Yesterday we had plenty of CFPB updates, and let's continue with those. Remember that even though although your bank or mortgage operation is thought to be too small to be examined, the CFPB's actions echo through the residential lending industry. And although as time passes and more information comes out to clarify things, unfortunately there are still plenty of gray areas and using the interpretation of enforcement actions in determining policy. Is that any way to run an industry?

CFPB-watchers know it revised the chapters of its Supervision and Examination Manual specific to TILA and RESPA, incorporating the TILA/RESPA integrated disclosures (TRID) requirements that are set to take effect on August 1. These chapters replace versions of the TILA and RESPA procedures released in late 2013. The TILA and RESPA chapters each contain two parts:  a narrative portion outlining the substantive requirements and restrictions of the law and its implementing regulation, and a detailed examination checklist.  While neither portion of the new TILA and RESPA chapters sheds much light on the CFPB's supervisory priorities with respect to early TRID rule exams, the narrative portion of the new TILA chapter does provide a good high-level summary of the rule, which aggregates the primary text with the relevant commentary.  (Because the TRID rule installed its disclosure, timing, and other requirements in TILA's Regulation Z, the new REPSA chapter merely cross-references the narrative portion of the new TILA chapter.)

In its "Winter 2015 Supervisory Highlights," which covers supervision work generally completed between July and December 2014, the CFPB highlights legal violations resolved using non-public supervisory actions involving debt collection, consumer reporting, overdraft practices, mortgage origination, and fair lending.

The information on mortgage origination is relevant. "In one or more examinations," CFPB examiners found that branch managers, who were loan originators and owners of related marketing services entities, were illegally receiving compensation based on the terms of loans they were originating. According to the report, examiners "found instances of improperly allocated expenses on branch income statements which resulted in marketing services entities receiving income based on the profitability of retail loans originated by branch managers. Consequently, branch managers, as owners of the marketing services entities, received compensation based on the terms of transactions originated by the branch managers themselves." CFPB examiners also found Regulation X and Z violations "at one or more institutions" involving improper use of lender credit absent changed circumstances and failure to provide timely Good Faith Estimates. They also found "in one or more institutions" where "social media advertising was not subject to monitoring or compliance audit" that loan originators were allowed to create their own advertisements that included "triggering terms" (such as the length of payment, amount of payments, numbers of payments, and finance charges) without providing the additional disclosures required by Regulation Z.

According to information posted on the CFPB's web site, Bureau examiners found that some loan originators illegally received compensation based on the terms of the loan. Examiners also found that at some loan originators the amounts disclosed on the HUD-1 form improperly exceeded those disclosed on the Good Faith Estimate. Some loan originators advertised the length of payment, amount of payments, numbers of payments, and finance charges without providing the required disclosures. And, the Bureau found weaknesses in compliance management systems that played a significant role in the identified violations.

With regard to fair lending violations, Bureau examiners found that one or more institutions rejected mortgage applications from consumers because they relied on public assistance income, such as Social Security or retirement benefits, in order to repay the loan. Marketing materials contained written statements regarding the prohibition on non-employment sources of income, and discouraged applicants who received public assistance from applying for credit. This violates the Equal Credit Opportunity Act. CFPB examiners directed that remediation be made to harmed applicants.

Law firm Ballard Spahr reminded us that, "Effective March 25 the sale of condominium units are no longer subject to the registration requirements of the Interstate Land Sales Full Disclosure Act (ILSA) under a new exemption. This new exemption applies only to the sale of condominium units on and after March 25, 2015, but also will include condominium units within projects currently registered with the CFPB that are offered for sale on and after March 25. (Dodd-Frank gave the CFPB rulemaking and other authority under ILSA.) The new exemption, however, is not a complete exemption from ILSA. Unless another full exemption applies, the sale of condominium units remains subject to the law's antifraud provisions.  For more on the sales exemption and how ILSA's antifraud provisions may continue to apply, see our legal alert."

A significant public comment period ended March 30^th. Plenty of lenders lend money in rural areas, and yes, the CFPB's trend seems to be suggesting that smaller financial institutions will have more ability to find rural grace and harmony in mortgage underwriting with some proposed rule changes. These changes are designed to facilitate responsible lending particularly in rural and underserved areas. CFPB Director Cordray announced the new rules, saying the agency aims to facilitate lending by giving more leeway to small financial entities through a number of strategies including expanding the definition of rural areas.

These Ability-to-Repay rules are the same ones that created the category of Qualified Mortgages (QM), but now they are being relaxed for rural and underserved areas. The idea is to allow banks the freedom to originate QM with balloon payments for example. Previously, any borrower whose debt-to-income ratio exceeded 43% was considered Qualified regardless of location and therefore prohibited from having loan features considered to be high risk. While the intentions were valid, the rules served to restrict lending in many underserved areas. In addition to the loan features designed to give more flexibility to borrowers and banks, the definition of rural areas deserving special treatment is being expanded to include all census blocks that are not in an urban area as defined by the Census Bureau.

The definition of a small creditor has also expanded. The old rule limited loan origination to 500 first lien mortgages after which, banks fell out of the small lender category. The limit may increase to 2,000 loans, although the overall size of the financial institution remains limited to $2B. I hope that plenty of folks commented by the deadline at the end of March.

BlackRock, JPMorgan Chase and other firms have been raising concerns about the role of clearinghouses, saying they could contribute to a global financial crisis. Federal Reserve Governor Daniel Tarullo is discussing the risks with the industry, according to sources. "You've concentrated the point of failure," said Thomas Hoenig, vice chairman of the Federal Deposit Insurance Corp.

And Housingwire reported a story that has been well known in capital markets circles for several months: that loans from certain lenders are gaining a reputation for paying off early, and pools with loans from those investors in them may see worse prices. "According to a Deutsche Bank report, several servicers, including Quicken Loans, Flagstar Bank, and Provident Lending prepaid faster than the rest of market for most of 2014...A new segment of lenders and servicers that specialize in quicker prepayments is costing the To-Be-Announced mortgage bond market several hundred million of dollars a year..." But those lenders aren't alone. "...the share of lenders and servicers that are delivering faster prepayments is increasing, and that creates a whole new set of problems for TBA investors. The rise of a new set of lenders and servicers in agency MBS has brought a new issue to the TBA pass-through market: prepayment speeds well above the market average and prices that have started to reflect it...Some investors have tried to avoid one servicer or another in their TBA flows, but the growing share of faster players makes that strategy untenable for most portfolios...TBA prices consequently have to reflect the new risk. That looks like it is already costing the MBS market several hundred million dollars a year."

While we're on the MBS market, Tuesday we ended the day, price-wise, about where we began after a smattering of news that moved things at 8:30AM EDT but did little else throughout the day. But today is a new day. We've already seen the European Central Bank leave its rates unchanged, and had the U.S.'s MBA's application index. (Overall apps fell 2.3% last week although purchase applications were up almost 7%. Compared to a year ago, the unadjusted MBA index shows purchase applications up 12% and refinances up nearly 47% - so keep things in perspective!)

We've also had the April New York Fed Empire index (-1.19) and later will have March's Industrial Production/Capacity Utilization results and the NAHB April housing reading (53 last). The Fed offers up its Beige Book at 2PM EDT. We closed the 10-yr Tuesday at 1.90% and this morning it, and agency MBS prices, are unchanged from Tuesday evening.

"If the NSA and IRS teamed up, with that kind of information flow I wouldn't have to do my taxes." Let's not forget that last year the top 20% of U.S citizens, income-wise, earned 51% of all income and yet paid 84% of income taxes. Yes, it is April 15^th already - time flies.  How about some tax-related tidbits?

"April is always a difficult month for Americans - even if your ship comes in, the IRS is right there to help you unload it."

"Today is the day to mail in your tax returns, which means last night was the night to start making fake receipts." Jimmy Kimmel

"Using the tax laws to stimulate the economy does create a lot of jobs for tax accountants and tax lawyers."

"What's the definition of an accountant? Someone who solves a financial problem you didn't know you had in a way you don't understand."

Jobs and Announcements

On the jobs front, HomeStreet Bank is one of the largest community banks in the Pacific Northwest, with mortgage operations in Washington, Oregon, Idaho, Arizona, California and Hawaii. "Since we began in 1921, we've stayed focused on what we believe is most important: building long-term relationships with our customers and providing ongoing support to our communities. We are seeking to hire a Customer Service Center Production Manager to manage overall sales activities and staff for the Customer Service Center as well as to originate single family loans in the Seattle area. Experience in a mortgage lending call center environment and/or experience with consumer direct lending is a plus. HomeStreet Bank offers a competitive compensation and benefits package which includes comprehensive health care coverage and an employee matching 401(k) plan. HomeStreet Bank is an Equal Opportunity/Affirmative Action Employer. Minorities, females, protected veterans and individuals with disabilities are encouraged to apply. Please use the following link to apply through our career website."

Down the Pacific coast on the Ops side, East West Bancorp is a publicly owned company with over $28.7 billion in assets and is traded on the Nasdaq Global Select Market under the symbol "EWBC". The Company's wholly owned subsidiary, East West Bank, is one of the largest independent banks headquartered in California. "We are one of the 30 largest public banks in the United States ranked by market capitalization and was named in the top 10 of the '100 Best Banks in America' by Forbes for four consecutive years from 2010 to 2013. As the premier 'financial bridge' between East and West, East West Bank is one of only a few U.S.-based banks with a full service banking license in China, offering unparalleled infrastructure and expertise to satisfy business and banking needs between the U.S. and Greater China. We are currently expanding our Mortgage Department to support our Fannie Mae/Freddie Mac mortgage portfolio. We are seeking qualified and experienced candidates in the Greater Los Angeles area for documentation, funding & closing, loan processing, loan servicing, quality control, underwriter, QC managers, etc. Interested parties should confidentially reach out to Christine Huynh.

Inland but also on the Ops side, MegaStar Financial Corp., a FNMA and GNMA approved lender headquartered in Denver, Colorado is seeking Part-Time Quality Control & Compliance analysts and 203k Loan Processors. "Our well established, financially strong 15 year old company has branches from coast to coast and lends in 23 states.  Additionally, our advanced technological systems allow you maximum efficiency in our paperless workflow environment. If you have at least five years of experience in Quality Control & Compliance or have processing experience with 203k provisions of sales contracts, plan reviewer and appraiser responsibilities, we would like to talk to you about joining our strong progressive team." Both positions would work remotely. Please forward your confidential resume to Meagan Pieper.

And a quick congratulations to David Battany. Mary Ann McGarry, president of Guild Mortgage, said "We are excited that David Battany has decided to join us at Guild as EVP Capital Markets, a new position. David's long experience with strategic product development, with trading and hedging, combined with his intelligence, thoughtful approach to strategy, and strong ethics all make him right for Guild."