September 18, 2017
Hon. Steven Mnuchin
Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington DC 20229
Dear Secretary Mnuchin:
We are writing to commend you for your release in June of the Treasury Report on regulations (“Core Principals for Regulating the US Financial System”) and to seek your support for targeted regulatory relief for smaller Independent Mortgage Bankers (IMBs) consistent with that Report.
Specifically, we would urge the Administration to support legislation which provides for a targeted exemption for smaller IMBs from Consumer Financial Protection Bureau (CFPB) supervision, enforcement, and third party vendor management audits. In a similar vein, we seek your support for administrative action by the CFPB, consistent with its authorizing statute, to provide such targeted relief.
We also seek your support the provisions in H.R. 10 to suspend the new Home Mortgage Disclosure Act (HMDA) requirements imposed by the Dodd-Frank Act, pending a study by the Comptroller General to determine if the final rule for the collection of additional data has adequate provisions for the safeguarding of consumer financial data.
Treasury Report Conclusions
The June Treasury identifies as one of its recommendations for regulatory reform the following: “Tailoring the regulatory approach based on size and complexity of regulated firms and requiring greater regulatory cooperation and coordination among financial regulators.”
With respect to non-banks, the Report states that “Dodd-Frank grants the CFPB supervisory powers that are . . . unjustified as applied to nonbanks. . . CFPB’s supervisory authority over nonbanks represents a major shift in regulatory practice – with no clear benefits to justify the additional burdens. . . . Before Dodd-Frank, these companies were regulated by the states which continue to license them and supervise them in coordination with the CFPB.”
The Report concludes by recommending the following: “To reduce needless duplication and regulatory burdens, Congress should repeal the CFPB’s supervisory authority. . . .Supervision of nonbanks should be returned to state regulators, who have proven experience in this field and an existing process for interstate regulatory cooperation.” We would also note that the qualified mortgage regulation, and increased scrutiny by the GSEs, Ginnie Mae, FHA and VA has made the community nonbank lending industry far different than prior to 2008.
Pending Legislative Action
On June 8, 2017, the House of Representatives passed H.R. 10, the Financial Choice Act. This legislation includes a number of provisions that provide regulatory relief for IMBs, including
(1) elimination of CFPB authority to conduct exams, (2) elimination of CFPB authority to conduct audits of third party vendors, and (3) elimination of CFPB authority to take action against firms based on Unfair Deceptive or Abusive Acts or Practices (UDAAP).
We support these provisions, and urge the Administration to push for their enactment.
In addition, Section 571 of H.R. 10 suspends the collection of additional mortgage data, as required under the Dodd Frank Act, from depository institutions until a study is conducted by the Comptroller General. The study called for in Section 571 is focused on whether the final rule issued by the CFPB provides adequate protection and safeguards for maintaining the privacy of consumers and their sensitive personal financial information.
We support these provisions and urge the Administration to push for enactment of these provisions with an expansion of the data collection suspension contained in Section 571 to all lenders required to report loan data pursuant to HMDA.
A Targeted Approach to Address Concerns Identified in the Treasury Report
Unfortunately, while these changes would be constructive, they don’t address the most significant and distinctive negative impact of the CFPB on smaller IMBs – which is the risk of enforcement action.
The simple fact is that 99% of banks (those under $10 billion in assets) are exempt from CFPB enforcement action under the Dodd-Frank statute – while no IMBs are exempt, regardless of how small they are. Smaller IMBs are committed to compliance with all consumer mortgage laws and are subject to stringent enforcement of these laws by the states, which we believe is comparable to banking regulators’ enforcement of these consumer laws. However, as with banks, smaller IMBs don’t have the economies of scale that larger lenders do to hire experts in CFPB compliance or to retain attorneys with direct access to CFPB staff to get answers to regulatory questions. Secondly, while CFPB fines may merely be a cost of doing business for large banks or large IMBs, they can be crippling financially for a small business owner of a smaller IMB.
For these reasons, we have been strong supporters of H.R. 1964, the “Community Mortgage Lender Regulatory Act of 2017,” legislation sponsored by Rep. Williams (R-TX). This bill would provide a targeted CFPB exemption for smaller IMBs – defined as IMBs with net worth of less than $50 million and also that originated fewer than 25,000 mortgages in the previous year.
As with H.R. 10, the bill provides that the CFPB could not conduct exams or carry out third party vendor audits – but more narrowly targets this relief to smaller IMBs. However, the bill also creates an exemption from CFPB enforcement actions against smaller IMBs, unless the CFPB receives a referral from their state regulator or some federal regulator. This provides regulatory relief, while protecting consumers by retaining CFPB authority to act if warranted.
For all these reasons, we would ask the Administration to support this important legislation.
CFPB Statutory Authority to Provided Targeted Relief to Smaller IMBs
The statute which provides for CFPB enforcement of nonbanks is Section 1024 of Dodd-Frank, “SUPERVISION OF NONDEPOSITORY COVERED PERSONS.” This section authorizes the CFPB to:
(1) Conduct examinations of non-banks,
(2) Conduct third party audits of independent service providers or nonbanks, and
(3) Take enforcement action against nonbanks.
Subsection (b)(2) of Section 1024 requires the CFPB to carry out a “Risk-based Supervision Program,” under which it shall exercise its supervisory authority over non-banks, including IMBs, “based on the assessment . . . of the risks posed to consumers in the relevant product markets and geographical markets, and taking into consideration as applicable—-
(A) the asset size of the covered person;
(B) the volume of transactions involving consumer financial products or services in which the covered person engages in;
(C) the risks to consumers created by the provision of such consumer financial products or services;
(D) the extent to which such institutions are subject to oversight by State authority for consumer protection; and
(E) any other factors that the Bureau determines to be relevant to a class of covered persons.”
It is our reading of the statute that it would not permit the wholesale exemption of non-banks, or even non-bank lenders, from CFPB supervision and enforcement. However, we believe this subsection points the way – and arguably requires – the CFPB to provide a targeted exemption or some other explicit regulatory relief for smaller IMBs.
IMBs are subject to supervision and enforcement with respect to an extensive array of federal consumer protection mortgage provisions by every state in which they do business in. And, every individual mortgage loan originator that works for a non-bank is subject to a rigorous qualifications regime, including a SAFE Act test, an independent background check, 20 hours of SAFE Act pre-licensing courses, and 8 hours of SAFE Act continuing education courses (provisions that mortgage loan originators at banks are exempt from).
Thus, with respect to subsection (D), IMBs are not just regulated by the states – they are generally subject to much more regulation than most other types of non-banks, a strong statutory argument for a de-emphasis of CFPB focus on IMBs. Additionally, subsections (A) through (C) above point to the need for differential treatment of smaller IMBs, which are smaller, have fewer transactions, and as a result, pose much less of a risk to consumers than the larger IMBs. Finally, as noted, regulatory exemptions for smaller mortgage firms are common, an example being Reg X and Z servicing exemptions for smaller servicers.
We understand that in practice, the CFPB may have informal protocols that emphasize targeting larger IMBs more than smaller ones for exams and enforcement. However, we believe a more explicit policy is appropriate in light of Section 1024 and we believe the Williams bill provides an approach that is consistent with that Section and accomplishes that objective.
Specifically, we would recommend that the CFPB establish an explicit regulation or policy that it will not conduct exams, conduct audits of third party service providers, or initiate or take enforcement action against smaller IMBs, unless one of the states with jurisdiction over the IMB requests that the CFPB do so.
This would restore the primacy of the states as regulators of these smaller IMBs. If a state determines that it does not have the resources to adequately investigate an IMB it has reason to believe may be violating a federal consumer law, it may make a formal request for the CFPB to act. Similarly, with respect to conducting periodic exams or carrying out audits of third party service providers of a smaller IMB, a state could ask for assistance with the CFPB.
This approach would better accomplish the recommendation in the Treasury Report of having “greater regulatory cooperation and coordination among financial regulators.” It would also reduce the regulatory CFPB compliance burden that disproportionately affects smaller lenders. Finally, it would best prioritize the limited CFPB supervision and enforcement resources – to concentrate on firms with the most significant impact on consumers.
In closing, we appreciate your consideration of these suggestions, and would look forward to meeting with you to discuss them in more detail.
COMMUNITY HOME LENDERS ASSOCIATION
COMMUNITY MORTGAGE LENDERS OF AMERICA
September 18, 2017