MBA Insights--John I. Vong, CMB, CMT
John Vong, CMB, CMT, is president and co-founder of ComplianceEase, Burlingame, Calif., and a frequent contributor to MBA Insights. He can be reached at j.vong@complianceease.com.
State regulators, like nature, abhor a vacuum, and with good reason. As the current Administration changes its stance on regulations and enforcement in the areas of environmental protection, climate change, and immigration, we've seen governors, attorneys general and regulators push back against the Administration and, in some cases, step up their enforcement efforts.
The latest example comes in the area of consumer protection. At the end of last month, New Jersey Attorney General Gurbir Grewal and Governor Phil Murphy (D) announced the state would create a "state-level CFPB" to "fill the void left by the Trump Administration's pullback of the Consumer Financial Protection Bureau."
And New Jersey is not alone. Shortly after Office of Management and Budget Director Mick Mulvaney was appointed acting director of the CFPB, AGs from New York, California, Connecticut, the District of Columbia, Hawaii, Illinois, Iowa, Maine, Maryland, Massachusetts, Minnesota, New Mexico, North Carolina, Oregon, Vermont, Virginia and Washington state banded together to express their concerns about the new direction in leadership and reiterated their statutory authority to enforce federal and state consumer protection laws.
Under Mulvaney, the CFPB's shift from "regulation by enforcement" to "more formal rulemaking on which financial institutions can rely" has resulted in zero enforcement actions against any bank, lender, credit card company or any other entity within its purview (with one major exception: the Bureau on Apr. 20 issued its first fine to Wells Fargo for $1 billion). By comparison, the CFPB under Richard Cordray performed 175 examinations of larger banks and non-banks, resulting in four mortgage-related enforcement actions last year.
State regulators, on the other hand, in coordination with the Multi-State Mortgage Committee, Multi-State MSB Examination Taskforce and the State Coordinating Committee, performed more than 32,000 state-level examinations, resulting in up to 10,000 enforcement actions. In California alone, four of the top 10 non-bank lenders were fined more than $13 million in the past year and a half for violating the state's per diem interest rule.
The reason many states are stepping in and vowing to maintain current regulatory enforcement efforts is that, following the consolidation of consumer protection under the Dodd-Frank Act, no federal agencies other than the CFPB are charged with protecting consumers. The Federal Reserve and the Office of the Comptroller of the Currency, for example, are mostly focused on safety and soundness, and the Federal Deposit Insurance Corp. is focused on loan-level compliance.
There are historical precedents for state activism in the area of mortgage lending. For example, the federal Home Ownership and Equity Protection Act, which addresses high cost lending, came to be as a result of earlier state regulations addressing lending abuse.
At the moment, the CFPB's "less-is-more" approach to regulation isn't creating too much confusion and, at first glance, may even appear to be a boon for lenders. But if it continues, it will raise the question of how will federal mortgage regulations evolve, or devolve, in the next few years? And what changes can we expect when the temporary GSE Qualified Mortgage exemption, also known as the QM Patch, ends in January 2021? (Today, most high-DTI prime lending gets done via "patch.")
In addition, the shift to state-level actions will present new challenges from a compliance perspective, especially for non-bank lenders that must be licensed in all 51 jurisdictions. Lenders will need best-of-breed compliance management systems to stay abreast of these changes and ensure consistent application of the jurisdictional rules and regulations appropriate for each loan.
(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA Insights welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at msorohan@mba.org; or Michael Tucker, editorial manager, at mtucker@mba.org.)