CFPB Mortgage Regs: Understanding the risks behind business decisions

With the mid-June message that there will be no extension of time for compliance with the new mortgage regulatory regime from CFPB, the importance of banks getting ready for the new body of rules by making critical business decisions now is underscored.

June 26 ABA presented a two-hour telephone briefing for boards and managers, as well as other bank officials, laying out the essentials that must be determined for banks that intend to go on making mortgages once the implementing regulations under the Dodd-Frank Act go into effect. In general that occurs in January 2014.

A team of ABA analysts specializing in mortgage finance, as well as experts from the Dechert LLP law firm, presented listeners with core decisions that must be made under the qualified mortgage and ability to repay provisions of the new regulations.

This telephone briefing followed on the heels of ABA's Regulatory Compliance Conference, held earlier in June, which presented more detailed, multiple sessions for regulatory compliance specialists.

A key part of the telephone briefing opener, by Thomas Vartanian, partner at Dechert LLP and himself a former regulator, dealt with the key sources of risk that boards and management must consider when deciding if the bank will remain in the mortgage business; what types of home loans it will make; and whether it will attempt to take full advantage of the "safe harbor" offered--at least in principle--under the CFPB regulatory scheme.

Speakers made the point that merely having a safe harbor doesn't mean a bank won't be sued. They suggested that the borrower bar will be trying to pierce the protection of the safe harbor, to the advantage of their delinquent borrower clients.

The risks listed by Vartanian include:

1. Customer nonpayment--This is a basic risk. Because of the possibility of losing lender protections under the incoming rules, banks could find themselves unable to collect and effectively unable to foreclose.

2. Customer claims and defenses under the ability to repay rule. The incredible level of detail in these regulations demand that banks tread carefully, with advice of counsel.

3. Safety and soundness. "The bank regulators, obviously, want you to engage in safe and sound lending," said Vartanian. "And that is affected both by the policies you adopt and the procedures of implementation."

4. CFPB enforcement of ATR rules. "We know there will be vigorous enforcement of these rules by CFPB and by bank regulators," said Vartanian. Coming off the financial crisis, enforcement will be determined.

5. CFPB fair-lending enforcement. To the extent you only participate in only QM lending, and limit the portfolio, "that may mean that you shrink the basis of acceptable borrowers, and to the extent that shrinkage creates increased declination rates that affect protected classes of people, that will feed right into the Department of Justice and CFPB disparate impact theories of discrimination."

6. DOJ and HUD. Likewise, lenders risk running afoul of Department of Housing and Urban Development policies dealing with disparate impact.

7. Customer lawsuits. Borrowers can sue lenders using these regulations, Vartanian pointed out.

8. CRA requirements. Banks' Community Reinvestment Act responsibilities continue to apply, so banks run the risk, if they pull in their efforts under the QM umbrella, of not fulfilling their CRA plans. This can result in lowered ratings, which might hold up corporate activities and approvals.

9. Secondary mortgage market issues. Banks intending to resell mortgages to the recovering secondary markets will face risks here. Vartanian pointed out that liquidity is a major concern for many mortgage lenders.

"This is not  risk decision that can be lightly made," said Vartanian.

Order a recording of the entire ABA telephone briefing