In April 2012, the Consumer Financial Protection Bureau (CFPB) introduced new guidelines for lenders to follow with regard to how they manage their business relationships with third-party vendors, including their technology providers. The somewhat vague set of rules basically made lenders liable for violations of the CFPB's regulations – even if the root cause of the violation was due to errors committed on the part of a vendor or technology firm.
However, in a speech he gave during the Mortgage Bankers Association's (MBA) 2015 Annual Convention and Expo, held in San Diego, Richard Cordray, director of the CFPB, said regulators should, perhaps, be paying more attention to the impact vendor errors can have on a lender's ability to comply with new regulations.
Although it's too soon to say if this represents a shift in the bureau's stance on the issue, Cordray said he was concerned that some technology firms were unable to update their software and systems in time for the Oct. 3 implementation of the CFPB's new TILA-RESPA Integrated Disclosures (TRID) rules, also known as the ‘Know Before You Owe’ rules. He said implementation of the new rules ‘was not as smooth as we would have hoped.’
‘Quite frankly, I have been disturbed by reports I have been hearing about the vendors on whom so many of you rely,’ he told the crowd of mortgage bankers and tech vendors during the event held at the San Diego Convention Center. ‘Some vendors performed poorly in getting their work done in a timely manner, and they unfairly put many of you on the spot with changes at the last minute or even past the due date.
‘It may well be that all of the financial regulators, including the consumer bureau, need to devote greater attention to the unsatisfactory performance of these vendors and how they are affecting the financial marketplace,’ he added.
In its 2012 bulletin, the CFPB stated that ‘the mere fact that a supervised bank or nonbank enters into a business relationship with a service provider does not absolve the supervised bank or nonbank of responsibility for complying with federal consumer financial law to avoid consumer harm.
‘A service provider that is unfamiliar with the legal requirements applicable to the products or services being offered, or that does not make efforts to implement those requirements carefully and effectively, or that exhibits weak internal controls, can harm consumers and create potential liabilities for both the service provider and the entity with which it has a business relationship,’ the bulletin states. ‘Depending on the circumstances, legal responsibility may lie with the supervised bank or nonbank, as well as with the supervised service provider.’
Interestingly, however, it appears that few lenders have had major problems complying with TRID so far, which calls into question the problems the CFPB has been hearing with regard to vendors not being ready. During his speech, Cordray was not specific about which vendors were not prepared for the new rule – nor did he say if any lenders were unable to comply due to software problems.
At the same time, Cordray seemed to imply that complying with TRID shouldn't be that difficult for lenders. He pointed out that when the CFPB was preparing to implement its ability to repay (ATR)/qualified mortgage (QM) rules in early 2014, there was significant industry outcry over the new rules, and yet two years later, lenders do not appear to have had any major problems complying with the ATR/QM rules.
‘When we put those new regulations in place, some were critical of our work,’ Cordray said of the ATR/QM rules. ‘For example, the [ATR] rule requires lenders to make sure that borrowers actually have the ability to repay their loans before extending them a mortgage. Some enjoyed describing this rule, which was also known as the qualified mortgage – or QM – rule, as the 'quitting mortgages' rule. They made scary predictions that our rules would cause mortgage costs to double and would cut the volume in half. They said that no one would make any non-QM loans because the risk of litigation was too great. They lamented that our rules would lead to the demise of community banks and credit unions, which would have to withdraw from the mortgage market altogether. We all recognize that change is hard, but we never believed any of this unsupported hyperbole.
‘And it turns out we were right,’ Cordray continued. ‘The rules have now been in place for almost two years, and none of those anxious concerns have come true. In fact, recent Home Mortgage Disclosure Act data from the Federal Financial Institutions Examination Council confirms the very opposite. In 2014, the first year of our new rules, home purchase mortgages increased by 4.6 percent. For jumbo loans, most of which are non-QM loans, the rate of increase was substantially higher, and so far as we can tell, there has yet to be a single case brought against a lender for making such a loan.’
In addition, mortgage volume continued on an upward trend through the first half of this year, Cordray said.
‘And while we saw minor consolidation in some parts of the mortgage market, there is no evidence of any mass exodus, as the doomsayers predicted,’ he said. ‘In fact, after adjusting for merger activity, the number of lenders that reported having originated mortgages showed an increase in 2014.’
It remains unclear whether the CFPB has the authority to regulate let alone fine software vendors serving the mortgage banking industry. On the one hand, it can be argued that the software providers are really only serving mortgage businesses and not consumers directly, thus they don't fall under the CFPB's regulatory authority. On the other hand, it can be argued that a software vendor's performance – or lack thereof – can have a direct impact on a lender's ability to comply with the CFPB's new rules, which, in turn, impacts consumers.
Adding complexity to the issue is whether mortgage lenders really want to shift liability for compliance onto their vendor partners – and, further, whether that shifting of liability would cause software vendors to exit the mortgage business or, perhaps, charge more for their products and services. Considering the vagueness of the CFPB's 2012 bulletin, it seems possible that the industry can expect further clarification with regard to lender-vendor partnerships. Whether the CFPB will introduce new measures that shift more liability for compliance to vendors remains to be seen.
To read Cordray's full speech, click here.