WASHINGTON — Regulators recently offered a rare behind-the-scenes glimpse of what areas they are targeting for enforcement, saying that potential fair lending violations and how mortgages are priced and serviced remain top priorities for the future.
Speaking at a mortgage conference last week, top enforcement officials from the Consumer Financial Protection Bureau and the Department of Justice said they have ramped up investigations of the mortgage space.
Several attendees said they expected that the agencies will focus on fair lending scrutiny of their portfolios, but were still struck by certain regulators' sometimes aggressive tone.
"We do not regulate you. We do not supervise you. We do sue you," said Steven Rosenbaum, chief of housing and civil enforcement in the DOJ's Civil Rights Division.
Following is an account of what each agency is targeting - and the impact that could have on lenders:
Justice's Stark Warning on Fair Lending
The DOJ's Rosenbaum listed two areas of concern for the department, both related to fair lending: when lenders "redline" minority communities regardless of whether it was unintentional, and when lenders use price discretion on mortgages to attract investors.
"One of the things that has always been a mainstay in our work is concerns about redlining; concerns about banks not opening services in minority communities on the same basis which they are in other parts and services in white communities," Rosenbaum said at a Mortgage Bankers Association panel discussion. "We have seen an uptick in referrals of redlining issues."
Some observers said such a comment is telling.
"When Rosenbaum says 'we're seeing an uptick,' that's a message to me to say that more referrals are coming over [from other agencies] and therefore, more instances of this are likely happening," said Ed Kramer, executive vice president of U.S. regulatory affairs at Wolters Kluwer Financial Services.
Rosenbaum also warned against lenders seeking higher profit margins by pricing a loan based on what the investor wants in order to buy the loan, which can lead to potential fair lending violations under the Equal Credit Opportunity Act.
Lenders "look at what investors will pay for the loan and they tell their loan officers or particular offices what their goals are in terms of pricing above or what the investor will pay," Rosenbaum said. "This introduces discretion in the pricing of loans discretion is neither required by ECOA nor prohibited by ECOA but if your pricing is based on discretion, you have fair lending risk that needs to be managed."
Overall, Rosenbaum said he's noticed that regulators have ramped up their cooperation and referrals to the Justice Department. In the last three fiscal years, the department has received 55 referrals from other agencies, of which 24 were in the mortgage area.
"The number and ratio of mortgage referrals has increased for us in the last three years and" the office is projecting "that it will continue," Rosenbaum said, noting that they "work really closely" with the CFPB.
CFPB Targeting Mortgage Servicers
Peggy Twohig, the CFPB's assistant director of supervision policy, also discussed how her agency decides to use its roughly 400 examiners to police its jurisdiction, which includes thousands of nonbanks.
"We have quite the challenge with this reach and number," Twohig said. So examiners "focus on our evaluation of where the greatest risks are to consumers."
Rather than examine based on each entity, Twohig said the CFPB has taken an "across markets" approach where it stacks product markets against each other and evaluates each market based on size and risk to consumers to determine what companies to examine.
Kristen Donoghue, the CFPB's acting deputy enforcement director of policy and strategy, added that when her department assesses a company for potential violations they start with the number of victims, then the size of individual harm leading to the size of overall harm.
Once the CFPB has particular company under review, it then looks at the product size within the institution and any data - including consumer complaints - based on the product the company heavily uses.
"For example, mortgage servicers have a relatively higher amount of servicing default portfolios," Twohig said. "That would be higher in our risk factors."
The CFPB also made an unprecedented move by banning the servicer from obtaining servicing rights on default loan portfolios until it could prove it was in compliance with the mortgage rules that took effect in January. Additionally, the CFPB cited Flagstar on the new mortgage servicing rules for loans dating back to 2011, under the premise that the bank also allegedly violated the Unfair and Deceptive Acts and Practices Act.
"I took great interest in the mortgage servicing comments in light of the Flagstar consent order that came out afterward," said Steven Burt, an attorney at Ballard Spahr specializing in consumer financial services litigation and regulatory issues. "Flagstar is a shot across the bow to the industry; these are the standards, this is what is expected of you, and even though the mortgage servicing rules didn't go into effect until January 2014, certain practices that predate the rules may still be scrutinized as potential violations under UDAAP."
Twohig said during the conference that the agency is keenly focused on how servicers are modifying loans for struggling borrowers regardless of whether that process started before the new servicing rules.
Mortgage servicing "has been a top priority for the CFPB well before we had the rules in mortgage servicing," she said. "We have findings that predate the rules and we will continue to report our findings as we continue our supervisory program."
