On June 4, 2013, in what it deemed to “first round” of “what will likely be multiple updates” to its Supervision and Examination Manual, the CFPB published forward-looking examination procedures related to new mortgage rules under the Truth in Lending Act (TILA) and the Equal Credit Opportunity Act (ECOA) on June 4, 2013. This update identifies what CFPB examiners will be considering in evaluating compliance with the new rules when they become effective next January. Director Cordray explained that the " CFPB recognizes that the easier we make it for financial institutions and mortgage companies to follow the new regulations, the better off consumers will be." Cordray hopes that "[b]y releasing details of what our examiners will be looking for well in advance of the effective date of most of the rules, we are giving industry more time to adjust."
The 218 pages of updated procedures cover loan originator qualifications and loan originator compensation, escrow on higher priced mortgage loans and mandatory provision of appraisals and valuations in connection with certain mortgage loans. Specifically, the CFPB emphasized that these updated exam procedures “will help financial institutions and mortgage companies understand how they will be examined for CFPB rules that:”
- Set qualification and screening standards for loan originators: A loan originator must be ethical and knowledgeable. They will need to: meet character, fitness, and financial responsibility requirements; pass criminal background checks; and complete appropriate training.
- Prohibit steering incentives: Compensation for a loan originator generally cannot vary with the loan terms. A broker or loan officer cannot get paid more if the consumer takes a loan with a higher interest rate, a prepayment penalty, or higher fees.
- Prohibit “dual compensation:” A loan originator cannot get paid by both the consumer and another person such as the creditor.
- Protect borrowers of higher-priced mortgage loans: The required duration of an escrow account on higher-priced mortgage loans extends from a minimum of one year to a minimum of five years.
- Prohibit the waiver of consumer rights: It is prohibited to bar consumers in their mortgage or home equity loan or related agreements from bringing a claim in court in connection with any alleged violation of federal law.
- Prohibit mandatory arbitration: Mandatory arbitration of disputes related to mortgage loans is generally prohibited for mortgage and home equity loans.
- Require lenders provide appraisal reports and valuations: Mortgage lenders will need to provide applicants with free copies of all appraisals and other written valuations developed in connection with certain mortgage loan applications.
- Prohibit single premium credit insurance: Creditors will be prohibited from financing certain credit insurance premiums in connection with certain mortgage loans.
The CFPB indicates that once additional procedures are finalized, it will incorporate the procedures into the Supervision and Examination Manual. Mortgage lenders and brokers will be wise to consult the updated procedures as they make compliance systems changes to implement next year’s regulatory overhaul.