Mortgage CUSO Regulations: Consumer Friend or Foe?
They tell you to keep your eye on the ball. But these days we are all wondering, which ball? The skill of a major league batter is needed to respond to the speed and number of regulatory balls of late fired at credit unions and CUSOs making mortgage loans. What may be most frustrating is the guise of these regulations as "protecting the consumer," when they are more likely to have the effect of increasing the cost of a mortgage loan for the consumer and making mortgage loans available to fewer consumers.
Secure and Fair Enforcement for Mortgage Licensing Act compliance has been a focus for many. Hopefully, by now, your mortgage loan originators are licensed in accordance with the laws of the states in which your CUSO does business. The NCUA made clear that it does not regulate CUSOs and thus mortgage CUSOs are not eligible for a licensing exemption. Credit unions must register their MLOs by July 29, 2011.
Some credit unions and CUSOs decided to consolidate functions of various individuals to decrease the number of persons licensed or registered. This is acceptable provided you do not have unlicensed or unregistered persons engaging in the loan origination activities. As roles of individuals change, each CUSO and credit union should periodically evaluate its loan origination process to ensure continued compliance.
Although many may have thought the SAFE Act was a difficult e regulation to comply with, it was the least of our regulatory woes. This was especially evident when the Federal Reserve Board released the Loan Originator Compensation and Steering Rule, which was effective on April 1, 2011.
This rule prohibits any MLO, whether employed by a credit union or CUSO, from receiving compensation based on any terms of the loan other than the amount of the loan. It also prohibits steering borrowers toward a loan that would increase the MLO’s compensation at the expense of the best interest of the borrower. MLOs may be paid by the lender or the borrower but not by both. This rule has required many to return to a compensation plan primarily, or in some circumstances exclusively, based on salary. Will this actually benefit consumers? I am not convinced. Maybe it will deter those who are already rule followers but is that the point?
In response to the regulators’ concern regarding the inflated value of properties, the federal banking agencies revised the Interagency Appraisal and Evaluation Guidelines at the end of 2010.
Additionally, the board amended Regulation Z to require appraisal independence for all consumer transactions secured by a principal dwelling. The stated purpose of the rule is to ensure that the appraisers exercise independent, uninfluenced judgment and the consumers pay appraisal fees that are reasonable and customary. Compliance with the rule is challenging as the independence requirement prohibits any person involved in the loan origination and production function from selecting or ordering the appraisal. Consequently, credit unions and CUSOs may determine that outsourcing the appraisal process is the best method of compliance. There will always be bad actors and no regulation will prevent that entirely. While I agree appraisers should exercise independent judgment, this rule unnecessarily added cost to the mortgage loan process because the only viable options are to outsource or dole out duties to other persons.
The lack of underwriting standards by some persuaded Congress to unleash new stringent requirements on all. As required by Dodd-Frank, the board proposed a rule implementing new ability-to-repay standards. These standards require a lender to make a reasonable and good faith determination that the borrower will be able to repay the debt. Comments to this proposed rule are due on July 22, 2011, and a final rule will be issued by the Consumer Financial Protection Bureau I would encourage credit unions and mortgage CUSOs to carefully review the underwriting standards and the definition of a qualified mortgage to make an assessment of the impact this will have on their business.
Dodd-Frank, the act that keeps on giving, also required a risk retention rule. This rule was proposed and comments are due by June 10, 2011. This rule would require a lender selling a mortgage loan to retain a minimum of 5% of the loan unless the loan was a qualified residential mortgage loan as defined within the regulation. Unless the scope of the proposed definition of QRM is broadened, mortgage loans will be available to a much smaller population of members.
Finally, what I believe we have yet to understand is the impact the Consumer Financial Protection Bureau will have on credit unions and CUSOs. This new agency will have jurisdiction over mortgage CUSOs as well credit unions. They are charged in part with resolving the perceived issues related to mortgage lending. Accordingly, expect much more from this agency.
I recognize certain practices of some of the players in the mortgage industry needed reprimanding but not all. Is the punishment of all for the acts of a few warranted, especially when it has the ironic affect of punishing the consumer, the intended beneficiary?
I urge credit unions and CUSOs to voice their opinions and submit comment letters on proposed regulations. Credit unions and CUSOs were not at the root of the mortgage and housing crisis. To the contrary, they help the little guy. If only credit unions received this rightful recognition, rather than a pounding by the regulator, they could all get back to the business of what credit unions do best, helping their members.
Katherine Weber is a partner at the law firm Messick & Weber PC.
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