Consumer Financial Protection Bureau Finalizes Mortgage Origination Examination Procedures
by Marissa Aquila Blundell, Esq.
Senior Vice President & General Counsel
On January 11, 2012, the CFPB updated its Supervision and Examination Manual to include its Mortgage Origination Examination Procedures. Previously, the CFPB released its general examination procedures for large depository institutions and non-bank financial services providers which stressed the importance of an effective compliance management system.
According to the CFPB, a compliance management system should: establish compliance responsibilities; communicate responsibilities to employees; ensure that business processes incorporate compliance responsibilities; review operations to ensure compliance responsibilities are satisfied; and take corrective action as necessary. A supervised entity’s compliance program should include policies and procedures, training, monitoring and corrective action, and responding to consumer complaints.
The general compliance management system review includes an examination of policies and procedures for, among other things: changes management committed to make following recent monitoring; audit and examination findings and recommendations; coverage of new consumer financial laws, or new products; compliance with specific regulatory requirements and procedures; and outdated content or other indicators of overly general untailored policies.
In conjunction with the general compliance management system review, specific mortgage origination examinations will cover one or more of 7 possible modules:
Module 1 – Company Business Model
Module 2 – Advertising and Marketing
Module 3 – Loan Disclosures and Terms
Module 4 – Underwriting Appraisals and Originator Compensation
Module 5 – Closing
Module 6 – Fair Lending
Module 7 – Privacy
To complete these examination modules examiners may utilize an entity’s organizational charts, annual reports, policies and procedures, rate sheets, disclosures, loan files, operating checklists, computer system details, wholesale and correspondent lending agreements, underwriting guidelines, compensation policies, historical examination information, audit and compliance reports, and management’s responses to findings.
Complete information for each module of the Mortgage Origination Examination is available at: http://www.consumerfinance.gov/pressrelease/consumer-financial-protection-bureau-releases-mortgage-origination-examination-procedures.
The following are key points regarding the Mortgage Origination Examination Module 3 – Loan Disclosures and Terms, Module 4 – Underwriting, Appraisals and Originator Compensation, and Module 5 – Closing.
Module 3 – Loan Disclosures and Terms
RESPA
The RESPA review includes whether the GFE and Settlement Cost Booklet were provided. For mortgage brokers, examiners review whether the entity agreed to provide the GFE and Booklet and if so whether it is carrying out that responsibility adequately. For mortgage lenders, the review includes whether the RESPA Special Information Booklet, GFE, and affiliated business arrangements provisions are satisfied; and the final Settlement Statement is reviewed to assess compliance with RESPA disclosure requirements and tolerance limits on settlement charges.
TILA
The TILA review assesses compliance with disclosure provisions regarding the amount financed, annual percentage rate (APR), and payment schedule or rate and payment summary table as applicable; disclosure provisions for the appropriate calculation of finance charge and APR; high cost mortgage loan requirements; reverse mortgage loan requirements, HPML requirements; required escrow account requirements and prepayment penalty restrictions.
Additional Regulations
The ECOA review includes a determination of whether Adverse Action Notices were provided when required; the FCRA review assesses compliance with Adverse Action and Risk-Based Pricing Notice requirements; and the HOPA review includes whether the entity provided a notice to the borrower of borrower’s ability to terminate PMI, if required.
Review of Potential Risks to Borrowers
The Loan Disclosures and Terms examination module also includes file reviews to assess other risks to borrowers such as whether alterations to or forgeries of loan documentation exist, and review of rate lock practices to determine whether consumers lose their rate locks prior to expiration resulting in those consumers receiving more expensive mortgage products.
Module 4 – Underwriting, Appraisals and Originator Compensation
Underwriting
Examiners review high cost loans and HPMLs to assess compliance with requirements to establish borrower’s repayment ability. An entity’s underwriting policies and guidelines are reviewed for inclusion of verifiable standards for qualifying borrowers, including standards for debt ratios, credit scores, and LTV ratios. The entity’s processes and bases for approving exceptions to underwriting standards are also reviewed.
Examiners assess the independence of the underwriting unit from the sales unit and determine whether underwriter compensation structures affect incentives concerning speed and quality of underwriting.
Appraisals
The examiner reviews policies and procedures for obtaining appraisals and interviews employees regarding any relationships with independent third party appraisers to determine whether there are conflicts of interest. The entity’s compliance with TILA’s valuation independence provisions and ECOA’s provisions requiring provision of the appraisal to applicants is assessed. An entity’s oversight of its appraisers and safeguards against appraisal fraud are also reviewed.
Originator Compensation
Policies and procedures regarding originator compensation are reviewed and employees are interviewed to confirm the entity complies with its own policies. Compliance with the TILA prohibition against lender-paid compensation based on terms or conditions of loan, the prohibition against dual compensation and the steering prohibition is assessed.
Module 5 – Closing
Completion of the Closing examination module includes review of written procedures governing the provision of disclosures such as Final TIL, HUD-1, Servicing Transfer Disclosure, PMI cancellation notice and the privacy and opt out notices. In addition, examiners determine whether entity allows borrower to choose their settlement agents. Borrower receipt of the initial escrow account statement and rescission notices, if applicable, is confirmed.
An entity’s policies are reviewed to determine whether loan terms are explained deceptively, or whether
closing practices obscure key loan terms or provisions. Initial RESPA and TIL disclosures are compared to the HUD-1 Settlement Statement and Final TIL disclosure for evidence of bait and switch and closing files will be reviewed for evidence of coercion of or fraud against borrower.
To view the complete CFPB Supervision and Examination Manual, including the new Mortgage Origination
Examination Procedures visit: http://www.consumerfinance.gov/guidance/supervision/manual
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