Ignorance of the Law is No Excuse

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Rob Chrisman's Perspectives
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On July 9, President Biden issued a broad Executive Order (E.O.) that includes provisions related to the financial services industry. The E.O. encourages the CFPB director to issue rules under Section 1033 of Dodd-Frank “to facilitate the portability of consumer financial transaction data so consumers can more easily switch financial institutions and use new, innovative financial products.”

So what? Why should lenders take note? Currently there are five major concerns with lenders: agency gyrations, interest rates and the Federal Reserve, mergers and acquisitions, efficiency and cost cutting, and changes in the regulatory landscape. Some of these are handled by internal staff, some by outside companies. It can be argued that changes in regulations are difficult to monitor and implement by any lender or investor except for the largest.

STRATMOR has noticed an increase by our clients of the concern level about, and focus on, legal changes, shifts in rules and regulations, and the general temperature of the Biden Administration. And, although STRATMOR firmly believes that lenders with strong compliance and QC departments will be the most successful over the long run, there is little need for the thousands of lenders to immediately “lawyer up.” Changes come from regulatory bodies at the federal and state level, government lending agencies (such as Freddie Mac, Fannie Mae, and HUD), as well as court rulings. In fact, most lenders and servicers should be able to adjust to any changes in stride, as long as they pay attention.

For example, on August 5, the Consumer Finance Protection Bureau issued an Interpretive Rule which provides guidance on certain Regulation Z timing requirements related to the TILA-RESPA Integrated Disclosure (TRID) Rule and to the rescission of closed-end mortgages that are based on a definition of “business day” that excludes Federal holidays. The Interpretive Rule explains these timing requirements in light of the recent legislation that designated Juneteenth as a Federal holiday.

In an example of a court ruling, on July 9, the U.S. Court of Appeals for the Eighth Circuit affirmed summary judgment in favor of a mortgage loan servicer (defendant), concluding that the defendant’s communications were not in connection with an attempt to collect a debt. The plaintiff had alleged that the defendant violated the FDCPA by engaging in misrepresentations and unfair conduct when processing the plaintiff’s application for loss mitigation assistance and selling the plaintiff’s home through a foreclosure sale. According to the Eighth Circuit Court, “the district court applied the ‘animating purpose’ test, which considers the content of each communication individually, and determined that they were not made in connection with the collection of a debt.” The Eighth Circuit Court agreed with the district court’s decision that the defendant did not violate the FDCPA because the substance of each of the communications indicates that none were made in connection with an attempt to collect on the underlying mortgage debt.

At the state level,  also in early July (July 12), Colorado enacted HB 1282, which creates the Colorado Nonbank Mortgage Servicers Act under Article 21 and provides additional consumer protections through the regulation of mortgage servicers. A mortgage servicer does not include, among others: supervised financial organizations, certain regulated mortgage loan originators, a federal agency or department, a collection agency whose debt collection business involves collecting on defaulted mortgage loans, agencies, instrumentalities, or political subdivisions of the state, supervised lenders that do not service residential mortgages, servicers that service fewer than 5,000 residential mortgage loans annually, nonprofit organizations, government agencies, originators or servicers using a subservicer that does not act under their direction, and persons servicing loans held for sale. The act stipulates that on or after January 31, 2022, a person may not act as a mortgage servicer without providing notice to the administrator and paying the required fees within 30 days after it begins servicing in the state, and on or before January 31 annually thereafter.

Of course, groups “team up” in the regulatory arena, and these carry a little more weight. Here in August the Federal Reserve, FDIC, and OCC released new proposed interagency guidance on managing risks with third-party relationships. The intent of the Proposed Guidance is to promote consistent third-party risk management guidance, to better address the use of, and services provided by, third-parties, and more clearly articulate risk-based principles on third-party relationship risk management.

The Proposed Guidance reminds us how important third-parties are to lenders, whether they are non-depository lenders, banks, or credit unions. It offers a framework based on sound risk management principles that banking organizations supervised by the agencies may use when assessing and managing risks associated with third-party relationships. The Proposed Guidance stresses the importance of a banking organization appropriately managing and evaluating the risks associated with third-party relationships and emphasizes that a banking organization’s use of third-parties does not diminish its responsibility to perform an activity in a safe and sound manner and comply with applicable laws and organizations. The Proposed Guidance also states that banking organizations should adopt third-party risk management processes that are commensurate with the identified level of risk and complexity from the third-party relationships.

These are just a few examples of items that could fall into the area of “compliance.” Each week dozens of laws, regulations (proposed and actual), and changes are made by a wide variety of regulatory bodies that oversee residential lending. Staying on top of changes, actual and potential, especially for the larger companies that originate and service loans across a wide swath of states, is a herculean task. Most lenders use a combination of internal staff and outsourcing (to compliance and attorney firms). And changes are implemented by internal staff. One way any mortgage professional can make a difference in how the rules and regulations are applied to our industry is by joining the Mortgage Bankers Association’s Mortgage Action Alliance (MAA) and by supporting the MBA’s advocacy on the industry’s behalf. You’ll find more information on the MBA’s website.

Regardless of how you keep up on it all, it is critical that you do so, for you and your borrowers.

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