Intro to Mortgage Origination Examinations - June 2022

Introduction to Mortgage Origination Examinations Training

June 21-30 , 2022

@ www.csbs.org � @csbsnews

CONFERENCE OF STATE BANK SUPERVISORS 1129 20th Street NW / 9th Floor / Washington, DC 20036 / (202) 296-2840

Introduction to Mortgage Origination Examinations Training - Live Virtual June 21 - 30, 2022

Week 1 Tuesday, June 21, 2022 12:30 pm – 1:30 pm

Introductions & Welcome Mortgage Reg Overview Break & Icebreaker Corporate Governance

1:30 pm – 2:00 pm 2:00 pm –2:15 pm 2:15 pm - 3:15 pm 3:15 pm – 3:25 pm 3:25 pm – 4:30 pm

Break

Corporate Governance

Wednesday, June 22, 2022 12:30 pm – 1:00 pm

Prior Day Review – Corporate Governance Discussion

Scoping an Examination

1:00 pm – 2:00 pm 2:00 pm – 2:15 pm 2:15 pm – 2:45 pm 2:45 pm – 3:15 pm 3:15 pm – 4:30 pm

Break & Icebreaker

Policy Review

Policy Review Exercise

Exam Scoping Exercise - Independent Work

Thursday, June 23, 2022 12:30 pm – 1:00 pm

Prior Day Review – Exam Scoping Discussion

Mortgage Advertising

1:00 pm – 2:00 pm

Break & Icebreaker Mortgage Advertising

2:00 pm – 2:15 pm 2:15 pm – 3:30 pm 3:30 pm – 3:40 pm 3:40 pm – 4:30 pm

Break

Mortgage Advertising – Independent Work

Week 2 Monday, June 27, 2022 12:30 pm – 1:00 pm

Prior Day Review – Mortgage Advertising Discussion

Basics of Financial Analysis

1:00 pm – 2:00 pm 2:00 pm – 2:15 pm 2:15 pm – 3:00 pm 3:00 pm – 4:30 pm

Break & Icebreaker

Basics of Financial Analysis

Financial Analysis Exercise - Independent Work

Tuesday, June 28, 2022 12:30 pm – 1:00 pm

Prior Day Review – Financial Analysis Discussion

Compliance 101: Loan File Review

1:00 pm – 2:00 pm 2:00 pm – 2:15 pm 2:15 pm – 3:15 pm 3:15 pm – 4:30 pm

Break & Icebreaker

Loan Selection & Lock the Rate Activities Loan File Review Exercise - Independent Work

Wednesday, June 29, 2022 12:30 pm – 1:00 pm

Prior Day Review - Loan File Review Discussion

Writing the Report of Examination

1:00 pm – 1:45 pm 1:45 pm – 2:00 pm 2:00 pm – 3:00 pm 3:00 pm – 4:30 pm

Break & Icebreaker

Sample Writing Review

Writing Exercise - Independent Work

St

Thursday, June 30, 2022 12:30 pm – 1:00 pm

Prior Day Review - Writing Discussion

How to Run an Effective Meeting

1:00 pm – 1:45 pm 1:45 pm – 2:00 pm

Break & Icebreaker

Effective Meetings Activities

2:00 pm – 2:45 pm

Exit Meeting Role Play Exercise

2:45 pm – 3:30 pm

Conclusion

3:30 pm - 4:00 pm

St

Mortgage Origination Examiner Training Introduction to Mortgage Origination Exams

1

Microsoft Teams

2

Administrative & Non-Depository Bureau Chief Montana Division of Banking & Financial Institutions cromano@mt.gov Chris Romano

3

Principal Financial Examiner Consumer Credit Division Connecticut Department of Banking richard.cortes@ct.gov Richard Cortes

4

Financial Non-Depository Examiner Maryland Office of the Commissioner of Financial Regulation matthew.mainolfi@maryland.gov Matt Mainolfi

5

Financial Legal Examiner Washington State Department of Financial Institutions lindsay.maynard@dfi.wa.gov Kendall Freed

6

Financial Examiner Non-Depository Entities North Carolina Commissioner of Banks ktucker@nccob.gov Kareeme Tucker

7

Financial Examiner Non-Depository Entities North Carolina Commissioner of Banks egarcia@nccob.gov Eric Garcia

8

Introductions

NAME

AGENCY AND STATE

FUN FACT ABOUT YOURSELF

9

Go to www.kahoot.it and enter Game PIN provided

10

Session Learning Objectives: 1. Review Day One: Mortgage Examiner Training

11

Session Learning Objectives: 2. Understand state

supervision of the mortgage industry

12

Session Learning Objectives: 3. Discuss federal agencies and their roles related to the mortgage industry

13

Session Learning Objectives: 4. Apply concepts to exam scenario exercises

14

Introduction to Mortgage Origination Exams

State Supervision

SAFE Act & NMLS

Information Sharing

Federal Agencies

15

State Supervision

• Jurisdiction over non- bank mortgage entities • Each state is a sovereign entity

16

State Supervision

• Prior to 2008, no federal statutes for non-bank mortgage entities or individuals taking mortgage applications

17

Life Before the SAFE Act & NMLS • Inconsistent • Bad actors • Monthly all-states conference calls

18

Introduction to Mortgage Origination Exams

State Supervision

SAFE Act & NMLS

Information Sharing

Federal Agencies

19

SAFE Act

• Enacted in 2008 • Minimum standards • Model legislation

20

SAFE Act

21

SAFE Act

Mortgage Loan Originators (MLOs) • Testing • Education • Background check • Credit report

22

NMLS

Nationwide Multistate Licensing System (NMLS) • State licensing system • Uniform applications • Consumer access portal • CSBS, AARMR, SRR

23

State Regulatory Registry LLC (SRR)

24

NMLS

Nationwide Multistate Licensing System (NMLS) • Expanded licensing • Name change

25

SES

State Examination System • Platform for scheduling, exams, investigations, enforcement actions & complaints • Communication portal • Resource for exams & complaints

26

Mortgage Regulator Trade Associations CSBS & AARMR • State regulator Board of Directors • Resources for states & examiners • Promote coordinated supervision

27

Introduction to Mortgage Origination Exams

State Supervision

SAFE Act & NMLS

Information Sharing

Federal Agencies

28

Information Sharing

29

Information Sharing

• Nationwide Cooperative Protocol & Agreement May 1, 2009 • MOU between CFPB & CSBS January 4, 2011 • CFPB-State Supervisory Coordination Framework May 7, 2013

30

Key State Regulator Committees • Non-Depository Supervisory Committee (NDSC) • State Coordinating Committee (SCC) • Multistate Mortgage Committee (MMC)

31

Introduction to Mortgage Origination Exams

State Supervision

SAFE Act & NMLS

Information Sharing

Federal Agencies

32

Information Sharing

33

CFPB

Consumer Financial Protection Bureau • Established 2010 • Accountability & consumer protection • Supervisory authority

34

HUD United States Department of Housing & Urban Development • Founded 1965 • Support community development & homeownership • Enforces Fair Housing Act

35

FHA

Federal Housing Administration • Created by National Housing Act of 1934 • Part of HUD in 1965 • Provides mortgage

insurance on loans by FHA- approved lenders

36

FTC

Federal Trade Commission • Independent federal agency created in 1914 • Dual mission • Fair Credit Reporting Act • Fair Debt Collection Practices Act • Mortgage Assistance Relief Services Rule

37

VA

U.S. Department of Veterans Affairs • Federal agency providing services to veterans • VA Home Loans • Eligible borrowers get more favorable terms

38

FHFA

Federal Housing Finance Agency • Established by the Housing and Economic Recovery Act of 2008 • Oversees housing government sponsored enterprises

39

GSE

Government Sponsored Enterprise • Quasi-governmental entity • Not direct lenders • Guarantee third-party

loans & purchase loans in the secondary market

40

Ginnie Mae

Government National Mortgage Association • Wholly owned government corporation • Housing & Urban Development Act of 1968 • Primary financing mechanism for government-insured or guaranteed mortgage loans

41

42

Resources

• SAFE Act Resources: https://mortgage.nationwidelicensingsystem.org/SAFE/Pages/default.aspx

43

44

Mortgage Origination Examiner Training Corporate Governance

1

Session Learning Objectives: 1. Discuss the meaning

of corporate governance

2

Session Learning Objectives: 2. Understand the role and responsibilities of a board and senior management

in corporate governance

3

Session Learning Objectives: 3. Review the 13

principles of governance

4

Corporate Governance

5

6

Corporate Governance for Mortgage Companies Guidelines – Corporate Governance Principles for Banks • July 2015 • Applicable to any company • Principles are scalable

7

Corporate Governance for Mortgage Companies

Why is corporate governance so critical?

8

Corporate Governance for Mortgage Companies

• Essential element of safe & sound operations • Minimizes supervisory intervention • Increased focus on risk & supporting framework

9

Corporate Governance for Mortgage Companies 3 Lines of Defense: 1. Business Line 2. Risk Management 3. Internal Audit

10

Corporate Governance for Mortgage Companies

• “Tone at the Top” • Written Code of Ethics • Tailored to the company

11

13 Principles of Governance

12

13 Principles of Governance 1. Board’s Overall Responsibility 2. Board Qualification & Composition 3. Board Structure & Practices 4. Senior Management 5. Governance of Group Structure 6. Risk Management Function

13

13 Principles of Governance 7. Risk Identification, Monitoring & Controlling 8. Risk Communication

9. Compliance 10. Internal Audit 11. Compensation 12. Disclosure & Transparency 13. Role of Regulators

14

1. Board’s Overall Responsibility

15

1. Board’s Overall Responsibility Responsibilities of the Board • Approving and overseeing management’s

implementation of: • Strategic objectives • Governance framework • Corporate culture

16

1. Board’s Overall Responsibility Responsibilities of the Board - Continued • Actively engaged • Corporate culture & values

• Risk appetite • Oversee risk • Implement key policies • Finance function

17

1. Board’s Overall Responsibility Responsibilities of the Board - Continued • Financial statements • Hire & oversee CEO/Senior Management • Compensation & risk alignment • Whistleblower policies & procedures • Related party transactions • Regulator relationships

18

1. Board’s Overall Responsibility Corporate Culture and Values • Set at the top • Risk • Code of Ethics • Escalation of problems

19

1. Board’s Overall Responsibility Risk Appetite, Management and Control • Governance framework • Limit breaches • Culture • Risk Appetite Statement (RAS)

20

1. Board’s Overall Responsibility Risk Appetite, Management and Control – Continued • Risk Appetite Statement (RAS): • Qualitative & quantitative • Risk assumption • Boundaries • Communication • Decision-making • Issue escalation process • Board leadership & management involvement

21

1. Board’s Overall Responsibility Risk Appetite, Management and Control – Continued 1. Business Units • Take risks

• Manage risks • Report risks

22

1. Board’s Overall Responsibility Risk Appetite, Management and Control – Continued 2. Independent Risk Management Function • Oversee & assess risks • Promote importance • Financial accuracy & reporting • Compliance function

23

1. Board’s Overall Responsibility Risk Appetite, Management and Control – Continued 3. Internal Audit • Independent & effective • Internal controls • Internal Auditors must be:

• Competent • Independent

24

1. Board’s Overall Responsibility Oversight of Senior Management • Hold accountable • Enumerate consequences • Includes adherence to: • Values

• Risk appetite • Risk culture

25

2. Board Qualification and Composition

26

2. Board Qualification and Composition • Understand role • Sound judgement

• Independent directors • Qualified and diverse

27

2. Board Qualification and Composition Selection & Qualifications: • Clear process • Assess candidates

28

3. Board Structure and Practices

29

3. Board Structure and Practices • Organization and Assessment of the Board

• Role of the Chair • Board Committees • Audit Committee • Risk Committee

• Compensation Committee • Other Board Committees • Conflicts of Interest

30

3. Board Structure and Practices Organization and Assessment of the Board • Effectively carry out responsibilities • By-law updates • Self-assessments • Maintain appropriate records

31

3. Board Structure and Practices Role of the Chair

• Crucial role • Leadership • Experience, competence & personable • Decision making • Facilitate discussions • Time

32

3. Board Structure and Practices Board Committees • Specific issues • Appropriate number • Charters

• Committee chairs • Committee minutes

33

3. Board Structure and Practices Audit Committee

• Mid- to large-size companies • Separate from committees • Independent directors - Chair & membership • Experience • Direct reporting

34

3. Board Structure and Practices Audit Committee - Responsibilities • Policy • Financial reporting • Auditor oversight • Audit scope & schedule • Audit reports & corrective action • Accounting policies • Risk governance framework

35

3. Board Structure and Practices Risk Committee • Mid- to large-size companies • Distinct from committees • Independent director Chair • Majority of members independent • Experience • Review policies & adherence

36

3. Board Structure and Practices Risk Committee – Responsibilities • Advise Board • Oversee RAS implementation • Report on risk culture • CRO oversight • Capital & liquidity management • Oversee risks • Work with Audit Committee • Evaluate risk governance framework

37

3. Board Structure and Practices Compensation Committee • Larger companies • Oversee remuneration system • Independent directors • Ensure payments are appropriate

38

3. Board Structure and Practices Other Board Committees • Established as necessary • Could include: • Nomination • Human resources • Governance • Ethics • Compliance

39

3. Board Structure and Practices Conflicts of Interest • Establish policies & procedures • Duty to avoid • Examples • Review & approval process

• Duty to disclose • Voting abstention • Rules • Maintain records

40

4. Senior Management

41

4. Senior Management • Manage the company’s activities: • Board direction & oversight • Business strategy • Risk appetite • Policies • Daily management • Role, authority & responsibility • Aka - Executive Management

42

4. Senior Management Should have: • Experience • Training • Supervision • Ability to delegate • Ability to ‘set the tone’

43

4. Senior Management Should implement: • Business strategies • Risk management systems • Risk culture

• Processes & controls • Compliance & Audit • Internal Controls

44

4. Senior Management • Reports to the Board & provides: • Changes

• Financial condition • Performance reports • Breach notifications • Internal control failures • Legal & regulatory concerns • Whistleblower issues raised

45

5. Governance of Group Structure

46

5. Governance of Group Structure Holding company structure • Parent company board overall responsibility • Appropriate & clear governance framework • Board & senior management need understanding • Parent company aware of material risks & issues • Independent legal & governance responsibilities

47

5. Governance of Group Structure Parent Company should: • Establish governance framework

• Define subsidiary structure • Assess policies & procedures • Address conflicts of interests • Communications • Compliance • Effective internal audit

48

5. Governance of Group Structure Subsidiary Boards: • Develop risk management processes

• Support risk management • Policies & procedures input • Compliance

49

5. Governance of Group Structure Complex/Opaque Structures: • Increases complexity • Board & senior management must: • Risk management process • Policies & procedures • Regular audits

50

6. Risk Management Function

51

6. Risk Management Function Chief Risk Officer (CRO): • Sufficient stature, independence, resources & access to Board

52

6. Risk Management Function Enterprise-wide risk governance

• Risk identification • Risk measurement • Risk monitoring • Risk control • New initiative evaluation

53

6. Risk Management Function • Independent from operations • Sufficient & qualified staff • Access to training • Overall responsibility for company’s risk management

54

6. Risk Management Function CRO Responsibilities

• Oversee risk management • Support Board with RAS • Key decision-making

55

6. Risk Management Function CRO should: • Stature, authority & skills

• Independence • Board reporting • Access to Board • Board or risk committee:

• Appointment, dismissal or changes • Performance, compensation & budget

56

7. Risk Identification, Monitoring & Controlling

57

7. Risk Identification, Monitoring & Controlling • Company-wide & entity basis • Keep pace with changes • Risk governance framework: • Policies & procedures • Control

58

7. Risk Identification, Monitoring & Controlling • Risk identification: • All material risks • Risk assessment process • Qualitative & Quantitative

59

7. Risk Identification, Monitoring & Controlling Internal controls: • Key risks • Reliable, timely & complete information • Assure compliance • Managerial & employee check

60

7. Risk Identification, Monitoring & Controlling • Sophistication match complexity & risk profile • Accurate data • Risk model assumptions

61

7. Risk Identification, Monitoring & Controlling • Stress tests & scenario analyses: • Reasonable assumptions & scenarios • Documented & presented • Recommend actions • Test results • Communication

62

7. Risk Identification, Monitoring & Controlling • Risk management function should: • Mitigate risk exposure • Risk reduction or hedging • Risk acceptance • Outsourcing risks

63

8. Risk Communication

64

8. Risk Communication • Robust communication • Strong risk culture • Informed Board & management

• Developing risks • Regular reporting

65

9. Compliance

66

9. Compliance • Establish independent compliance function • Approve compliance risk policies & processes

67

9. Compliance • Evaluate compliance with laws, regulations & policies • Report to Board • Sufficient authority, independence, resources & Board access

68

10. Internal Audit

69

10. Internal Audit • Provide independent assurance • Promote effective governance • Third line of defense • Stature, authority, independence, resources & Board access

70

10. Internal Audit • Effectiveness dependent upon: • Full access • Independently assess • National standards • Mandate issues addressed • Periodic framework assessment • Respect & promote independence

71

11. Compensation

72

11. Compensation • Promote good performance • Reinforce risk culture • Review at least annually • Approve executive compensation

73

12. Disclosure and Transparency

74

12. Disclosure and Transparency • Transparent to stakeholders • Enable assessment • May be limited • Must be provided to regulators

75

13. Role of Regulators

76

13. Role of Regulators Supervisors should: • Provide guidance & supervise • Require improvement & remedial action • Share information • Evaluate fully

77

78

Corporate Governance Resources • Guidelines - Corporate Governance Principles for Banks: https://www.bis.org/bcbs/publ/d328.htm

79

80

Mortgage Origination Examiner Training Scoping an Origination Examination

1

Session Learning Objectives: 1. Identify resources that are helpful in scoping examinations

2

Session Learning Objectives: 2. Understand how

to leverage the NMLS for exam scoping

3

Session Learning Objectives: 3. Apply concepts to exam scenario exercises

4

Group Question

You have been assigned your first exam as EIC. What are some sources of information you think would be useful in helping you develop the scope of your exam and examination plan?

5

What is NMLS?

6

NMLS

Is a system for: • Processing applications for licensure • Collecting & storing company data • Data analysis

This information is key to helping you scope and create your examination plan

7

MCRs The Mortgage Call Report (MCR) is a report submitted by all licensed mortgage- industry companies on a quarterly basis

8

MCRs Mortgage call reports contain information regarding a company’s loan activity and financial condition

9

MCRs Two versions: 1. Expanded 2. Standard

10

MCRs A record of all MCRs filed by a company can be accessed through Composite View in NMLS

11

NMLS Analytics

12

NMLS Analytics

MCR data can be extremely useful to help understand the company you will examine: • Size

• Business model • Product offerings

13

NMLS Analytics

Two powerful analytic tools to assist you in scoping exams: • Mortgage Examiners’ Report • MCR Analytics

14

Accessing NMLS Analytics

15

Ordering an Examiners’ Report

16

The Examiners’ Report

17

The Examiners’ Report

• Trends • Changes • Impact on scope?

18

MCR Analytics

19

MCR Analytics - Dashboard

20

MCR Analytics - Dashboard

1

21

MCR Analytics - Dashboard

22

MCR Analytics - Analysis

1

3

2

23

MCR Analytics - Analysis

1

2

3

5

4

24

NMLS – Composite View

25

NMLS – Composite View

Provides you access to a wide range of useful information regarding: • Company • Branch • Individual

26

NMLS – Composite View

• This picture shows some areas of company information an examiner would typically utilize

27

NMLS – Company Information Screen Provides very basic information regarding the company, including: • Address • E-mail address • Telephone number • Primary regulatory contact • Consumer complaints contact

28

NMLS – License Items

Reviewing the company’s license items for the licenses from your agency can alert you to any issues/concerns that are active or that occurred during the review period

29

NMLS – License Items

30

NMLS – License Items

License items can be about a range of state-specific topics, including: • Financial Statements • License renewals • Surety Bonds • State-specific requirements

31

NMLS – Financials

• Companies provide through NMLS at least annually • “Financial Statement Summary” tab of NMLS • Review while scoping the exam

32

NMLS – Regulatory Actions

• Records of all regulatory actions against the licensee by state regulatory agencies • Each record includes copies of the document & detail privacy level of each action

33

NMLS – Document Uploads

• Certain documents uploaded to the licensee’s NMLS record • Only uploaded by the licensee • Different document categories

34

NMLS – Document Uploads

Types of documents include: • Advance Change Notices • Business Plans • Internal Policies & Procedures • Management Rosters • Org Charts • Surety Bonds

35

Business Plans

An excellent source of information for scoping!

36

Business Plans Can help you determine:

• How do they generate business? • What are the business channels? • Do they have specialty areas? • Other relevant details

37

NMLS - Forms

38

NMLS – Forms

Four basic “forms”: • MU1 – Company • MU2 – Control persons & other individuals • MU3 – Branch office • MU4 – Individual licensee (mortgage loan originator)

39

NMLS – Forms

Contain basic data, including: • Name • Address • Contact information • Data specific to the type of person or entity

40

NMLS – Forms

• The data in the forms is accessed through NMLS Composite View

41

NMLS – Form MU1 • State Historical Filings – view current & previous versions of MU1 form filings • Contains a large amount of information on the company

42

NMLS – Form MU1 Business activities & states company engages in the activity • Definitions found in the NMLS Resource Center Affiliates/subsidiaries listed • Entities with common ownership • Entities owned by the company

43

NMLS – Form MU1 Disclosure questions & explanations • Required to provide answers • Questions about criminal convictions, regulatory & civil actions, and financial issues • Any “yes” answers require explanation with supporting documentation

44

Non-NMLS Resources

Agency Specific Information

CFPB Complaint Portal

Company’s Website

Google Search

45

Agency-Specific Information • Previous exams • Correspondence folder • Regulatory actions • Consumer complaints

46

State Examination System (SES) • Access to exams • Join, Accept, or Leverage Another SA

47

CFPB Complaint Portal • Searchable database • Nationwide consumer complaints • Searchable • Factor into exam scope

48

CFPB Complaint Portal

49

SES Complaints

50

Company Website • Areas to review • Products highlighted • Advertising claims • Compliance with regulatory requirements • Triggering terms

51

Google Search

• Press releases • News articles • Online advertisements

52

Were any of these a surprise or new to you?

53

Are there any other resources you use?

54

Determining Scope Timeframe?

55

Determining Scope Timeframe? • No universal approach • Some considerations:

• Date of last exam • Last exam findings • Record retention • Statutory timeframes • Multi-state vs. single state

56

Loan Review Sample

57

58

Resources CFPB Examination Procedures, Mortgage Origination (General Considerations, pages 12-14): • https://www.consumerfinance.gov/compliance/supervision- examinations/mortgage-origination-examination-procedures/

59

Resources

NMLS Regulator Training: • https://extranet.csbs.org/NMLS/Regulators/Knowledge/Pages/Traini ngResources.aspx

60

61

Mortgage Origination Examiner Training Policy Review

1

Session Learning Objectives: 1. Understand the role a mortgage company's policies & procedures play in their compliance program

2

Session Learning Objectives: 2. Learn how to review & analyze a mortgage company's policies

3

Session Learning Objectives: 3. Discuss an examiner's approach to assessing a mortgage company's policies & procedures

4

Session Learning Objectives: 4. Identify the relevant policies & procedures that should be implemented by a mortgage company

5

Session Learning Objectives: 5. Review sample mortgage company policies that contain identifiable weaknesses

6

Policy Review

7

Policy Review

Management should own their own policies.

8

Policy Review

Board should: • Ensure policies are

implemented & procedures established for periodic review • Review is an opportunity to assess management & revise policies if needed • Ensure policies are reviewed & approved annually

9

Policy Review Compliance policies and procedures should document and be sufficiently detailed to implement the board-approved policy documents.

10

Policy Review Examiners should determine whether compliance policies & procedures: 1. Are designed to effectively manage compliance risk in the products, services and activities of the mortgage company. 2. Are consistent with approved compliance policies. 3. Address compliance with applicable Federal consumer financial laws in a manner designed to minimize violations and to detect and minimize associated risks of harm to consumers.

11

Policy Review Examiners should determine whether compliance policies & procedures: 4. Cover the full lifecycle of all products and/or services offered. 5. Are maintained and modified to remain current and complete, and to serve as a reference for employees in their day ‐ to ‐ day activities.

12

Policy Review Policies and procedures are not intended to be maintained in a dusty three-ring binder that hasn’t been opened since it was buried on a shelf.

13

Policy Review

Effective policy and procedure management goes well beyond simply crafting an initial set of documents.

Effective policies and procedures are living documents that must grow and adapt with a company.

14

Policy Review

Best Practice  ‐ an institution reviews all its policies & procedures annually.

Review can be scheduled into the corporate calendar.

15

Policy Review

• Current & relevant? • Being implemented as intended? • Having the desired effect? Questions to consider for policies & procedures:

16

Policy Review

• Organizational changes • New/amended laws or regulations • New loan programs/products • Incidents or policy violations Other events that warrant a review of policies & procedures:

17

Policy Review

• How does an institution New policies need to be communicated immediately & effectively. Examiners should consider: communicate policy changes? • How do employees access policies & procedures?

18

Policy Review A company’s policies and procedures should be commensurate with its size and complexity.

19

Policy Review

• Written & readily available • Prevent/reduce violations • Protect consumers • Align business strategies & outcomes Compliance Program should include policies & procedures that are:

20

Policy Review

• Implemented by management • Administered by CCO • Tailored to the company • Control risk • Independently audited Policies & procedures should be:

21

Exam Procedures

22

Exam Procedures

Request & review policies & procedures related to consumer compliance, including (as applicable): • Sales practices • Incentive structures ( compensation & non ‐ compensation based )

• Federal consumer financial laws • State ‐ specific laws & regulations

23

Exam Procedures Do policies & procedures address new or amended Federal and state consumer financial laws implemented since the previous examination?

24

Exam Procedures Do policies & procedures cover consumer financial products or services introduced since the previous examination? • Who is responsible for implementing new products?

25

Exam Procedures Review policies & procedures relating to compliance with specific regulatory requirements & their implementing procedures.

26

Exam Procedures Review policies & procedures for: • Outdated content • Names of unaffiliated entities • Indicators that policies are not tailored to the institution

27

Exam Procedures Review policies & procedures for products with features that may inhibit consumer understanding or otherwise pose heightened risks of unfair, deceptive, or abusive practices.

28

Exam Procedures Determine whether policies & procedures related to a company’s incentive program include sales quotas, performance goals, and incentive structures. Independent process for investigating improper behavior?

29

Exam Procedures Determine whether policies & procedures provide clear guidance for managing risk of incentives abuse throughout the product life cycle.

30

Exam Procedures Review policies & procedures for products with features that may pose heightened risk of discrimination, such as:

• Incentives • Discretion • Distinctions

31

Exam Procedures Review policies & procedures maintained by different units or legal entities for

consistency and reasonableness.

Instances of inconsistency should be justified by business necessity or market condition.

32

Exam Procedures Review policies & procedures for record retention & destruction timeframes to ensure compliance with legal requirements.

33

Exam Procedures If compliance procedures are embedded in automated tools, are periodic reviews performed? Were tools approved by the Board or committee thereof?

34

Exam Procedures Coordinate compliance examination activities with members of the examination team & the EIC. • Identify violations • Exam findings/issues related to P&Ps? • Absence of P&Ps? • P&Ps periodically reviewed?

35

Exam Procedures Utilize discussions with the Institution’s mangers to gather information and discuss procedures & practices to ensure compliance with laws & regulations.

36

Exam Procedures Draw conclusions about policies & procedures: • Are they strong, satisfactory, deficient, seriously deficient, or critically deficient? • Do P&Ps match actual company/employee processes?

37

Evaluation of Policies

38

Evaluation of Policies

Strong Satisfactory Deficient

Seriously Deficient

Critically Deficient

39

Evaluation of Policies

P&Ps are comprehensive and provide standards to effectively manage compliance risk in the products, services, and activities of the institution.

Strong

40

Evaluation of Policies

P&Ps are adequate to manage the compliance risk in the products, services, and activities of the institution.

Satisfactory

41

Evaluation of Policies

P&Ps are inadequate at managing the compliance risk in the products, services, and activities of the institution.

Deficient

42

Evaluation of Policies

P&Ps are seriously deficient at managing the compliance risk in the products, services, and activities of the institution.

Seriously Deficient

43

Evaluation of Policies

P&Ps are critically absent in programs to manage compliance risk in the products, services, and activities of the institution.

Critically Deficient

44

Policies & Procedures

45

Policies & Procedures

Request P&Ps related to mortgage compliance for origination, specifically: • Consumer Compliance

• State/Federal Consumer Financial Laws • Consumer Financial Products & Service

46

Policies & Procedures

Examiners should review P&Ps and consider:

• Understandable • Effective dates • Last reviewed • Review frequency • Who reviews • Is content updated

47

Policies & Procedures - Examples

48

Policies & Procedures - Examples 1. Third ‐ Party Due Diligence

2. Vendor Management

3. Direct & Indirect Origination Activities

4. Marketing, Advertising, and Solicitation

5. Underwriting

49

Policies & Procedures - Examples 6. Investment Lending

7. Appraisal Independence

8. Quality Control, Monitoring, and Management Review

9. Employee Compliance Training

10. Whistleblower

50

Policies & Procedures - Examples 11. Fraud Prevention

12. OFAC Screening Procedures – borrowers, staff & vendors

13. Secondary Market Activities

14. Third ‐ Party Coverage

15. USA PATRIOT Act Compliance Procedures

51

Policies & Procedures - Examples 16. Gramm ‐ Leach ‐ Bliley Policies & Procedures

17. BSA/AML Compliance Program

18. HECM Counseling

19. Fair Lending

20. MLO/Employee Compensation

52

Policies & Procedures - Examples 21. Record Retention

22. Adjustable ‐ Rate Mortgages

23. Compliance Management System – Loan Products

24. Training

25. Complaint Resolution

53

54

Resources • MMC Manual - Compliance Management System Exam Procedures: https://www.csbs.org/mortgage-examination-supplements • CFPB Compliance Management Exam Procedures : https://files.consumerfinance.gov/f/documents/201708_cfpb_complian ce-management-review_supervision-and-examination-manual.pdf

55

56

Exercise

57

58

Mortgage Origination Examiner Training Mortgage Advertising

1

Session Learning Objectives: 1. Understand federal regulations that impose mortgage advertising requirements

2

Session Learning Objectives: 2. Discuss triggering terms and what must be included in an advertisement when they are used

3

Session Learning Objectives: 3. Provide examples of mortgage advertisements that contain federal law compliance violations

4

Exercise

5

Deceptive Advertising

6

Deceptive Advertising

FTC Act §5 (15 USC 45) – unfair or deceptive acts or practices are unlawful

7

Deceptive Advertising

Unfair, deceptive, or abusive acts and practices (UDAAP) • Unlawful • Adds abusive

8

Deceptive Advertising

Regulation Z requires clear and conspicuous non-deceptive disclosure of credit terms and has added prohibited practices

12 C.F.R. Part 1026

9

Deceptive Advertising

Regulation N provides guidance and clarity as to what constitutes deceptive mortgage advertising

12 C.F.R. Part 1014

10

Elements of Deceptions (FTC Act§5) • Unfair or deceptive acts or practices are unlawful • An act or practice is unfair if it: 1. “causes or is likely to cause substantial injury to consumers” 2. “cannot be reasonably avoided by consumers,” and 3. “Is not outweighed by countervailing benefits to consumers or competition.”

11

Elements of Deceptions (FTC Act §5) • An act or practice is deceptive if:

1. “likely to mislead consumers” 2. “consumer interpretation is reasonable” 3. “material to consumers”

*Intent is not an element of deception

12

How does the FTC Typically Determine if an ad is deceptive?  Looks at the ad from a reasonable consumer’s view  Looks at both express and implied claims  Looks at what the ad does not say

 Looks at whether the claim would be “material”  Looks at whether the advertiser has sufficient evidence to support the claims in the ad

13

Group Question Has anyone received an advertisement you felt may have violated any of these laws? If so, what was it in the advertisement that made you feel that way?

14

When is an advertisement likely to mislead?

15

When is an advertisement likely to mislead?

• Partly true • Unsubstantiated • Likely to mislead ?

16

When is an advertisement likely to mislead? • More than one meaning, one of which is false • Representation or claim is not accompanied by material disclosures

17

When is an advertisement likely to mislead? • “Net general impression” versus the offer • Fine-print or disclaimer • Omits material disclosures or information

18

Regulation Z

19

Regulation Z

• CFPB & FTC enforce • Clear & conspicuous disclosure of terms • Applies to open-end &

closed-end credit • Advertised rates • Credit terms • Variable rate loans

20

Regulation Z

Clear & Conspicuous Disclosure

• Prominence • Presentation • Proximity • Placement

21

Regulation Z

Prohibited Practices • Misleading use of “fixed” • Misleading comparisons

• Misrepresentations about government • Misleading use of current lender’s name • Misleading claims of debt elimination • Misleading use of “counselor” • Misleading foreign language - triggers

22

Regulation Z

Rate of Finance Charge • Advertised rates must be stated in terms of annual percentage rate (APR)

23

Trigger Terms

24

Trigger Terms • Down payment* • Number of payments • Payment amount • Finance charge amount *Regulation Z limits applicability of triggering term to credit sale transactions for down payment

25

Trigger Terms When an advertisement includes trigger term(s), it must also include: • Down payment ($/%) • Terms of repayment • The “annual percentage rate”

26

Game: Is. It. A. Trigger. Term?!?

Reminder - Trigger terms are: • The amount or % of any down payment • The number of payments or period of repayment • The amount of any payment • The amount of any finance charge

Trigger Term?

• “$500 total cost of credit.” • “12% APR” • “$1,600 monthly payment”

• “30-year mortgage” • “$400 appraisals”

27

Regulation N

28

Regulation N

• Effective 12/30/2011 • Prohibits material

misrepresentation, either express or implied, relating to any term of a mortgage credit product

29

Regulation N: Prohibits Misrepresentations Relating To: Interest Charged APR or Rate Fees or Costs

Other Products

Taxes & Insurance

Prepayment Penalties

Fixed/Variable Interest

Type of Loan Product

Source of Solicitation Amount of Credit

Payments Due Potential for Default

Effectiveness of Product in Reducing Debt Likelihood of Obtaining Refinance or Modification

Association or Affiliation with Government

Counseling or Expert Advice

Comparisons with Illusory Rates or Terms

Likelihood of Obtaining Mortgage

Right to Reside in Dwelling

24 ‐ Month Recordkeeping Requirement!

30

State Laws

• FTC acts • Violations of relevant federal laws

31

Examination

Pre-Exam

Substantiation

On-Site Exam

Examples

32

Examination – Pre-Exam Request recent advertising: • Written transcripts • Telemarketing scripts • Review for express & implied claims • Check for disclosures

33

Examination – Pre-Exam For each advertisement, read and ask: • Is there a representation, omission, or practice that is likely to mislead consumers acting reasonably under the circumstances ?

34

Examination – Pre-Exam For each advertisement, read and ask: • Is that representation, omission, or practice material to consumers ?

35

Examination – Pre-Exam General impression of the advertisement: • Express claims • Implied claims • Half truths • Material disclosures missing What is the “reasonable takeaway” from the ad?

36

Examination – Pre-Exam For any questionable claim or omission: • Questionnaire responses • Advertising expenses • Policy & procedures • Request substantiation from management • Request translation

37

Substantiation • Reasonable basis for objective claims before they are made • Possess & rely on evidence • Applicability • Exists is material • Post-claim substantiation may influence findings

38

Game: CAN. THEY. SUBSTANTIATE. IT!?! 1. Hands down, best loans nationwide. 2. We close all loans in 15 days. 3. From app to consummation, 15 days. 4. Lowest rates! 5. Clients always rate us 5 stars. 6. Free appraisal! 7. No appraisal required!

39

Examination – On-Site • Interview person responsible for advertising review and compliance

40

Examination – On-Site

• Request substantiation of questionable express and implied claims

41

Examination – On-Site

• Request records

relating to advertising performance

42

Examination – On-Site

• If substantiation

analysis is deficient, re-interview advertising compliance officer

43

Examination – On-Site Loan Review Initial finding of deceptive advertising, stop & evaluate with team • If needed, expand scope • Restart loan review with focus on advertising

44

Translated Ad: What issues do you see?

45

Example: Rocket Mortgage, LLC formerly known as Quicken Loans, LLC • Settlement Agreement and Order, effective September 22, 2021. • Purpose: resolve disputes and require certain corrective actions regarding advertising practices. • 12 participating states. • Monetary Costs: $500,000 with the potential of up to an additional $1 million. • Remedial measures.

46

47

Resources CFPB Interactive Bureau Regulations • https://www.consumerfinance.gov/rules-policy/regulations/ State Examination System (SES) • Advertising Area for Review (AFR) includes Procedures & IRs

48

Resources CFPB Examination Procedures, Mortgage Origination (Advertising and Marketing, pages 17-22) • https://files.consumerfinance.gov/f/documents/201509_cfpb_mortgage- origination-examination-procedures.pdf CFPB Examination Procedures Unfair, Deceptive, or Abusive Acts or Practices (UDAAPs) Examination Procedures • https://www.consumerfinance.gov/compliance/supervision- examinations/unfair-deceptive-or-abusive-acts-or-practices-udaaps- examination-procedures/

49

Additional Resources

FTC Policy Statement on Deception http://www.ftc.gov/bcp/policystmt/ad-decept.htm FTC Policy Statement on Unfairness http://www.ftc.gov/bcp/policystmt/ad-unfair.htm FTC Policy Statement Regarding Advertising Substantiation http://www.ftc.gov/bcp/guides/ad3subst.htm

50

Additional Resources FTC Guide Concerning the Use of Endorsements and Testimonials in Advertising http://ftc.gov/os/2009/10/091005revisedendorsementguid es.pdf FTC Guide Concerning the Use of the Word “Free” and Similar Representations https://www.ftc.gov/enforcement/rules/rulemaking- regulatory-reform-proceedings/guide-concerning-use- word-free-similar

51

52

Mortgage Origination Examiner Training Basics of Financial Analysis

1

Session Learning Objectives: 1. Understand what tools are available for assessing an institution's financial condition

2

Session Learning Objectives: 2. Discuss key financial ratios and their relationship to an institution's financial condition

3

Session Learning Objectives: 3. Understand basic financial reporting, including core parts of a financial statement

4

Session Learning Objectives: 4. Identify financial reporting requirements that may be applicable to a financial institution

5

Session Learning Objectives: 5. Understand how a mortgage lender or

servicer creates revenue streams

6

Session Learning Objectives: 6. Understand the

role of capital, asset quality, earnings, liquidity, and sensitivity to market risk

7

Importance of Financial Condition

8

Importance of Financial Condition

Financial condition of a mortgage lender is critical to its means to operate.

9

Importance of Financial Condition

Mortgage lenders must: • Utilize capital and/or credit to make and fund loans • Achieve profitability • Anticipate and manage risks

10

Importance of Financial Condition

• Mortgage lender fails, what is the worst-case scenario? • Non-Bank Lenders originating higher percentage of mortgage loans

11

Importance of Financial Condition

Key factors that can lead to deteriorating financial condition: • Inability to manage risk • Poor internal controls • Risky loans • Interest rate risk

12

13

Financial Analysis

14

Financial Analysis • Stable, solvent, liquid, or profitable? • Past, present and future conditions • Financial strengths & weaknesses • Decision making • Core vs. ancillary earnings

15

Available Tools

16

Available Tools

• MMC Examination Manual • Financial Condition Examination Procedures

17

Available Tools

• NMLS Data Analytics • Mortgage Call Reports • Financial statements • Audited • Unaudited • SEC filings

18

Available Tools

Accountant/ CPA Reports: • Compilations • Reviews • Audits • Review opinion expressed by auditor

19

Basic Financial Reporting

20