Consumer financial services at a crossroads: Mortgage origination and servicing

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Supervision

In 2017, the CFPB issued several final rules to clarify, revise, and update the regulatory framework applicable to the home mortgage origination and servicing market:

Home Mortgage Disclosure Act (HMDA) 

In August 2017, the CFPB published a final rule that clarifies certain HMDA data collection and reporting requirements, most of which became effective on January 1, 2018. Among other changes, the rule introduces mandatory reporting of home equity lines of credit for both depository and non-depository institutions above a certain threshold3 and adds 25 new data points for collection and reporting—in addition to the pre-existing 23 data points.4 The Bureau also published a reference chart intended to assist lenders with compliance with the new collection requirements.5

"The Fair Lending Office will continue to focus on advocacy, coordination, and education, while its current supervision and enforcement functions will [move to the Office of the Director]."
CFPB Acting Director Mick Mulvaney1

"Know-Before-You-Owe" mortgage disclosure 

In July 2017, the CFPB released an updated version of its TILA-RESPA integrated disclosure rule (TRID). Notably, the amended rule extends coverage to all closed-end credit transactions (other than reverse mortgages) that are secured by a cooperative unit; creates tolerances for calculating the finance charge and disclosures affected by such charge; clarifies the circumstances in which a creditor may provide disclosures to certain parties involved in the origination process; and expands the rule's partial exemption for certain non-interest-bearing subordinate loans that provide down-payment and other homeowner assistance.6 The mortgage industry must comply with these updated provisions by October 1, 2018. Concurrently, the Bureau issued a follow-up proposal for public comment to address the "black hole" issue that prevents creditors from resetting tolerances except in very limited circumstances.7 However, it remains unclear how the new CFPB leadership will proceed on this issue.

Truth in Lending Act 

In March 2018, the CFPB also finalized an amendment to its 2016 mortgage servicing rule to clarify and, as of April 19, 2018, afford mortgage servicers more latitude in providing periodic statements to consumers entering or exiting bankruptcy.8

"Our coalition of Attorneys General investigating lending disparities and allegations of redlining is growing." 
Pennsylvania Attorney General Josh Shapiro2

In December 2017, CFPB Acting Director Mick Mulvaney announced that the Bureau would not penalize industry participants for non-material errors in data reported for 2019, and would open a rulemaking to reconsider certain aspects of HMDA.9 Moving forward, we expect the CFPB to focus on the HMDA disclosure requirements and seek to reduce the regulatory burden for mortgage-related activities, particularly concerning regulatory provisions not required by statute. This could include the removal of certain data points previously added by the CFPB under its discretionary authority. Additionally, the House passed a bill in January 2018 that if enacted, would exempt community banks, small credit unions and nonbank mortgage lenders from the expanded HMDA disclosure requirements.10

Enforcement

The CFPB remained a prominent enforcer in the mortgage space in 2017, primarily targeting mortgage lenders and loan servicers with respect to kickback schemes, mortgage servicing violations, and deceptive foreclosure practices and communications.

In 2017, the CFPB resolved two enforcement actions involving alleged illegal kickbacks. In January, the Bureau imposed a US$3.5 million fine on a major mortgage lender for paying illegal kickbacks for mortgage business referrals, including paying for referrals through agreements and split fees.11 In September, the Bureau ordered a real estate settlement services provider to pay US$1.25 million in redress for steering consumers to a title insurer owned in part by several of its executives.12 The CFPB also sued two mortgage servicers for failing to disclose critical information about the process of applying for foreclosure relief,13 or imposing excessive paperwork demands to apply for such relief, as well as issued a US$1.75 million fine on a mortgage company that failed to report accurate mortgage transaction data under HMDA.14 Finally in 2018, in a joint enforcement action with the OCC, the Bureau notably reached an unprecedented US$1 billion settlement with a major financial institution for mortgage servicing abuses that include improperly charging fees to borrowers for mortgage interest rate-lock extensions.

A notable pending enforcement action in 2018 concerns alleged improper mortgage servicing practices. The Bureau filed a lawsuit against a leading nonbank mortgage servicer for failing to provide routine servicing functions, including making widespread errors and runaround costs, failing to send accurate monthly statements, illegally foreclosing on struggling borrowers, ignoring customer complaints and selling off the servicing rights to loans without fully disclosing the mistakes it made in borrowers' records.15

Although the new CFPB leadership is conducting an ongoing review of pending enforcement actions,16 we expect mortgage servicing violations to remain a focal point of the Bureau's enforcement efforts.

In 2016, the mortgage industry represented 23 percent of all consumer complaints,17 82 percent of which concerned mortgage servicing.18 In light of the continued high rates of mortgage servicing-related complaints, we anticipate that the CFPB will continue to scrutinize mortgage servicing practices.

25%
of overall consumer complaints were mortgage-related (since CFPB’s creation)

Litigation

In 2017, the Department of Justice (DOJ) and US Attorneys reached several large settlements against bank and nonbank mortgage companies under the False Claim Act (FCA) and the Fair Housing Act (FHA), frequently through joint actions with the Department of Housing and Urban Development (HUD). Enforcement efforts primarily focused on origination and servicing violations in connection with FHA-insured loans, as well as discriminatory lending practices. The DOJ and US Attorneys secured significant settlements (including treble damages) under the FCA. Notably:

  • In September 2017, the US Attorney for the Southern District of Texas obtained a US$280 million settlement against two mortgage companies for violating various FHA guidelines in underwriting and originating FHA-insured loans, as well as falsely certifying compliance with the FHA program.19 The DOJ also reached a US$74 million settlement against a leading mortgage servicer and an US$11.7 million settlement with a Louisiana-based mortgage lender on similar grounds.20 The DOJ has initiated at least one other investigation regarding the adequacy of underwriting and quality control processes of FHA-insured loans21
  • In March 2017, HUD reached a US$1 million settlement with an Illinois bank resolving allegations that the bank engaged in illegal "redlining" of mortgage applicants in minority neighborhoods.22 The US Attorney for the Southern District of New York also obtained a US$53 million settlement against a leading financial institution for discriminatory pricing on the basis of race and national origin in the conduct of its wholesale lending business23

By reassigning the Office of Fair Lending to the Office of the Director, the new CFPB leadership has signaled a possible retreat from fair lending enforcement. HUD and the DOJ seem unlikely to compensate for any such retreat. For example, HUD Secretary Ben Carson has recently proposed to remove language promoting "inclusive, discrimination-free communities" from HUD's mission statement,24 reflecting a similar slowdown in HUD's fair housing enforcement activity. Thus, moving forward, we expect consumer advocates, state enforcement authorities and municipalities to drive further fair housing/lending activity.

Fintech outlook and mortgages

Fintechs in this space have principally focused on developing software to assist mortgage lenders in complying with HMDA disclosure requirements, and performing real-time audits of the entire mortgage origination process to reduce cost and exposure. Fintechs have also developed AI-based scoring algorithms used to evaluate alternative data sources and assess mortgage seekers' creditworthiness, as well as provide more accurate mortgage origination pricing and rates. As in other market segments, these tech-focused methods may raise novel fair lending considerations. While the CFPB may not prioritize federal fair lending enforcement moving forward, new market entrants unfamiliar with applicable consumer protection laws and regulations may be particularly susceptible to state fair lending enforcement.

State spotlight

State-level mortgage enforcement activity, reflective of a diminishing pool of credit crisis-related cases, trended downward in 2017. One notable exception was the Florida AG's office, which filed a suit against a leading nonbank mortgage loan servicer and its subsidiaries for failing to provide routine servicing functions, including filing illegal foreclosures, mishandling loan modifications, misapplying mortgage payments and collecting excessive fees.25

We expect that AGs will be more proactive in 2018. In light of the new CFPB leadership's retreat from fair lending and explicit reliance on states to take the lead on enforcement actions,26 we anticipate that AGs will focus on discriminatory practices. A recent Senate vote to roll back certain consumer protections under the Dodd-Frank Act, including provisions designed to combat housing discrimination and disclosure requirements for mortgage lenders, may provide an additional impetus for AGs to pick up this issue:27

  • In February 2018, the Pennsylvania AG announced it has opened three investigations to probe redlining in Philadelphia28; at least five other states have started to investigate local mortgage lending disparities as well29


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Kate Berry, CFPB’s Mulvaney Strips His Fair-Lending Office Of Enforcement Powers (Feb. 1, 2018), https://www.americanbanker.com/news/cfpbs-mulvaney-strips-his-fair-lending-office-of-enforcement-powers.
2https://twitter.com/JoshShapiroPA/status/974332577522708480.
3 Reporting becomes mandatory for both depository institutions and non-depository institutions that originate at least 100 HELOCs in each of the two preceding
calendar years.
4 CFPB, Home Mortgage Disclosure (Regulation C) (Aug. 24 2017), https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/201708

_cfpb_final-rule_home-mortgage-disclosure_regulation-c.pdf.
5 CFPB, Reportable HMDA Data: A Regulatory and Reporting Overview Reference Chart (Feb. 1, 2018), (first version was published in Oct. 2017, and updated in Feb. 2018), https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/201710

_cfpb_reportable-hmda-data_regulatory-and-reporting-overview-reference-chart.pdf.
6 CFPB, Amendments to Federal Mortgage Disclosure Requirements under the Truth in Lending Act (Regulation Z) (Jul. 7, 2017), https://www.consumerfinance.gov/about-us/newsroom/cfpb-finalizes-updates-know-you-owe-mortgage-disclosure.  
7 The CFPB is seeking comments on when lenders may use a Closing Disclosure or revised Closing Disclosure, instead of a Loan Estimate, to determine the good faith of an estimated closing cost. See CFPB, Amendments to Federal Mortgage Disclosure Requirements Under the Truth in Lending Act (Regulation Z) (Aug. 11, 2017), https://www.gpo.gov/fdsys/pkg/FR-2017-08-11/pdf/2017-15763.pdf.
8 CFPB, Mortgage Servicing Rules Under the Truth in Lending Act (Regulation Z) (Mar. 8, 2018), https://files.consumerfinance.gov/f/documents/cfpb_mortgage-servicing_final-rule_2018-amendments.pdf.
9 CFPB, CFPB Issues Public Statement On Home Mortgage Disclosure Act Compliance (Dec. 21, 2017), https://www.consumerfinance.gov/about-us/newsroom/cfpb-issues-public-statement-home-mortgage-disclosure-act-compliance
10 H.R. 2954 (Home Mortgage Disclosure Adjustment Act), 115th Cong. (Jun. 20, 2017).
11 Consumer Fin. Prot. Bureau v. Prospect Mortgage LLC, 2017-CFPB-0006 (Jan. 31, 2017), https://files.consumerfinance.gov/f/documents/201701_cfpb_P

rospectMortgage-consent-order.pdf.
12 Consumer Fin. Prot. Bureau v. Meridian Title Corporation, 2017-CFPB-0019 (Sept. 27, 2017), https://files.consumerfinance.gov/f/documents/201709_cfpb_meridian-title-corp_consent-order.pdf.
13 Consumer Fin. Prot. Bureau v. Fay Servicing, LCC, 2017-CFPB-0014 (Jun. 7, 2017), https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/062017

_cfpb_Fay_Servicing-consent_order.pdf.
14 Consumer Fin. Prot. Bureau v. CitiFinancial, LLC, et al., 2017-CFPB-0004 (Jan. 23, 2017); Consumer Fin. Prot. Bureau v. CitiMortgage, Inc., 2017-CFPB-0005 (Jan. 23, 2017), https://www.consumerfinance.gov/about-us/newsroom/cfpb-orders-citi-subsidiaries-pay-288-million-giving-runaround-borrowers-trying-save-their-homes.
15 Consumer Fin. Prot. Bureau v. Ocwen Fin. Corp., et al., case no. 9 :17-cv-80495  (S.D. Fla. Apr. 20, 2017), https://s3.amazonaws.com/files.consumerfinance.gov/f/

documents/20170420

_cfpb_Ocwen-Complaint.pdf.
16 Press Release, CFPB Call for Evidence (Jan. 17, 2018), https://www.consumerfinance.gov/policy-compliance/

notice-opportunities-comment/open-notices/call-for-evidence; Press Release, CFPB Issues Request For Information On Enforcement Processes (Feb. 7, 2018), https://www.consumerfinance.gov/about-us/

newsroom/cfpb-issues-request-information-enforcement-processes
17 CFPB, Monthly Complaint Report, Vol. 24, at 8 (Jun. 2017), https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/

201706_cfpb-Monthly-Complaint-Report-50-State.pdf.
18 CFPB, Monthly Complaint Report, Vol. 19, at 12,  (Jan. 2017),  https://s3.amazonaws.com/files.consumerfinance.gov/f/

documents/201701

_cfpb_Monthly-Complaint-Report.pdf
19 Matthew L. Riffee, Court Awards Nearly $280 Million in Treble Damages Against Former FHA Lender, Consumer Finance Enforcement Watch (Sept. 18, 2017), https://www.enforcementwatch.com/2017/09/18/court-awards-nearly-280-million-in-treble-damages-against-former-fha-lender.  
20 Dep’t of Justice, PHH Agrees to Pay Over $74 Million to Resolve Alleged False Claims Act Liability Arising from Mortgage Lending (Aug. 8, 2017), https://www.justice.gov/opa/pr/phh-agrees-pay-over-74-million-resolve-alleged-false-claims-act-liability-arising-mortgage; Dep’t of Justice, IBERIABANK Agrees to Pay Over $11.6 Million to Resolve Alleged False Claims Act Liability for Submitting False Claims for Loan Guarantees (Dec. 8, 2017), https://www.justice.gov/opa/pr/iberiabank-agrees-pay-over-116-million-resolve-alleged-false-claims-act-liability-submitting.
21 U.S. Securities and Exchange Commission, Lennar Corp., Form 10-K, at 20, https://www.sec.gov/Archives/edgar/data/920760/000162828018000562/

len-20171130x10k.htm.
22 U.S. Dep’t of Housing and Urban Development, HUD And Northern Illinois Lender Reach Fair Lending Settlement (Mar. 10, 2017), https://www.hud.gov/press/press_releases_media_advisories/2017/

HUDNo_17-022.
23 Dep’t of Justice, Manhattan U.S. Attorney Settles Lending Discrimination Suit Against JPMorgan Chase For $53 Million (Jan. 20, 2017), https://www.justice.gov/usao-sdny/pr/manhattan-us-attorney-settles-lending-discrimination-suit-against-jpmorgan-chase-53.
24 Jacqueline Thomsen, HUD Removes Promises Of Inclusive, Discrimination-Free Communities From Mission Statement: Report,

The Hill (Mar. 7, 2018), http://thehill.com/homenews/administration/377115-hud-removes-promises-of-inclusive-discrimination-free-communities.
25 Florida Office of the Attorney General, Attorney General Bondi and OFR Commissioner Breakspear File Action Against Ocwen (Apr. 20, 2017), http://www.myfloridalegal.com/newsrel.nsf/newsreleases/

975B9DF2B52BB823852581080060D1A2.
26 Rachel Witkowski, AGs, Not CFPB, Should Take Greater Role On Enforcement: Mulvaney, American Banker (Feb. 28, 2018), https://www.americanbanker.com/news/ags-not-cfpb-should-take-greater-role-on-enforcement-mulvaney.
27 S. 2155 (Economic Growth, Regulatory Relief, and Consumer Protection Act), 115th Cong. (Nov. 16, 2017).
28 Aaron Glantz, 3 Investigations Opened After Reveal Uncovers Redlining In Philly, Reveal (Feb. 22, 2018), https://www.revealnews.org/blog/3-investigations-opened-after-reveal-uncovers-redlining-in-philly.  
29 Aaron Glantz, State Attorneys General Probe Lending Disparities, Reveal (Mar. 13, 2018), https://www.revealnews.org/blog/state-attorneys-general-probe-lending-disparities.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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