitutionality of the Bureau itself! Areas of contention, right from the inception, have been the supposed, czarist-like construct of having a single director in charge of the Bureau, plus the view that the CFPB’s funding should come from congressional appropriations rather than from the Federal Reserve’s own budget.

Is it surprising that the DC Circuit recently required the Bureau to be prepared to face questions about whether Dodd-Frank’s provision - stating that the president can remove the CFPB director only for “inefficiency, neglect of duty, or malfeasance in office” - passed constitutional muster? Actually, I don’t think so. After all, the Bureau has been challenged on these issues all along and there is clearly an interest in determining the scope of authorities vested in the Director. If adjudication seems to reach to an unassailable decision, the viability of claims involving the CFPB’s constitutionality may be finally resolved. Or maybe not! The Supreme Court would be the next step along this circuitous path to a decision.

Should we be surprised that the Court is looking for answers about potential remedies for any problems that the applicable provision brings, including potentially removing it from the statute and allowing the president to remove the CFPB director without any specific cause?

Again, I am not surprised. If it turns out that the cures (remedies) are worse than the infection (overreaching authority) and the treatment needs to be changed, the Court will need to determine the extent to which such changes could affect the Director’s authority.

So, even though PHH is challenging Director Cordray’s interpretation of violations under RESPA that allowed him to distend a $6 million penalty handed down by an administrative law judge into an engorged, ballooned penalty of $109 million that the CFPB director handed down when PHH appealed, the fact is the instant arguments are really going quite far beyond that issue.

Here’s a pivot point: whether the Constitution allows Congress to put in restrictions on when the president can fire officials at an administrative agency. Short answer: Yes, it is constitutional if you go by the Supreme Court’s decision in 2010 in Free Enterprise Fund v. Public Company Accounting Oversight Board, which affirmed the DC Court’s ruling that such protections were constitutional.

CFPB’s Mortgage Rules for Readiness

The just released 2013 CFPB Dodd-Frank Mortgage Rules Readiness Guide (Guide) from the Consumer Financial Protection Bureau (CFPB) provides, finally, a set of criteria and preparation procedures for residential mortgage lenders and originators. It is Version 1.0 and, like previously issued guides and manuals, the CFPB will update the Guide periodically, using the results from its field examinations to further enhance the audit methodologies.

Note that it is called a “Readiness Guide.” Such documents are not meant to be, and are not, conclusive. Such guides are expected to be sign posts leading the way, a means by which a company may learn of the priorities and exigencies of a regulator’s oversight functions. In other words, as the Guide itself declaims: “The Guide summarizes the mortgage rules finalized by the CFPB in January 2013, but it is not a substitute for the rules.”

To put a finer point on the use of the Guide, please always remember that only the rules and their official interpretations can provide complete and definitive information regarding their requirements.*
 
These rules can be found at http://www.consumerfinance.gov/regulatory-implementation/.

Each rule in the Guide also includes a hyperlink with additional information, which includes Small Entity Compliance Guides that may make the rule easier to digest. There are links to videos outlining the main elements of the rule. Furthermore, a convenient hyperlink compendium structure is embedded in the Guide, so that the rule headings are themselves hyperlinks directing the reader to the rule-specific CFPB website page.

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IN THIS ARTICLE

Sections of the Guide

Summary of the Rules

Questionnaire

Library

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SECTIONS OF THE GUIDE

The Guide consists of the following sections:

Part I: Summary of the Rules
Part II: Readiness Questionnaire
Part III: Frequently Asked Questions
Part IV: Tools

Part I (Summary of the Rules) contains an outline of the eight final rules issued in January 2013 concerning mortgage markets in the United States pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) Public Law 111-203, 124 Stat. 1376 (2010) (2013 Title XIV Final Rules).

The rules amend several existing regulations, including Regulation Z, X, and B. Throughout the year, CFPB expects to provide updates to the rules where necessary. Updates will be posted, along with summaries of the changes, on the regulatory implementation CFPB webpage.

The questionnaire in Part II (Readiness Questionnaire) is '”not intended” to encompass all details of a comprehensive compliance program. This should not be interpreted to mean that the questionnaire is a replacement for the examination procedures or regulations. It is intended to serve as a guide in preparing for implementation of the mortgage rules and in performing a self-assessment. Thus, the questionnaire should be used as a self-assessment in determining a company’s progress towards compliance with the new mortgage rules. The questionnaire contains twenty-nine self-assessment questions and numerous subsections. Do not confuse the questionnaire with a proxy examination tool: it will not be added to the Examination Manual. The CFPB views the questionnaire as a “voluntary guide” for preparation. I have no doubt that it will be used by management in their discussions with examiners. The extent of those discussions may be determined by the institution’s size, products offered, risk mitigation, risk profiles, and other factors, such as the overall strength of the compliance management system.

Part III (Frequently Asked Questions) consist of only a two-page set of questions and answers, most of them quite obvious, both in the asking and the answering. Perhaps the most interesting ‘question and answer’ set is this one:

Question: Will the CFPB coordinate and communicate supervisory activities with other regulatory agencies?

Answer: In accordance with the Dodd-Frank Act and its routine practice, the CFPB will coordinate with other regulators. Regulators will communicate examination plans and findings with each other. When appropriate, the regulators will coordinate examination efforts in order to reduce regulatory burden.

Although the CFPB gave a vaguely worded answer, let’s put it this way: the integration of information between the state banking departments and the CFPB and, where applicable, other state and federal agencies, has become (or is becoming) seamless.

Finally, Part IV (Tools) is a resource directly, commonly used on many websites to direct the reader to other website locations of interest. This section hosts many hyperlinks, seventeen in total, that cover most of the rules and regulations that the CFPB has promulgated relating to mortgage compliance.

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CFPB’s Regulatory Agenda - 2013

As we begin a new year and prepare ourselves for the blizzard of new and revised regulations coming our way, I think it is important for us to consider the regulatory agenda that the Consumer Financial Protection Bureau (CFPB) has set for itself.* As you've heard me say so many times, preparation is protection. So, please undertake a review of the agenda that the CFPB has promised to pursue in the coming months, especially with the view of how best to prepare for the changes that are sure to follow.

It is worth noting that the CFPB reasonably anticipates having certain regulatory matters under consideration during the period from October 1, 2012 to October 1, 2013. And the CFPB will publish updates to its agenda periodically through October 1, 2013. These matters will be under consideration by the CFPB, primarily including various rulemakings mandated by the Dodd-Frank Act, such as several mortgage-related rulemakings and rulemakings to implement the CFPB's supervisory program for nondepository covered persons by, among other things, defining "larger participants" in certain consumer financial product and service markets. 

The CFPB is completing several mortgage-related rulemakings in January 2013, even as it continues to assess the need and resources available for additional rulemakings. For instance, the Dodd-Frank Act mandates rulemakings to implement amendments to the Home Mortgage Disclosure Act, and to the Equal Credit Opportunity Act to create a data reporting regime concerning small, women-owned, or minority-owned business lending. Also, the CFPB has inherited proposed rules concerning mortgage loans, home equity lines of credit, and other topics from other agencies as part of the transfer of authorities under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). All of these regulatory changes will require careful planning and clear guidance with respect to implementation.

In this article, I am going to highlight the regulatory changes that the CFPB has moved into their final stages. I offer a brief outline of the regulatory issues and the CFPB's likely resolution. Each of these regulations, now approaching the status of Final Rule, is extraordinarily significant and, in some instances, constitutes formidable challenges. 

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IN THIS ARTICLE

Chart

Consumer Financial Protection Bureau -
Final Rule Stage (Selected Rules)

Final Rule Stages

Loan Originator Compensation (Regulation Z)
Mortgage Servicing (Regulation X, Regulation Z)
Requirements for Escrow Accounts (Regulation Z)
TILA Ability To Repay (Regulation Z)
TILA/RESPA Mortgage Disclosure Integration
(Regulation X, Regulation Z)

Library

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Chart: Consumer Financial Protection Bureau

Final Rule Stage (Selected Rules)

This chart provides a quick overview of certain regulatory changes that the CFPB will promulgate this year. The chart also provides the anticipated Final Rule dates.

CFPB: Mortgage Originator Violations

Yesterday, I outlined for you the features of the CFPB's requisites of a Compliance Management System (CMS). My observations were based on the CFPB's newsletter, entitled Supervisory Highlights: Fall 2012, an issuance to the public and the financial services industry about its examination program, including the concerns that it finds during the course of its completed work, and the remedies that it has obtained for consumers who have suffered financial or other harm.

There are other important areas covered in the newsletter that I would now like to briefly discuss: 

Violations relating to Credit Reporting, and

Violations by Mortgage Originators

Fair Lending Compliance 

These subjects are very nuanced and complex, involving many aspects of regulatory compliance mandates. Necessarily, my remarks will be limited to the kinds of observations that the CFPB has indicated as principal concerns with respect to these matters.

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IN THIS ARTICLE

Violations relating to Credit Reporting

Violations by Mortgage Originators

Fair Lending Compliance

Library

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Violations relating to Credit Reporting

The Fair Credit Reporting Act (the FCRA) regulates the collection, use, and dissemination of consumer report information, and promotes the accuracy, fairness, and privacy of information held by the nation’s credit bureaus.

As you many know, the CFPB examines financial institutions for their compliance with the FCRA’s requirements for handling consumers’ credit information. Among other things, the FCRA and its implementing regulation, Regulation V, generally require entities that provide consumer information to credit bureaus to establish and implement reasonable written policies and procedures regarding the accuracy and integrity of the consumer information they furnish to these entities.

A party’s failure to comply with the FCRA may cause significant consumer harm.

According to the CFPB's most recent announcement on its examination findings, its examiners have discovered one or more instances in which a financial institution’s employees did not have sufficient training or familiarity with the requirements of the FCRA to implement it properly.

Such deficiencies resulted in a failure implement the following actions:

- Communicate appropriate and accurate account information to the credit bureaus.

- Indicate when account information had been disputed by consumers.

- Determine whether disputes had been fully investigated.

Findings by the CFPB noted that companies were unaware of the potential and actual violations of the FCRA, and, therefore, they repeatedly failed to respond to communications from consumers about their accounts.

The remedial actions mandated by the CFPB included (1) implementing procedures for properly reporting consumer credit disputes to all credit bureaus, (2) taking action on all disputes reported directly to the financial institution and correcting errors where appropriate, and (3) deleting information regarding customers, as appropriate, upon completion of their credit dispute investigations.

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Violations by Mortgage Originators

CFPB examiners have found significant violations of Real Estate Settlement Procedures Act (RESPA) and Truth in Lending Act (TILA).

Violations under RESPA have included failures to make proper and complete disclosures to consumers of costs and other terms of a transaction due to inadequate or improper completion of the Good Faith Estimate and the HUD-1 settlement statement.

Violations under TILA have included failures to provide accurate interest rate disclosures, and payment amounts and schedules, as well as disclosures regarding late payments, security interests, and assumption policies.

One aspect of the CFPB's examination, it should be mentioned, is to review a company's policies and procedures with respect to RESPA and TILA. Those financial institutions that do not maintain an accurate and current set of such policy statements should expect to receive an adverse finding.

Specifically, where financial institutions have violated RESPA and/or TILA, they have been directed to implement appropriate policies, procedures, and monitoring to prevent recurrence of the violations, and to ensure that any third-party vendors, including mortgage brokers, are identified and included in the company’s oversight program. The relevant policies and procedures should provide guidelines to ensure that proper Good Faith Estimate and HUD-1 disclosures are provided to consumers, and that consumers are not improperly charged. In fact, where appropriate, the CFPB has actually directed that consumers receive a corrected HUD-1, and, just as in state banking examinations, where customers are improperly charged, a financial institution will be directed to provide reimbursement to the consumer.

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Fair Lending Compliance

Another area of concern is compliance with the Home Mortgage Disclosure Act (HMDA), and its implementing regulation, Regulation C.

In our newsletter yesterday, I discussed deficiencies of fair lending compliance programs and some "common features" of well developed programs. The CFPB utilizes HMDA data in the course of its review of such programs, and it may seek corrective action or relief, as appropriate, in cases that demonstrate fair lending violations.

CFPB Proposes New Servicing Rules - RESPA

Recently, the Bureau of Consumer Financial Protection (Bureau) issued proposed rules (Proposal) to amend Regulation X, which implements the Real Estate Settlement Procedures Act (RESPA) and the official interpretation of the regulation.

The proposed amendments implement the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) provisions regarding mortgage loan servicing. Specifically, this proposal requests comment regarding proposed additions to Regulation X to address seven servicer obligations:

1) Correct errors asserted by mortgage loan borrowers; 

2) Provide information requested by mortgage loan borrowers;

3) Ensure that a reasonable basis exists to obtain force-placed insurance;

4) Establish reasonable information management policies and procedures;

5) Provide information about mortgage loss mitigation options to delinquent borrowers;

6) Provide delinquent borrowers access to servicer personnel with continuity of contact about the borrower's mortgage loan account; and

7) Evaluate borrowers' applications for available loss mitigation options.

The Proposal would modify and streamline certain existing servicing-related provisions of Regulation X. For instance, it would revise provisions relating to:

1) A mortgage servicer's obligation to provide disclosures to borrowers in connection with a transfer of mortgage servicing, and
2) A mortgage servicer's obligation to manage escrow accounts (including the obligation to advance funds to an escrow account to maintain insurance coverage and to return amounts in an escrow account to a borrower upon payment in full of a mortgage loan).

The Bureau proposes 'companion' regulations implementing amendments to the Truth In Lending Act (TILA) in Regulation Z (the 2012 TILA Servicing Proposal). We will provide an outline of the 2012 TILA Servicing Proposal in a subsequent newsletter.

Comments Due: On or before October 9, 2012.

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IN THIS ARTICLE

Scope

Nine Major Topics

Small Servicers

Library

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Scope

• The Proposal generally applies to closed-end mortgage loans, with certain exceptions.

• Under the Proposal, open-end lines of credit and certain other loans, such as construction loans and business-purpose loans, are excluded.

• Under the 2012 TILA Servicing Proposal, the periodic statement and adjustable-rate mortgage (ARM), disclosure provisions apply only to closed-end mortgage loans, but the prompt crediting and payoff statement provisions apply both to open-end and closed-end mortgage loans.

• Reverse mortgages and timeshares are excluded from the periodic statement requirement, and certain construction loans are excluded from the ARM disclosure requirements.

• The Bureau is seeking comment on whether to exempt small servicers from certain requirements or modify certain requirements for small servicers.

Nine Major Topics

The Proposal covers nine major topics, as follows:
   
1. Periodic billing statements.

Dodd-Frank generally mandates that servicers of closed-end residential mortgage loans (other than reverse mortgages) must send a periodic statement for each billing cycle. These statements must meet the timing, form, and content requirements provided for in the rule. The Proposal contains sample forms that servicers could use.

The periodic statement requirement generally would not apply for fixed-rate loans if the servicer provides a coupon book, so long as the coupon book contains certain information specified in the rule and certain other information is made available to the consumer. The proposal also includes an exception for small servicers that service 1000 or fewer mortgage loans and service only mortgage loans that they originated or own.
   
2. Adjustable-rate mortgage interest-rate adjustment notices.

Servicers would have to provide a consumer whose mortgage has an adjustable rate with a notice 60 to 120 days before an adjustment which causes the payment to change. The servicer would also have to provide an earlier notice 210 to 240 days prior to the first rate adjustment. This first notice may contain an estimate of the rate and payment change. Other than this initial notice, servicers would no longer be required to provide an annual notice if a rate adjustment does not result in an increase in the monthly payment. The Proposal contains model and sample forms that servicers could use.
   
3. Prompt payment crediting and payoff payments.

As required by Dodd-Frank, servicers must promptly credit payments from borrowers, generally on the day of receipt. If a servicer receives a payment that is less than a full contractual payment, the payment may be held in a suspense account. When the amount in the suspense account covers a full installment of principal, interest, and escrow (if applicable), the Proposal would require the servicer to apply the funds to the oldest outstanding payment owed. A servicer also would be required to send an accurate payoff balance to a consumer no later than seven business days after receipt of a written request from the borrower for such information.

Disclosure Integration, High Cost, and Counseling

On July 9, 2012, the CFPB issued its proposed integration of RESPA and TILA disclosures into the "integrated" forms, entitled "Loan Estimate" and "Closing Disclosure". These new forms are derived from the Good Faith Estimate (GFE), the Truth-in-Lending (TIL) Disclosure, and the HUD-1/1A Settlement Statement. This assemblage has been duly dubbed with the euphemism "integration".

Excluded from the forthcoming integration are reverse mortgages, home equity lines of credit (HELOCs), chattel dwelling loans, and de minimis originations consisting of loans made by creditors who make five or fewer otherwise covered loans per year.

I have covered the process of constructing these forms in several newsletters and articles, including HERE, and HERE.*

The CFPB is not expecting to finalize the integration before the end of this year. Comments are due November 6, 2012.

However, there is a comment deadline of September 7, 2012 - which will lead to rulemaking before January 2013 - regarding the extent to which the rule applies to loans previously exempted from RESPA or TILA and the further redefining of the term “finance charge” to include most costs associated with residential mortgage loans.

By its own admission, the CFPB has stated that the proposal to "broaden" the definition of a "finance charge" by adopting certain adjustments or accommodations in its HOEPA implementing regulations under Regulation Z, would "cause more loans to exceed the APR and points and fees triggers and be classified as high-cost mortgages under HOEPA."

The CFPB has also set forth proposed rules to implement Dodd-Frank amendments regarding high-cost mortgages and also to provide homeownership counseling provisions that would affect mortgage lending generally (with no exclusion for HELOCs).

The implications of these rules, taken together, are far reaching. I would suggest that you visit our Library for further information.

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IN THIS ARTICLE

“Loan Estimate” and “Closing Disclosure”

Integration

High-Cost Mortgages

Homeownership Counseling

Library

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“Loan Estimate” and “Closing Disclosure”

• The Loan Estimate replaces the GFE and early TIL, while the Closing Disclosure replaces the HUD-1/1A and final TIL.

• HUD's Special Information Booklet will still be required.

• The CFPB's proposal would combine five pages (seven if typical appraisal and servicing disclosures were to be counted) of TILA/RESPA data into a three-page Loan Estimate, not counting the written list of available providers that must be separately provided if the creditor allows a consumer to shop for a settlement service.

• The Closing Disclosure is five pages.

Integration

The integration not only provides an entirely new format but also reconciles certain existing differences between Regulation X, the implementing regulation of RESPA and Regulation Z, the implementing regulation of TILA.

Highlights

• Redefines the term “application” by deleting the 7th component from the definition adopted by HUD, as outlined in its New RESPA Rule FAQs, as “any other information deemed necessary by the loan originator.”

• Alters the coverage of the disclosure requirements so they would apply to home loans, except for the aforementioned exemptions.

• Changes the timing and responsibility rules for providing closing disclosures.

• Prohibits the collection of any fees other than a credit report fee, until the Loan Estimate has been received, as provided by Regulation X, instead of the broader parameter of the “credit history” fee set forth in Regulation Z.

• Prohibits the collection of any fees other than a credit report fee, until the consumer has indicated “an intent to proceed with the loan,” as specified by the Regulation X amendments of January 2010.

• Requires the credit report fee to be accurately described as a credit report fee, not as an “application fee.”

• Allows preliminary estimates only if they are clearly labeled as not the Loan Estimate.

• Continues requiring the Regulation X Special Information Booklet, and possibly incorporating material from the Regulation Z's ARM (CHARM) booklet.

• Prohibits a creditor from requiring a consumer to verify any information the consumer provided with the application (per Regulation X).

• Incorporates the disclosure tolerances of Regulation X, modified to extend the zero tolerance to fees paid to affiliate providers and providers for whom a consumer cannot shop.

• Adjusts Regulation X limitations on revising Loan Estimates, including the definition of “changed circumstances.”

• Allows a waiver of waiting periods in the event of bona fide personal emergencies.

• Permits price averaging.

• Requires providing certain Closing Disclosures to the seller, if a seller is a party to the transaction.

• Requires close communication and cooperation between mortgage brokers and settlement agents who may provide disclosures, in order to ensure accurate disclosure.

• Prohibits providing disclosures of both estimated and actual costs at the same time (viz., as revised Loan Estimate and a Closing Disclosure).

• Requires the retention of evidence of compliance (i.e., permitting electronic file retention) for three years for Loan Estimates and five years for Closing Disclosures.

• Requires states with existing exemptions from TILA (i.e., Maine, Connecticut, Massachusetts, Oklahoma, and Wyoming) to conform their laws if they wish to retain their exemptions.

High-Cost Mortgages

• Balloon payments would largely be banned, and creditors would be prohibited from charging prepayment penalties and financing points and fees.

• Late fees would be restricted to four percent of the payment that is past due, fees for providing payoff statements would be restricted, and fees for loan modification or loan deferral would be banned.
  

Next Up, Reverse Mortgages!

In a June 28, 2012 Report to Congress, the Consumer Financial Protection Bureau (the CFPB or the Bureau) published its study of reverse mortgage transactions. This study was required by Section 1076 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).

The Report surmised that reverse mortgages are not being used as Congress originally intended, because, rather than provide income for borrowers during retirement, reverse mortgages are being provided to consumers at younger ages, thereby increasing the risk that these borrowers will go broke later in life. The study found that almost half of reverse mortgage borrowers in fiscal year 2011 were younger than 70 years of age.

Furthermore, the Report concluded that 70% of reverse mortgage borrowers withdrew all the available funds at once in lump-sum payments, which the CFPB claims can be squandered quickly, leaving borrowers with the potential to face foreclosure due to the reduced ability to pay property taxes. According to the study, nearly 10% of reverse mortgagors (as of February 2012) were at risk of foreclosure.

In its 231 page Report, the CFPB stated the following "emerging concerns":

1. Reverse mortgages are complex products and difficult for consumers to understand.

2. Reverse mortgage borrowers are using the loans in different ways than in the past, which increase risks to consumers.

3. Product features, market dynamics, and industry practices also create risks for consumers.

4. Counseling, while designed to help consumers understand the risks associated with reverse mortgages, needs improvement in order to be able to meet these challenges.

5. Some risks to consumers appear to have been adequately addressed by regulation, but remain a matter for supervision and enforcement, while other risks still require regulatory attention.

The study identified four major topics "where additional research would help determine if additional consumer education or regulatory action is needed."

Those topics are:

(a) Factors influencing consumer decisions;
(b) consumer use of reverse mortgage proceeds;
(c) the longer-term outcomes of reverse mortgages; and
(d) the differences in market dynamics and business practices among the broker, correspondent, and retail channels.

On July 2, 2012, the CFPB began the process of investigating the consumer use of reverse mortgages. This procedure begins with a Notice and Request for Information. In effect, that CFPB now seeks comment and information from the public on the aforementioned topics.

In this review of reverse mortgages, the CFPB will undertake, among other things, to identify any practice as unfair, deceptive, or abusive, and may provide for an integrated disclosure standard and model disclosures. Additionally, it will seek detailed information from the public on the factors that influence reverse mortgage consumers' decision-making, consumers' use of reverse mortgage loan proceeds, longer-term consumer outcomes of a decision to obtain a reverse mortgage, and differences in market dynamics and business practices among the broker, correspondent, and retail channels for reverse mortgages.

In this article, I will outline the scope of information that the CFPB is seeking from the public, including consumers, housing counselors, financial institutions, and others, regarding consumer use of reverse mortgages and consumer experiences during the reverse mortgage shopping process.*

Factors Influencing Consumer Decisions

The CFPB asks the following questions regarding the factors that influence consumer decisions:

1. What factors are most important to consumers in deciding whether to get a reverse mortgage?

2. What factors are most important to consumers in choosing among products? Among other things, comments could address the choice between fixed-rate, lump-sum reverse mortgages and adjustable-rate, line-of-credit or monthly disbursement reverse mortgages.

3. What factors are most important to consumers in choosing among potential lenders?

Consumer Use of Reverse Mortgage Proceeds

4. Nearly 75% of recent reverse mortgage consumers took out all of their available funds upfront in a lump sum.
   

a. What do consumers do with these funds?
b. Where do consumers place loan money that they do not use immediately? (i.e., in a savings account, an investment account, a certificate of deposit (CD), et cetera).

5. Some reverse mortgage consumers use reverse mortgage loan funds to refinance a traditional mortgage or home equity loan/line of credit.
   

a. What proportion of consumers are using reverse mortgage loan funds to refinance a traditional mortgage or home equity loan/line of credit?
b. What proportion of the loan funds are typically spent on paying off an existing mortgage?
c. Do consumers using a reverse mortgage to refinance an existing mortgage typically consider other options first (e.g. moving to a different home or a traditional refinancing)? If not, why not? If so, what factors lead them to choose a reverse mortgage instead?
   

6. Some reverse mortgage consumers use reverse mortgage loan funds to consolidate non-housing debts.
   

a. What proportion of borrowers use reverse mortgage loan funds to
consolidate non-housing debts?
b. What proportion of the loan funds are typically spent on consolidating non-housing debts?
c. What types of non-housing debts are typically consolidated (i.e., credit card, auto, medical-related debt, et cetera)?

CFPB Issues Supervision and Examination Manual

On October 13, 2011, the Consumer Financial Protection Bureau (CFPB) issued its Supervision and Examination Manual - Version 1.0 (Manual). This is first edition of a guide devoted to how the CFPB will supervise and examine consumer financial service providers under its jurisdiction for compliance with Federal consumer financial law.

The Manual is divided into three parts: 

Part 1: Describes the supervision and examination process. 

Part 2: Contains examination procedures, including both the general instructions and the procedures for determining compliance with specific regulations. 

Part 3: Provides templates for documenting information related to supervised entities and the examination process, including examination reports.

Unfortunately, at this time Part 1 and Part 2 are only available as website pages. Part 3 is available in PDF.

However, we have created a Directory and Compendium.

At this time, Part 1 and Part 2 are only available as website pages.

Part 3 is available in PDF.

In preparing our Audit and Due Diligence procedures for our clients, we have combined all three parts into a single Directory with links to both each section's text and website links. There are over 700 pages in this compendium. 

Our compendium provides:

• Directory: All Sections
• Contents: Links to Compendium Text
• Contents: Links to CFPB Website Text

We are pleased to share this compilation with you for free.

Due to the huge size of the compendium - over 13 MBs - it must be downloaded from our secure Extranet. If you are interested in obtaining this compendium, please request it and we'll send you the download instructions.

Supervision and Examination Manual - Version 1.0 

OUTLINE

Part I - Compliance Supervision and Examination

Supervision and Examination Process     

Overview     

Examinations 

Part II - Examinations Procedures 

Compliance Management Review

Unfair, Deceptive or Abusive Acts or Practices     

Narrative     

Examination Procedures

Equal Credit Opportunity Act     

Narrative     

Examination Program     

Interagency Fair Lending Examination Procedures     

Interagency Fair Lending Examination Procedures – Appendix

Home Mortgage Disclosure Act     

Narrative     

Examination Procedures     

Home Mortgage Disclosure Act Checklist

Truth in Lending Act     

Narrative     

Examination Procedures     

Appendix A: High-Cost Mortgage (§ 226.32) Worksheet

Real Estate Settlement Procedures Act     

Narrative     

Examination Procedures     

Checklist 

Homeowners Protection Act     

Narrative     

Examination Procedures

Consumer Leasing Act     

Narrative     

Consumer Leasing Act Examination Procedures     

Consumer Leasing Act Checklist

Fair Credit Reporting Act     

Narrative     

Examination Procedures

Fair Debt Collection Practices Act     

Narrative     

Examination Procedures

Electronic Fund Transfer Act     

Narrative     

Examination Procedures     

Checklist 

Truth in Savings Act     

Narrative     

Examination Procedures     

Checklist

Privacy of Consumer Financial Information (GLBA)     

Narrative     

Examination Procedures     

Examination Procedures Attachment     

Checklist

Mortgage Servicing Examination Procedures 

Part III - Examination Process Templates     

Templates     

Entity Profile     

Risk Assessment     

Supervision Plan     

Examination Scope Summary     

Examination Report     

Examination Report cover     

Examination Report cover letter

LIBRARY

Consumer Financial Protection Bureau

Supervision and Examination Manual 

Version 1.0 

Announcement

October 13, 2011

Seeking Clearance to Fund Disclosure Research

On September 26, 2011, the Consumer Financial Protection Bureau (CFPB) published its September 20, 2011 Generic Information Collection Request (Generic ICR) to the Office of Management and Budget (OMB). This Generic ICR requests OMB's review and clearance under the Paperwork Reduction Act of 1995.

The title of the Generic ICR is Generic Clearance for Research in Development of Disclosure Forms.

This issuance commences a Comment Period to the OMB, which will conclude on or before October 26, 2011.

Synopsis

 

The Dodd-Frank Act (Title X) requires the CFPB to develop model forms that integrate separate disclosures concerning residential mortgage loans that are required under the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA).

For more information, please visit our newsletters or the CFPB section in our Library.

Development of these integrated disclosures will involve qualitative testing of the disclosures given in connection with consummation of the transaction and may involve testing of additional disclosures required by TILA and RESPA during the shopping, application, and origination process.

The CFPB may perform qualitative testing of other model disclosures or materials related to the integrated mortgage loan disclosures, such as instructions for loan originators, tools to assist consumers in understanding the disclosures and certain loan products and features, other mortgage loan-related disclosures, and of industry usability.

Also, the CFPB anticipates engaging the public to obtain feedback about the draft integrated mortgage loan disclosures and related materials before formal notice and comment of proposed rules.

Data Collection and Disclosures

 

The CFPB plans to collect qualitative data through a variety of collection methods, which may include interviews, focus groups and the Internet, in order to inform its design and development of the mandated integrated disclosures and their implementation.

The information collected through qualitative evaluation methods is being gathered in order to inform the disclosure form's design and content, using an "iterative process" to improve the draft form, presumably to make it easier for consumers to use the document to (1) identify the terms of the loan, (2) compare among different loan products, and (3) understand the final terms and costs of the loan transaction.

The research is expect to result in recommendations for development of and revisions to disclosure forms and related materials that would be provided to consumers in connection with obtaining mortgage loans.

Research activities will be conducted primarily by external contractors employing various cognitive psychological testing methods. The CFPB claims that "this approach has been demonstrated to be feasible and valuable by other agencies in developing disclosures and other forms."

The planned research activities will be conducted during FY 2012 through FY 2014 with the goal of creating effective disclosures and related materials for consumers.

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Consumer Financial Protection Bureau 

Proposed Information Collection: Comment Request 

Generic Clearance for Research 

in Development of Disclosure Forms

 

September 26, 2011

HUD: Updates RESPA

On July 11, 2011, the Department of Housing and Urban Development (HUD) issued updates to the Real Estate Settlement Procedures Act (RESPA).

This is a final rule (Rule) which makes technical corrections and certain clarifying amendments to HUD's RESPA regulations promulgated by a final rule published on November 17, 2008.

The majority of the regulations promulgated by the November 17, 2008, and became applicable on January 1, 2010.

The HUD will transfer its authority over this Rule to the CFPB on July 21, 2011. 

Effective Date: August 10, 2011. 

 SALIENT AMENDMENTS

Good Faith Estimate (GFE) and Intent to Proceed

The applicant borrower must express an intent to continue with the application process.

The Rule amends § 3500.7(a)(4) and (b)(4) to provide that the applicant borrower must indicate an intention to proceed with the loan covered by the GFE received by the applicant borrower from the lender or mortgage broker before the lender or mortgage broker may charge additional fees.

Good Faith Estimate (GFE)

Tolerances

Currently the applicable provision states that a loan originator is bound "within the tolerances provided in paragraph (e) of this section, to the settlement charges and terms listed on the GFE provided to the borrower, unless a [revised] GFE is provided prior to settlement consistent with this paragraph (f)."

However, the introductory paragraph inadvertently omits that the GFE does not remain binding indefinitely but expires 10 business days after the GFE is provided to the borrower if the borrower does not express an intent to continue with an application provided by the loan originator that provided the GFE, or expires after such longer period as may be specified by the loan originator pursuant to § 3500.7(c).

Although the expiration period of the GFE is clearly stated in paragraph (f)(4) of § 3500.7(f), HUD finds that clarity is enhanced by also adding this language to the introductory paragraph of § 3500.7(f).

Changed Circumstances

Currently the applicable provision addresses changed circumstances affecting settlement costs, provides that the revised GFE may increase charges for services listed on the GFE but only to the extent that the changed circumstances actually resulted in higher charges.

However, the currently the applicable provision, which addresses borrower-requested changes, inadvertently omits that the revised GFE may increase charges listed on the GFE only to the extent that changed circumstances affecting the loan, or the borrower's requested change, actually increased those charges. 

This rule therefore adds language that clarifies this limitation.

Locked Interest Rate

HUD clarifies that whenever the borrower's interest rate is locked, a revised GFE must be provided to the borrower showing the revised interest rate-dependent changes and terms within 3 business days.

Construction Loans

In revising § 3500.7(f)(6) of RESPA, HUD is adding the word "construction" to the phrase "new home purchases" so that it reads "new construction home purchases."

HUD believes that the content of this paragraph is clear that new home purchases refers to purchases of newly constructed homes, not simply any home that is new to a borrower. This interpretation is supported by the preamble to the November 17, 2008, final rule in which this regulatory provision was discussed.

While HUD believes the meaning of paragraph (f)(6) is clear, to remove any possibility of ambiguity the word "construction" is inserted between the words "new" and "home purchases."

HUD-1 or HUD-1A Settlement Statements

Appendix: HUD-1 Instructions for Page 3 

The instructions for the HUD-1, found at 73 FR 68243 of the November 2008 final rule, provide that the HUD-1 form is to be used as a statement of the actual charges and adjustments. If the borrower, or a person acting on behalf of the borrower, does not purchase a settlement service that was listed on the GFE (e.g., owner's title insurance), there should be no amount entered for that service in the corresponding line on Page 2 of the HUD-1, and the estimate of the charge from the GFE should not appear on the comparison chart on Page 3 of the HUD-1.

HUD has determined that the current instructions are not sufficiently clear on this point. Allowing loan originators to include on Page 3 of the HUD-1 charges from the GFE for settlement services that were not purchased could both induce loan originators to discourage consumers from purchasing settlement services (e.g., owner's title insurance) in order to gain padding in the 10 percent tolerance categories, and encourage loan originators to pad the 10 percent tolerance categories on the GFE with estimates of services that the consumer will not need in the transaction. HUD has previously addressed and clarified this issue in informal guidance.

Therefore, HUD is revising the first paragraph of the instructions for Page 3 of the HUD-1 to clarify that the amounts to be inserted in the comparison chart are those for the services that were purchased or provided as part of the transaction, and that no amount should be included on Page 2 of the HUD-1 for any service that was listed on the GFE, but which was not obtained in connection with the transaction.

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HUD: Real Estate Settlement Procedures Act (RESPA)
Technical Corrections and Clarifying Amendments
Federal Register - Vol. 76, No. 132
Monday, July 11, 2011