MBA Letter Calls for Revamp of BCFP Supervision Program

The Mortgage Bankers Association called on the Bureau of Consumer Financial Protection to develop new supervisory practices that respects good-faith efforts by mortgage lenders and servicers and creates a level playing field for all financial institutions.

The letter, the latest in a series of MBA responses to more than a dozen BCFP Requests for Information on Bureau practices, reiterated MBA’s long-held criticisms of the Bureau’s oversight of the mortgage market.

“The BCFP’s supervisory program is an important component of the regulator’s oversight of the mortgage market,” wrote MBA President and CEO David H. Stevens, CMB. “When the BCFP launched its supervisory function, the examination process was chaotic, disorganized and examiners often seemed to not understand the mortgage market or the regulations governing the market.”

The letter noted while the Bureau “has made great strides” in this area, MBA believes there is significant room for improvement in the supervisory process. “Unfortunately, the tone of examinations is all too often adversarial, which leads to subpar results for the BCFP, regulated institutions and, most importantly, consumers,” the letter said. “Regulated institutions operating under constant threat of enforcement for even minor infractions must divert resources toward building compliance management system edifices that may please regulators, but have marginal impact, at best, for consumers. This means fewer resources are available to serve consumers, develop new products or invest in technologies.”

MBA said the Bureau’s “expectation of perfection” during examinations has been, and remains, the enemy of the good, which is much to the detriment of consumers.

“A well-structured supervision program does not need to be adversarial,” MBA said. “Rather, it should encourage the free flow of information between the regulator and the institution, both of whom should strive to get to the right, compliant result. One critical deficiency in the BCFP’s supervision program is that institutions have the sense that any infraction uncovered during the examination could lead to an enforcement action. This fear is not unfounded, and arises generally from industry’s experience with the Bureau’s supervision program.”

MBA cited two particularly concerning supervision tactics:
–Too often, institutions are cited for infractions uncovered by their own well-functioning compliance management systems, and

–PARR letters–letters threatening potential enforcement action–seem to include laundry lists of all infractions identified during an exam without regard to their actual severity.

“This creates a perverse incentive whereby institutions are fearful of setting up well-functioning compliance testing programs, and conducting meaningful audits and self-assessments, due to the concern that these documents will provide a roadmap for regulators seeking to notch additional regulatory violations during an examination,” MBA said.

The letter offers three key recommendations:

–The Bureau should create an examination standard that respects good-faith efforts to comply and does not expect perfection. “The goal of the Bureau’s supervision should be to ensure that companies have appropriate compliance risk management systems as opposed to the enormous expense of seeking perfect compliance,” MBA said. “The Bureau should not place institutions with very good, but not perfect compliance, under the threat of enforcement. An error rate slightly below perfection does not mean that the institution has engaged in a pattern or practice of non-compliance. Where humans are involved in a process, mistakes happen. Each consumer’s situation is different. No set of procedures can cover every scenario that might be thrown at a mortgage originator or servicer.”

–The Bureau should emphasize greater reliance on guidance over enforcement to improve the examination process. “MBA strongly recommends that the Bureau end the practice of regulation by enforcement,” the letter said. “Ending this practice will directly benefit examiners and institutions, as both will be able to follow the same, clear, set of rules. Where institutions have clear rules and guidance before an examination, the parties should be able to agree in principle to the institution’s legal and regulatory requirements. Examiners could then focus on reviewing the institution’s documentation and practices to assess whether the institution is following those agreed-upon requirements.”

–The Bureau should develop a truly risk-based examination process to relieve the burden on smaller independent mortgage banks that do not present risk characteristics warranting a supervisory exam. “A truly risk-based supervision program would reduce the regulatory burden for institutions with lower risk profiles,” MBA said. “It would also provide for a more efficient deployment of Bureau resources, thereby reducing the burden of the taxpayer. Unfortunately, despite these and other obvious benefits, the Bureau has not truly tailored its examination process to reflect a risk-based approach.”

Taken as a whole, MBA said, “the recommendations included in this letter will result in a risk-based examination program that ensures supervisory resources of the Bureau, as well as those of mortgage lenders and servicers, are deployed in an efficient and useful manner.”