CFPB announces appointments to Consumer Advisory Board; Community Bank Advisory Council; Credit Union Advisory Council and Academic Research Council

CFPB on September 12 announced the appointment of 25 people to its newly formed  Consumer Advisory Board  which will provide advice to CFPB leadership on a broad range of consumer financial issues and emerging market trends.

“This group of experts truly represents the interests of the diverse people and communities we serve,” said CFPB Director Richard Cordray. “The Consumer Advisory Board will be a key resource to the CFPB and I look forward to working with its members to further our mission to protect American consumers.”

The Dodd-Frank Wall Street Reform and Consumer Protection Act charges the CFPB with establishing a Consumer Advisory Board to advise and consult with the Bureau’s director on a variety of consumer financial issues. In February, the CFPB issued a Federal Register Notice outlining the board’s responsibilities and the duties of its members and solicited recommendations for nominees.

The newly appointed board members include experts in consumer protection, financial services, community development, fair lending, civil rights, and consumer financial products or services. They also represent depository institutions that primarily serve underserved communities, and they represent communities that have been significantly impacted by higher-priced mortgage loans.

The first meeting of the Consumer Advisory Board will take place Sept. 27, 2012 and Sept. 28, 2012 in St. Louis, Mo. By statute, the board will meet no less than twice per year. Members will have staggered three-year terms.

CFPB also announced appointments for two additional advisory councils that will provide the CFPB with feedback and recommendations to inform its policy development, research, rulemaking, and engagement functions. These groups are the Credit Union Advisory Council (CUAC) and the Community Banks Advisory Council (CBAC).  The Dodd-Frank Act gives the CFPB authority to create advisory councils as an additional way to reach out to stakeholders with an interest in the CFPB’s activities.

Members of the CBAC and the CUAC are appointed by the CFPB Director and must be employed by a company with total assets of $10 billion or less, and cannot be affiliates of companies with total assets of more than $10 billion.

The CBAC and CUAC will convene publicly and provide public summaries or reports of their meetings.   Members on both councils will serve two-year terms; they are not eligible for reappointment. CBAC’s first meeting will be Oct. 10, 2012. CUAC’s first meeting will be Oct. 11, 2012

The CFPB conducts research, performs analysis, and reports on topics relating to the Bureau’s mission, including developments in markets for consumer financial products and services, consumer awareness, and consumer behavior. To support the Bureau’s commitment to fact-based policy development, the CFPB established the Academic Research Council, a consultative body comprised of scholars with relevant subject matter expertise. The council advises the CFPB on research methodologies, data collection, and analytic strategies, and provides feedback regarding the Bureau’s research and strategic planning process.

The Academic Research Council will meet in-person once annually and maintain ongoing communications throughout the year. The first in-person meeting of the council was held July 27, 2012.

Members of each are: CFPB Consumer Advisory Board; CFPB Community Bank Advisory Council Members; CFPB Credit Union Advisory Council Members and CFPB Academic Research Council Members

Consumer Advisory Board Charter

Community Bank Advisory Charter

Credit Union Advisory Charter

Academic Research Charter


FHFA – Increased Transparency and Certainty for Lenders

Washington, DC – The Federal Housing Finance Agency (FHFA) today announced that Fannie Mae and Freddie Mac are launching a new representation and warranty (rep and warranty) framework for conventional loans sold or delivered on or after Jan. 1, 2013. The new rep and warranty approach, part of a broader series of strategic initiatives called seller-servicer contract harmonization, aims to clarify lenders’ repurchase exposure and liability on future deliveries.

“Ultimately, better quality loan originations and underwriting, along with consistent quality control, help maintain liquidity in the mortgage market while protecting Fannie Mae and Freddie Mac from loans not underwritten to prescribed standards,” said Edward J. DeMarco, Acting Director of FHFA. “These efforts contribute to a firm foundation for a new, sustainable housing finance system for the future.”

The objective of the new framework, developed at the direction of FHFA, is to clarify lenders’ repurchase exposure and liability on future deliveries. The new rep and warranty approach does not affect loans sold to Fannie Mae or Freddie Mac prior to Jan. 1, 2013. With this new framework:


    • Lenders will be relieved of certain repurchase obligations for loans that meet specific
    • payment requirements, for example, rep and warranty relief will be provided for loans
    • with 36-months of consecutive, on-time payments;
    • Home Affordable Refinance Program (HARP) loans will be eligible for rep and
    • warranty relief after an acceptable payment history of only 12 months following the
    • acquisition date;
    • Information about exclusions for rep and warranty relief, such as violations of state,
    • federal and local laws and regulations will be detailed;
    • Fannie Mae and Freddie Mac will continue to make available for lenders a range of tools
    • to help improve loan quality.

The new model moves the focus of quality control reviews from the time a loan defaults up to the time the loan is delivered to Fannie Mae or Freddie Mac. An FHFA review of past repurchase requests issued by Fannie Mae and Freddie Mac revealed that these requests were based on substantive underwriting and documentation deficiencies. These deficiencies have led to substantial losses for Fannie Mae and Freddie Mac, and hence, taxpayers. Fannie Mae and Freddie Mac will continue to work with their lenders to resolve contractual claims resulting from such deficiencies, arising primarily from loans originated before the conservatorships in September 2008. With the new model FHFA is directing Fannie Mae and Freddie Mac to:


    • Conduct quality control reviews earlier in the loan process, generally between 30 to 120 days after loan purchase;
    • Establish consistent timelines for lenders to submit requested loan files for review;
    • Evaluate loan files on a more comprehensive basis to ensure a focus on identifying significant deficiencies;
    • Leverage data from the tools currently used by Fannie Mae and Freddie Mac to enable earlier identification of potentially defective loans;
    • Make available more transparent appeals processes for lenders to appeal repurchase requests.

Fannie Mae’s Lender Announcement and Lender Letter, and Freddie Mac’s Lender Bulletin and Industry Letter will provide further details.

Reps and Warrants Release and FAQ 091112


CFPB Recruits Undercover Agents

The Consumer Financial Protection Bureau is seeking to recruit investigators to possibly pursue cases against America’s financial institutions.

According to a Washington Times report, the CFPB is running recruitment advertisements seeking new employees to go undercover at financial institutions. One recruitment advertisement described the job duties as being able to “establish and conduct surveillance activity to develop both intelligence and evidence to further investigation and Utilize surveillance activities to identify subjects, their activities and their associates, corroborate source information and collect evidence.”

The CFPB said that investigators may earn between $98,000 to $149,000 per year and that the recruits could be required to set up and oversee contracts with private investigators.

“Investigative work conducted by our staff will be covered by [CFPB] policies to ensure all practices comply with applicable laws and regulations and protect individuals’ privacy rights,” Moira Vahey, a CFPB spokeswoman, said, according to The Washington Times. “The investigation activities described in the posting are intended to inform our enforcement office about what consumers may experience with different financial products or services. We anticipate that the type of information gathered generally will be information available to the general public. Investigation activities like these are typical among agencies charged with civil law enforcement.”


CFPB Releases Report Showcasing 2012 Highlights

Today, the Consumer Financial Protection Bureau (CFPB) released their Semi-Annual Report highlighting the Bureau’s work in the first half of 2012. One year ago, the CFPB became the nation’s first federal agency solely focused on protecting Americans in the consumer financial products and services marketplace.

“Consumers deserve to be treated fairly, and to have someone stand on their side when they are not,” said CFPB Director Richard Cordray. “The CFPB has used the tools at our disposal for the benefit of consumers in the past year, and we pledge to continue to do so as we work to promote a transparent, fair, and competitive consumer financial marketplace.”

The Dodd-Frank Wall Street Reform and Consumer Protection Act created the CFPB not only to protect consumers but also to help provide consistent enforcement of federal consumer financial laws.

Today’s report covers the Bureau’s actions from January 1, 2012 through June 30, 2012. It showcases how the Bureau has used its multiple authorities, including regulation, supervision, enforcement, market research, financial education, and the authority to deal directly with consumer complaints regarding consumer financial products and services.

Testimony on Ability to Repay – Qualified Mortgage Rules

On Wednesday July 11, 2012 the House Subcommittee on Financial Institutions and Consumer Credit held a hearing addressing consumer and market perspectives of mortgage reforms made by The Dodd-Frank Wall Street Reform and Consumer Protection Act. Both consumer and industry members provided testimony, including the Mortgage Bankers Association and American Bankers Association.  The ongoing CFPB rulemaking to implement the Dodd-Frank ability to repay rule and special status under the rule for qualified mortgages was the focus of both trade groups’ testimony.

Both trade groups agreed that a qualified mortgage should be broadly defined so that qualified loans can be made to a wide range of borrowers. It is generally viewed by the trade groups as well as the consumer groups that if this is not done many deserving consumers will not be able to obtain mortgage loans.

The other point made by all was the need for a safe harbor, without a clear definition the threat of litigation might significantly limit lending through the tightening of already conservative underwriting standards and with some lenders actually exiting the business.

Both trade groups recently submitted letters during the comment period on the ability to repay rule including litigation costs.

MBA Testimony
ABA Testimony
ABA-Ability to Repay
MBA-Ability to Repay

Systemic Risk Council Formed

The council, a group of former regulators, lawmakers and business leaders holding an inaugural meeting in Washington yesterday, was formed to counter industry lobbying that members say may undermine Dodd-Frank Act measures enacted in response to a collapse that led to U.S. bailouts for the biggest banks and nonbank companies including American International Group Inc. (AIG)

The panel is led by former Chairman Sheila Bair of the Federal Deposit Insurance Corp.The group’s members also include former U.S. Treasury Secretary Paul O’Neill; John S. Reed, former co-chairman and co- chief executive officer of Citigroup Inc. and Brooksley Born, former chairman of the U.S. Commodity Futures Trading Commission. Former Federal Reserve Chairman Paul Volcker will serve as the council’s senior adviser. Bair, now a senior adviser to Washington-based Pew Charitable Trusts, said in an interview that while the panel is not anti-industry, “it’s independent of the industry.”

Council members, who have criticized delays in Dodd-Frank implementation, plan to monitor the regulatory overhaul and identify systemic risks to U.S. financial markets. buy a domain . They will provide commentary on, and release reports to, the Financial Stability Oversight Council ((As established under the Dodd-Frank Act, the Financial Stability Oversight Council (FSOC) will provide, for the first time, comprehensive monitoring to ensure the stability of our nation’s financial system. The Council is charged with identifying threats to the financial stability of the United States; promoting market discipline; and responding to emerging risks to the stability of the United States financial system. The Council consists of 10 voting members and 5 nonvoting members and brings together the expertise of federal financial regulators, state regulators, and an insurance expert appointed by the President)) and the Treasury Department’s Office of Financial Research, both created by Dodd-Frank.


New Rules Governing the CFPB’s Enforcement Work

On June 6, 2012 the CFPB is posted three final rules and one interim final rule that  have been  sent to the Federal Register for publication. The rules deal with our procedures and practices related to enforcing federal consumer financial law.

The three final rules deal with the agency’s investigative and adjudicative processes and their interactions with state law enforcement authorities. Interim versions of these rules were published in July of 2011.

Rule Relating to Investigations: This rule describes the CFPB’s procedures for investigating whether persons have engaged in conduct that violates federal consumer financial law. Similar to rules used by other regulators, it lays out an efficient and fair process for conducting CFPB investigations. This rule sets forth our authority to conduct investigations, including the procedures for issuing civil investigative demands. It also describes the rights of persons from whom the CFPB seeks to compel information in investigations.

Rule of Practice for Adjudication Proceedings: Under this rule, the CFPB can conduct administrative adjudications (hearings) to ensure or enforce compliance with federal laws and regulations. In developing this rule, we leveraged the experiences of other regulators and reviewed the public comments on the interim rule to create a fair and expeditious process for resolving administrative enforcement actions. The result is an adjudication process that is streamlined and protects parties’ rights to fair and impartial proceedings.

State Official Notification Rule: This rule is designed to help the CFPB stay informed about state-level legal developments relating to the Dodd-Frank Act. It describes the process through which state officials update the agency on certain legal actions they bring to enforce compliance with certain provisions of the Dodd-Frank Act and regulations the CFPB may issue. Proper notification will help ensure that the law is being enforced in a consistent manner.

The last rule is an interim final rule that implements the Equal Access to Justice Act (EAJA). They are now asking for public input on this interim final rule.

EAJA Implementation Rule: This rule implements the Equal Access to Justice Act. The Act provides that certain prevailing parties in administrative proceedings can recover attorney fees and expenses. The rule sets forth who can seek to recover these costs and how to do so. It is based on model rules and rules used by other agencies. The public can comment on the interim final rule for 60 days after its publication in the Federal Register.

These rules will be published in the Federal Register in the near future and will be effective immediately upon publication.

The versions linked in this post contain the text as the CFPB submitted them.

Rule Relating to Investigations

Rule of Practice for Adjudication Proceedings

State Official Notification Rule

EAJA Implementation Rule

The Best Preventive Medicine: Pre-Sale Audits of Loan Portfolios

Can you really be certain that there are no toxic problems lurking within your portfolio?

By: Penny A. Showalter

An edited version of this article was originally published in the May 2012 issue of Secondary Marketing Executive

Risk & Reward In The Mortgage Loans Secondary Market

The dramatic increase in forensic reviews and repurchase requests in recent years has rendered the mortgage loans secondary market dangerous to those who follow either of two tactics:

  1. Those who operate on a “business as usual” basis, assuming their loan qualification processes meet industry and legal standards  and are being assiduously  followed by their staffs, are in danger of being fiscally savaged by a buyer pushing back on them an overwhelming number of loans because of significant, trivial, or even irrelevant violations.
  2. Those fearful enough of such a catastrophic possibility that they refuse to participate in the selling of mortgage loans are in danger of unnecessarily surrendering the considerable economic advantages the secondary market offers.

There is, however, a third strategy that mitigates the dangers of selling mortgage loans, protecting sellers from being ambushed with repurchase demands months or years after the completion of a transaction and allowing even cautious managers to both reap the rewards of the secondary market and sleep soundly at night:. Pre-sale audits can identify and eliminate hidden flaws in the methodology of an institution’s mortgage processes and its execution of those processes to prevent those imperfections from becoming time bombs in ones portfolio.

The Pre-Sale Audit Effect On Loan Purchasers

Auditing your portfolio prior to selling the loans not only protects you but also provides purchasers evidence of the quality of your product.

Moreover, those potential buyers most likely to garner assurance from the knowledge that you care enough about the quality of your loans to invest in an independent, third-party review are likely to be your  most desirable customers – i.e., those searching for mortgages that have been produced by careful guidelines and thus have reliable and calculable outcomes. Such buyers may, in fact, consider mortgages constructed under these conditions to be a premium product worth a premium price.

On the other hand, a potentially antagonistic purchaser, i.e., one looking for groups of loans produced with less care in hopes that consequent process errors could ultimately be used to justify repurchase requests for any loans that might default (whether the process errors are pertinent or not), is unlikely to view a pre-sale audit as a positive sales point. I would hold that the decreased attractiveness of audited mortgage loans and any subsequent loss of sales to this category of client is a major benefit of performing such audits.

The Pre-Sale Audit Process

A pre-sale audit informs you whether the proper loan origination policies and procedures have been followed, as well as whether guideline and credit parameters have been met.

As a consequence of the pre-sale audit and the resulting corrective actions, you know that the documentation of your delivery package will be correct, and, should questions later arise about an individual loan, you will already have the necessary answers.

A comprehensive pre-sale audit involves five areas of review:

  1. Documentation
  2. Regulatory Compliance
  3. Guideline Adherence
  4. Borrower Forensics
  5. Appraisal Review

Every loan undergoes the first three categories of review: Documentation, Regulatory Compliance, and Guideline Adherence.  Borrower Forensics and Appraisal Review are completed on a random sample of the files with the sample size calculated by taking into account various parameters, such as number of loans in the portfolio, credit grade of the pool, seasoning of the files, number of files current and number delinquent, … .  If government loans are included, MIC and Guaranty Status are also relevant.

Documentation:  The audit assures all requisite documentation is in the file.  Missing documentation is a major source of repurchase demands that can be easily avoided.  Your audit firm should provide a Documentation Checklist that indicates not only if the documents are present but whether the documents were accurately completed and if all necessary signatures were obtained.

Searching for trailing documents months or years after loans have closed and the sale is complete is not only time-consuming and expensive but demoralizing as well. Nor is there any guarantee that such belated rectification efforts will be successful.  Deficiencies identified at this point are more economically and efficiently correctible than several months after the sale.

Regulatory Compliance:  The Statement of Work for the audit should require that all loans undergo examination for Regulatory Compliance with

  • TILA
  • MDIA
  •  Fair Lending
  • All State Compliance Requirements

And do yourself a favor:  formally request that HMDA information be double-checked.

Again, it is far less onerous to correct an error at this point in the process – and far less expensive than buying back a loan.

A pre-sale audit can prevent that innocent typo in a date on a Notice of Right to Cancel from coming back to bite you two years down the line.

Guideline Adherence:  It is essential to provide the appropriate origination guidelines and your policies for approving exceptions to guidelines to your audit firm. Exceptions to guidelines are a red flag; the ability to demonstrate that any exceptions were accurately documented and approved is key.

By the same token, if a deficiency is found, any needed approval signatures and supporting documentation can be obtained   and added to the file.

Borrower Forensics:  My personal experience in the field have convinced me that a sampling of borrowers,  based upon originating office, the specific loan officer, or some other criterion, should have their employment status, income figures, and other critical data re-verified. . The key point is conducting your own forensic review BEFORE one is mandated.

By employing fraud detection techniques ahead of the loan sale, you once again provide an extra layer of comfort for the prospective buyer of the loan pool.  And, as a seller you will have the information required to calculate a price and determine if specific loans should be pulled from the pool.

Appraisal Review:  A sample of appraisals should be checked as well.  Have the validity of the appraiser’s license confirmed, especially if you have originations in states that have a history of problems with the quality of appraisals.

This is not a job for amateurs. Ask your audit firm if they have an appraisal review specialist on their staff and, if so, how much experience he or she has.  Have some appraisals reviewed on a “challenge” basis, looking for questionable valuation conclusions.  Make sure that the appraiser has correctly identified the market trends for the specific area, and verify that the sales used as comparables were in fact good comps.  Again, applying this forensic approach in advance of the sale and before problems declare themselves is far more cost-effective than attempting to do so under the pressure of a repurchase demand.

Pre-Sale Audit As A Quality Assurance Component

The pre-sale audit will not only benefit you at the time of the pending loan sale, but the audit results will give you information to enable you to fine-tune your processes going forward.  Identifying deficiencies now will give you an opportunity to take remedial action before the sale, or time to identify compensating factors that you can provide to minimize the impact of the problem to the buyer.  In the worst case, you will learn ahead of time that you have a loan that has to be pulled from the pool and shelved until seasoning compensates for the problem or you have a buyer willing to take on loans with such issues.  Once again, correcting errors at this point is more effective, economical, and efficient than doing so when questions or legal issues arise later.

The audit also identifies recurring problems, providing you with the opportunity to revise your training programs and methods and bring your Policy and Procedures manual up-to-date if necessary.  Depending upon the criteria used to select loans for review, the audit results could also be used to assist in performance evaluations.

The primary benefit, in fact, of the pre-sale is as one integrated component of Quality Assurance.  You, your employees, and your buyers have concrete evidence that you reliably generate a high quality product. Not only will that improve the prices of that product, but it will also enhance the relationship with your most favored buyers, and bring increased sales opportunities.

Buyer-initiated Pre-Sale Audits Initiated

While this article has been presented from the perspective of the seller of loans, the advantages of a pre-sale audit accrue to the buyer of portfolios as well.  Buyers who commission their own pre-sale audit can determine if the loans being offered are flawed with guideline or regulatory violations.    Audit findings provide not only warning of increased risk but also the data needed to calculate the cost of corrective actions and readjust the price to reflect lower quality loans. Buyer-initiated pre-sale audits include all the procedures outlined above and the following steps:

  1. BPO: In addition to the Appraisal Review, a BPO should be obtained on all files to verify current values.  The market has changed throughout the country, areas and buyers need to be alert to potential problems that could arise in the future if a loan defaults and becomes subject to foreclosure.  The value of the property is crucial to the funds that can be recouped by its sale if it becomes an REO.
  2. Corrective Analysis: Buyers not only need to know if a compliance issue exists but also if correction is possible, the means by which a correction would take place, the time and money required for that correction. Only with this information can a buyer render an informed decision on the pricing and ultimate purchase of a file.
  3. Service History Review: When considering the purchase of a seasoned portfolio or pool, a review of the servicing history is essential.  This goes beyond the current loan status and reflects the payment history over the life of the loan.
  4. Comprehensive Guideline Review: Buyers should ensure that guidelines presented cover all timeframes of the lending process of the loans in the pool and that the policies governing exceptions to those guidelines are fully documented.

An audit done prior to purchase informs the buyer about the nature of the product independent of the seller’s potentially skewed description and enables the buyer to determine a price that takes into account the risk being assumed.

The Pre-Sale Audit: How To Start

Whether you are the buyer or seller of mortgage loans,  the pre-sale audit is a necessary element of a strategically sound transaction that maximizes profit, manages risk, and enhances the efficiencies  of not only those directly involved in the sale and the mortgage market as a whole.

The checklist below covers many of the points raised in this article and can serve as a starting point for those considering a pre-sale audit.

Checklist for Review



CFPB Comes Knocking for Mortgage Lenders, Lawyers In Tow

What the Consumer Financial Protection Bureau is looking for in its mortgage industry audits has  been a question since the bureau took effect. As they start we are beginning to see hints of what will be part of the inspection process.

It has been just four months since the CFPB got its director, and along with him, the ability to examine non-banks, but it has begun to visit mortgage companies of all shapes and sizes as part of its examination practice. Most important, say those familiar with the exams: preparation.

Many mortgage lenders have never had this type of examination.  It can be very intense and it is important that you understand what they want and what they are looking for.

Manned with plenty of enforcement staff, the CFPB is also making the rules, leaving little room for gray area. Lenders are left to walk a fine line between working with the agency to resolve potential issues while not opening themselves up for enforcement action if they are in the process of trying to maintain or improve compliance.

Another issue, sources close to the exams say is that there is often an enforcement lawyer present from the CFPB, with one assigned to each exam team. This has been confirmed by companies already dealing with an exam.

The CFPB is interested in looking at policies and procedures. Under that part of the exam, the agency will look at things like compliance management, customer complaint intake and response and anything that will indicate whether the company has procedures in place to manage compliance as well as the “culture” of compliance.

They’re looking at loan files, interviewing staff, looking at any complaints, even calling to interview complaining borrowers

It would benefit any institution to hire someone to help prepare for the CFPB exam by reviewing Policy & Procedures, doing a pre-audit and looking at Fair Lending practices.

The big issue currently on the table is fair lending. CFPB has purblished statements on this being a focal point and recently commenting on disparate impact.

Cognitive Options Group can help you prepare, contact us today.

A Good Time to Buy a House – American Respond

Nearly three-quarters of Americans said they thought it was a good time to buy a home last month, with expectations that rental and purchase prices will rise over the next year and as consumers’ views of their finances stabilized, according to a monthly survey by mortgage finance company Fannie Mae (FNMA).

“Conditions are coming together to encourage people to want to buy homes,” said Doug Duncan, Fannie Mae chief economist.

The portion of Americans who indicated that it is a good time to buy in March–73%–was up 3 percentage points. The percentage of those who said it is a good time to sell was up by 1 percentage point at 14%.

The portion of participants who expected home prices to increase over the next 12 months improved to a third last month, from 28%. On average, consumers expected U.S. home prices to increase 0.9%.

A record 49% of respondents expected rental prices to increase, the highest number since Fannie Mae began tracking the metric in June 2010. On average, consumers expected rents to rise 4.1%.

Also, more respondents expect that mortgage rates–currently around historic lows–will increase over the next year: at 39%, up by 5 percentage points.

The percentage of respondents that expect their financial situation will worsen over the next year was 12%, consistent with February as the lowest value in more than a year and tied with January for the lowest to date.

The portion of respondents whose income increased significantly from a year earlier was 21%, an improvement of 1 percentage point. Meanwhile, 63% reported that their income stayed the same, consistent with February data.