On April 26, 2017, the CFPB released the fifteenth edition of Supervisory Highlights, sharing recent supervisory observations in the areas of mortgage servicing, student loan servicing, fair lending, and mortgage origination.
In the context of mortgage origination, the CFPB clarified how lenders may treat a borrower’s down payment for purposes of the Ability-to-Repay (“ATR”) rule. Specifically, the ATR rule provides that creditors must consider “the consumer’s current or reasonably expected income or assets, other than the value of the dwelling, including any real property attached to the dwelling, that secures the loan.” The CFPB interprets this provision to prohibit lenders from treating a down payment as an asset for purposes of considering the consumer’s income or assets. While the size of a down payment generally affects the loan amount, the ATR rule already accounts for this by examining the consumer’s ability to repay the loan according to its terms. A larger down payment will lower the principal amount of the loan, and, therefore, will decrease the monthly payment. However, the size of a down payment does not directly indicate a consumer’s ability to make the monthly payments on a loan because a down payment is not an asset available for this purpose. Therefore, without more, down payments do not support a reasonable and good faith determination of the consumer’s ability to repay. The CFPB notes that it cannot anticipate a circumstance where a creditor could demonstrate that it reasonably and in good faith determined the ATR for a consumer with no verified income or assets based solely on the down payment size.
Additionally, the CFPB noted persistent compliance deficiencies with mortgage servicers and student loan servicers. Specifically, the CFPB noted that it is continuing to see deficiencies among mortgage servicers with respect to loss mitigation acknowledgement notices, loan modification denial notices, servicing transfers, dual tracking, problems with the maintenance of escrow accounts, and deficient periodic statements. The CFPB has also observed student loan servicers were receiving incorrect information from third-party enrollment reporting service providers on whether borrowers are currently attending school, causing the servicer to automatically terminate deferments prematurely. The CFPB found that the servicers engaged in unfair practices because they did not reverse the adverse financial consequences of the erroneous deferment termination, including late fees charged for non-payment during periods when the borrower should have been in deferment, and interest capitalization that occurred because the borrower’s deferment was erroneously terminated.
Furthermore, the CFPB updated the Bayesian Improved Surname Geocoding (BISG) proxy methodology, which is used during fair lending analyses to predict a borrower’s race and ethnicity based on his or her surname and place or residence. The Census Bureau recently released new data, which has been incorporated into the BISG proxy to make it more accurate. The CFPB did not announce any changes in how the BISG proxy is used by examination teams.
Finally, the CFPB announced a number of updates to its supervision program. First, the CFPB developed a tool to continuously monitor the volume of consumer complaints for all companies named by consumers in complaint submissions. This monitoring tool, which looks for spikes and trends in complaints, is intended to be an early warning system. The CFPB has historically used this information as part of its risk-based prioritization of examinations. Thus, it appears that consumer complaint data may play a larger role in examination prioritization going forward. Furthermore, the CFPB revised its Supervision and Examination Manual in response to the updated FFIEC Uniform Interagency Consumer Compliance Rating System, which became effective on March 31, 2017. These updates emphasize that effective service provider oversight is a critical element of any compliance management system.
The Supervisory Highlights report is available here.