Mortgage Risk and Compliance Trends in 2021: What’s New and What’s Next?
A global pandemic. An economic crisis. Plummeting interest rates. Soaring loan origination volumes. A national election.
The mortgage industry has had quite the year.
And, in addition to trends I’ve been tracking for a while now, the events of this past year will likely have a big impact on the regulatory landscape in 2021.
Here are three mortgage risk and compliance trends to watch:
1. Changing Regulatory Landscape
The Consumer Financial Protection Bureau (CFPB) has generated no small amount of controversy in its almost decade-long existence. Over the past four years, the current administration has rolled back the Bureau’s mandate.
As we prepare to usher in a new Administration, how might the country’s new leadership affect the Consumer Financial Protection Bureau (CFPB)?
A Supreme Court Ruling in June 2020 means that a president can now fire the director of the CFPB at will. People are already speculating that the President Elect will appoint a new director whose views align more closely with that of the new Administration’s, with potential goals to revert the regulatory agency to a former version of itself. If that’s the case, lenders should expect CFPB changes to include increased budget, scope and oversight.
2. Expanding State Regulatory Reach
More than 2,300 miles from Washington, DC lawmakers are preparing for some of the most sweeping changes to financial services regulations since the passage of Dodd-Frank nearly a decade ago. On September 25, 2020, California signed the California Consumer Financial Protection Law (CCFPL). The law creates the Department of Financial Protection and Innovation (DFPI), often referred to by the media as a “mini-CFPB.”
The CCFPL, which goes into effect on January 1, 2021, authorizes the DFPI to enforce:
- California laws against people offering or providing consumer financial products or services in the state.
- Dodd-Frank Act provisions that entrust certain consumer financial protection and enforcement powers to state regulators.
And California isn’t the first state to do create its own state regulatory agency to oversee the financial services industry.
Increasingly, states are taking on financial services regulation to plug gaps in federal legislation so they can better protect consumers. Pennsylvania was one of the first states to create its own “mini-CFPB” back in 2017, and New York is currently proposing changes that would grant its Department of Financial Services (DFS) additional authority. If this past year is any indication, this is a trend that’s only just starting to gather momentum.
It’s important to note that California’s CCFPL has the added benefit of fostering innovation in financial services while also bringing some clarity to fintech’s gray areas. Should other states follow suit, this could open interesting opportunities in the financial sector. However, mortgage lenders will face increased complexity when it comes to ensuring regulatory compliance.
3. Increased Focus on Non-Bank Regulation
The mortgage market changed considerably after the 2008 financial crisis. Today, stringent regulations require lenders carefully assess a borrower’s ability to pay and that servicers give customers plenty of opportunity to renegotiate their debts before resorting to foreclosure. The problem is most of the regulations take aim at traditional depository lenders. The burden has been such that much of mortgage origination moved outside of the banking system to independent mortgage bankers (IMB).
Not bound by the same rules, non-banks have flourished over the past decade. In fact, they now originate 51% of all new home loans as well as holding more than 50% of residential mortgage servicing in United States. These IMB, who are often privately owned and have no capital requirements from current state licensing laws, are ready to lend money to consumers with less-than perfect credit and tend to offer more alternative (non-QM) products than traditional lenders. Looking for additional growth opportunities, non-bank lenders have started to diversify, opting for shift toward servicing. The non-bank model works well when the economy is percolating. However, many lenders may not be able weather rockier economic climates.
With ownership of mortgage servicing rights (MSR) by IMB increasing beyond the 50% mark, the Conference of State Bank Supervisors (CSBS) has been proposing Regulatory Prudential Standards for Non-Bank Mortgage Servicers, with particular emphasis on capital requirements for IMB.
Even prior to the economic crisis triggered by COVID-19, there was a push to regulate non-bank lenders. But, as the CARES Act forbearances end, lenders will almost certainly come under increased scrutiny. During foreclosure proceedings, plaintiff lawyers will be on lookout for compliance errors such as:
- Fee tolerances
- Disclosure timing
- Changed circumstance disclosures
- Foreclosure disclosures
If you are a non-bank lender, and you haven’t already, take steps to ensure you can prove compliance at every step of the loan life cycle.
Stay on Top of the Regulatory Landscape in 2021
The housing market isn’t known for being simple to predict. And nobody could have predicted everything that happened this year. And yet, there is also a cyclical nature to the mortgage industry that makes it possible for us to look at the larger picture to get a general sense of what’s to come.
Ultimately, I’d predict that this year, mortgage lenders from all walks of the industry will have their compliance programs put to the test. Now is the time to review your compliance team’s processes and software to make sure you’ll be able to handle these, and other, emerging mortgage risk and compliance trends.