There’s a new enforcement playbook for mortgage lenders

As employees of the Consumer Financial Protection Bureau (CFPB) sit in home offices awaiting news of their fate, the enforcement landscape has already shifted to state regulators. And if Craig Ungaro’s experience is any indication, the dynamic will pose a very different challenge for independent mortgage banks.

“There are some states very focused on unfair and deceptive practices, a couple other RESPA-focused. Not many are fixated on the LO compensation rule, although every one of them do want to know about your policies,” Ungaro, the veteran chief operating officer of AnnieMac Home Mortgage, said. “It really does vary state by state, but I have not seen the states all start to focus on one thing—there isn’t uniformity, not on our experience, at least.” 

The company recently dealt with an issue related to appraisal independence. There was confusion about whether AnnieMac could use an internal appraisal panel or an external appraisal valuation company. 

“It went back and forth on the interpretation of the FAQs related to appraisal independence,” Ungaro said. “That was one example. We’ve also had RESPA discussions, but it’s more of a dialogue during audits, not typically a penalty situation.” 

In a recent memo, the CFPB announced it would reduce the overall number of supervisory exams by about 50% and direct 30% of its supervisory activity toward non-depository financial services providers, down from 60% during the prior administration. 

For IMBs, this signals increased state scrutiny in areas such as loan fees, loan officer licensing and compensation and community investment, industry attorneys and executives told HousingWire. 

States gearing up 

Enforcement and regulatory efforts are expected from both mortgage regulators and state attorneys general. However, as attorneys general are elected officials, enforcement priorities will vary based on local political dynamics.

“We’ve seen some recent actions by state attorneys general in the consumer financial space, but these are all related to investigations that have been ongoing for a while,” said Kris Kully, partner at Mayer Brown.

One example: in Massachusetts, Attorney General Andrea Joy Campbell filed a lawsuit in February against Hometap Equity Partners, LLC and HomeTap Management Holdings, LLC, alleging violations of the state’s mortgage and foreclosure prevention laws—including charging unlawfully high interest and making loans without proper underwriting. The company responded by affirming its belief in the integrity of its products.

In Ohio—where the first CFPB director, Richard Cordray, once served as attorney general—top U.S. mortgage lender United Wholesale Mortgage (UWM) was sued in April by Attorney General Dave Yost, who claims UWM conspired with mortgage brokers to steer loans and deceive consumers. 

According to Kully, the Massachusetts case suggests the state is stepping into the consumer protection gap, while Ohio has precedent for what she calls “arguably aggressive enforcement and regulatory approaches.” 

Since state enforcement is often led by politically elected attorneys general, lenders may see more active consumer protection efforts in certain jurisdictions. Additionally, mortgage companies may be overseen by state banking agencies or specialized mortgage divisions.

In New York, Attorney General Letitia James announced her support in March for legislation expanding the state’s consumer protection statute to prohibit not only deceptive acts but also unfair and abusive business practices. Governor Kathy Hochul has also proposed regulations to curb unfair overdraft fees. Meanwhile, Gabriel O’Malley, former CFPB deputy enforcement director for policy and strategy, joined the New York Department of Financial Services as executive deputy superintendent of its consumer protection and financial enforcement division. 

In Michigan, Attorney General Dana Nessel has publicly backed enforcement of the Michigan Consumer Protection Act (MCPA). However, two separate court rulings in 1999 and 2007 limited the MCPA’s applicability within regulated industries. As a result, Michigan has relied heavily on CFPB enforcement. Nessel was among nearly two dozen state AGs who filed amicus briefs warning of the consequences of dismantling the federal agency.

“Those are concrete moves that suggest that activity will be stepping up [at the state level],” said Richard Andreano, practice leader of Ballard Spahr‘s mortgage banking group. “We will likely see, particularly in blue states, attorney generals working together; it’s going to be a combination of the mortgage regulators and the attorney generals. Clients haven’t seen it yet, but they’re expecting it.” 

“Unconventional” interpretations

According to attorneys, states sometimes adopt unconventional—or even inaccurate—interpretations of federal law. Since there’s often no clear way to challenge those views, IMBs typically adjust their practices to comply.

Colgate Selden, a founding member of the CFPB and an attorney at SeldenLindeke LLP, said states have already started to “come up with their own rule interpretation.”

“Under the loan officer compensation rule, one state was trying to say overrides are prohibited – where the branch manager gets 20 basis points of every loan that’s originated out of the branch – which is pretty widespread in the industry,” Selden explains. “That could become the most costly thing for IMBs.” 

Kully noted that there has been state examination activity around LO compensation over the past decade. States assert the authority to impose their own requirements. Much of this has focused on disclosure requirements, but states could go further if the political will exists, she added. 

In another focus of state attention, fees are usually scrutinized, Andreano added. Examiners review the closing disclosures in loan files and ask lenders to provide invoices justifying every third-party fee. If an invoice can’t be produced, refunds are required. They may even ask lenders to review all loans in a given period and issue refunds if fees exceed invoice amounts. “That’s very common, and I expect it to continue,” he said.

Beyond enforcement, states are increasingly active on the regulatory front. Some have introduced Community Reinvestment Act (CRA)-like requirements for mortgage companies. CRA initiatives have emerged in New York, Massachusetts, and Illinois. Mortgage companies argue that, unlike banks, they don’t collect deposits and already serve their communities.

“They’re requiring IMBs to report on how they serve their communities, almost as if they were depository institutions,” Kully said. “We’ve also seen states move to regulate home equity investment contracts. So it’s not just enforcement—there’s a regulatory push too.”

AnnieMac’s Ungaro said that while enforcement may emerge at the state level, the company is “making sure all compensation records, marketing service agreements, and real estate partnerships are tight and clearly aligned with regulations.” 

Candice McNaught, senior vice president of business development and strategic initiatives at Planet Home Lending, hopes states will learn from one another and work toward aligning their policies.

“It’s especially challenging for loan officers licensed in multiple states to keep up with changing, state-specific rules. That’s where the difficulty lies,” McNaught said.