Developing a Cost-Effective Strategy to Navigate State vs Federal Regulations

While federal regulatory oversight may appear to be in flux, states are stepping up to fill the void, creating a new compliance landscape for mortgage professionals. This presents a challenge for many mortgage lenders and servicers, who now face the prospect of navigating a patchwork of 50 different state regulations rather than a single federal standard. This session will explore how to develop a cost-effective strategy for managing these new challenges, including key legislative and enforcement trends, and what to expect from state regulators.

Transcription: 
Transcripts are generated using a combination of speech recognition software and human transcribers, and may contain errors. Please check the corresponding audio for the authoritative record. 

Andrew Martinez (00:08):
Okay. Good afternoon everybody. Hello and welcome. Thanks for tuning into our session today. My name is Andrew Martinez. I am a reporter at National Mortgage News, and today I'm joined by two expert industry attorneys to discuss state versus federal regulations. We're going to dive in today about how lenders, servicers, and technology vendors can really develop a cost-effective strategy around what's going on in regulation today. Today we're welcoming Jonathan Kolodziej, a partner at Bradley, and Marty Green, a principal with Polunsky Beitel Green. Thanks guys for joining me today. Alright, to kick us off, I just want to set the stage and talk about the Consumer Financial Protection Bureau. Let's try to figure out where it stands today. Jonathan, I'll start with you. I'm wondering if you could just fill us in as to what's going on with the CFPB today. Feels like it's been a ton of headlines lately, so I'm wondering if you could explain if it's still operational.

Jonathan Kolodziej (01:05):
Yeah, I think it's safe to say that we are in absolutely unprecedented times from the CFPB perspective, but also just generally from a legal and compliance perspective in our industry. We have a lot going on and to kind of set the stage, we have the Trump 2.0 administration priorities of deregulation and pulling back from the independent agencies and the allegations of agency overreach. As we think about the CFPB in particular, as that obviously implicates the mortgage industry, I think about the three primary functions of the bureau: supervision, enforcement, and rulemaking. Down the line, we really see consistent pullback; a "defanged CFPB" is the common refrain nowadays. From a supervision perspective, it's pretty clear most everything has been ground to a halt for the time being. From an enforcement perspective, there are some very minor signs of life—a couple of matters where they have not fully dismissed things or where they have proceeded as usual. On the rulemaking side, we have kind of the opposite indicators, but I still do think we're in the pullback period. The most recent rulemaking agenda had a lot on it that would impact the mortgage industry, including LO comp, servicing rules, and other rulemakings. We'll have to see how that all plays out. But at the end of the day, we have a much more hands-off, pulled-back CFPB following through the DOGE theme that we've seen across the federal government over the last eight months.

Marty Green (02:57):
Jonathan, that's an interesting point. It's the first time in my career that I can really think of where we've seen the regulatory climate sort of shrink rather than expand. What's interesting about it is the rules haven't really changed. It's just the "police" are sort of nowhere to be found in some ways. The question really is how do our clients best navigate that world where it at least feels a little bit more like the Wild West, even if the rules haven't really changed at all.

Jonathan Kolodziej (03:24):
Yeah, absolutely. We could probably go in a lot of directions off that. We mentioned the rules haven't changed, and I completely agree, though we do have to keep watching the news because there are very real chances that any day now some of these rules may actually change. There are lots of efforts to rescind existing federal regulations, the impacts of which we could talk about ad nauseam. Those impacts then bring us into the states and the regulators at the state level and how that could impact the industry as well.

Andrew Martinez (04:00):
Yeah, for sure. I know Trump could be tweeting right now or Russell Vought could be. I just want to ask you guys: for lenders, vendors, and IMBs, is this an opportunity to—might be the obvious question here—skirt the rules? What are you advising your clients right now, and do you think there's companies out there that may be saying now's the time to bend the rules a bit? Marty, I'll start with you.

Marty Green (04:25):
I'm certainly not advising anyone to bend the rules, but I am saying you need to be smart about your compliance program and pay attention to what your regulators are paying attention to. Right now, the CFPB is not going to be the principal regulator for most folks in terms of at least the enforcement of those rules. But as we mentioned, the state regulators are still there and they still have the power to enforce all of those rules. You have to be mindful of that and pay attention to what the states are telling you regarding how they're going to look at any kind of expansive role. Some states will not necessarily expand what they're doing. They think they've been doing a good job of regulating their industries in their particular states. Texas is one where I've had a conversation with Hector Retta, the commissioner of the Department of Savings and Mortgage Lending. They're not really looking at changing how they view things at all in terms of the regulation of people. They may take a closer look if they see violations, complaints, and those kinds of things, but I don't think the mindset of our state regulator has changed. I think in other states that may not be as true. Jonathan, you may have some experience with some of those.

Jonathan Kolodziej (05:32):
Yeah, I agree with all of that. The easy, top-line answer is that we are certainly not advising anybody to stop paying attention to the rules. While there may not be big, bold enforcement actions at the federal level right now or high-level priorities, there still are ways that we can get in trouble. One perspective is the state enforcers—the state regulators and state attorneys general. We've seen that in the past. They have the ability to enforce lots of our federal consumer financial laws and obviously could implement their own rulemakings through the exam process. One other misconception that we see a lot these days started with Elon Musk and "delete CFPB," his post on X, and then "CFPB RIP." A very basic clarification here is that Elon Musk, DOGE, or even President Trump via executive order cannot delete the CFPB. They were created by statute by Congress. The only way to get rid of them would be for Congress to pass a new federal statute. We also have to think about statutes of limitations. Even if we had a change of administration in the coming years, things we're doing now in the industry can still come back in years to come. We have to continue to look forward and recognize that those laws are absolutely still on the books.

Marty Green (07:04):
Now, there may be some gray areas where people can navigate and make different choices in terms of priorities because the regulatory environment becomes more conducive to it. I don't want to say that nothing's changed, but you have to be very selective about what you're looking at. We've seen some clients sort of say, "Look, we want to focus on what's really important and what our regulators are paying attention to," but there may be some things we were spending money on because we were afraid of the CFPB, but that aren't clearly problematic under the law, that we may be less concerned about at this point in the cycle.

Jonathan Kolodziej (07:44):
Absolutely. I would say if I look back over the last eight months, the number one high-level topic we have heard from our mortgage clients is new initiatives, particularly as it relates to new technologies and the various compliance angles. I don't know if that's just the modern evolution of technology and we're finally there now, or if it's the regulatory shift and they feel like they can breathe a little bit more and have more leeway to take some chances and venture outwards. That certainly is what we're seeing the most right now: inquiries about new types of business, new technologies, and new ways of finding efficiencies.

Marty Green (08:32):
I think that was one area where the CFPB kind of scared people, saying you have to be real careful about how you implement things like AI because you don't know what prejudices are built into it. For the next couple of years, you could have greater comfort that the CFPB is not coming after you with respect to those kinds of things.

Jonathan Kolodziej (08:50):
And one other thing: as we contemplate the federal government pulling back and the states taking the mantle, one of the disadvantages of having the federal government there is we knew the high-level priorities of the CFPB. We knew what they were looking at. We knew that when it came to AI, they were worried about bias and discrimination being baked into the algorithms and the "black boxes." We don't have that same kind of information at the state level. We don't get those supervisory highlights reports or the big national headlines. A lot of times the priorities are less public, which puts us at a little bit of a disadvantage and forces us more often to be reactive as opposed to proactive. That is just a downside of that pullback from the federal side.

Andrew Martinez (09:45):
On that note, I wanted to ask about the mantra of "50 state regulators versus one CFPB." One CFPB is not totally accurate either, but I wanted to ask you guys: for companies trying to follow this patchwork of state regulations, is that really the case? Is it 50 different laws out there? Jonathan?

Jonathan Kolodziej (10:07):
Unfortunately, the answer is often yes. There are a lot of different ways to think about the state side right now. There are going to be state regulators enforcing and interpreting federal law. Again, we don't have that consistent voice setting out the official interpretation of the agency tasked with jurisdiction for a particular law. We could have differing interpretations across different states, which will be problematic in and of itself. Then we also could have state actions on their own. Some have already started the rulemaking process. Particularly if the CFPB were to start the rescission process for various mortgage-related or other financial laws, it would certainly not be out of the question for the states to pick up that slack. We do 50-state surveys all the time and we have charts for servicers or originators where we can see it with disclosure requirements, foreclosure restrictions, and fee restrictions across states. It often is that patchwork. The inevitable reality of a federal government pullback is increased patchworks from the state side and, unfortunately, increased costs from a compliance standpoint.

Marty Green (11:26):
I tend to agree, Jonathan. I think the one thing, though, is that rather than have 50 states against the federal government, you're probably just going to have a few different approaches. One of the things that the state regulators do through AARMR and other organizations is coordinate efforts. They discuss things and get some understandings. They may have different viewpoints—certainly you have blue states with a certain viewpoint and red states with a different one—but to have 50 of them as it relates to federal law is probably not what you're going to see. You're probably going to see a spectrum that's a little bit narrower than that.

Andrew Martinez (11:58):
Marty, you mentioned red and blue. I wonder if it's that simple, or if maybe it's more a case of larger states versus smaller states, or maybe enforcement budgets. I'm curious if it's that clean of a split.

Marty Green (12:10):
I think it's both. You have a philosophical thing that happens where red states tend to be a little less hands-on in terms of regulatory things and blue states tend to see the value of the regulation. But even Texas, which is a relatively red state, takes the responsibilities toward consumers very seriously. That's still out there. They just need to balance that with the industry and the industry's needs. I think that's where I see the differences. It's not so much large states and small states necessarily, but most of the larger states like New York and California tend to be more heavily on the regulatory side. Illinois and Massachusetts are the same. Texas and Florida are also large states where the regulators are still active, but it's maybe a more practical regulatory framework from the industry standpoint, at least from what I've seen.

Andrew Martinez (13:07):
Jonathan, are you seeing the same?

Jonathan Kolodziej (13:09):
Yeah, I completely agree. If we think about red versus blue or purple, there certainly are some trends we could identify. The higher up you go, whether it's at an attorney general level or the head of a state agency like DFPI, those are going to be more red or blue aligned. But the deeper you go, down to the actual examiners on the ground, I think there's less variance there. If you have folks looking at assessing compliance for state or federal law, they are more focused on consumer protection. You're going to have more consistent approaches or viewpoints there that aren't so much red versus blue. But when we get to the regulatory regimes, we definitely see those trends. You mentioned, Marty, the "problem states"—you could probably add Washington and Connecticut in there. Those are the typical cast of characters that are likely in our thinking on those topics.

Andrew Martinez (14:17):
I'm curious about the cost aspect of this. Is there such a thing as a state that's cheaper to incorporate or operate in, or a state that is more "hardcore" when it comes to actual monetary penalties?

Marty Green (14:29):
There's no question that's the case. There are certain issues in certain states that you just don't want to be in front of the regulator with. But for other issues, they may be perfectly reasonable. There are hot buttons for certain commissioners in certain states, or just the way the laws are drafted in certain states where they felt they needed to take a more stringent approach than others. We certainly see that.

Andrew Martinez (14:51):
I completely agree. I wanted to ask about some laws that would be relevant to our audience today. In the past couple of months, or since the Trump administration took over, there were a few states—I believe California with "zombie seconds"—with new consumer protection laws. ¹ Jonathan, what are some of the more notable laws or things your clients are watching on the state level?

Jonathan Kolodziej (15:16):
Tracking state developments has become a top priority. That makes sense in this environment. Andrew, you mentioned California; that one kind of came out of nowhere after lots of lobbying and advocacy efforts from trade associations. All of a sudden, we had Governor Newsom sign that into law. There's another one in New York sitting on Governor Hochul's desk that adds some UDAAP authority and enforcement powers. My overall impression, though, is that we haven't seen the cascade yet. Early on there was the mantra that when the federal government recedes, the states pick up the slack. We've certainly received questions recently saying, "Well, when's that actually coming?" We haven't necessarily felt that just yet. It still feels like we're somewhat in the ramp-up period. I'm not sure anybody fully expected the full extent of this administration's pullback efforts at the federal level. It bears no resemblance at all to the Trump 1.0 administration; it's a completely different approach to deregulation and pulling back on agency independence. I still think there's some reaction time—budgets were set, priorities were set, elections happen. Over time, we'll start seeing that. I am absolutely confident we'll see increased state action in the years to come, but we haven't gotten that avalanche of new state laws just yet.

Marty Green (16:59):
The other question is whether they step in to try to enforce federal laws in a different way, maybe via the UDAAP statute or other things. For instance, in Texas, the legislature only meets every other year anyway, so there aren't going to be any legislative changes for the next 12 months. We wouldn't anticipate our legislature jumping into the fray on that one. But in other states, there's also that legislative hurdle. The real question that is probably more likely is: are you going to see state regulators jump in on existing laws—not new ones necessarily—and enforce them in a different way?

Andrew Martinez (17:38):
Yeah. Thinking about Trump, we're still in the early stages of Trump 2.0, but I'm wondering about the Biden administration era as well. There were lots of initiatives around appraisal bias and other regulations. Was it an expensive time to be a lender, servicer, or vendor in the Biden era? Are we in a totally different place now?

Marty Green (18:05):
Interestingly, I didn't see the Biden era as necessarily really aggressive in terms of new laws. They were aggressive in terms of the mindset of the CFPB regarding how they go about enforcing things, particularly as it relates to the implementation of AI and the rhetoric they had. But it was not necessarily a fast-paced time in terms of lots and lots of new laws. Maybe part of that is because we came out of TRID and TRID 2.0 where things were changing at such a rapid pace that it felt relatively quiet from that standpoint. This administration is going to be completely different. Where we may actually see it is the industry leading the changes with respect to regulations, particularly as it relates to things like loan officer comp. I think that is something that can absolutely be positioned as beneficial to the consumer because it's beneficial to competition. I could see that being a big change in this administration versus what we saw with the Biden administration.

Jonathan Kolodziej (19:06):
We certainly have seen changing priorities. From the mortgage perspective, we had the modern-day redlining initiative with the Department of Justice and the CFPB. ² There were a number of rulemakings—not mortgage-specific—like the non-bank registry and Dodd-Frank Section 1033 financial rights. Those were tangential to the mortgage industry, but nothing specific to us. So it didn't feel that way, but the priorities have shifted. We have a lot of potential changes or rescissions of mortgage-related rules. On the fair lending side, it seems safe to say that at the federal level—and we see this with all the banking agencies—there is a shift towards the "de-banking" priority. President Trump has alleged he was a victim of politicized de-banking. We had an executive order a month ago and we're now seeing agencies start to roll that out; I would expect the CFPB to be doing that as well. While mortgages are probably not the best target for banking concerns, it is a new hot topic. We'll have to see how it's tasked with looking at prior complaints and policies regarding allegations of politicized de-banking. That seems to be the new frontier of the anti-discrimination front under this administration.

Andrew Martinez (20:38):
You mentioned LO comp. I want to ask about that. I understand the status is still in effect, but the future is uncertain. I'm not an originator myself, so I'm curious about the impact if that gets fully rescinded. I know there's a ton of chatter about what should be done with it. I believe the Trump administration asked the Office of Management and Budget to just rescind it. How could that change the cost strategy for lenders if that goes away or gets altered? Is this going to roil budgets, Marty?

Marty Green (21:08):
It's interesting because the way the industry would ultimately like it to play out is that you could adjust comp to meet competition if needed. LO comp is such a big component of the cost of originating a loan that not having the ability to vary that when the party you're competing with has a lower comp plan seems kind of anti-competitive. I think there should be some room for them to potentially do that. Whether that's the focus, we'll see, but that's certainly what the industry would like to see. Right now, there are a lot of folks out there sort of skirting the rules anyway, so at least it would level the playing field where people would feel they could compete more consistently.

Jonathan Kolodziej (21:59):
Marty, you mentioned earlier—and I agree—that this is an opportunity for the industry to maybe craft the future of the rule. We can get into "lawyer nerd space" regarding different rescission and rulemaking efforts. If the CFPB were to just rescind the Reg Z regulations around LO comp, we still would be stuck with the federal statute that Congress passed in TILA, the Truth in Lending Act, which restricts LO compensation based upon the terms of a transaction. What we would then lose with the regulation going away is all of the detail we get with it. That's what agencies have the ability to do—go in and flesh things out and put in some exceptions that Congress maybe didn't do at that top-line level. We see that across some of these proposals to rescind things. Again, we have the deregulatory executive order and the initiative from the Trump administration with the idea of lowering costs and compliance burdens. But the unfortunate reality is that a lot of them are helpful, and if we were to just get rid of them, it would cause uncertainty and chaos. In some cases, we would not like the outcome. The regulations have in some ways been beneficial. There are absolutely areas for improvement. I think LO comp is a prime example where we probably do want a regulation, even if you are small-government politically. It would help us to have the regulation and maybe help craft the future of it because there is sufficient authority for the Bureau to do that. It isn't an example where they overreached.

Marty Green (23:47):
Sufficient authority, but perhaps not consistent resources today. That is one way the industry can help fill the gap by proposing some things through the MBA or others.

Jonathan Kolodziej (24:00):
That's a great point. I should have tied that together. If we have a Bureau where they're going through RIFs and going from 1,800 employees down to maybe a couple hundred, the big question is: who is there to do the rulemaking work? The reality on the ground is that it is hard to effectively and successfully go through the rulemaking process. Marty and I were talking about how perhaps the industry then can fill some of that gap and provide suggestions if the Bureau doesn't have the manpower or expertise as folks are leaving or get let go in the coming weeks and months.

Andrew Martinez (24:43):
For sure. We have a few minutes left. I have a closing thought or two, but I wanted to ask for any questions in the audience. We have time for a question or two if anybody has one in mind. I wanted to ask you guys about another topic: trigger leads legislation. Trump signed it earlier this month. It goes into effect in March, around the spring home-buying season, which will be really interesting. How does this change the cost equation for lenders and the mortgage ecosystem? Also, what's the picture on enforcement regarding trigger leads? Marty?

Marty Green (25:23):
It was welcome. The industry's been asking for this for a long time. We actually adopted something in Texas before; it was one of the first states that did that. You have some states stepping into that space on trigger leads as well. It's welcome. As you said, enforcement is postponed until next year. What I think you're going to see, though, is the credit reporting agencies really dialing it back and closing that line of business down because that's where it's ultimately headed. One question I don't think we know the answer to is that those credit reporting agencies have been getting a lot of revenue from providing those trigger leads to your competitors. If they've been doing that, they've got to make up that revenue somewhere, so you may see credit report costs actually go up generally.

Jonathan Kolodziej (26:06):
That's exactly right. The trigger lead legislation amended the FCRA, the Fair Credit Reporting Act. ³ From an enforcement perspective, that falls back under the CFPB. We'll have to see how that goes, as we just discussed. But there also is the ability to enforce that through state attorneys general. There still are enforcement mechanisms out there, but the law restricts the consumer reporting agencies from providing that information to inquiring entities. It'll really fall on them. The big question will be: do they try to recoup that revenue elsewhere and increase the costs of other reporting?

Marty Green (26:47):
Even if they do, I think most people in the industry would say if I don't have all of these trigger leads out there where my borrowers are confused by information from people pretending to be the mortgage company that took the original application, they'll pay a little bit more on the credit report without question.

Andrew Martinez (27:05):
For sure. As we come up on time, I wanted to ask: what advice are you giving your clients regarding a cost-saving strategy? What have been the questions you've been hearing lately? What are your clients concerned about? Jonathan?

Jonathan Kolodziej (27:22):
Our clients are thinking about new technologies and more efficiencies. I do a lot of work with mortgage servicers in particular. They're thinking about moving away from physical mail and into emails. They're thinking about text messages for communications, collection efforts, and interactions. We saw a lot of that start during the pandemic as folks shifted to apps and portals. We're still seeing that evolution take place. That's the number one cost saving. There still is a big focus on tracking state laws. We've seen more collaborative efforts and multi-client engagements where people are sharing costs. Everyone collaborates on the same project and splits the cost as opposed to somebody taking it on by themselves. We have different arrangements from a cost and pricing perspective that are at play.

Marty Green (28:27):
We're seeing a lot of questions on just data security, particularly with remote work and how regulators are measuring the steps you're taking. That's an area of the law where they expect you to take reasonable action to protect the customer's information, but they don't necessarily specify what steps to take. One thing we know they are auditing for is that when you have remote workers, you actually need a plan for what you do if there is a data breach and how you measure it. Those are some areas where we see that people have not perhaps paid as much attention as they should, and the regulators are really catching up in terms of regulating that more aggressively. The other piece of advice I always give my clients is that it's always a good idea to get to know your regulator. There are many ways to do that on a macro or micro level. One thing the Texas Department of Savings and Mortgage Lending does every year is hold a "mortgage lending day" where they actually share the top 10 findings from their audits for the last year. That tells you what they're looking for. That's always a good roadmap. I always encourage people to find out if your regulator has anything like that or to ask them: "What are the top 10 things that you find in your audit so that we can avoid those things?" That conversation gets you great information, but it also establishes a nice rapport with the regulator that says, "I want to comply. I want to do things the right way. Help me to do that." I think that's really important.

Andrew Martinez (29:58):
Yeah, that's good. Any questions in the audience? I think we've got a question.

Audience Member One (30:06):
I was hoping you could touch on the bills we anticipate coming through, like the American Homeowners Crypto Modernization Act. How would cryptocurrency in this mortgage process affect the industry and where do you see that headed?

Jonathan Kolodziej (30:28):
I didn't catch the name of the law...

Audience Member One (30:30):
It is the American Homeowners Crypto Modernization Act. It would allow cryptocurrency in the mortgage approval process. These bills are being passed but haven't been signed. If it goes through, how do you see that impacting the mortgage sector and the whole workflow?

Marty Green (30:51):
I don't know a whole lot about it. I know we talk about it periodically. I serve on the Texas Finance Commission, which oversees the Texas Department of Banking and the Texas Department of Savings, Mortgage and Lending. One of the things we're constantly looking at is how crypto is being used as an asset class. I think one thing that particular act attempts to do is make sure it's being counted appropriately as an asset. I think Bill Pulte and the President both are very strongly in favor of that happening. Whether or not the law passes is still a question. It's hard for this Congress to agree on a whole lot. Whether they get there is questionable, but I think you could see it policy-wise via FHFA without necessarily having a legislative change.

Andrew Martinez (31:42):
Alright, we're over time. Thank you guys for the time. You've got a really great panel coming up on more regulation, so stay tuned. Thank you.