Introduction to Mortgage Origination Examinations Training eBook

Introduction to Mortgage Origination Examinations Training

June 3-13, 2024 Virtual

@ www.csbs.org ♦ @csbsnews

CONFERENCE OF STATE BANK SUPERVISORS 1300 I Street NW / Suite 700 / Washington, DC 20005 / (202) 296-2840

June 3-13, 2024 Introduction to Mortgage Origination Examinations Training Virtual

ATTENDEES California Department of Financial Protection and Innovation Markley-Friedman, Jacqueline

jacqueline.markley-friedman@dfpi.ca.gov

Wong, Elise

elise.wong@dfpi.ca.gov

Hawaii Division of Financial Institutions Harts, Nazareth Maryland Office of Financial Regulation Doonquah, Monifa

nharts@dcca.hawaii.gov

monifa.doonquah@maryland.gov lashay.holiness@maryland.gov john.wyngarden@maryland.gov

Holiness, LaShay Wyngarden, John

Michigan Department of Insurance and Financial Services Berendt, Zach

berendtz@michigan.gov kolloffk@michigan.gov

Kolloff, Katie

Mississippi Department of Banking & Consumer Finance Adams, Imani

imani.adams@dbcf.ms.gov samantha.fitzhugh@dbcf.ms.gov branden.hines@dbcf.ms.gov jacob.sisco@dbcf.ms.gov austin.stanley@dbcf.ms.gov

Fitzhugh-Berl, Samantha

Hines, Branden

Sisco, Jacob

Stanley, Austin

New York State Department of Financial Services Oyewumi, Albert

albert.oyewumi@dfs.ny.gov ninad.shah@dfs.ny.gov christine.simmons@dfs.ny.gov

Shah, Ninad

Simmons, Christine

North Carolina Office of Commissioner of Banks Mathena, Roger

rmathena@nccob.gov lmcrae@nccob.gov

McRae, Leslie

Oregon Division of Financial Regulation Roth, Robin

robin.k.roth@dcbs.oregon.gov jordan.a.zade@dcbs.oregon.gov

Zade, Jordan

Rhode Island Division of Banking Olaitan, Olayinka

olayinka.olaitan@dbr.ri.gov peter.perry@dbr.ri.gov

Perry, Peter

Texas Department of Savings & Mortgage Lending Jackson, Courtney

cjackson@sml.texas.gov cong@sml.texas.gov erobinette@sml.texas.gov ttutwiler@sml.texas.gov

Ong, Chester

Robinette, Emma Tutwiler, Travis

Wisconsin Department of Financial Institutions Holtzman, Diana

diana.holtzman@dfi.wisconsin.gov

Wyoming Division of Banking Matthews, Dave

dave.matthews@wyo.gov christina.straw@wyo.gov elizabeth.wetzel1@wyo.gov

Straw, Christina Wetzel, Elizabeth

INSTRUCTORS Connecticut Department of Banking Cortes, Rich

richard.cortes@ct.gov daniel.landini@ct.gov

Landini, Daniel

Montana Division of Banking & Financial Institutions Romano, Chris

cromano@mt.gov

North Carolina Commissioner of Banks Garcia, Eric

egarcia@nccob.gov ktucker@nccob.gov

Tucker, Kareeme

Washington State Department of Financial Institutions Stenger, Lindsay

lindsay.stenger@dfi.wa.gov

CSBS STAFF Richardson, Amy

arichardson@csbs.org

Introduction to Mortgage Origination Examinations Training - Live Virtual June 3 - 13, 2024

Week 1 Monday, June 3, 2024 12:30 pm – 1:30 pm

Introductions & Welcome Mortgage Reg Overview

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

Break

Corporate Governance

Tuesday, June 4, 2024 12:30 pm – 12:40 pm 12:40 pm – 2:00 pm 2:00 pm – 2:15 pm

Prior Day Review – Corporate Governance Discussion

Scoping an Examination

Break

Policy Review

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

Policy Review Exercise

Exam Scoping Exercise - Independent Work

Wednesday, June 5, 2024 12:30 pm – 1:00 pm

Prior Day Review – Exam Scoping Discussion

Mortgage Advertising

1:00 pm – 2:00 pm

Break

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

Mortgage Advertising

Break

Mortgage Advertising – Independent Work

Thursday, June 6, 2024 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

Break

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Thursday, June 6, 2024 - Continued 2:15 pm – 3:15 pm

Basics of Financial Analysis

Financial Analysis Exercise - Independent Work

3:15 pm – 4:30 pm

Week 2 Tuesday, June 11, 2024 12:30 pm – 1:00 pm

Prior Day Review – Financial Analysis Discussion

Compliance 101: Loan File Review

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

Break

Compliance 101: Loan File Review

Loan File Review Exercise - Independent Work

Wednesday, June 12, 2024 12:30 pm – 1:45 pm

Compliance 101: Loan File Review Writing the Report of Examination

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

Break

Writing the Report of Examination

Sample Writing Review

Writing Exercise - Independent Work

St

Thursday, June 13, 2024 12:30 pm – 1:00 pm

Prior Day Review - Writing Discussion

How to Run an Effective Meeting

1:00 pm – 2:00 pm 2:00 pm – 2:15 pm 2:15 pm – 2:40 pm 2:40 pm – 3:00 pm

Break

How to Run an Effective Meeting Effective Meetings Activities

Exit Meeting Role Play Exercise

3:00 pm – 3:55 pm

Conclusion

3:55 pm - 4:00 pm

St

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Mortgage Origination Examiner Training Introduction

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Zoom

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

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

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

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Field Examiner Supervisor Washington State Department of Financial Institutions lindsay.stenger@dfi.wa.gov Lindsay Stenger

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

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Associate Financial Examiner Consumer Credit Division Connecticut Department of Banking daniel.landini@ct.gov Daniel Landini

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Introductions

NAME

AGENCY AND STATE

FUN FACT ABOUT YOURSELF

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

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

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Session Learning Objectives: 2. Understand state

supervision of the mortgage industry

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

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

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Introduction to Mortgage Origination Exams

State Supervision

SAFE Act & NMLS

Information Sharing

Federal Agencies

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State Supervision

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

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State Supervision

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

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

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Introduction to Mortgage Origination Exams

State Supervision

SAFE Act & NMLS

Information Sharing

Federal Agencies

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SAFE Act

• Enacted in 2008 • Minimum standards • Model legislation

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SAFE Act

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

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NMLS

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

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State Regulatory Registry LLC (SRR)

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NMLS

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

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SES

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

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

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Introduction to Mortgage Origination Exams

State Supervision

SAFE Act & NMLS

Information Sharing

Federal Agencies

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Information Sharing

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

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

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Introduction to Mortgage Origination Exams

State Supervision

SAFE Act & NMLS

Information Sharing

Federal Agencies

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CFPB

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

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

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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

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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

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VA

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

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FHFA

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

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GSE

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

loans & purchase loans in the secondary market

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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

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Resources

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

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Mortgage Origination Examiner Training Corporate Governance

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Session Learning Objectives: 1. Discuss the meaning

of corporate governance

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

in corporate governance

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Session Learning Objectives: 3. Review the 13

principles of governance

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Corporate Governance

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

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Corporate Governance for Mortgage Companies

Why is corporate governance so critical?

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Corporate Governance for Mortgage Companies

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

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

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Corporate Governance for Mortgage Companies

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

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13 Principles of Governance

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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

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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

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1. Board’s Overall Responsibility

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

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

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

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

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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

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

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

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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

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

• Manage risks • Report risks

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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

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

• Competent • Independent

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

• Risk appetite • Risk culture

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2. Board Qualification and Composition

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

• Independent directors • Qualified and diverse

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

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3. Board Structure and Practices

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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

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

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3. Board Structure and Practices Role of the Chair

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

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

• Committee chairs • Committee minutes

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3. Board Structure and Practices Audit Committee

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

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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

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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

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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

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

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

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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

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4. Senior Management

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

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

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

• Processes & controls • Compliance & Audit • Internal Controls

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

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

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5. Governance of Group Structure

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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

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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

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

• Support risk management • Policies & procedures input • Compliance

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

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6. Risk Management Function

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

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6. Risk Management Function Enterprise-wide risk governance

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

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

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6. Risk Management Function CRO Responsibilities

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

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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

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7. Risk Identification, Monitoring & Controlling

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

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7. Risk Identification, Monitoring & Controlling

• Risk identification: • All material risks • Risk assessment process • Qualitative & Quantitative

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

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

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

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

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8. Risk Communication

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

• Developing risks • Regular reporting

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9. Compliance

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

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

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10. Internal Audit

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

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

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11. Compensation

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

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12. Disclosure and Transparency

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

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13. Role of Regulators

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

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

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Mortgage Origination Examiner Training Scoping an Origination Examination

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

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Session Learning Objectives: 2. Understand how

to leverage the NMLS for exam scoping

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

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What is NMLS?

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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

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

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

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MCRs Two versions: 1. Expanded 2. Standard

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

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NMLS Analytics

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NMLS Analytics

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

• Business model • Product offerings

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NMLS Analytics

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

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Accessing NMLS Analytics

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Ordering an Examiners’ Report

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The Examiners’ Report

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The Examiners’ Report

• Trends • Changes • Impact on scope?

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MCR Analytics

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MCR Analytics - Dashboard

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MCR Analytics - Dashboard

1

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MCR Analytics - Dashboard

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MCR Analytics - Analysis

1

3

2

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MCR Analytics - Analysis

1

2

3

5

4

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NMLS – Composite View

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NMLS – Composite View

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

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NMLS – Composite View

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

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

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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

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NMLS – License Items

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NMLS – License Items

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

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NMLS – Financials

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

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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

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NMLS – Document Uploads

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

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NMLS – Document Uploads

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

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Business Plans

An excellent source of information for scoping!

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Business Plans Can help you determine:

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

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NMLS - Forms

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NMLS – Forms

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

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NMLS – Forms

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

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NMLS – Forms

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

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

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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

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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

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Non-NMLS Resources

Agency Specific Information

CFPB Complaint Portal

Company’s Website

Google Search

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

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

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

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CFPB Complaint Portal

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SES Complaints

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

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Google Search

• Press releases • News articles • Online advertisements

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Were any of these a surprise or new to you?

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Are there any other resources you use?

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Determining Scope Timeframe?

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

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

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Loan Review Sample

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

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Mortgage Origination Examiner Training Policy Review

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

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

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

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

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

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Policy Review

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Policy Review

Management should own their own policies.

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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

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

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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.

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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.

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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.

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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.

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Policy Review

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

Review can be scheduled into the corporate calendar.

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Policy Review

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

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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:

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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?

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

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Policy Review

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

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Policy Review

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

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Exam Procedures

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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

Internal Use Only

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

Internal Use Only

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

Internal Use Only

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

Internal Use Only

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

Internal Use Only

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.

Internal Use Only

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?

Internal Use Only

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

Internal Use Only

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

• Incentives • Discretion • Distinctions

Internal Use Only

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.

Internal Use Only

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

Internal Use Only

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

Internal Use Only

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?

Internal Use Only

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

Internal Use Only

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?

Internal Use Only

Evaluation of Policies

Internal Use Only

Evaluation of Policies

Strong Satisfactory Deficient

Seriously Deficient

Critically Deficient

Internal Use Only

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

Internal Use Only

Evaluation of Policies

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

Satisfactory

Internal Use Only

Evaluation of Policies

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

Deficient

Internal Use Only

Evaluation of Policies

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

Seriously Deficient

Internal Use Only

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

Internal Use Only

Policies & Procedures

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

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

Internal Use Only

Policies & Procedures

Examiners should review P&Ps and consider:

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

Internal Use Only

Policies & Procedures - Resource

Internal Use Only

Internal Use Only

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

Internal Use Only

Internal Use Only

Exercise

Internal Use Only

Internal Use Only

Mortgage Origination Examiner Training Mortgage Advertising

Internal Use Only

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

Internal Use Only

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

Internal Use Only

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

Internal Use Only

Exercise

Internal Use Only

Deceptive Advertising

Internal Use Only

Deceptive Advertising

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

Internal Use Only

Deceptive Advertising

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

Internal Use Only

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

Internal Use Only

Deceptive Advertising

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

12 C.F.R. Part 1014

Internal Use Only

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.”

Internal Use Only

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

Internal Use Only

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

Internal Use Only

When is an advertisement likely to mislead?

Internal Use Only

When is an advertisement likely to mislead?

• Partly true • Unsubstantiated • Likely to mislead ?

Internal Use Only

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

Internal Use Only

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

Internal Use Only

Regulation Z

Internal Use Only

Regulation Z

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

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

Internal Use Only

Regulation Z

Clear & Conspicuous Disclosure

• Prominence • Presentation • Proximity • Placement

Internal Use Only

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

Internal Use Only

Regulation Z

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

Internal Use Only

Trigger Terms

Internal Use Only

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

Internal Use Only

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

Internal Use Only

Regulation N

Internal Use Only

Regulation N

• Effective 12/30/2011 • Prohibits material

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

Internal Use Only

Regulation N: Prohibits Misrepresentations Relating To:

Interest Charged

APR or Rate Prepayment Penalties

Fees or Costs

Other Products

Taxes & Insurance

Fixed/Variable Interest Payments Due

Type of Loan Product

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

Amount of Credit Association or Affiliation with Government Likelihood of Obtaining Mortgage

Potential for Default Comparisons with Illusory Rates or Terms

Counseling or Expert Advice

Right to Reside in Dwelling

24-Month Recordkeeping Requirement!

Internal Use Only

State Laws

• FTC acts • Violations of relevant federal laws

Internal Use Only

Examination

Pre-Exam

Substantiation

On-Site Exam

Examples

Internal Use Only

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

Internal Use Only

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 ?

Internal Use Only

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

Internal Use Only

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?

Internal Use Only

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

Internal Use Only

Cool Feature For Translating Ads https://www.youtube.com/@AAALENDINGS/featured In Edge: • Right click in webpage • Select translate to English

Internal Use Only

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

Internal Use Only

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

Internal Use Only

Examination – On-Site

• Request substantiation of questionable express and implied claims

Internal Use Only

Examination – On-Site

• Request records

relating to advertising performance

Internal Use Only

Examination – On-Site

• If substantiation

analysis is deficient, re-interview advertising compliance officer

Internal Use Only

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