In January, most servicing professionals were anxious about the potential for regulatory rollback under the Trump administration and how it might impact the servicing industry. After having made significant investment in new technology, staffing and training in order to meet new regulatory requirements, including the Consumer Financial Protection Bureau’s (CFPB) final servicing rules, some servicing execs were actually worried that much of that investment was going to turn out to be a complete waste of time and money.
Six months later, it would seem that those same servicing execs had nothing to worry about because, as of this writing, Congress and the Trump administration seem no closer to passing meaningful financial reform than they were immediately following the election. Yes, the House of Representatives recently passed the Financial CHOICE Act, a sweeping piece of GOP-backed legislation that will, if approved, gut major portions of the Dodd-Frank Act and significantly limit the power of the CFPB.
However, the measure faces an uphill battle in the Senate, where it will need at least 60 votes – including support from at least six Senate Democrats – in order to pass. Senate Democrats have been saying for months that the bill is “dead on arrival in the Senate,” and it seems highly unlikely that the measure will see the light of day.
But there is a major reason why servicing execs should be worried if the measure does pass: Should the CHOICE Act get signed into law, one can be sure that a majority of the Democratic states will enact new, Dodd-Frank-like regulations of their own in order to fill the regulatory void. This could make the regulatory landscape for mortgage servicing even more complex than it is today. Servicers would need to be even more proactive in terms of meeting compliance on the state level.
There is plenty of anecdotal evidence showing that this threat of additional state regulation is very real. For example, a recent letter to Republican members of Congress from a coalition of 20 state attorneys general (AGs) urges the House leadership to consider the implications of weakening the CFPB via the CHOICE Act. In the letter, the group of AGs say that the elimination of the CFPB’s UDAAP authority, the elimination of its supervisory authority, the elimination of its consumer complaint database, and other changes under the CHOICE Act would “effectively cripple the CFPB from doing the job it has been doing so effectively since its inception.”
“While the act purports to protect consumers from over-regulation by federal agencies, its far-reaching consequences would make consumers more vulnerable to fraud and abuse in the marketplace,” the AGs write in their letter. So, even if the CFPB is “de-fanged” by the CHOICE Act, there’s nothing to stop the states from enacting their own, similar mortgage servicing rules. Most states, in fact, have already adopted rules that are based on the federal regulations put in place under Dodd-Frank.
The recent regulatory actions brought against mortgage servicer Ocwen Financial Corp. are yet another indication of how far the states are willing to go in order to pick up the slack left by a “de-fanged” CFPB. In April, the CFPB announced that it was bringing action against Ocwen and its subsidiaries for “failing borrowers at every stage of the mortgage servicing process.” Coinciding with this action, more than 20 states announced that they, too, would be bringing regulatory action against the servicer. Some have even gone so far as to ban Ocwen from doing further business in those states.
Interestingly, Ocwen has vowed to fight the CFPB’s complaint. Taking a page from the PHH Mortgage regulatory defense playbook, it has filed two related motions in U.S. District Court, Southern District Of Florida, West Palm Beach Division, asking the court to toss the complaint on the grounds the bureau’s leadership structure is unconstitutional. That means the decision in the PHH Mortgage case could end up either derailing or reinforcing the CFPB’s complaint against Ocwen.
But a victory for PHH may do nothing to relieve Ocwen from the state actions it is currently facing.
Meanwhile, the CFPB keeps marching on. The bureau recently brought action against special servicer Fay Servicing for allegedly “failing to provide mortgage borrowers with the protections against foreclosure that are required by law” and has ordered the company to pay $1.15 million in order to redress consumers who were unfairly impacted by its “illegal” foreclosure practices.
What this suit and the Ocwen suit tell us is that the CFPB is going to continue enforcing its rules and finding new ways to levy fines and penalties on mortgage servicers while it still can.
So relax, servicing execs; you did, indeed, make a wise investment in staffing and systems. There will be no need for a “rip and replace”; if anything, you’ll be required to make even greater investment in regulatory compliance in the years to come.
There, aren’t you relieved?