Recently I was reminded of comments made by former Secretary of Defense Donald Rumsfeld almost a decade ago when discussing the challenges related to intelligence gathering.
“…there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns—the ones we don't know we don't know. And…it is the latter category that tend to be the difficult ones.”
Secretary Rumsfeld was not discussing fraud in the mortgage industry or the government’s new efforts to protect consumers. Nevertheless, I often think of his statement when I consider the overall impact of the wide-ranging Dodd-Frank Act. That is because the unknowns related to the new law are as important to understand as the challenges everyone already recognizes.
By now most of us understand that the Dodd-Frank Act created the Consumer Financial Protection Bureau, and that the CFPB has extraordinarily broad authority to regulate consumer markets. Here is just a partial list of changes the CFPB will oversee:
• Qualified Residential Mortgage—rules related to the requirement that securitizers retain a portion of the risk of the assets they package into securities; a.k.a. the “skin in the game” requirement.
• Qualified Mortgage—rules that will require lenders to make a good faith effort to determine that the borrower has the ability to repay the loan.
• HOEPA changes—home-purchase loans and HELOCs will become subject to HOEPA, and thresholds that trigger HOEPA coverage will be greatly reduced.
• Revised RESPA/TILA disclosures—new model forms designed to make required mortgage disclosure forms more consumer-friendly.
• Mortgage Servicing requirements—revised billing statements and disclosures for complex loans, as well as new requirements related to escrow accounts.
• HMDA changes—expansion of the scope of information that must be collected and maintained.
• Mortgage originator standards—regulations prohibiting certain compensation paid to loan originators and the steering of consumers into unfavorable loans.
• Mortgage Origination Examinations—until Dodd-Frank, “nonbank” mortgage lenders were not subject to federal supervision. Now both banks and nonbanks must be ready for CFPB oversight.
There is definitely no shortage of “knowns,” and lenders who seek to understand even more can become acquainted with resources such as the 805-page Supervision and Examination Manual that was recently published by the CFPB. However, this is where hubris becomes dangerous, because unknowns remain. Many of the specific rules associated with these requirements have not been finalized. Until final rules are published, lenders cannot be completely certain as to what “exactly” they must comply with.
When gathering military intelligence, or originating mortgages, it is dangerous to overestimate your level of knowledge or to underestimate the knowledge of professional fraudsters. Originators and servicers must recognize that new layers of complexity will be coming out of the CFPB over the next several months. These new layers are sure to cause some confusion because it is simply asking too much to expect your compliance department which is already overwhelmed with existing compliance challenges, to keep up with all of the changes.
This confusion is a perfect situation for problems to arise. The best defense that lenders have is to work with proven vendors who have the technology and the expertise to navigate the “knowns” and the “unknowns.”
Jeff Walker is manager of compliance at Interthinx.
