Consumer finance lawyers have spent the last year helping their clients adjust to sweeping regulatory changes to the residential mortgage industry that are set to go into effect in January, and last month brought with it another round of regulations that will keep the attorneys busy well into 2015.
And that is for just one industry.
The Consumer Financial Protection Bureau has issued thousands of pages of regulations in the last year that in some respects overhauls the way the residential mortgage industry operates, attorneys in that space have said. The result has been hours of attorney time, tons of client seminars and webinars, several interpretations and modifications of the rules, and the inevitable scramble as the deadline approaches to ensure the clients are in compliance with the complex regulations.
“The industry is investing heavily in trying to achieve compliance with this massive amount of new regulations,” said Reed Smith partner Leonard Bernstein, chairman of the firm’s financial services regulatory group.
There are so many changes to the mortgage industry that were mandated by the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act that the CFPB, the agency charged with implementing those changes, has created a Web page with tables outlining the different changes and “plain-language guides” to the rules’ implementation.
Wayne Streibich, chairman of Blank Rome’s consumer financial services group, said the scope of the rule changes are unlike anything he could have imagined. And unlike many industries that are going through consolidation, the mortgage servicing industry is producing more clients as the larger banks sell off chunks of their servicing rights, Streibich said.
The larger companies already in the crosshairs of the CFPB are more prepared for the rule changes than smaller companies not directly under the CFPB’s enforcement arm, Streibich said. He said that makes sense given smaller companies have to make decisions on where to allocate their resources, but Streibich also noted the CFPB’s reach could always expand.
“This is the game for now and you better be ready to play it,” Streibich said.
Streibich said he would be surprised if not all of the attorneys representing mortgage servicers don’t consider the new regulations an “overreach.” But he said the agency was formed specifically to make these “massive changes” and that is what it is doing. Streibich said there was an initial fear that, because there were “no real checks on the powers” of the CFPB, it could become the “wild, wild west.” But Streibich said he has been pleasantly surprised to find the agency has shown a little more willingness to consider the comments and feedback it is receiving from the attorneys and industry associations following the changes.
Preparing their clients for these changes has meant lots of research, presentations and time spent analyzing how the regulations will affect a particular entity.
Reed Smith created a four-part teleseminar series earlier this year to go over the changes to be implemented come Jan. 10, 2014. Streibich said that beyond sending out memos detailing the changes, his team has focused on meeting with individual clients to tailor an implementation approach that works for them.
“We go in like a business partner with a servicer … get an idea on how they run and whether their protocols need to be adjusted,” Streibich said.
Ballard Spahr has a blog, CFPB Monitor, that provides news and guidance for companies affected by the CFPB’s regulations and enforcement. And the firm’s 55-person mortgage banking group has been coordinating its efforts to more efficiently handle client requests.
Michael Waldron, one of the group’s practice leaders, said the firm has spent thousands of attorney hours on its own dime to digest the regulations. It has also created a central portal for the team’s attorneys to track client questions and responses in order to more quickly get an answer for a client calling on a subject the firm has already tackled.
“If you are turning to outside advisers and what they are providing you back takes your own internal analysis and digestion at a pace that’s not practical to implement, then you haven’t really [given] your clients certainly the service level that they demand,” Waldron said.
The regulations going into effect Jan. 14 deal with four main areas, as Bernstein sees it. The first deals with a comprehensive set of guidelines for how mortgage servicers operate. The second facet is known as the “ability to repay,” which requires underwriters to analyze the ability of a consumer to repay and provide a safe harbor from liability for certain qualified mortgages.
The third aspect of the regulation revamps how loan officers are compensated, taking away the ability to pay loan officers for things like steering the work to certain lenders. Bernstein said the compensation plans for all loan officers have to be redone under this regulation. The fourth piece Bernstein identified was new regulations regarding escrow accounts, appraisals and higher-priced mortgage loans.
“Each of those categories have hundreds of pages of discussion and new regulations,” Bernstein said. “Each of those have possible liability, including lawsuits and administrative enforcement.”
On Nov. 20, the CFPB issued additional regulations for the residential mortgage industry that are set to go into effect in August 2015. Those regulations, which Bernstein described as just as massive, require the two different mortgage disclosure requirements outlined under the Truth in Lending Act and the Real Estate Settlement Procedures Act to be consolidated into one disclosure that is consistent with the goals of both disclosures.
“The industry had urged the CFPB to provide a reasonable implementation period in view of the significant changes to systems and procedures necessary to implement the rule, on top of the implementation challenges presented by the other CFPB mortgage rules,” Ballard Spahr associate Karen Morgan wrote last month on the CFPB Monitor blog. “It appears the efforts were successful; much shorter implementation periods had been rumored.”
Streibich said the legal work associated with these regulations and the agency will continue for years. The overhaul of the mortgage regulations is something that could have been done in eight to 10 years but was instead done in one to two years, he said. It would take much longer than that to undo even if a different administration came into the White House with a different perspective on the regulatory scheme, he said.
And as Bernstein pointed out, these latest regulations deal just with the residential mortgage industry. The CFPB has already made substantial changes to the credit card industry and other changes are expected for the auto industry, student lending and other lending products such as payday loans, Bernstein said.