By Scott Flaherty
Fear. Dread. Confusion. Concern. These are feelings normally experienced when meeting with your doctor after a CAT scan. Or maybe a father’s mindset after meeting his 14 year old daughter’s first boyfriend before they go out on a date. Unfortunately, they are also terms I hear commonly used by those who have just come out of a conference break out session on the Consumer Financial Protection Bureau (CFPB or Bureau) and its recent actions. The panelists in those things do a great job of making many people long for the luxury of a job as a beach resort towel boy.
But for those who are stuck in this business like myself, learning from and dealing with the reality of the first set of CFPB actions becomes crucial to your company’s success. Too many times I see and hear about business owners becoming almost paralyzed by the overwhelming level of detail required for compliance in today’s mortgage world. The result has been something of concern for those companies which have really committed to becoming compliant. It seems as though there is a Grand Canyon type gap between those few who have embraced the communication from the CFPB and those who still want to think that things are unclear, and, therefore, they can continue their current practice. I see many companies still operating in ways that will most certainly end them up in a publication like this being described by the CFPB as taking advantage of consumers when that was truly not their intent. But intent does not seem to matter to our new governing agency. Numbers and statistics do. And if you are an organization that has leadership who believes you are too small to matter, or you are doing everything right, you are simultaneously contributing to our industry problems and your own demise. Does size matter to the CFPB? It certainly may. It is true that they are most interested in behavior that has a larger effect on the public. But it only takes one disgruntled employee from a small company to say the wrong thing to the right person and you will quickly find yourself fighting an ulcer of concern over a pending CFPB audit.
A mistake I see many compliance managers and business owners making is dismissing the CFPB actions because their company “doesn’t do those things.” “We don’t take advantage of our customers.” “We don’t discriminate.” “We don’t pay for referrals from realtors.” No, you may not intend to, but you might be surprised at how close your actions are to those seemingly evil people disciplined by the CFPB. The Bureau does a great job of vilifying those who have policies that don’t quite measure up to their standards. When you read their reports, you are led to believe that these are sinister companies who are all out to lie, cheat, and steal their borrowers out of every nickel they can. But, many times, the truth is that the disciplined company did care about their borrowers. They did what they thought was best. They did have attorneys who gave them advice. They just didn’t dig deep enough to discover their problems before the CFPB did. Or, they tricked themselves into thinking they were compliant based on answers they wanted to hear from their attorney instead of what they were really being told because the result would mean being less competitive in the marketplace.
In this article we will examine a few of the recent disciplinary actions and ask you questions intended for you to analyze your own company’s risk. We will also simplify the things you need to do to become compliant if you feel there is risk. Too many people keep saying that the CFPB isn’t clear in what they want or that the rules are too ambiguous. But I disagree. In most cases, what you need to do for compliance is pretty clear. It’s just that many people don’t want to take the proper steps to become compliant because doing so could negatively impact their production. So instead, they commit what I consider to be the fatal flaw when it comes to compliance. They look for ways around the rules instead of looking for ways to comply with the rules. That mindset shift is the difference between companies at risk and those who are compliant.
So, what can you do if any of this sounds familiar to you or your company? Let’s explore three of the recent CFPB actions to find out.
Fair Lending
There is no doubt that fair lending compliance is at the top of the CFPB list of concerns. Yet, this seems to be the area where I hear the most amount of confusion and dismay from operators. It’s also an area where most companies tend to be ostrich-like and bury their heads in the ground with their thinking. They read recent cases saying that companies have charged higher rates to African American and Hispanic borrowers “because of their race or national origin” and say, “That’s not us.” “We don’t do that.” But have you ever tested your company data to know? I’m sure those companies didn’t have a policy that said their originators must charge higher rates to Hispanics either. But what they did was allow different terms for different borrowers in the same geographic area. Does your company allow different rates within the same region for either different originators or branches? I know a lot of companies that do and there may be nothing wrong with that. If done correctly, there certainly isn’t from a loan originator (LO) compensation standpoint. But, any company that allows different branches or originators to have different rates or fees within the same geographic area does have fair lending risk. If your company allows this practice, a fair lending analysis is a must. Yet, the vast majority of companies have yet to test themselves. The reason may be because they don’t want to find out the results. They don’t want to change their practice if inconsistencies are found. But this type of willful ignorance doesn’t cut it with the Bureau. They expect that you know your problems and self correct. There are several companies like Wolters Kluwer or Compliance Ease who can perform the analysis for you at a cost. You can also purchase the software to test yourself. They are the same tests that the CFPB will perform on your company during an audit so why not be proactive and find out the results ahead of time? It is an investment, but could be one that makes the difference between you surviving a CFPB audit or not.
Steering of clients to higher rate loans
Castle and Cooke and Franklin Mortgage. Both are companies which have been hit by the CFPB for illegally steering consumers into higher rate loans. They did so similarly by, allegedly, paying originators a bonus partially based on any overage money obtained on a loan. We all know that paying an originator based on the terms of a transaction is a violation. But, many companies still have creative bonus plans disguised to compensate an originator for making a little extra money for the company on those juicy margin government loans. Many originators still ask me in the interview process, “What happens to my overage money?” Does your company have any type of incentive for its originators to sell a slightly higher rate that creates a rebate not given to the customer? Even if that incentive is combined with other legitimate measurement terms such as underwriting touches or loan quality, the CFPB will see it as a violation. Many companies are still thinking of themselves as creative when it comes to overages. You do not want to get cute in this area. Any pricing overage above LO compensation must remain with the company or the CFPB will find it. It can also not be used to offset a future price concession. As you can read in the two cases mentioned, the financial repercussions are by far worse than the alternative.
MSAs
Does your company have any Marketing Service Agreements (MSA) or Desk Rental Agreements with your real estate partners? If so, you will definitely want to analyze your policies and procedures surrounding these agreements and begin looking at whether they are worth your risk. In the recent action taken against Franklin Mortgage, the CFPB took an aggressive stance regarding these agreements. It has become obvious that the Bureau is skeptical of MSAs. Legal experts around the country are heavily debating MSAs and whether or not they are viable options for their clients. They are doing so in light of the recent statement by the CFPB that entering a contract is itself a “thing of value” within the meaning of RESPA “even if the fees paid under the contract are fair market value for the goods or services provided.” This language would, effectively, spell the end of MSAs if interpreted conservatively. Even with an aggressive interpretation, companies need to be very active in validating the value of these agreements and take extreme measures to provide the Bureau with proof that what they are paying for is truly marketing and not a referral. As an example, leading companies who have MSAs in place take the following steps (among other things) to manage every MSA:
Create a full, written policy that describes every step of the MSA process from negotiation through ongoing auditing of the agreement
Do not involve sales staff in the valuation of any MSA
Obtain cost comparisons for the same marketing as if being done outside of the MSA
Utilize an independent third party like Mlink to help determine the marketing value
Have the realtor disclose to the potential borrower that an MSA exists
Make sure that the agreements are a minimum of 12 months at a time
Insure that each agreement is for a fixed dollar amount
Audit every MSA each and every month to validate what has been received compared to what the contract states. This includes, but is not limited to, obtaining proof of the number of mailers sent, emails generated, website clicks received, and physically inspecting any office where advertising is placed including taking pictures for proof to include in the file. If any of the terms of the agreement have not been met, MSA payment is not made.
In the end, a strong and thoughtful compliance manager is a necessity for every mortgage company today. Regardless of your size, you must have someone dedicated to compliance. That person should have a completely different mindset from the person who runs production.
I see too many companies not equipped to handle the rules of engagement when it comes to today’s mortgage lending. Their leadership may have great qualities that made them successful in years past, but they just aren’t willing or able to face today’s reality. Their skills and talents are valuable in most other industries, but in the current mortgage business, they might be slightly misplaced. They hear what is being said but become overwhelmed by all the rules, policies and procedures.
It can be easy to become paralyzed by the sheer volume of communication on required compliance. When you start realizing how much it would take to become or remain in compliance, you start thinking that, no matter what you do, you won’t ever be fully compliant. That leads to complacency and a lack of any action whatsoever. I hear some people say, I could spend X amount on fixing this problem, but I am still left with these other three problems that are just as bad so why do anything? Owners add up the resources it would take to put new policies in place and decide that they just can’t afford to take action. Sadly, that inaction seals the fate of everyone involved with the company.
If we have learned anything by the first 60+ actions from the CFPB, we have learned that they are very thorough and their expectations are high. These are not the audits you may have completed at the state level. They are dramatically different and the steaks couldn’t be higher. If your company doesn’t have someone equipped with the mindset to handle compliance, you need to hire someone who does. If your company can’t afford to hire someone or implement the technology needed for proper procedures, you should consider partnering with a company that can. The CFPB has gone to great lengths to communicate its rules. They have created easy to read compliance guides and readiness books that are available to everyone. The worst thing you can do is pretend that you weren’t aware of the guidance they have published. Yes, some fear may be healthy when approaching compliance, but there is no need to panic or become complacent. The answers are there. You just have to be willing to find them.
Scott Flaherty is founder and Chief Executive Officer of Lend Smart Mortgage, a highly respected and growing regional lender, headquartered in Shoreview, Minnesota. Scott can be reached at: sflaherty@lendsmartmortgage.com
The post The Clarity and Action of the CFPB appeared first on Mortgage Compliance Magazine.