The Consumer Financial Protection Bureau must follow the Dodd-Frank Act’s standard of tiered supervision of small- and mid-sized independent mortgage banks based on size, volume, and extent of state supervision, a Community Home Lenders Association letter to Director Rohit Chopra said.

The group also expressed “strong opposition” to any use of regulation by enforcement, which was a common practice for the bureau under its first director, Richard Cordray. A notable example is the bureau’s actions on marketing services agreements that disguise kickbacks as payment for advertising. No formal rulemaking ever took place; instead the bureau ruled on a case-by-case basis.

This practice was ended by acting Director Mick Mulvaney, and Director Kathy Kraninger also expressed opposition. However, under the Biden Administration, the CFPB is ramping up enforcement efforts. Director Chopra, at one time Cordray’s student loan ombudsman, was questioned about enforcement by regulation during his confirmation hearing.

Although Dodd-Frank lacks a specific exemption for smaller independent mortgage banks from CFPB regulation and enforcement, it does contain “tiered regulation language,” the letter states. That includes asset size, volume size and the extent of state oversight. Smaller IMBs are subject to duplicative regulation by the states and the CFPB, the letter states.

“The majority of small IMBs are closely held firms, where the principal owner(s) has skin in the game,” the letter said. “For such firms, the risk of significant CFPB fines has a personal impact, unlike banks and publicly held IMBs, where shareholders bear the risk.”

The CFPB needs to spell out the steps it will take to comply with the tiered enforcement requirements of Dodd-Frank.

Furthermore, “CHLA also requests that the CFPB adopt a public statement or formal policy that it will exempt smaller IMBs from being subject to CFPB exams or audits — ideally listing an annual loan origination cutoff dollar or loan amount and a servicing cutoff dollar or loan amount.”

The group also wants a promise from the CFPB that it will not initiate enforcement actions against smaller mortgage bankers unless requested by a state regulator.

It also suggests that the bureau adopt a formal policy to allow a smaller mortgage lender the opportunity to correct a violation prior to imposing fines or taking enforcement action, if the IMB was making a good faith effort to comply with a rule.

“Such an approach would mirror that of other financial regulators such as the FDIC, which uses memorandums of understanding, a common informal agreement used to obtain a commitment from a bank’s board of directors to implement corrective measures,” the CHLA said. “Other informal actions that the CFPB could consider include board resolutions, letter agreements, and other forms of bilateral agreements or actions.”

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