What the Consumer Financial Protection Bureau is looking for in its mortgage industry audits has long been a question since the bureau took effect. As the agency begins to get under way with its inspection of mortgage companies, some hints are beginning to emerge.
It has been just four months since the CFPB got its director, and along with him, the ability to examine non-banks, but it has begun to visit mortgage companies of all shapes and sizes as part of its examination practice. Most important, say those familiar with the exams: preparation.
“I think of the [agency] as a major force for entities involved in the mortgage industry to deal with,” says Christopher Willis, partner with Ballard & Spahr, LLP. “Some have never had exposure to supervision before. The exam process can be very intensive. If you’re not properly prepared, it can cause a lot of problems.”
But another issue arises as well, in that the CFPB has not yet made it known yet how it will fully examine reverse mortgage lenders. Manned with plenty of enforcement staff, the CFPB is also making the rules, leaving little room for gray area. Lenders are left to walk a fine line between working with the agency to resolve potential issues while not opening themselves up for enforcement action if they are in the process of trying to maintain or improve compliance.
“That problem will either be resolved over time if the CFPB acts in reasonable way, or it will be exacerbated if the agency takes every opportunity to engage in enforcement,” Willis says. “It’s too soon to tell, because it has not been long enough to establish trust or distrust. But the [mortgage] industry is naturally skeptical.”
Another issue, sources close to the exams say, is that for banks, there is often an enforcement lawyer present from the CFPB, with one assigned to each exam team. The agency told banking industry members upon its launch that it would be ramping up enforcement staff from 60 to twice that number. It can cause concern for the companies under examination because it begs the question as to whether they should have their own lawyer present.
As for the exams themselves, Willis says two components have emerged in the audits he has seen thus far. First is a structural component, where the CFPB is interested in looking at policies and procedures. Under that part of the exam, the agency will look at things like compliance management, customer complaint intake and response and anything that will indicate whether the company has procedures in place to manage compliance as well as the “culture” of compliance that’s present, he says.
Second, is a test of substantive compliance.
“They’re looking at loan files, complaints, calling to interview complaining borrowers and looking at history on the highest level,” Willis says. “We’re trying to tell as many institutions as possible that it will do them good to hire someone to help with the CFPB exam.”
The big issue currently on the table is fair lending, he says. Above all, it is a point of focus the agency has demonstrated in its work.
“There’s an incredible focus on fair lending,” Willis says. “From exams I’ve been involved in as well as from the CFPB’s public statements, they are very focused on fair lending.”
Written by Elizabeth Ecker