We need balanced regulation for smaller independent mortgage banks

Enjoy complimentary access to top ideas and insights — selected by our editors.

The Consumer Financial Protection Bureau recently came out with two new proposed rules, totaling 435 pages, that impose new compliance burdens on all non-banks.

The Community Home Lenders of America response to both letters was the same: the rules make sense for most non-banks but applying them to independent mortgage banks is redundant. And, applying them to smaller IMBs would on balance be harmful to consumers, by contributing to factors already driving mortgage market consolidation. 

CHLA supports the CFPB's mission and federal consumer mortgage protections. A recent court case held that the funding for the CFPB is unconstitutional. If upheld, Congress may need to provide funding authority and a re-affirmation of financial rules of the road that CFPB adopted since its creation. Such re-affirmation would be good for both consumers and for smaller IMBs that don't want to be trampled by mega-lenders that could go off the rails without consequence.

At the same time, the CFPB should be cognizant of its regulatory impact on small businesses which, in the case of mortgage lenders, means smaller IMBs. Smaller IMBs don't have the compliance economies of scale mega-lenders do — a factor that is magnified by the recent severe drop in mortgage loan volume.

When Congress created the CFPB as part of the Dodd-Frank law, it adopted Section 1024(b)(2). This section requires the CFPB to tailor the extent of its supervision of non-banks by asset size, volume, consumer risk, and extent of state supervision. Streamlining supervision for banks that are small businesses is how bank regulation works. And it is how supervision of IMBs should work.  

For example, while regulation by enforcement is a problem for all IMBs, it is particularly a problem for smaller ones.  Smaller IMBs simply don't have the same resources as mega-lenders to hire lawyers and consultants that specialize in understanding how CFPB will interpret a myriad of federal mortgage laws.

This balanced approach is also appropriate for new rules. Consider the first of these new CFPB rules — requiring all non-banks to submit all their forms that might limit consumer legal protections.  

This may be appropriate for most non-banks. Many payday lenders engage in predatory financial practices, then require consumers to sign away their legal rights to seek redress for those practices. Many non-banks require a consumer to agree to arbitration. Most non-bank financial products have few product-specific consumer protections.  Most nonbanks have weak state regulatory supervision.

But, as our comment letter notes, this new requirement does not really make sense for IMBs. Section 1414 (e) of Dodd-Frank explicitly bars arbitration, stating that "no residential mortgage loan . . . may include terms which require arbitration or any other nonjudicial procedure as the method for resolving any controversy or settling any claims arising out of the transaction."  IMBs are also subject to a large number of specific and stringent federal consumer protections that by statute cannot be waived.

Even so, what is the harm of imposing this new requirement on IMBs? The CHLA answers this question simply: an IMB's resources will have to be spent to analyze the requirements, assess potential liability, and decide which form contracts to submit. This poses a disproportionate compliance burden on smaller IMBs. This will exacerbate other factors causing industry consolidation, which is bad for consumers. 

CHLA even articulated an appropriate standard for how to implement Section 1024(b)(2). The CFPB should balance proposed mall business compliance burdens against the incremental consumer benefit. Under this test, the CFPB should exempt small and mid-sized IMBs from this requirement.

The same is true for the second proposed CFPB rule — the required submission by every non-bank of its federal agency orders and its federal and state court orders. In our CHLA Comment Letter, we expressed support for the underlying objectives of this rule.  We understand why the CFPB might want to impose this for the wide range of non-banks that do not currently have such a reporting requirement.

But this is redundant for IMBs.  IMBs are already required to report the same types of agency and court orders to the Nationwide Multi-state Licensing System. 

In practice IMBs will have to undertake a complex legal analysis of what state court orders might be required under this new requirement, analyze what new liabilities the rule might create, and spend time and energy to submit and monitor the same types of actions already being submitted to the NMLS for no real additional consumer benefit.  

Instead, the CFPB should create a compliance safe harbor if an IMB complies with its NMLS reporting requirements.

This rule also requires nonbanks to "designate a senior executive to attest to the firm's compliance with covered rules."  

We understand that the CFPB might want to ensure accountability for large IMBs — e.g. for publicly traded firms where individuals can make large bonuses without having any personal liability or accountability for consumer damage and financial penalties for the very same bad actions that helped generate those bonuses.

But owners of smaller IMBs are already personally on the hook for such penalties and for compliance.  

The CFPB's press release and rule both claim this designation requirement is limited to "larger" nonbanks. But the proposed $1 million in gross receipts exemption threshold is meaningless for IMBs.  The CFPB should create a much higher, more meaningful exemption for all but the largest IMBs. 

In isolation, the compliance burden of these two new rules may not be backbreaking but they come on top of a plethora of regulations and compliance burdens on IMBs, emanating from every state an IMB does business in, the CFPB, FHA, Ginnie Mae, Fannie Mae, Freddie Mac, and others. In the next month, CHLA will be releasing a detailed report highlighting this compliance burden on smaller IMBs.

The cumulative impact on smaller IMBs is a very real factor that exacerbates other forces already driving mortgage market consolidation.  A more concentrated mortgage market means consumers have less competition, higher mortgage rates and fees, and fewer choices.  

And that is why regulatory balance for smaller IMBs is important.