CFPB should use lighter touch on IMBs, CHLA says

Looking to seize the opportunity for a lighter regulatory touch when it comes to independent mortgage bankers, the Community Home Lenders of America has sent a letter to the Consumer Financial Protection Bureau highlighting four areas it would like to see changed.

The letter is addressed to Russell Vought, the bureau's acting director pending confirmation of Jonathan McKernan. So far Vought has fired numerous employees and closed the headquarters.

The CHLA is calling on the bureau to streamline the regulation of smaller independent mortgage bankers, pointing out that banks under $10 billion in assets are exempt from its supervision.

"Every IMB — no matter how small or how few loans it originates — is redundantly subject to exams and actions by the CFPB with respect to all federal consumer protection laws," the letter continued.

"The Dodd-Frank Wall Street Reform and Consumer Protection Act, which created the CFPB, requires a tiered regulatory streamlining for smaller IMBs."

The CHLA conceded that the bureau has "implicitly" followed the Dodd-Frank guidelines to a degree, as larger IMBs get examined more frequently than their smaller brethren.

But without "a formal and transparent exemption," small IMBs have significant compliance costs for exams that may never occur or for hiring lawyers to figure out CFPB interpretations that may differ from that of their state regulators.

Secondly, the regulation or rulemaking by enforcement policy should end. Since its earliest days under Richard Cordray, the CFPB has engaged in such practices to get its point across, rather than enter into a formal rulemaking process.

It disproportionally affects smaller IMBs in several ways, including because they "lack the loan volume and revenue economies of scale that large lenders have to pay outside attorneys and lobbyists to stay current on how the CFPB might interpret its rules."

The CHLA wants to add flexibility to the loan officer compensation rules, which were put into place to minimize steering of consumers into certain products.

It is looking for changes in three areas: allowing a lender to reduce compensation to being able to match a competing offer; having different pay structures for state housing finance agency bond mortgage loans; and permit flexible pay when a mortgage banker decides to broker out the loan rather than originating it itself.

Finally, "the CFPB should immediately suspend court order registry requirements for IMBs and withdraw its proposed form contracts rule.  Both are redundant and unnecessary for IMBs," the letter said.

While Vought has taken drastic actions to curtail the CFPB, McKernan "took some reasonable positions" while on the Federal Deposit Insurance Corp. board, Richard Horn, the co-managing partner of Garris Horn said during a Dodd Frank Update webinar on Feb. 12.

"There's some hope that he has a more reasonable posture towards federal financial regulation than the current acting director and DOGE, but then the question remains, well, if this is really the approach that President Trump wants to take with the CFPB, that wouldn't be within McKernan's power to forward Trump's efforts to shut down the agency," Horn, a former senior counsel at the bureau said.

"No matter how reasonable he may be, if the administration wants the CFPB to be shut down, then that's probably what's going to happen," he added.

McKernan's confirmation hearing will be interesting, as a lot of conflicting information and statements are going around about what's going to happen to CFPB in the short term, medium term, and long term, added David Friend of Friend Mortgage Consulting and also a former senior counsel at the bureau.

"That type of regulatory inquiry and those types of types of interactions, I found that the smaller participants, especially the mortgage market, are the ones that get a lot of benefit out of that, simply because they usually don't have the resources that some of the bigger firms have to have all of those materials at their hand and fingertips," Friend said.

Regulators need to give "clear rules of the road" to keep the mortgage industry functioning and avoid uncertainty in the process, Horn said.

Without a CFPB, it could lead to more aggressive state enforcement especially in areas open to interpretation like the Real Estate Settlement Procedures Act's anti-kickback provision, also known as Section 8," which Horn called an "unfortunate consequence."

Horn considers rulemaking to be a legal question for Congress to decide, not the bureau.

"Should it be up to the CFPB to create that new law, or should it be up to Congress? I think Congress should really take a strong look at all the underlying statutes and put limits around that rulemaking authority, because the CFPB has shown that they'll use it to go off on these single director-wanted projects," he said.

Horn also called for the CFPB to be governed by a board, rather than a director, because it would "help try and prevent some of the pendulum shifting we've seen," as well as limit some of the "bad decision making" the agency has made.

But apparently Vought has restored publishing the average prime offer rate tables from the CFPB, according to an article on The American Prospect website on Feb. 11.

Those tables are used to calculate Dodd-Frank thresholds for various items, including the qualified mortgage test.

"I can't confirm this myself that he directed the Office of Research to keep on publishing APOR, which is a good thing," Horn said. "But I think it's hopefully a realization that there are some important statutory functions, regulatory functions, that the CFPB conducts that need, that should continue."

But a July 2024 proposal to change Regulation X to add loss mitigation options and foreclosure prevention alternatives "will most likely wither and die on the vine," said Jim Sandy of McGlinchey Stafford in an email.

The "across-the-board pause will allow the bureau to reevaluate its priorities and decide what rules to continue to pursue," Sandy said. "I think it is a fair assumption that given the deregulatory agenda of President Trump…this proposed rule will never be finalized, and certainly not in its current form."