Compliance & Coffee: Does Cost-Cutting Cost You More?

On Friday, September 30th, mortgage professionals from far and wide gathered in front of their various devices, caffeinated beverage in hand, for our increasingly popular LinkedIn Live segment, Compliance & Coffee. This month’s 30-minute episode - starring ActiveComply’s EVP/Head of Compliance, Melissa Thomas, and Firstline Compliance, LLC’s President, Joshua Weinberg – featured a lively discussion peppered with recent regulatory compliance updates, fair lending violation case reviews, and a healthy dose of reading-list and coffee-brand suggestions. 

Doing more with less. 

In case you haven't heard - or if you’re not traditionally from the mortgage industry, in that case, welcome! - the mortgage industry’s sky-high volume that we experienced through 2020-2021 took a nosedive over the course of the past few months, taking thousands of jobs and dozens of companies down with it. The culprit? Near 30-year-high interest rates, declining origination and refinance activity, and general economic uncertainty.  

Classic. 

Companies that have managed to pivot have done so primarily at the expense of their employees, and compliance departments find themselves in a uniquely difficult spot. Though these teams are straining under the weight of reduced resources and staffing, regulatory and examination pressure and workloads have ballooned.  

“Both at a federal and state level, many of the regulators are sitting in a better financial position than they've been in many years. In part that's due to funding that they received from COVID. And in part, it's due to transactional volume fees,” said Weinberg. “So many states charge assessment fees based on volume, and the volume that industry had over the last couple of years has led to an increase in the revenue that they've received.”  

A recent example of state regulators changing the game due to an influx of revenue is the state of New Hampshire announcing that as of October of this year they will be reducing their per diem examination fee, having already made more than enough money through enforcement actions. With regulators feeling financially stable and ready to spare no expense in the name of compliance, lenders and those that need to reply to examinations find themselves under an increasingly intense lens. Both federal and state-by-state regulators are watching lenders particularly closely in their transactions with borrowers coming out of COVID forbearance, and are strongly emphasizing the importance of fair lending, equity, and inclusive housing.  

Speaking of Fair Lending... 

On July 15th, 2020, the CFPB (Consumer Financial Protection Bureau) filed a lawsuit against Townstone Financial, Inc. The Bureau alleges that Townstone violated Regulation B of the Equal Credit Opportunity Act (ECOA) and the Consumer Financial Protection Act (CFPA). Unfortunately, Townstone hasn’t been the only financial institution in hot water this year.  

On July 27th, 2022, the CFPB brought an action against Trident Mortgage Company LP under the Fair Housing Act, ECOA, and the CFPA. This action against Trident, the very first nonbank mortgage redlining resolution from the CFPB, was brought to remedy the company’s alleged discrimination in mortgage lending on multiple fronts, including office location, HMDA (Home Mortgage Disclosure Act) data, and, of course, marketing & advertising.  

“It was identified in the complaint that the Trident data alleged that they avoided serving those majority-minority areas about of the 30,000 plus applications they received about 12% came from majority-minority areas. Whereas their peers generated 21 and a half percent, which was quite a staggering difference for that peer comparison,” said Thomas. “Some of the questions that a lot of lenders are asking themselves within the industry today is: what is a peer? What counts in that peer group comparison? Disparaging email chains being exchanged internally - that a consumer never sees – are they indicative of fair lending issues? Does it have the same implications if you share it versus authoring it? There's a lot of questions at play, we're all keeping an eye out for a CFPB response.” 

Weinberg was quick to stress the importance of internal emails and even text correspondence. “We've got to be very careful about what we say. The bureau and other regulators and the department of justice, once they institute an action, have the right to see virtually all our internal company information. So, what might be perceived internally as a funny joke may be perceived by the regulator as evidence of discrimination,” he said. ”Text messages are now included as part of what could be evidence or information that would be indicative or representative of discrimination or a culture within the company that would lead to discouraging applicants from applying - and that's somewhat dangerous.” 

You can read our full blog post for more information about what the Trident Mortgage complaint entailed. 

Tale as old as time: Redlining 

We know redlining has been coming up a lot at the dinner table and in the US Congress’ chambers, but there’s a reason that we’ve been talking about it for 50 years – even after all this time, it’s still a problem.  

“This is an institutionally created problem that we're slowly looking for ways to fix and address,“ said Weinberg. “Some may not find it to be fair to hold an individual lender accountable for those activities. I think the view from the regulators, and particularly from the administration, is while it may not be your fault, you must be part of the solution to fix it.” 

The most recent ventures in reducing the long-term effects of the Federal Government-led discrimination and exclusion in housing and mortgage lending are as follows:  

• January 26, 2021: Biden issues Memorandum on Redressing Our Nation’s and the Federal Government’s History of Discriminatory Housing Practices and Policies  

• October 22, 2021: Justice Department Announces New Initiative to Combat Redlining. “We will spare no resource to ensure that federal fair lending laws are vigorously enforced and that financial institutions provide equal opportunity for every American to obtain credit.” - General Merrick B. Garland. Read more about this initiative here. 

These direct actions prove a coordinated, comprehensive effort at the federal and state level to find and eliminate discrimination is certainly in progress. Richard Rothstein’s The Color of Law: A Forgotten History of How Our Government Segregated America was highly recommended by both of our speakers for those who might be interested in learning more about the history of state-sponsored segregation and racially discriminatory practices in the housing industry. 

Revitalized emphasis on Limited English Proficiency (LEP) requirements. 

“Suffice to say, the compliance challenges [for Limited English Proficiency requirements] are numerous," said Weinberg. “The requirement to serve borrowers, to identify and serve their preferences, is going to be critical for lenders to retain and take market share now and in the near future. And the primary reason for that is the shifting demographics of our population.” 

According to the Joint Center for Housing Studies State of the Nation’s Housing 2022 report, the US population grew by almost 23 million from 2010 to 2020, and people of color accounted for all the net increase, while the White population declined by nearly 3 percent over the decade. 

• The Hispanic population increased 23% 
• The Asian population increased by 36% 
• The Black population increased by 6%  
• People identifying as multiracial increased approximately 127% 

Based on these metrics, it shouldn’t come as a surprise that the number of U.S. residents who are considered Limited English Proficient has increased substantially in the past two decades. Approximately 22% of the U.S. population over the age of 5 (in all, 67.8 million people) speak a language other than English at home and, of these, 37.6% are LEP (United States Census Bureau, 2019).  

Title VI of the Civil Rights Act of 1964 requires recipients of Federal financial assistance to take reasonable steps to make their programs, services, and activities accessible by eligible persons with Limited English Proficiency (LEP). This year, the Federal Housing Finance Agency has announced new data requirements, including collecting language preference and housing counseling information in addition to maintaining quality fair lending data.  

The mortgage industry has spent billions of dollars in recent years trying to improve the customer experience but has largely avoided the increasing need for accessibility within the LEP borrower’s journey. How can lenders ensure that all loan documents, including the need for custom disclosures, are properly translated for different LEP consumers? How does a lender rollout LEP initiatives that are UDAAP proof? With growing government initiatives, lenders will have to pivot quickly to answer these questions to avoid fair lending issues and tap into a disarmingly underserved population. 

Remote Work – Where do we go from here? 

During the COVID-19 pandemic, many states issued emergency guidance to allow highly regulated businesses to continue working remotely. With the harshest pandemic restrictions in the rearview, regulators are now faced with setting expectations for a drastically different-looking workforce: between 2019 and 2021, the number of people primarily working from home tripled from 5.7% to 17.9%, approximately 27.6 million people (about the population of Texas).  

The Mortgage Bankers Association (MBA) released a Remote Work Policies page on its website and a proposed model for state legislation and regulation. The American Association of Residential Mortgage Regulators (AARMR) also published its own Best Practices for Permitting Employees to Work Remotely. While useful, these guidance documents are sometimes purposefully vague, as financial institutions of varied sizes may have various levels of remote work supervision needs, and the level of resources available to these companies are likely to vary.  

“...regulators often are hesitant to being overly prescriptive with some of their guidance because they know that not every lender and financial institution has the same resources available,” said Thomas. “But it is very concerning when we're hearing from organizations like HUD (Housing and Urban Development) that they rely on the lender to prove how they are supervising. It's quite subjective as to when you're going to get it wrong.” 

While we learn the new rules of the road, it’s recommended that lenders implement technology like geolocation tracking and remote workspace inspection tools to prove their due diligence and keep their remote employees compliant. Read more about the Best Practices for Remote Work in the Mortgage Business. 

In conclusion. 

What is left of the mortgage industry after the U.S. economy finally stabilizes has higher expectations than ever regarding compliance and accessibility initiatives. Though it is tempting to downsize compliance departments in the name of cost-cutting, lenders are increasingly likely to negate the financial benefits of paying fewer salaries when regulatory entities come knocking on their door, incriminating evidence in hand.  

How confident are you that there would be nothing for them to find?