By Joseph Yenouskas & Lindsay Raffetto
n March, Chris D’Angelo, the Associate Director for Supervision, Enforcement and Fair Lending at the Consumer Financial Protection Bureau (CFPB), announced that the CFPB would be starting its five-year review of several of the major mortgage rules it has implemented. This five-year review, which Congress mandated in the Dodd-Frank Act, could result in changes to several of the rules that have impacted the regulatory landscape of the mortgage market in the last several years. The mortgage-rule review is only in its early stages, and it will likely be several months before the CFPB even issues its request(s) for information concerning the rules it will review. But the start of the review is important because it means the mortgage industry will have the opportunity to weigh in on the positive aspects, and the pain points, of some of the most important mortgage rules. And it means that, in theory at least, the CFPB will be listening.
Section 1022(d) of the Dodd-Frank Act (codified at 12 U.S.C. § 5512) requires the CFPB, within five years of the effective date of the rule, to:
conduct an assessment of each significant rule or order adopted by the Bureau . . . . The assessment shall address, among other relevant factors, the effectiveness of the rule or order in meeting the purposes and objectives of [the Dodd-Frank Act] and the specific goals stated by the Bureau.
Which mortgage rules is the CFPB likely to assess as part of its five-year review? As noted above, Section 1022(d) requires the CFPB to review “significant” rules; the CFPB’s determination in its Request for Information Regarding the Remittance Transfer Rule, 82 Fed. Reg. 15009 (Mar. 24, 2017) (Request for Information) that its remittance rule (discussed below) was a “significant rule” requiring review may shed light on the determination process. In the case of the remittance rule, the CFPB determined that the rule was “significant” because (1) the estimated aggregate annual cost to the industry of complying with the rule is high, (2) the CFPB stated at the time of the rule’s issuance that it expected the rule to have important effects on remittance transfers, (3) the rule was expected to create new compliance risks for providers, and (4) the rule stated that providers are liable for violations by an agent. These factors will likely also be used in determining which of the mortgage rules is significant enough to warrant assessment.
In 2013, the CFPB finalized a number of important mortgage-related rules, including: the Ability-to-Repay and Qualified Mortgage standards, expanded escrow requirements for higher-priced mortgages, increased protections under the Home Ownership and Equity Protection Act (HOEPA) and new homeownership counseling requirements, mortgage servicing rules to implement servicing changes to RESPA and TILA, a new requirement that lenders provide free copies of all appraisals and other written valuations obtained in connection with first-lien home loans, enhanced appraisal requirements for non-exempt higher-priced mortgage loans, and new restrictions on loan originator compensation. Most of these rules were finalized in the middle of 2013 and took effect at the beginning of 2014.
Based on Mr. D’Angelo’s comments and the factors the CFPB identified in its remittance rule determination, it is likely that, at the very least, the CFPB will review the Ability-to-Repay/Qualified Mortgage rule (which amended Regulation Z) and the mortgage servicing rules (which were implemented as amendments to both Regulations X and Z). The Ability-to-Repay rule, for instance, has stood out among the mortgage rules as one of the more difficult rules to comply with, and many mortgage industry members still struggle to understand how to correctly implement its requirements. Additionally, these rules substantively changed mortgage lenders’ and servicers’ obligations—the mortgage servicing rules, for example, affect implementations of both RESPA and TILA and impose important new obligations on lenders concerning force-placed insurance and loss mitigation protections. In addition to these rules, Mr. D’Angelo’s comments and the recent media focus on the mortgage lending industry’s incentive compensation practices suggest that rules governing compensation may also come up for review.
How might the CFPB conduct its review of the rules it identifies as significant? The CFPB has already begun its review of its remittance transfer rule, which took effect in October 2013, and which implemented several new requirements governing remittance transfers sent by consumers in the U.S. to individuals or businesses in foreign countries, including requirements for depository institutions regarding disclosures, cancellation and refund of transfers, and error resolution. The Request for Information concerning the remittance-rule review may be helpful in anticipating what the Bureau’s review of the mortgage rules might look like.
After reviewing what the Bureau views as the key changes the remittance rule effected, the Request for Information sets out its assessment plan. First, it identifies the purposes and goals against which the remittance rule will be assessed. It notes that the Bureau’s purpose is to enforce consumer financial laws fairly to ensure that “all consumers have access to markets for consumer financial products and services and that markets for consumer financial products and services are fair, transparent, and competitive.” 82 Fed. Reg. 15012. It states that its goals are to ensure that: (1) consumers are given to timely and understandable information to allow them to make responsible financial decisions, (2) consumers are protected from unfair, deceptive, abusive, or discriminatory practices, (3) the laws are enforced consistently, without regard to entity’s status as a depository institution, (4) markets for consumer financial products and services are transparent and efficient to encourage innovation, and (5) “outdated, unnecessary, or unduly burdensome regulations are regularly identified and addressed in order to reduce unwarranted regulatory burdens.” 82 Fed. Reg. 15012-13.
The assessment plan proposes to compare the primary protections created by the remittance rule to the stated purposes and goals of the Bureau, and to consider (1) whether the remittance rule has had a positive impact on access, efficiency, and limiting market disruption, and (2) whether the remittance rule has provided greater information, transparency, and price predictability to the remittance market. The CFPB further proposes to quantitatively compare consumer outcomes under the new rule compared with the baseline of consumer outcomes it believes would have resulted without the rule. It also plans to interview “various market participants, including remittance transfer providers” concerning certain aspects of the rule. Finally, the CFPB states that it plans to analyze certain discrete provisions of the remittance rule to evaluate those provisions’ effectiveness.
Perhaps most important for industry members in the near term, the Request for Information also includes a request for comment, inviting stakeholders to weigh in before the assessment begins in earnest. Specifically, the CFPB asks commenters to respond concerning several topics of interest: (1) the feasibility and effectiveness of the assessment plan; (2) “data and other factual information that may be useful for executing the Bureau’s assessment plan”; (3) recommendations to improve the assessment plan; (4) “data and other factual information about the benefits and costs of the [rule] for consumers, remittance transfer providers, and others”; (5) data and factual information about the rule’s effectiveness in meeting the stated purpose and goals of the CFPB; and (6)”recommendations for modifying, expanding, or eliminating the [rule].” 82 Fed. Reg. 15014.
Essentially, the Request for Information associated with the five-year review of the remittance rule is giving industry members the opportunity to tell the Bureau about their experience of the rule: what about the rule has worked, and what about the rule has not, either because a provision is too burdensome to be feasible or because it simply does not accomplish the goals it was intended to accomplish. And while the feedback that industry members provide may not result in immediate changes to the rule – the remittance rule Request for Information specifically indicates that the CFPB does not anticipate including any proposals for rule changes in its assessment report – comments on what truly has not been working for the industry may be taken into consideration and impact future rule changes the Bureau undertakes, particularly if its assessment concludes that there are ways the rule could be improved. In any case, revising outdated or unduly burdensome rules is one of the Bureau’s stated goals, so it must consider as part of its assessment whether the rules it is reviewing have been too burdensome.
The chance to provide feedback on rules like the remittance rule and the mortgage rules is especially opportune given the current political climate surrounding the financial industry. Currently, the legality of the CFPB’s structure is still up in the air, and there continues to be talk of a major overhaul to the financial services regulatory environment in the form of a bill like the Financial CHOICE Act. Under these circumstances, the CFPB may be more inclined to consider seriously the constructive feedback industry members provide suggesting improvements to important rules. Indeed, some commentators have even speculated that the CFPB is starting its five-year review of the mortgage rules (many of which were not effective until 2014 and therefore do not need to be reviewed until the beginning of 2019) so early because the Bureau wants to get out ahead of a legislative overhaul by trying to moderate some of its more burdensome regulations. Whether or not this is the case, the chance for industry members to weigh in on how the CFPB should assess its existing rules and to suggest some changes that would improve the rules from the industry’s perspective is fairly unique and should be taken advantage of.
Many mortgage lenders and servicers have encountered challenges in implementing several of the mortgage-related rules established by the CFPB in the last five years. And now, through the CFPB’s mandatory five-year review of its early mortgage rules, the opportunity to raise the issues institutions have encountered and to suggest improvements will soon be presented. Institutions should review their internal processes and compliance programs now to determine which rules they believe are the most impactful and what they believe can and should be changed about those rules to improve both their efficacy and their operational feasibility. And when the CFPB issues its request(s) for information concerning the mortgage rules, institutions should avail themselves of the opportunity to provide reasonable and realistic feedback on the strengths and areas for improvement in the rules that most affect their businesses.
Joseph Yenouskas is a partner and Lindsay Raffetto is an associate in the Financial Institutions group in the Washington, D.C. office of Goodwin Procter LLP. Views expressed in this article are their own. They can be reached at JYenouskas@GoodwinLaw.com and LRaffetto@GoodwinLaw.com.