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The Consumer Financial Protection Bureau’s (CFPB) just released, in June, 2013, updated exam procedures for its mortgage regulations issued in January 2013.
Why should all depository institutions pay attention to these procedures?
Although the CFPB’s examination authority is over banks, savings associations and credit unions with assets of over $10 billion, it is coordinating with other federal government regulators that also conduct examinations of financial institutions to ensure that all regulators have a shared understanding of the CFPB’s new rules with the expectation of interagency cooperation for a consistent exam experience. Even if a depository institution is not directly examined by the CFPB, it should be mindful of the CFPB exam requirements as they will be followed by their respective banking supervisors.
Thus, now is a good time for depository institutions to review and update internal policies, standards and procedures, including those policies that reflect on the new loan originator qualification requirements, in order to be ready in time for the January, 2014 effective date for the exam procedures.
One part of the loan originator qualification examination procedures requires an examiner to determine that the depository institution appropriately concluded that an individual loan originator demonstrates financial responsibility, character, and general fitness to warrant a determination that the originator will operate honestly, fairly, and efficiently. An examiner will expect to see policies and procedures reasonably designed to ensure that that the depository institution complies with the loan originator requirements.
Prior to the CFPB issuing its mortgage regulations, there was regulatory expectation that banks would have codes of conduct for its employees. For example, the FDIC had issued guidance to regulated financial institutions emphasizing the importance of an internal code of conduct or ethics policy in October, 2005. (See An Effective Code of Conduct for Banking.) As discussed in the FDIC guidance, board of directors/trustees were expected to establish standards of conduct within the institution that encourage integrity and ethical values that foster acceptable business practices across the organization. Part of such a code of conduct/ethics policy should address implementing appropriate background checks.
This concept has been taken a step further with CFPB rules under Truth in Lending Act that are specific to a subset of employees, the mortgage loan originator. Under those rules, loan originator organizations that are depository institutions, before allowing their employees to act in that capacity, must obtain:
- a criminal background check and
- a credit report from a consumer reporting agency in compliance with FCRA; and information about any administrative, civil or criminal findings by any government jurisdiction.
From the information gathered after taking the above steps and other available information, the employer must determine prior to allowing the employee to act as a loan originator in a consumer credit transaction secured by a dwelling, (a) that the individual has not been convicted of, or pleaded guilty or nolo contendere to a felony in a domestic or military court during the preceding 7-year period, or in the case of a felony involving an act of fraud, dishonesty, a breach of trust or money laundering, at any time, and (b) has demonstrated financial responsibility, character and general fitness such as to warrant a determination that the individual loan originator will operate honestly, fairly, and efficiently.
So how is a depository institution to make the determination about whether a loan originator will operate in a financially responsible, fair and honest manner? Official CFPB interpretations are helpful in this regard, and should be integrated into policies and procedures:
- An employer should assess all information obtained as required and discussed above, and any other reasonably available information, including information that is known to the loan originator organization as part of a reasonably prudent hiring process. The absence of any significant adverse information is sufficient to support an affirmative determination that the individual meets the standards.
- With regard to a review and assessment of financial responsibility, it is sufficient if an employer considers, as relevant factors, the existence of current outstanding judgments, tax liens, other government liens, nonpayment of child support, or a pattern of bankruptcies, foreclosures or delinquent accounts, but is not required to consider debts arising from medical expenses. Such procedures may provide that bankruptcies and foreclosures are considered under the financial responsibility standard only if they occurred within a recent timeframe established in the procedures. Such procedures are not required to include a review of a credit score.
- For a review and assessment of character and general fitness, it is sufficient if it considers, as relevant factors, acts of unfairness or dishonesty, including dishonesty by the individual in the course of seeking employment or in connection with determinations pursuant to the qualification requirements of §1026.36(f), and any disciplinary actions by regulatory or professional licensing agencies. No single factor necessarily requires a determination that the individual does not meet the standards for financial responsibility, character, or general fitness, provided that the loan originator organization considers all relevant factors and reasonably determines that, on balance, the individual meets the standards.
Susan is a member of the Real Property and Probate Section of the New Hampshire Bar, and is admitted in New Hampshire, Massachusetts, and Vermont.
THIS ARTICLE IS NOT INTENDED TO PROVIDE LEGAL ADVICE, AND DOES NOT CREATE AN ATTORNEY-CLIENT RELATIONSHIP.