CFPB ought to introduce tiered oversight, business group says

The Consumer Financial Protection Bureau must follow the Dodd-Frank Act standard of tiered oversight of small and medium-sized independent mortgage lenders based on size, volume and scope of government oversight, according to a letter from the Community Home Lenders Association to Director Rohit Chopra.

The group also expressed "strong opposition" to any use of regulation through enforcement, which was standard practice for the office under its first director, Richard Cordray. A notable example is the Bureau's actions on marketing services agreements, which disguise kickbacks as payment for advertising. There has never been any formal rule-making; Instead, the Bureau decided on a case-by-case basis.

This practice was ended by acting director Mick Mulvaney, and director Kathy Kraninger also expressed opposition. However, under the Biden administration, the CFPB is stepping up its enforcement efforts. Director Chopra, once Cordray's student loan ombudsman, was questioned during his confirmation hearing.

Although Dodd-Frank lacks a specific exemption for smaller independent mortgage lenders from CFPB regulation and enforcement, it does include "tiered regulatory language," the letter said. These include asset size, volume size and the level of government oversight. Smaller IMBs are subject to dual regulation by states and the CFPB, the letter said.

"The majority of small IMFs are tightly controlled firms where the main owner has a role to play," the letter reads. "For such companies, the risk of significant CFPB fines has personal implications, unlike banks and listed IMBs, where shareholders bear the risk."

The CFPB must outline the steps it will take to meet Dodd-Frank's tiered enforcement requirements.

In addition, “CHLA is also requesting that the CFPB adopt a public statement or formal policy that it will exempt smaller IMBs from CFPB audits or audits — ideally with an annual dollar or loan limit on lending and a dollar or loan limit for the service."

The group also wants a promise from the CFPB that it will not take enforcement action against smaller mortgage lenders unless required to do so by a state regulator.

It also proposes that the Bureau adopt a formal policy to give a smaller mortgage lender an opportunity to rectify a breach before imposing fines or taking enforcement action where the IMF has made a good faith effort to comply with a rule.

"Such an approach would mirror that of other financial regulators, such as the FDIC, who use letters of intent, a joint informal agreement used to obtain a commitment from a bank's board of directors to implement corrective actions," the CHLA said. "Other informal actions that the CFPB might consider include board resolutions, written agreements and other forms of bilateral agreements or actions."

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