Guilty Until Proven Innocent?

QUESTION 

I am the Chief Executive Officer of a lender and servicer. Last week, the CFPB hit us with a Civil Investigative Demand. Our in-house lawyer has put a team together from various departments to respond to it. And you kindly referred us to an attorney who specializes in this process. We are retaining the attorney you recommended. 

At this point, many people in the company are aware that we received the Civil Investigative Demand, and I am very concerned about reputation risk. We have built a fantastic company, yet rumors have already started that we did something to violate laws and regulations. I need a way to calm everyone down and not worry. 

Because of the rumors, some employees now think we are guilty of wrongdoing. We intend to fight any such charges! I need to issue a statement that explains the process in plain and simple language. I need your help in providing information that helps them to understand the process. 

What is the CFPB’s Civil Investigative Demand? 

Are we guilty until proven innocent? 

COMPLIANCE SOLUTION 

CMS Tune-up®  

RESPONSE 

Rumour doth double, like the voice and echo,

The numbers of the feared.

Henry IV, Part 2, Shakespeare 

Allow me to put the above lines into our modern idiom: An unconfirmed report expands like an echo growing louder and louder, magnifying the perceived size and threat. 

DO NOT IGNORE THE RUMORS! 

Perhaps you think that the truth will reduce the rumors. Sometimes, it does; sometimes, it does not. One of my favorite literary figures, Jonathan Swift, once said that “falsehood flies, and the truth comes limping after it.” He cautioned that by the time people become “undeceived,” the “jest” is over, and the “tale” has already had its effect.  

Reputation risk is real, and adverse issues can hobble a company financially, even when there’s nothing to the allegations of wrongdoing. Some rumors don’t have a scintilla of truth, but they thrive nonetheless. Like a garden of weeds, pull out one, and another takes its place. Your aim should be to control the message. However, do not ignore rumors! 

PEEKING BENEATH THE CFPB HOOD 

I am going to give you a peek into the CFPB’s Civil Investigative Demand process. The acronym is “CID,” and for brevity, I will use this acronym. If you’re wondering if the CFPB has coopted the authority to conduct CIDs, you might be interested in knowing that it certainly does have the authority pursuant to the Dodd-Frank Act.[i] A primary access point to the authority is Unfair, Deceptive, or Abusive Acts or Practices (UDAAP),[ii] which

 “…take any action . . . to prevent a covered person or service provider from committing or engaging in an unfair, deceptive, or abusive act or practice under Federal law in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service…”[iii] 

Most CIDs are triggered by CFPB examination. However, the examination is not the only source of the CID. I’ll get back to examinations momentarily. 

NON-EXAMINATION SOURCES OF CIDs 

Other sources can trigger a CID, many of them being external to the company itself. For instance, the Office of Enforcement monitors the CFPB’s Consumer Complaint Database for potential violations.[iv]

The CFPB also sources allegations of violations from its Whistleblower and Tips portal. 

In addition, states and federal agencies may send referrals relating to possible breaches of regulations. 

News reports and even Better Business Bureau complaints can lead to activating a CID. 

Unfortunately, a company may have no idea that it has come to the attention of the CFPB’s enforcement investigation team until the CID is actually issued. Often, the company is surprised by the CID. Indeed, it may have no idea of the alleged violations. Put otherwise, the first a company learns of an investigation is usually when it gets the CID.[v] 

TRIPARTITE TEAM 

Such enforcement puts huge pressure on a company. One reason for the pressure is that there is an unyielding timeline for document production and appropriate responses.[vi] This is the reason why I referred you to an attorney who is steeped in handling the CID process. 

You must retain a lawyer who is capable of vetting relevant information, identifying witnesses and knowledgeable people in the company, and determining the legal violations implicated in the investigation. Importantly, the attorney must ensure compliance with the CID while also advising the company of any legal and factual risks. The appropriate legal counsel should be experienced in understanding UDAAP (for instance, the “unfair” and “deceptive” prongs), including, but not limited to, public consent orders, CFPB administrative adjudications, district court opinions, the CFPB examination manual, published guidance, and relevant CFPB policy statements. 

I have often said that the best tactical response to a CID is to establish a Tripartite Team, as follows:

Third-Party Relationships: Compliance Risk

Jonathan Foxx

Managing Director

Lenders Compliance Group

I am often asked if there are significant compliance risks involving third parties in mortgage banking. The answer is: without a doubt! In providing some insight, I will just mention three of the many types of third parties that pose such risks: mortgage brokers, mortgage lenders, and mortgage servicers.

Let’s be clear at the outset: managing third-party risk is critical for providers of consumer financial products and services. This is because financial institutions (“FI”) can be and often are themselves held liable for the practices of third parties acting on their behalf. Where there is contact with the public by third parties, directly or indirectly, on behalf of the FI the risk is substantively greater. From the point of view of technological factors, service providers may be integrated into an FI’s business operations. As such, this can lead to enforcement actions in which certain violations of consumer protection laws are alleged against the service provider and the FI itself!

It is the case that regulators have affirmed their intention to hold companies strictly liable for conduct of their agents. The legal principal invoked is usually the theory of “vicarious liability.” Just a few years ago, in October 2015, the Department of Housing and Urban Development (“HUD”) proposed rules to formally codify third-party liability standards under the Fair Housing Act, including strict vicarious liability for acts of an institution’s agents, as well as direct liability for negligently failing to correct and end discriminatory practices by those agents.[i]

Consider the risk posed by mortgage brokers. For many years, an area that has seen a lot of fair lending enforcement and class action litigation has been the wholesale mortgage lending industry. Since mortgage lenders close loans originated by independent mortgage brokers, regulators and private litigants have brought enforcement actions and lawsuits alleging that lenders have failed to monitor and control discretionary mortgage broker pricing and product selection practices. In these cases, it has been alleged, under the disparate impact theory, that the mortgage lenders have violated the Equal Credit Opportunity Act (ECOA) due to pricing disparities disfavoring racial and ethnic minorities.

In fact, since 2010 there have been several Department of Justice (DOJ) and Consumer Financial Protection Bureau (CFPB) enforcement actions, as well as lawsuits filed by cities, against wholesale mortgage lenders under this theory.[ii]

Most of the mortgage pricing fair lending enforcement actions to date have focused on conduct that predates April 2011, when regulations by the Federal Reserve on loan originator compensation first took effect. I have written extensively on the features of the loan originator compensation requirements that went into effect on April 6, 2011, if you are interested in reading more about these rules.[iii] The loan originator compensation regulations prohibit compensation to mortgage loan originators based on, among other things, discretionary loan pricing or product steering by a broker based on a financial incentive to a product not in the consumer’s interest.[iv]

Although these changes in the law have reduced pricing’s influence on fair lending risk, they have certainly not eliminated the risk entirely. For instance, in December 2015, the DOJ brought an enforcement action against Sage Bank in Massachusetts relating to disparities in revenue earned on retail mortgage loans to minority borrowers compared to that on mortgage loans to non-minority borrowers. What is notable about this action is that it was the first pricing discrimination enforcement action that focused on loans made after the loan originator compensation rules took effect in 2011. Obviously, it demonstrated that regulators are continuing to focus on mortgage pricing discrimination issues.

But fair lending is not the only compliance risk associated with wholesale lending. Other risks include Unfair, Deceptive, or Abusive Acts or Practices (referred to collectively, “UDAAP”) and related areas. In fact, the CFPB issued guidance on UDAAP in its Supervision and Examination Manual of October 2012.[v] With the benefit of time, litigation, guidance, and examinations, among other things, we can say that these risks arise because mortgage brokers play a key role in marketing, discussing product benefits and terms with applicants and guiding their product choices, providing disclosures, completing applications, and gathering documentation in support of the loan applications. It stands to prudent reasoning that, in addition to fair lending, oversight of an FI’s mortgage broker network is critical for mitigating UDAAP risk and managing other compliance requirements.

When we move from a consideration of risks associated with mortgage brokers to those posed by mortgage lenders the risk profile is neither better nor worse, but, as the saying goes, it is different. Much risk tends to congregate around fair lending in secondary market transactions. For instance, in the case Adkins v. Morgan Stanley, plaintiffs alleged that the policies and procedures of Morgan Stanley, which had purchased loans from subprime loan originator New Century Mortgage Company, had created a disparate impact on African-American borrowers. If as alleged, this would be a violation of the Fair Housing Act (FHA), ECOA, and state law.[vi] Although the court dismissed the ECOA claims as time-barred, it allowed the FHA claims to proceed, holding that plaintiffs’ allegations were sufficient to state a claim of disparate impact discrimination. In the ruling, the court stated that the FHA expressly applies to secondary market purchasing of mortgage loans. It further emphasized allegations relating to Morgan Stanley’s warehouse lending commitments, on-site due diligence of New Century loans, demand for loans with alleged “high-risk” features, and instructions to originate no-documentation loans when it appeared that the applicant could not afford the loan. In its conclusion, the court noted that the evidence was sufficient to support claims that Morgan Stanley’s policies “set the terms and conditions on which it would purchase loans from New Century” and that these terms and conditions had resulted in a disparate impact when they caused New Century to issue toxic loans to the plaintiffs.

In the case In re Johnson, a Chapter 13 debtor alleged that a loan originator had targeted minority borrowers for predatory loans, and that the purchasers and assignees “were involved in this enterprise of selling toxic loans and targeting vulnerable minorities” because the loans were originated with securitization as the ultimate goal.[vii] Although the court dismissed the complaints on the ground that the plaintiff had not alleged sufficient facts to support the claims, it did not summarily reject the proposition that a secondary market purchaser could be held liable under ECOA or the FHA.[viii]

My point is that fair lending scrutiny of not only mortgage lenders, but also their investors, will likely increase in the coming years as new Home Mortgage Disclosure Act (HMDA) reporting requirements, finalized in October 2015, will provide greater insight into the role of investors in the loan origination process.

The Lead Generation Company: Managing the Risks

Jonathan Foxx

President & Managing Director

Generating leads is an important way to reach consumers. It is also fraught with regulatory risk. A lead is consumer information that signals consumer interest or inquiry into products or services offered by a business, such as residential mortgage lenders and originators. There are several factors to be considered, not just licensing. I will list some rudimentary guidelines in this article, specifically with respect to contact with the consumer. Caution is urged to consult with a risk management professional to ensure compliance with federal and state guidelines required by a marketing campaign to generate leads. Although my focus is primarily on the online lead generation process, virtually all the guidelines provided herein may be extrapolated for use in offline lead generation campaigns.

My firm often is requested by clients to vet a lead generator, which I will call a Lead Generation Company. Careful risk management advice should be considered when developing and managing leads, whether obtained from an outsourced entity or a loan originator’s own website, in-house, or through online lead generation advertisements. Certainly, any loan originator that uses leads must have an internal compliance function that accounts for proper licensing of the Lead Generation Company (where required), monitoring of the data integrity derived therefrom, testing conformance with the originator’s policies, and training of staff in the appropriate use of lead generated, consumer data.

Banking departments these days are not just looking at licensing qua licensing. They are looking for loan originator compensation violations that are triggered by lead generation. For instance, they know that loans may have different cost structures depending on how the loans were initially received by the lender. A lead generated by the loan originator may be compensated differently than those generated by the creditor. As long as this doesn’t constitute a proxy for a loan term or condition, it is generally acceptable; that is, the loan officer may also be reimbursed for lead generation and other legitimate business costs, but the creditor must beware of how this may serve as a proxy for terms and conditions. It is up to the lender to make this determination (and properly document it).

Four Rules

In any lead generating marketing, the following four rules should be implemented:

1.     Complete, accessible, and straightforward disclosure of all parties’ intent regarding data collection and usage is essential;

2.     Data should not be brokered or sold without consent (or notice and choice) of all parties involved, including the consumer and the loan originator;

3.     Both the consumer, Lead Generation Company, and the loan originator should be made aware, through clear notices, of all parties involved in data collection and sharing; and,

4.     All parties should be educated and aware of current regulations regarding consumer protection and privacy.

These four rules become the bases of the policies, procedures, contractual arrangements, and protocols that ensure a viable marketing campaign that relies, in whole or in part, on lead generation.

Regulatory Focus

The regulators involved in enforcement of compliance with lead generation rules include, but are not limited to, state banking departments, state Attorneys General, the Federal Trade Commission (“FTC”),[i] and the Consumer Financial Protection Bureau (“Bureau”). We already know that the Bureau examines for whether the lead generator is a third-party provider and reviews the terms and appropriateness of the relationship. The Bureau reviews advertisements and advertising sources. It will review TV, radio, print media, Internet, scripts, recordings, and so forth. It will determine if there was proper consumer disclosure all along the way, from point of contact with the consumer to point of contact with the lender, including any intimation of fees and other terms and conditions. Plus, a review is conducted for online data security and sharing of consumer information.

Although the new loan originator qualification standards do not impose licensing requirements, every lender must ensure that each loan originator in its employ is licensed and registered in compliance with laws related to Secure and Fair Enforcement for Mortgage Licensing Act (SAFE), if applicable. Further, entities engaged in lead generation and marketing activities, as well as the companies that do business with such entities, need to pay particular attention to their activities to ensure that they do not inadvertently engage in loan originator activity. If they do, they’ll need to make sure that they meet the new loan originator qualification standards, including licensing requirements. Failure to meet these standards will give rise to severe civil liability that could impair the collectability of the loan.

The Bureau has stated that anytime a consumer gives out sensitive personal and financial information on the Internet there are risks involved to the consumer. In the context of Pay Day Loans, for instance, the Bureau has already warned consumers that if a consumer applies for a loan online, the consumer could be increasing risk significantly.

The Bureau has expressed concern that an online application or form that consumers fill out could be sold to a loan originator that offers to originate a loan on behalf of the consumer. Indeed, the Bureau also has indicated it has concerns that multiple lenders or other settlement service providers could pay for this information, thereby causing them to contact or email the consumer.

Consumer Advocacy

In a November 11, 2013 announcement to consumers, the Bureau stated, “Lead generators might not find you the lowest cost loans, and you should be cautious of sites that promise they will. Many consumers can also be confused about who actually made the loan, which makes getting help when you need it harder.”[ii] In addition, the Bureau has provided caution regarding key words, tags, and tactics.

Importantly, the Bureau’s view toward the Pay Day lead generator should be applied to residential mortgage lenders and originators that purchase leads from a Lead Generation company. Here’s the point: the Bureau has clearly issued an answer to the question, "What is the difference between an online payday lender and one with a storefront?" Its answer was that consumers need to make sure the online website is licensed to do business in the consumer's state and whether the lead generator follows the state's [payday] lending laws. Consider it a warning to all residential loan originators!

Therefore, when the Bureau starts looking at online lead generation involving residential mortgage loans, it is somewhat certain that it applies an even stricter standard to the Lead Generation Company that solicits mortgage information or a mortgage conversation from consumers and sells it or even passes it on to a loan originator. Questions that the Bureau would resolve, either by promulgating rules or through enforcement action, will likely be: (1) Is the Lead Generation Company violating the SAFE Act if it is not licensed in the state it is operating in?, and (2) If it is licensed under SAFE will it be violating the broadly defined Loan Officer Compensation Rule?

Lead Generation as Advertising

Depending on the advertising used to find a consumer for a loan originator, the Bureau may deem the communication to be an advertisement to generate a lead by using certain phrases, such as “Let us help you find a mortgage! Call us! Or Click Here for More Information!” If deemed an advertisement, the Bureau will move to the view that such advertising is a solicitation for a mortgage conversation from a consumer. The outcome of that position would likely lead to a violation of SAFE, because most states consider such a solicitation a violation of SAFE even if no payment is made by the lender or loan officer to the Lead Generation Company - because this type of solicitation would trigger a license requirement.

Even if the Lead Generation Company is properly licensed under a particular state's SAFE Act, if it sells that lead to an unlicensed loan originator in that state the Bureau could pursue an action against the Lead Generation Company because it assisted or facilitated a consumer’s information to be sold to an unlicensed entity, pursuant to various third party vendor management bulletins.

Some states already require a Lead Generation Company collecting consumer information to be licensed as "mortgage brokers" such as Arizona and Virginia. The licensing requirement varies from state to state. Referencing Pay Day lenders, most of the Pay Day lenders in Ohio, for example, have become Mortgage Brokers under the SAFE Act as it takes them out of the state usury statute for Pay Day lenders.

Three Concerns

What type of online Lead Generation Company could cause issues of concern?

(1) Unlicensed Lead Generation Company that tells consumers, for instance, whether they are "Qualified for a Loan or Not";

(2) Online Lead Generation Company that collects any sort of non-public personal information data (the definition of what is “NPI” may vary from state to state, but is also federally settled in Gramm-Leach-Bliley, et alia) and fails to inform and obtain the consumers consent that their information will be shared with a third party; and,

(3) Online Lead Generation Company where it has spoken directly with the consumer and then transfers the "Live Handoff" over to the loan originator (especially if the Lead Generation Company is not licensed, where required by state law). If the Lead Generation company acts as a special kind of mortgage broker then it may be best to stay away because this could violate the standards associated with the Loan Officer Qualifying Rule, mentioned above, which became effective on January 1, 2014.

Additionally, please note that the Bureau has broad authority to enforce Fair Lending Laws, the Telemarketing Sales Rule, Mortgage Lending and Regulations, Mortgage Acts and Practices Advertising Rule, and most certainly Unfair, Deceptive and Abusive Acts or Practices (UDAAP).[iii]

CFPB and FTC: Warning Letters - Misleading Advertisements

The Consumer Financial Protection Bureau (CFPB), in coordination with the Federal Trade Commission (FTC), has issued warning letters to twelve mortgage lenders and mortgage brokers advising them to remove or revise misleading advertisements. The warnings concern advertisements that target veterans, seniors, and other consumers.*

Additionally, the CFPB announced that it has begun formal investigations of six companies believed to have committed more serious violations of the law.

After reviewing hundreds of mortgage advertisements, the FTC staff has also sent warning letters to twenty companies, warning them that their ads may be deceptive. The FTC sent its warning letters to real estate agents, home builders, and lead generators, urging them to review their advertisements for compliance with the Mortgage Acts and Practices Advertising Rule and the FTC Act. 

The collaboration between the CFPB and the FTC are characterized as a "sweep" - a review conducted by these agencies of about 800 "randomly selected mortgage-related ads across the country, including ads for mortgage loans, refinancing, and reverse mortgages." The agencies looked at ads in newspapers, on the Internet, and from mail solicitations, and advertisements that were the subject of consumer complaints.

I really can't emphasize enough how important it is to control all the advertising your firm publishes - and I mean advertisements in any media. Just adopting a policy and procedure is insufficient.

In my view, several components must be included in advertising compliance:

a formally adopted policy and procedure;

an advertising manual that is signed for and attested to by the employee;

checklists, model forms, ad formats, and authorizations;

an easy reference guide for employees;

periodic training;

and auditing.

If you are not implementing at least these risk management practices, you are certainly falling short of the controls you need to manage the regulatory challenges posed in advertising of mortgage loan products.

______________________________________________________

IN THIS ARTICLE

The Sweep
The Rule
The Warning
The Remedy

______________________________________________________

The Sweep

The following problems were identified by the sweep:

Potential misrepresentations about government affiliation.
For example, some of the ads for mortgage products contained official-looking seals or logos, or have other characteristics that may be interpreted by consumers as indicating a government affiliation (i.e., advertisements containing statements, images, symbols, and abbreviations suggesting that an advertiser is affiliated with a government agency).

Potentially inaccurate information about interest rates. For example, some ads promoted low rates that may have misled consumers about the terms of the product actually offered. These are advertisements offering a very low “fixed” mortgage rate, without discussing significant loan terms (i.e., advertisements “guaranteeing” approval and offering very low monthly payments, without discussing significant conditions on these offers).

Potentially misleading statements concerning the costs of reverse mortgages. For example, some ads for reverse mortgage products claimed that a consumer will have no payments in connection with the product, even though consumers with a reverse mortgage are commonly required to continue to make monthly or other periodic tax or insurance payments, and may risk default if the payments aren’t made.

Potential misrepresentations about the amount of cash or credit available to a consumer. For example, some ads contained a mock check and/or suggested that a consumer has been pre-approved to receive a certain amount of money in connection with refinancing their mortgage or taking out a reverse mortgage, when a number of additional steps would customarily need to be completed before the consumer would qualify for the loan.

____________________________________

The Rule

The Mortgage Acts and Practices Advertising Rule ("MAP-AD Rule" or "MAP Rule"), known as Regulation N since rulemaking authority for it transferred from the FTC to the CFPB, is applied to advertising compliance relating to mortgage loan products. (We have discussed the MAP Rule previously. See, for instance, our September 2, 2011 newsletter, FTC: Adopts Mortgage Advertising Rule.)

The MAP Rule prohibits material misrepresentations in advertising or any other commercial communication regarding consumer mortgages. The FTC and the CFPB share enforcement authority over non-bank mortgage advertisers such as mortgage lenders, brokers, servicers, and advertising agencies. Mortgage advertisers that violate the MAP Rule may be required to pay civil penalties. HUD mortgagees may be subject to additional sanctions by the Mortgagee Review Board.

The MAP Rule was issued as a Final Rule by the FTC on July 22, 2011 (the day after the CFPB received its enumerated authorities) and given the compliance effective date of August 19, 2011. On July 21, 2011, the Commission’s rulemaking authority for the MAP Rule transferred to the CFPB, but the FTC, the CFPB, and the states all have authority to enforce the MAP Rule.

It applies to all entities within the FTC’s jurisdiction that advertise mortgages - mortgage lenders, brokers, and servicers; real estate agents and brokers; advertising agencies; home builders; lead generators; rate aggregators; and others. The MAP Rule, however, does not cover banks, thrifts, federal credit unions, and other entities that are outside the Commission’s jurisdiction.

CFPB: Next Up, Reverse Mortgages!

In a June 28, 2012 Report to Congress, the Consumer Financial Protection Bureau (the CFPB or the Bureau) published its study of reverse mortgage transactions. This study was required by Section 1076 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank).

The Report surmised that reverse mortgages are not being used as Congress originally intended, because, rather than provide income for borrowers during retirement, reverse mortgages are being provided to consumers at younger ages, thereby increasing the risk that these borrowers will go broke later in life. The study found that almost half of reverse mortgage borrowers in fiscal year 2011 were younger than 70 years of age.

Furthermore, the Report concluded that 70% of reverse mortgage borrowers withdrew all the available funds at once in lump-sum payments, which the CFPB claims can be squandered quickly, leaving borrowers with the potential to face foreclosure due to the reduced ability to pay property taxes. According to the study, nearly 10% of reverse mortgagors (as of February 2012) were at risk of foreclosure.

In its 231 page Report, the CFPB stated the following "emerging concerns":

1. Reverse mortgages are complex products and difficult for consumers to understand.

2. Reverse mortgage borrowers are using the loans in different ways than in the past, which increase risks to consumers.

3. Product features, market dynamics, and industry practices also create risks for consumers.

4. Counseling, while designed to help consumers understand the risks associated with reverse mortgages, needs improvement in order to be able to meet these challenges.

5. Some risks to consumers appear to have been adequately addressed by regulation, but remain a matter for supervision and enforcement, while other risks still require regulatory attention.

The study identified four major topics "where additional research would help determine if additional consumer education or regulatory action is needed."

Those topics are:

(a) Factors influencing consumer decisions;
(b) consumer use of reverse mortgage proceeds;
(c) the longer-term outcomes of reverse mortgages; and
(d) the differences in market dynamics and business practices among the broker, correspondent, and retail channels.

On July 2, 2012, the CFPB began the process of investigating the consumer use of reverse mortgages. This procedure begins with a Notice and Request for Information. In effect, that CFPB now seeks comment and information from the public on the aforementioned topics.

In this review of reverse mortgages, the CFPB will undertake, among other things, to identify any practice as unfair, deceptive, or abusive, and may provide for an integrated disclosure standard and model disclosures. Additionally, it will seek detailed information from the public on the factors that influence reverse mortgage consumers' decision-making, consumers' use of reverse mortgage loan proceeds, longer-term consumer outcomes of a decision to obtain a reverse mortgage, and differences in market dynamics and business practices among the broker, correspondent, and retail channels for reverse mortgages.

In this article, I will outline the scope of information that the CFPB is seeking from the public, including consumers, housing counselors, financial institutions, and others, regarding consumer use of reverse mortgages and consumer experiences during the reverse mortgage shopping process.*

Factors Influencing Consumer Decisions

The CFPB asks the following questions regarding the factors that influence consumer decisions:

1. What factors are most important to consumers in deciding whether to get a reverse mortgage?

2. What factors are most important to consumers in choosing among products? Among other things, comments could address the choice between fixed-rate, lump-sum reverse mortgages and adjustable-rate, line-of-credit or monthly disbursement reverse mortgages.

3. What factors are most important to consumers in choosing among potential lenders?

New Mortgage Servicing Practices

On August 10, 2010, the New York State Banking Department issued new regulations that address the business practices of mortgage loan servicers and establish additional consumer protections for homeowners.

Part 419 of the Superintendent's Regulations, which went into effect on October 1, 2010, were a follow-up to the adoption of Part 418 in July 2009, which established standards and procedures for the registration of mortgage loan servicers in New York. The regulations implement certain provisions of the Mortgage Lending Reform Law enacted in 2008 to address the foreclosure crisis and establish greater consumer protections for subprime and high-cost home loans.

Recently, Benjamin M. Lawsky, the Superintendent of Financial Services of New York's Department of Financial Services and Banking Department, announced that the Department had entered into two agreements with certain servicers to implement new servicing practices. The Department considers these new servicing requirements to be landmark changes, and they form the basis of the new Mortgage Servicing Practices.

In the first instance, Superintendent Lawsky announced on September 1, 2011 that Goldman Sachs Bank, Ocwen Financial Corp, and Litton Loan Servicing LP agreed to adhere to the new Mortgage Servicing Practices. The agreement, entitled "Agreement on Mortgage Servicing Practices," was required by the Department as a condition to allowing Ocwen's acquisition of Litton, the Goldman Sachs mortgage servicing subsidiary. With the Litton acquisition, Ocwen's mortgage servicing entity, Ocwen Loan Servicing, LLC becomes the 12th largest servicer in the nation. The servicer has 60 days from the date of the acquisition to implement the provisions and requirements of the Mortgage Servicing Practices.

In the second instance, Superintendent Lawsky announced on November 10, 2011 that Morgan Stanley and its mortgage servicer Saxon, American Home Mortgage Servicing, and Vericrest Financial had agreed to the new Mortgage Servicing Practices.

The changes are substantial and clearly the Department is committed to enforcing them. Maybe you would suggest other changes. In any event, these servicing requirements will benefit both the consumer and the mortgage industry.

It is likely that these new Mortgage Servicing Practices will become a model in other states.

The following is a brief review of these new practices.

OVERVIEW

The Department has consumer protection concerns relating to practices "highlighted in the media" that have been prevalent in the mortgage servicing industry generally, including but not limited to, (1) the practice of "Robo-signing," (2) referring to affidavits in foreclosure proceedings that falsely attest that the signer has personal knowledge of the facts presented therein and/or were not notarized in accordance with state law; (3) weak internal controls and oversight that may have compromised the accuracy of foreclosure documents; (4) unfair and improper practices in connection with loss mitigation, including improper denials of loan modifications; and, (5) imposition of improper fees by servicers, among others.

OUTLINE OF PRACTICES

-Document Execution and Accuracy of Documentation
-Ownership of Note, Foreclosures
-Quality Assurance and Audits
-Oversight of Third Party Vendors
-Staffing
-Training
-Notices, Single Point of Contact and Modifications for Transferred Servicing Files
-Borrower Communication
-Independent Evaluation of Loan Modification Denials
-Restrictions on Dual Tracking
-Application of Payments
-Servicing Fees
-Force-Placed Insurance
-Compliance with Federal and State Law

PROHIBITED PRACTICES

• "Robo-signing," where servicer staff signed affidavits stating they reviewed loan documents when they had not actually done so.

• Weak internal controls and oversight that compromise the accuracy of foreclosure documents.

• Referring borrowers to foreclosure at the same time as those borrowers are attempting to obtain modifications of their mortgages or other loss mitigation.

• Improper denials of loan modifications.

• Failing to provide borrowers with access to a single customer service representative, resulting in delays or failure of the loss mitigation process.

• Imposition of improper fees by servicers.

SPECIFIC CHANGES

1) End Robo-signing and impose staffing and training requirements that will prevent Robo-signing.

2) Require servicers to withdraw any pending foreclosure actions in which filed affidavits were Robo-signed or otherwise not accurate.

3) End "dual tracking", for instance referring a borrower to foreclosure while the borrower is pursuing loan modification or loss mitigation, and prohibit foreclosures from advancing while denial of a borrower's loan modification is under an independent review, which is also required by the agreements.

4) Provide a dedicated single point of contact representative for all borrowers seeking loss mitigation or in foreclosure so borrowers are able to speak to the same person who knows their file every time they call.

5) Require servicers to ensure that any force-placed insurance be reasonably priced in relation to claims incurred, and prohibit force-placing insurance with an affiliated insurer.

6) Impose more rigorous pleading requirements in foreclosure actions to ensure that only parties and entities possessing the legal right to foreclose can sue borrowers.

7) For borrowers found to have been wrongfully foreclosed, require servicers to ensure that their equity in the property is returned, or, if the property was sold, compensate the borrower.

8) Impose new standards on servicers for application of borrowers' mortgage payments to prevent layering of late fees and other servicer fees and use of suspense accounts in ways that compounded borrower delinquencies and defaults.

9) Require servicers to strengthen oversight of foreclosure counsel and other third party vendors, and impose new obligations on servicers to conduct regular reviews of foreclosure documents prepared by counsel and to terminate foreclosure attorneys whose document practices are problematic or who are sanctioned by a court.

CFPB Issues Supervision and Examination Manual

On October 13, 2011, the Consumer Financial Protection Bureau (CFPB) issued its Supervision and Examination Manual - Version 1.0 (Manual). This is the first edition of a guide devoted to how the CFPB will supervise and examine consumer financial service providers under its jurisdiction for compliance with Federal consumer financial law.

The Manual is divided into three parts:

Part 1: Describes the supervision and examination process.

Part 2: Contains examination procedures, including both the general instructions and the procedures for determining compliance with specific regulations.

Part 3: Provides templates for documenting information related to supervised entities and the examination process, including examination reports.

Unfortunately, at this time Part 1 and Part 2 are only available as website pages. Part 3 is available in PDF.

However, we have created a Directory and Compendium.

At this time, Part 1 and Part 2 are only available as website pages.

Part 3 is available in PDF.

In preparing our Audit and Due Diligence procedures for our clients, we have combined all three parts into a single Directory with links to each section's text and website links. There are over 700 pages in this compendium.

Our compendium provides:

• Directory: All Sections
• Contents: Links to Compendium Text
• Contents: Links to CFPB Website Text

We are pleased to share this compilation with you for free.

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Supervision and Examination Manual - Version 1.0

OUTLINE

Part I - Compliance Supervision and Examination

Supervision and Examination Process
    Overview
    Examinations

Part II - Examinations Procedures
Compliance Management Review

Unfair, Deceptive or Abusive Acts or Practices
    Narrative
    Examination Procedures

Equal Credit Opportunity Act
    Narrative
    Examination Program
    Interagency Fair Lending Examination Procedures
    Interagency Fair Lending Examination Procedures – Appendix

Home Mortgage Disclosure Act
    Narrative
    Examination Procedures
    Home Mortgage Disclosure Act Checklist

Truth in Lending Act
    Narrative
    Examination Procedures
    Appendix A: High-Cost Mortgage (§ 226.32) Worksheet

Real Estate Settlement Procedures Act
    Narrative
    Examination Procedures
    Checklist

Homeowners Protection Act
    Narrative
    Examination Procedures

Consumer Leasing Act
    Narrative
    Consumer Leasing Act Examination Procedures
    Consumer Leasing Act Checklist

Fair Credit Reporting Act
    Narrative
    Examination Procedures

Fair Debt Collection Practices Act
    Narrative
    Examination Procedures

Electronic Fund Transfer Act
    Narrative
    Examination Procedures
    Checklist

Truth in Savings Act
    Narrative
    Examination Procedures
    Checklist

Privacy of Consumer Financial Information (GLBA)
    Narrative
    Examination Procedures
    Examination Procedures Attachment
    Checklist

Mortgage Servicing Examination Procedures

Part III - Examination Process Templates
    Templates
    Entity Profile
    Risk Assessment
    Supervision Plan
    Examination Scope Summary
    Examination Report
    Examination Report cover
    Examination Report cover letter

LIBRARY

Consumer Financial Protection Bureau

Supervision and Examination Manual
Version 1.0
Announcement

October 13, 2011