An “Advisory Opinion” is a legal opinion issued to help clarify rules and regulatory decisions made by certain government agencies. When issued by a court, an advisory opinion is a way for a potential litigant to assess the legality of its situation before a case or controversy arises. When issued by another government agency, an advisory opinion is created in response to a specific inquiry from a party that is or may be subject to agency regulation. Agency issued Advisory Opinions may also provide meaningful advice on the application of agency rules and regulations to all parties regulated by the issuing agency; however, an agency issued advisory opinion considers only the specific facts and circumstances that surround the requesting party's business. For these reasons, advisory opinions are binding and may legally be relied upon only by the requestor. This said, the subsequent review of advisory opinions by businesses that are similarly situated to requestors may help the reviewing businesses avoid costly business decisions, regulatory violations and liabilities
The following Advisory Opinions have been created by combining current events in the mortgage industry, client questions and attorney responses. They are sometimes purposely general and sometimes state specific. It is hoped that they will provide you and your business with timely guidance and improve the flow of information across the mortgage investment industry.
Advisory Opinion Topic: CFPB’s expansion of “Service Providers” in the mortgage industry
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) established the Consumer Financial Protection Bureau (CFPB). The CFPB shares supervisory authority over banks with the Office of the Comptroller of the Currency and has supervisory authority over all nonbank covered persons offering or providing origination, brokerage, or servicing of residential mortgage loans secured by real estate, and related mortgage loan modification or foreclosure relief services.
The CFPB regulates businesses that offer, purchase, manage, modify and sell consumer financial products and services. Prior to the CFBP, consumer financial products and services were limited to mortgages, student loans, auto loans and personal loans. To this list the CFPB has added loan servicing, deposit services, custodian activities, first party and third party debt collection, extensions of credit, deferred payment of debt, brokerage of leases, real estate settlement services, appraisal services, prepaid debit cards, check cashing services, credit reporting services, financial advisory services, deposit taking activities, law firms conducting mortgage related services and activities in which a company is “otherwise acting as a custodian of funds or any financial instrument.”
In April of 2012 the CFPB released a Bulletin announcing its intent to hold financial institutions and their service providers accountable for compliance with consumer protection laws. The Bulletin requires that banks and nonbanks that contract with service providers ensure that such arrangements do not present unwarranted risks for consumers. Specifically, the CFPB expects that financial institutions do all of the following:
• Conduct thorough due diligence to verify that the service provider understands and is capable of complying with the law;
• Request and review the service provider’s policies, procedures, internal controls, and training materials to ensure that the service provider conducts appropriate training and oversight of employees or agents that have consumer contact or compliance responsibilities;
• Include language in its contracts with the service provider that describe clear expectations about compliance, as well as appropriate and enforceable consequences for violating any compliance-related responsibilities;
• Establish internal controls and on-going monitoring to determine whether the service provider is complying with the law; and
• Take prompt action to address fully any problems identified through the monitoring process.
The CFPB requires verification that each service provider is operationally compliant with consumer laws and its regulations. Advisory Opinion’s vendor assessment and management services are designed to help clients develop and implement CFPB compliant policies, procedures and practices.
What do Banks, Investors and Their Service Providers need to know about the CFPB?
• Whether you are a bank, a mortgagee, an assignee or a service provider, the CFPB and other regulators now care about your vendor relationships, expect you to actively manage your service providers and sub-providers, and to take financial and reputational responsibility for their compliance (past, present and future) with consumer laws.
• If your company participates in debt collection, owns servicing rights, enters into loan modifications, allows deferred payments from borrowers or has accepted a deed in lieu of foreclosure or other litigation, you may also be subject to CFPB regulation as a service provider.
Advisory Opinion Topic: Service Provider Compliance with Servicer Checklists
Advisory Opinion Topic: Modification and foreclosure of mortgage loans post-maturity (GA vs NC)
Advisory Opinion Topic: “Illegal descriptions”
Advisory Opinion Topic: What you should do when the borrower deeds the property to an LLC
Advisory Opinion Topic: Texas Home Equity Loans vs. HELOCs