CFPB Mortgage
Examination Procedures Origination
CFPB January 2014 Procedures 1
Mortgage Origination
These Mortgage Origination Examination
Procedures (Procedures) consist of modules
covering the various elements of the mortgage
origination process; each module identifies specific
matters for review. Examiners will use the
Procedures in examinations of mortgage brokers and mortgage lenders. Before using the
Procedures, examiners should complete a risk assessment and examination scope memorandum
in accordance with general CFPB procedures. Depending on the scope, and in conjunction with
the compliance management system review, including consumer complaint review, each
examination will cover one or more of the following modules.
Module 1 Company Business Model
Module 2 Advertising and Marketing
Module 3 Loan Disclosures and Terms
Module 4 Underwriting, Appraisals, and Loan Originators
Module 5 Closing
Module 6 Fair Lending
Module 7 Privacy
Module 8 Examiner Conclusions and Wrap-Up
Exam Date:
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Exam ID No.
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Prepared By:
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Reviewer:
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Docket #:
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Entity Name:
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Examination Objectives
1. To assess the quality of a supervised entity’s compliance management systems in its
mortgage origination business.
2. To identify acts or practices that materially increase the risk of violations of federal
consumer financial law, and associated harm to consumers, in connection with mortgage
origination.
3. To gather facts that help determine whether a supervised entity engages in acts or practices
that are likely to violate federal consumer financial law in connection with mortgage
origination.
4. To determine, in accordance with CFPB internal consultation requirements, whether a
violation of a federal consumer financial law has occurred and whether further supervisory
or enforcement actions are appropriate.
Background
This section of the Procedures provides background on the mortgage business and the federal
consumer financial law requirements that apply.
A. Mortgage Types
Residential mortgage loans offer a variety of features to meet differing consumer needs. The
length of a mortgage is usually 30 years or less, but can vary from one year to 50 years. Interest
rates can be fixed or adjustable. Some adjustable rate mortgage loans (ARMs) are “hybrid,”
having a fixed interest rate for a certain period of time and then changing to an adjustable rate.
Hybrid ARMs often are identified using two numbers, such as 5/1. The first number identifies
the number of years the interest rate will be fixed, and the second number identifies the
frequency with which the interest rate will adjust after the fixed interest rate period ends. A “5/1”
loan would have a fixed interest rate for five years, and then the interest rate would adjust one
time per year. Alternatively, the second number denotes the number of years the loan will have
an adjustable rate: in a “2/28 loan,” the loan would have a fixed interest rate for two years, and
then the interest rate would adjust periodically over the subsequent 28 years.
Most, but not all, loans are “fully amortizing,” meaning that the borrower pays down part of the
principal and the full amount of interest that is due each month so that at the end of the loan term,
the principal is paid off. Other loans might not amortize fully over their terms. One type is a
balloon payment mortgage where payments may be made for a period of time, with the remaining
balance due in one lump sum, or “balloon.” Another type is an “interest-only” (I-O) loan, in which
only the interest is paid for a certain time period at the beginning of the loan; after the initial period,
the borrower either makes increased principal and interest payments to amortize the principal over
the remaining term, or pays a large “balloon” payment, usually at the end of the term. These loans
can be fixed- or adjustable-rate. In addition, for a period of time, payment option adjustable rate
mortgages (Pay Option ARMs, or Option Payment ARMs) were offered to many consumers. These
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loans provided borrowers with several payment choices each month during the loan’s introductory
period, including a minimum payment that was less than the interest accruing and due on the
principal each month. If the borrower chose the minimum payment option, the accrued but unpaid
interest was added to the loan balance, so the principal amount actually increased. This outcome is
known as negative amortization. Eventually the loan is recast after the introductory period
(typically five years), and the borrower’s fully amortizing payments typically increase in order to
repay the increased principal and the interest rate. Balloon loans, interest-only loans and Pay
Option ARMs often are called “non-traditional loans.”
Mortgage originators offer various mortgage products that may be classified in different ways,
such as:
1. Purpose
Mortgages often are categorized by whether they are used to purchase real property (called
purchase money loans) or to refinance an existing loan (refinances). Refinance loans are
sometimes “cash out” loans, made for more than the existing loan’s outstanding principal
balance. The borrower receives the cash borrowed in excess of the amount necessary to pay off
the existing loan. Construction loans, bridge loans, temporary loans, or combined construction
to take-out loans are examples of short- term loans for other purposes. Another category is a
“home equity” loan, in which the borrower can receive funds to use for any purpose by
borrowing against home equity. Equity is the amount the property is currently worth, minus the
outstanding principal balance of any other mortgage the consumer has. Reverse mortgages are
available to older homeowners to borrow against the equity they have in their homes. (See
below for fuller discussion of reverse mortgages.)
2. Lien position
Lien position determines which mortgage loan receives priority over other loans in the event
of a foreclosure or bankruptcy. A mortgage that is in a first lien position, sometimes called a
senior loan, has priority for payment over a mortgage in a junior lien position if there is a
foreclosure or bankruptcy proceeding. The proceeds from the foreclosure sale are divided
according to lien position. A “simultaneous second lien” is a second lien originated at the
same time as a first lien mortgage, which may allow a consumer to borrow an amount that is
100% of the value of the home. Sometimes lenders have allowed consumers to borrow an
amount greater than the value of the property, although this practice is not common in today’s
mortgage marketplace. Payments necessary for a simultaneous second lien will have an
impact on the borrower’s ability to repay the mortgage.
3. Closed-end or open-end
Most purchase money and refinance mortgages are considered “closed-end credit” under the
Truth in Lending Act, generally consisting of installment financing where the amount
borrowed and repayment schedule are set at the transaction’s outset. Closed-end mortgages
can take first or junior lien positions.
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In contrast, home equity lines of credit (HELOCs) are “open-end credit,” extended to a
consumer under a plan in which:
the creditor reasonably contemplates repeated transactions;
the credit line generally is made available to the consumer to the extent that any
unpaid balance is repaid; and
the creditor may impose a finance charge from time to time on an outstanding unpaid
balance.
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During the time while borrowers are able to draw down funds, they usually must pay a
monthly interest charge on the outstanding balance. If the borrower owes funds after a fixed
period of years, called the “draw period,” the consumer enters the “repayment period” and
must pay off the outstanding balance in regular periodic payments of principal and interest.
The repayment period is also a fixed term of years. HELOCs are often, but not always, in a
junior lien position.
Depending upon the lender and the HELOC agreement, the consumer may have to pay back
the entire outstanding balance as soon as the draw period ends. In these cases, there is no
repayment period, just a balloon payment in the amount of the outstanding balance when the
draw period ends. HELOCs usually have an adjustable interest rate that changes over time, so
the consumer’s payments may not be the same from month to month.
4. Reverse Mortgages
A reverse mortgage is a special type of loan that allows homeowners 62 and older to borrow
against the equity in their homes. It is called “reverse” because the consumer receives
payments from the lender, without making loan payments to the lender. In exchange for
borrowing the money and receiving these payments, the borrower grants a lien interest in the
home in the favor of the lender. The lender charges interest each month and is paid off when
the homeowner (which includes the spouse of the homeowner) leaves the home permanently.
In taking out a reverse mortgage loan, a consumer can receive a lump-sum payment, regular
monthly payments, or a line of credit. The homeowner does not have to pay back the loan as
long as he continues to live in the home, maintain it, and stay current on expenses like
homeowner’s insurance and property taxes. If the homeowner moves, passes away, or goes
into assisted living or a nursing home on a long-term basis, the loan has to be paid off,
usually by selling the house.
The vast majority of reverse mortgages extended today are through the Home Equity
Conversion Mortgage (HECM) program, which is the reverse mortgage product insured by
the Federal Housing Administration.
1
12 CFR 1026.2(a)(20).
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Because of the unique features of reverse mortgages, examiners should follow the procedures
that are specific to reverse mortgages and be aware that other examination procedures may
not apply to reverse mortgages.
5. Ability to Repay and Qualified Mortgages
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act)
amended the Truth in Lending Act (TILA) to require that for almost all closed-end
transactions secured by a dwelling, creditors make a reasonable, good faith determination
that the consumer can repay the loan. The requirement applies generally to closed-end loans
secured by a dwelling, including manufactured housing, conventional and governmental
loans, prime and subprime (see below). Lenders can choose to meet that requirement by
making qualified mortgages (QMs). As a result, it is sometimes said that there are two
categories of mortgages: ability-to-repay (ATR) mortgages (which must comply with the
general ability-to-repay requirements directly), and QMs (which are presumed to comply
with the ability-to-repay requirements).
The ATR rule does not apply to HELOCs, timeshares, reverse mortgages, temporary or
bridge loans, or loans to finance the initial construction of a dwelling. It also does not apply
to certain types of creditors making loans under programs for low- and middle- income
borrowers, such as housing finance agencies, Community Development Financial Institutions
and certain nonprofit organizations.
6. Conventional Lending
Conventional lending generally refers to prime standardized mortgage products that are not
government-backed loans (discussed below). Conventional loans can be “conforming” or
“non-conforming.” Conventional conforming mortgages meet the underwriting and
documentation standards set by the government sponsored enterprises (GSEs): Federal
National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation
(Freddie Mac). Loans that are eligible for purchase by the GSEs have QM status under a
temporary provision that expires January 10, 2021 (or whenever the GSEs exit
conservatorship, whichever is earlier). Non-conforming mortgages may have, among other
attributes, principal balances that exceed the loan limits set by the GSEs.
7. Subprime and Alt-A Lending
Subprime mortgages carry interest rates higher than the rates of prime mortgages. These
loans might also be called “higher priced” or “high cost” mortgages, depending on how much
the interest rate exceeds the average prime offer rate. A subprime mortgage generally has a
higher cost and is offered to prospective borrowers with impaired credit records – those
borrowers whose credit rating is “subprime.” The higher interest rate is intended to
compensate the lender for accepting the greater risk in lending to such borrowers.
Traditionally, “subprime” has been the riskiest lending category, followed by “Alt-A,” or
Alternative-A, and then A-paper, or “prime,” as the least risky. Alt-A borrowers may have
prime credit, but some aspect of the loan makes it riskier.
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8. Governmental Support
Government-backed lending includes mortgage lending that is insured by the Federal
Housing Administration (FHA) or guaranteed by the U.S. Department of Veteran Affairs
(VA), among other agencies. Government-supported loans generally offer terms similar to
conventional loans, but these loans allow additional benefits such as smaller down payments,
higher loan-to-value ratios (amount of loan in proportion to the appraised value of the home),
or lower interest rates. FHA loans also are available to consumers with lower credit scores
who otherwise meet FHA underwriting standards. Generally, consumers that qualify for these
loans must pay additional insurance or guarantee fees. FHA loans have QM status under
regulations issued by the Department of Housing and Urban Development.
2
Other
government-backed loans that are eligible for guarantee or insurance can have QM status
under the temporary provision that expires January 10, 2021.
B. Business of Mortgage Origination
Mortgage lending generally occurs through retail, wholesale, or correspondent lending channels.
Sometimes there are no clear lines of demarcation among the channels, as a participant may
operate in more than one of them. Each channel is described in more detail below.
1. Retail Channel
In the retail channel, the lender conducts the origination process directly with the consumer,
either in person or through an online application. An employee of the lender, generally called
a loan officer, solicits the loan, takes the application, and tracks the application through to the
closing process.
2. Wholesale Channel − Mortgage Brokers
In the wholesale channel, a mortgage broker solicits the loan and takes the application from
the consumer. Mortgage brokers are independent contractors and are not employees of the
lender. The broker establishes relationships with multiple mortgage lenders and offers
different mortgage loan products from these lenders. Mortgage brokers generally do not
make underwriting decisions and do not actually fund the loans. In this channel, it is the
mortgage lender that makes the underwriting decision, based on information provided by the
broker. These mortgage lenders, called wholesale lenders, often are divisions of larger
depository institutions. Generally, a wholesale lender requires a broker to enter into a
wholesale lending agreement before the broker may originate loans on the lender’s behalf.
In a variant of standard wholesale mortgage originations, some brokers “table fund” loans. In a
table-funded transaction, the mortgage broker closes the loan as the lender of record and then
2
HUD issued final rules on qualified mortgages. See 78 Fed.Reg. 75215 (Dec. 11, 2013).
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assigns the loan to a purchaser at or immediately after the closing. The loan purchaser provides
the funding for the loan, but the documents name the mortgage broker as the creditor.
3. Correspondent Channel – Small Mortgage Lenders
Correspondent lending, a hybrid of retail channel and wholesale channel lending, often
features smaller institutions, acting as correspondent lenders. Correspondent lenders are the
primary interface with consumers, conducting all steps in the mortgage origination process
and funding their own loans. They generally originate and deliver loans pursuant to
underwriting standards set by other lenders or investors, usually larger depository lenders,
upon advance commitment on price. In addition to soliciting consumers directly,
correspondent lenders may receive applications and mortgage documents from mortgage
brokers and subsequently speak directly with the consumer. Generally, a wholesale lender
requires a correspondent to enter into a written correspondent lending agreement before the
correspondent may originate loans for sale to the wholesale lender.
C. Federal Consumer Financial Law Requirements
Mortgage originators must comply with the following federal consumer financial laws:
The Real Estate Settlement Procedures Act (RESPA) and its implementing regulation,
Regulation X, require lenders or mortgage brokers, with respect to mortgage
origination, to provide borrowers with disclosures regarding the nature and costs of
the real estate settlement process. RESPA also protects borrowers against certain
abusive practices, such as fees or kickbacks for the referral of settlement service
business, and places requirements on the administration of, and limitations upon
required deposits into, escrow accounts. The main disclosure requirements applicable
at or before origination include:
o
Good Faith Estimate of settlement costs within three business days after
application;
o
Provision of a written list of homeownership counseling organizations that
provide relevant counseling services in the loan applicant’s location;
o
Disclosure of affiliated business arrangements;
o
An initial notice explaining whether the servicing rights to the loan may be
transferred; and
o
A listing of the final settlement charges of borrowers and sellers on a prescribed
settlement statement (HUD-1 or HUD-1A) that is provided at or before closing
(and, at the borrower’s request and whether it is complete or not, must be
available for inspection one business day before closing).
The Truth in Lending Act (TILA) and its implementing regulation, Regulation Z,
provide a uniform system for creditors’ disclosures of credit terms. In addition, they:
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o
Impose certain advertising rules;
o
Require written disclosure and re-disclosure of certain loan terms;
o
Require that creditors make a good faith determination of the borrower’s ability
to repay and verify information they relied on to do so;
o
Provide consumers with rescission rights in certain circumstances;
o
Provide consumers with legal remedies if the creditor fails to consider ability to
repay;
o
Delineate and prohibit certain unfair and deceptive mortgage lending practices;
o
Restrict certain mortgage loan originator compensation;
o
Require certain mortgage loan originator qualifications;
o
Require loan originator identification on certain loan documents;
o
Require depository institutions to have policies and procedures to ensure and
monitor compliance with certain requirements;
o
Prohibit certain terms and practices in the origination of “higher-priced” loans
and prohibit additional terms and practices on a subset of these loans known as
“high cost loans;”
o
Require escrow accounts for certain higher- priced mortgage loans;
o
Prohibit certain appraisal practices; and
o
Prohibit mandatory arbitration and financing credit insurance.
The Equal Credit Opportunity Act (ECOA), and its implementing regulation,
Regulation B, prohibit creditors from discriminating against any applicant with
respect to any aspect of a credit transaction:
o
On the basis of race, color, religion, national origin, sex, marital status, or age
(provided the applicant has the capacity to contract);
o
Because all or part of the applicant’s income derives from any public assistance
program; or
o
Because the applicant has in good faith exercised any right under the Consumer
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Credit Protection Act.
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Creditors also are prohibited from making any oral or written statement, in
advertising or otherwise, to applicants or prospective applicants that would
discourage on a prohibited basis a reasonable person from making or pursuing an
application.
In addition, ECOA and Regulation B require lenders to retain information related to
applications, existing accounts, and prescreened solicitations for a specified period of
time, and to provide adverse action notices and appraisal and other written valuations
to consumers, such as those generated by automated valuation models (AVMs) and
broker price opinions.
The Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act)
and its implementing regulations, Regulation G and Regulation H, establish
requirements for registration and, when applicable, standards for licensing of
individuals who are residential mortgage loan originators. The registration and
licensing requirements are administered, in part, through the Nationwide Mortgage
Licensing System and Registry (NMLSR). Each loan originator, unless exempt, must
register or be licensed through the NMLSR, obtain a unique identifier and provide it
to consumers in certain circumstances, and maintain registration.
The Home Mortgage Disclosure Act (HMDA) and its implementing regulation,
Regulation C, require mortgage lenders that meet certain threshold conditions to
collect, report to federal regulators, and disclose to the public certain data about
applications for, and originations and purchases of, home purchase loans, home
improvement loans, and refinancings for each calendar year. The data include
information about the loan or application (e.g., loan amount, loan purpose, action
taken), the applicant (e.g., sex, ethnicity and race), and the property (e.g., property
type and geographic information such as census tract, state and metropolitan
statistical area (MSA)).
The Gramm-Leach-Bliley Act (GLB), through its implementing regulation,
Regulation P, requires covered entities to provide privacy notices and limit
information sharing in particular ways.
The Fair Credit Reporting Act (FCRA) and its implementing regulation, Regulation V,
impose disclosure and other requirements on mortgage lenders that obtain
information from a consumer reporting agency to determine a consumer’s credit
3
The Consumer Credit Protection Act, 15 U.S.C. 1601 et seq., is the collection of federal statutes that protects consumers when
applying for or receiving credit. The Act includes statutes that have certain rights for consumers, such as dispute rights under the
Fair Credit Reporting Act. The ECOA prohibits discriminating against an applicant who has exercised a right, such as a dispute
right pursuant to one of the statutes outlined in the Act.
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worthiness. These include the disclosure of credit score information, disclosure of
adverse action, and disclosure of risk-based pricing.
Mortgage Acts and Practices – Advertising Rule (MAP Rule), Regulation N, issued
pursuant to the 2009 Omnibus Appropriations Act as clarified by the Credit Card
Accountability Responsibility and Disclosure Act of 2009, applies only to non-depository
mortgage lenders and state-chartered credit unions, as well as entities that market and
advertise mortgage products but are not mortgage lenders, such as mortgage brokers, real
estate brokers, advertising agencies, lead generators, and rate aggregators. The MAP Rule
sets forth specific deceptive acts and practices in the advertising of mortgage loan
products and prohibits misrepresentation in any commercial communication concerning
terms of mortgage loan products.
4
These laws historically have been implemented by regulations published by one or more of seven
federal agencies, including the Federal Trade Commission, the Department of Housing and
Urban Development, the Board of Governors of the Federal Reserve System, and other
prudential regulators. The Dodd-Frank Act generally transferred these agencies’ rulemaking
authority under those laws to the Bureau, which published implementing regulations under its
authority, effective beginning December 30, 2011. When examiners observe violations of
regulatory requirements, they should cite to the regulation that was in effect at the time the act
occurred.
To carry out the objectives set forth in the Examination Objectives section, the examination
process also will include assessing other risks to consumers generally prohibited by the Dodd-
Frank Act. These risks may include potentially unfair, deceptive, or abusive acts or practices
(UDAAPs) with respect to mortgage originators’ interactions with consumers.
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Please refer to CFPB’s examination procedures regarding UDAAPs for more information about
the legal standards and the CFPB’s approach to examining for UDAAPs.
The particular facts in a case are crucial to a determination of unfair, deceptive, or abusive acts or
practices. As set out in the Examination Objectives section, examiners should consult with
Headquarters to determine whether the applicable legal standards have been met before a
violation of any federal consumer financial law can be cited, including a UDAAP violation.
4
The MAP Rule became effective on August 19, 2011. Mortgage Acts and Practices – Advertising, 76 Fed. Reg. 43826 (July 22,
2011).
5
Sec. 1036 of the Dodd Frank Act (July 21, 2010).
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General Considerations
Completing the following examination modules will allow examiners to develop a thorough
understanding of mortgage brokers’ and lenders’ practices and operations. To complete the
modules, examiners should obtain and review, as applicable, each entity’s:
organizational charts and process flowcharts;
board minutes, annual reports, or the equivalent to the extent available;
relevant management reporting;
policies and procedures;
rate sheets;
loan applications, verification of information relied on in determining ability to repay;
loan account documentation, notes, disclosures, and all other contents of loan
underwriting and closing files;
operating checklists, worksheets, and review documents;
relevant computer program and system details;
wholesale and correspondent lending agreements, due diligence and monitoring
procedures, and lending procedures;
underwriting guidelines; compensation policies;
historical examination information;
audit and compliance reports; management’s responses to findings;
training programs and materials;
service provider contracts;
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advertisements; and
complaints.
6
CFPB issued a bulletin highlighting its expectation that supervised banks and nonbanks oversee their business relationships
with service providers in a manner that ensures compliance with federal consumer financial law. See CFPB Bulletin 2012-03,
Service Providers (April 13, 2012), http://files.consumerfinance.gov/f/201204_cfpb_bulletin_service-providers.pdf.
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Depending on the scope of the examination, examiners should perform transaction testing using
approved sampling procedures, which may require use of a judgmental or statistical sample.
Examiners also should conduct interviews with management and staff to determine whether they
understand and consistently follow the policies, procedures, and regulatory requirements
applicable to mortgage lending; manage change appropriately; and implement effective controls.
Examiners also should consider observing customer interactions and, if consumer complaints or
document review indicate potential concerns, interviewing customers.
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Examination Procedures
Module 1 – Company Business Model
Conduct initial interviews for all relevant departments.
1. Determine the type of mortgage origination channel(s) used by the entity. Is the entity:
Acting as a broker;
Acting as a correspondent;
Lending through a retail system;
Lending through a wholesale or correspondent system; or
Using a combination of these strategies?
2. Determine the funding source(s) that the entity uses.
3. Ascertain the product volume, mix, trends, and concentrations, including in any of the
branches.
4. Review the organizational chart and reporting structure for mortgage loan origination to
determine the reporting structure and responsibilities of key managers.
5. Determine whether the quality control (or audit, as applicable), underwriting, and appraisal
functions operate independently of the production function (sales unit).
6. Determine whether the entity has a program in place to make sure it verifies and considers
a borrower’s ability to repay the mortgage.
7. Determine whether the entity makes qualified mortgages (QMs) to fulfill its obligation to
consider ability to repay.
8. Review and list the types of products the entity offers. Determine whether the entity offers
hybrid ARMs, interest-only loans, Payment Option ARMs, simultaneous second liens, Alt-
A loans, or subprime loans. If the entity offers reverse mortgages, determine whether it
offers HECMs and, if so, what percentage of the reverse mortgages originated are HECMs.
9. Determine whether the entity has eliminated any contractual provisions for mandatory
arbitration, waiver of certain legal rights, or provisions for financing credit insurance
premiums.
10. Review the qualifications, experience levels, and training programs for originators,
processors, underwriters, closers, and the quality control (or audit, as applicable) staff, and
the depository’s required policies and procedures for assuring compliance with
requirements on loan originator qualifications.
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11. Review the entity’s policies and procedures for preventing prohibited payments to loan
originators, prohibited steering arrangements, and requirements for loan originator NMLSR
IDs on loan documents.
12. Determine whether the entity uses service providers in conducting its business, such as
mortgage brokers (if it is a lender), lead generators or affinity groups, business process
outsourcing, processors, underwriters, appraisers, or insurers.
13. Review compensation arrangements, including incentive programs for employees and
service providers.
14. Review the entity’s general compliance management system using the compliance
management review section of the CFPB examination manual and its fair lending
compliance management using Section A of the ECOA Examination Procedures if you
have not already done so.
15. Review entity’s policies and procedures for recording HMDA reportable transaction on a
Loan/Application Register within 30 calendar days after the end of each calendar quarter.
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Module 2 – Advertising and Marketing
This module applies to both mortgage brokers and mortgage lenders. Examiners should develop a
detailed understanding of the entity’s marketing program to determine whether its marketing
policies, procedures, and practices are consistent with the requirements of applicable laws and
regulations. First, examiners should evaluate the originator’s advertising materials and disclosures
across all media, including: print, television, radio, telephone solicitation scripts, and electronic
media including the Internet, email and text messages. If the entity engages in telemarketing,
examiners also should listen to a selection of the sales calls. Finally, examiners should determine
whether the entity employs or acts as a third-party lead generator, and should understand the extent
of any relationships that the entity has with affiliated or other service providers (i.e., as a broker or
agent) to advertise, offer, or provide loans or other products and services.
TILA, Regulation Z
1. Assess compliance with TILA, Advertising Provisions, for advertisements concerning open-
end accounts. Please refer to the TILA examination procedures, Advertising, regarding 12
CFR 1026.16, for more information.
2. Assess compliance with TILA, Advertising Provisions, for advertisements concerning
closed-end loans. Please refer to the TILA examination procedures, Advertising, regarding 12
CFR 1026.24, for more information.
RESPA, Regulation X
3. Determine whether the entity complies with the RESPA Section 8 prohibitions against giving
or accepting kickbacks for the referral of settlement service business and a split or portion of
unearned fees. Please refer to the examination procedures regarding RESPA, 12
CFR 1024.14, for more information.
ECOA, Regulation B
4. Assess compliance with ECOA’s prohibition against discrimination or discouragement on a
prohibited basis. Please refer to the examination procedures regarding ECOA / Regulation B,
12 CFR 1002.4, for more information. See Module 6 for more information on fair lending
examinations.
SAFE Act
5. For federal regulated depository institutions and certain of their subsidiaries, assess
compliance with the SAFE Act’s requirements to register in the NMLSR (and obtain a unique
identifier) and to maintain that registration. For examinations of those institutions, please
refer to the SAFE Act examination procedures for more information.
FCRA, Regulation V
6. Assess compliance with Fair Credit Reporting Act prescreening obligations. For more
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information please refer to the FCRA examination procedures on Prescreened Consumer
Reports and Opt-Out Notice – Sections 604(c) and 615(d); 15 U.S.C. 1681b(c) and 15 U.S.C.
1681m(d); and 12 CFR 1022.54, in Module 3 – Disclosures to Consumers and Miscellaneous
Requirements,
Other Risks to Consumers - General
7. Determine whether advertisements and promotional materials for mortgage loan products
contain material misrepresentations, expressly or by implication, of the following:
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a. the existence, nature, or amount of fees or other costs;
b. number, amount, or timing of payments, including whether the payment includes
amounts for monthly escrow payments for taxes and insurance;
c. credit qualifications for a particular product or program;
d. potential for default;
e. product type;
f. product effectiveness with respect to debt elimination;
g. nature of counseling services; or
h. the existence, nature, or amount of prepayment penalties.
8. Determine whether advertisements and promotional materials for mortgage loan products
contain misleading representations that a lender or broker is acting in a fiduciary capacity or
in the consumer’s best interest, if in fact, the lender or broker has no fiduciary duty.
9. Determine whether advertisements and promotional materials for mortgage loan products
clearly disclose all material limitations or conditions on the terms or availability of products
or services, such as:
a. special interest rates for a limited time period (teaser rates);
b. the expiration date for terms that apply only during an introductory period;
c. interest rate resets that could cause significant increases in payments;
d. material prerequisites for obtaining particular products, services, or benefits (e.g.,
discounts, refunds or rebates);
7
The MAP Rule, 12 CFR 1014.3, which applies to nonbanks and certain state-chartered credit unions, lists 19 examples of
specific prohibited claims, including the claims described in this item.
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e. non-amortizing or less-than-fully amortizing loan terms;
f. balloon payments; or
g. prepayment penalties.
10. Determine whether advertisements and promotional materials avoid using fine print, separate
statements, or inconspicuous disclosures to correct potentially misleading headlines.
11. If additional products or services are sold or offered in connection with the loan, such as
credit insurance products, home warranties, or annuities, determine whether advertisements
and promotional materials provide timely, clear, and understandable information about the
existence of costs, payment terms, penalties, or other terms and charges, the reasons for their
imposition, and the salesperson’s compensation from cross-sales.
12. Determine the target audience for each type of advertisement and product and whether the
entity designs advertisements, promotional materials, disclosures and scripts to be
comprehensible by the target audience.
13. Determine whether the entity maintains appropriate procedures for resolving complaints
about marketing practices.
Other Risks to Consumers – Non-traditional Mortgage Loans
14. Determine whether advertisements and promotional materials:
a. Provide information about the costs, terms, and features associated with non-
traditional mortgage loans, including information about payment shock, balloon
clauses, negative or less than full amortization, prepayment penalties, and the cost
of reduced documentation;
b. Provide timely, clear, and understandable information about the relative risks of
non-traditional mortgage products;
c. Clearly disclose key terms, including limitations and conditions that are important in
enabling the consumer to make an informed decision regarding whether the product
or service meets the consumer’s needs.
Other Risks to Consumers – Reverse Mortgages
15. Determine whether the entity offers or receives compensation from those offering other
financial products, like an annuity or long-term care insurance, to be paid for with the
proceeds of the reverse mortgage. If so, determine whether the entity provides timely, clear,
and understandable information about these products.
16. Determine whether the entity provides timely, clear, and understandable information about
the costs and relative risks of reverse mortgages.
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17. Determine whether the entity provides timely, clear, and understandable information about
the requirements to pay property taxes, insurance, utilities, maintenance, and other expenses
after obtaining a reverse mortgage.
18. Determine whether the entity provides timely, clear, and understandable information about
the circumstances under which the borrower may be required to pay the loan in full.
19. Determine whether the entity has adequate safeguards against improper marketing of reverse
mortgages to seniors who have medical or cognitive problems or in situations raising
concerns about undue influence by third parties.
Conduct of Employees and Service Providers
20. Determine whether the entity has developed appropriate training and monitoring policies and
procedures for employees and service providers that provide marketing, including:
a. monitoring outbound calls to consumers to ensure compliance with applicable law
and internal policies;
b. ensuring service provider compliance with legal obligations; and
c. regularly evaluating employee and service provider performance.
Refer to the Compliance Management Review - Compliance Program examination
procedures for more information.
8
8
CFPB issued a bulletin highlighting its expectation that supervised banks and nonbanks oversee their business relationships
with service providers in a manner that ensures compliance with Federal consumer financial law. See CFPB Bulletin 2012-03,
Service Providers (April 13, 2012), http://files.consumerfinance.gov/f/201204_cfpb_bulletin_service-providers.pdf.
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Module 3 – Loan Disclosures and Terms
When lenders take applications, evaluate applicants, and originate mortgage loans, they are
subject to disclosure and operational requirements. Examiners should identify acts, practices, and
materials that indicate potential violations of federal consumer financial laws.
Disclosures
1. Examiners should review financial institution policies, procedures, and systems to determine
whether the applicable disclosures listed below are scheduled and furnished when required.
2. Examiners should obtain a list of consumer accounts and select a sample for further review.
a. Consider weighting the sample so that more loans from branches with a larger
volume of complaints are reviewed.
b. Obtain complete loan files, which contain the disclosures required by federal
consumer financial laws and other legal documents, as well as underwriting
documents, rate sheets, and all documents provided to and by the consumer.
3. Review the sample of loan origination files to assess the adequacy and completeness of
required disclosures, as described below.
4. Determine whether the required disclosures were made as required and ensure the presence
and accuracy of the items below, as applicable.
5. If consumer complaints or document review indicate potential violations in the areas
discussed below, examiners also may conduct review of recorded telephone calls and/or
complaints, if available, and interviews of consumers from the sample and ask questions
relevant to each topic area below.
RESPA (Regulation X) - Disclosures
Under RESPA and its implementing regulation, Regulation X, the lender/creditor is responsible
for providing the Good Faith Estimate (GFE) and the Shopping for your Home Loan, Settlement
Cost Booklet (Settlement Cost Booklet) (see 12 CFR 1024.6). The regulations permit the
mortgage broker to provide the disclosures, but the lender must ascertain whether the GFE has
been provided.
6. During an examination of a mortgage broker, examiners should determine whether it has
agreed to provide the GFE and Booklet and if so, whether it is doing so.
7. For mortgage lenders, determine whether the lender complies with RESPA Settlement Cost
Booklet provisions. Please refer to the examination procedures regarding RESPA, 12 CFR
1024.6, for more information.
8. For mortgage lenders, determine whether the lender complies with RESPA GFE requirements.
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Please refer to the examination procedures regarding RESPA, 12 CFR 1024.7, for more
information.
9. For mortgage lenders, determine whether the lender complies with RESPA List of
Homeownership Counseling Organizations requirements. Please refer to the examination
procedures regarding RESPA, 12 CFR 1024.20, for more information.
10. For any person making a referral to an entity that is part of an affiliated business arrangement,
determine whether the entity complies with RESPA requirements for affiliated business
arrangements. Please refer to the examination procedures regarding RESPA, 12 CFR 1024.15,
for more information
11. For mortgage lenders, brokers, or dealers, determine whether the entity complies with
RESPA requirements for providing the notice stating whether the servicing of the loan may
be transferred. Please refer to the examination procedures regarding RESPA, 12 CFR
1024.33, for more information.
12. Review the final settlement statement (HUD-1 or HUD-1A), and assess compliance with
RESPA disclosure requirements and tolerance limits on settlement charges. Please refer to the
examination procedures regarding RESPA, 12 CFR 1024.7, for more information.
TILA (Regulation Z) - Disclosures
13. Assess compliance with TILA’s disclosure provisions, including appropriate disclosure of
amount financed, finance charge, annual percentage rate, and payment schedule or rate and
payment summary table (as applicable), as well as the right to rescind for non-purchase
money loans secured by a principal dwelling. Please refer to the regulation and examination
narrative and procedures regarding TILA, 12 CFR 1026.4, 1026.6, 1026.14, 1026.15 and
1026.40 (open-end accounts) and 1026.4, 1026.17, 1026.20, 1026.22 and 1026.23 (closed-
end accounts), for more information. Please refer to the following TILA examination
procedures:
General Procedures
Disclosure Forms
Closed-End Credit Disclosure Forms Review Procedures, 1026.4, 1026.17 –
1026.20 (closed-end accounts)
Open-End Credit Forms Review Procedures, Requirements for Home Equity Plans
– Section 1026.40
Account Opening Initial Disclosures – Section 1026.6, (open-end accounts)
Reverse Mortgage Forms Review Procedures (both open- and closed-end)
ECOA (Regulation B) - Disclosures
Adverse Action Notices
14. Review loan files to determine whether ECOA adverse action notices were provided when
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required. Please refer to the examination procedures regarding Regulation B, 12 CFR 1002.9,
for more information.
Right to Copies of Appraisals and Other Written Valuations
15. Review loan files to determine whether ECOA notices of the applicant’s right to receive a
copy of all written appraisals developed in connection with an application for credit to be
secured by a first lien on a dwelling were provided when required. Please refer to the
examination procedures regarding Regulation B, 12 CFR 1002.14(a), for more information.
FCRA (Regulation V) - Disclosures
16. Review the loan file to determine whether FCRA adverse action and risk-based pricing
notices were provided when required. Please refer to the examination procedures regarding
FCRA, 15 U.S.C. 1681m(a) and 12 CFR 1022.72, for more information.
17. Assess the entity complies with the requirements for disclosure of credit scores. Please refer
to the FCRA examination procedures regarding Disclosure of Credit Scores by Certain
Mortgage Lenders – Sections 609(g); 15 U.S.C. 1681g(g).
Homeowners Protection Act - Disclosures
18. Determine whether the entity provided a notice to the borrower of the borrower’s ability to
terminate private mortgage insurance. Please refer to the examination procedures regarding
the Homeowners Protection Act for more information.
Terms
19. If the creditor originates qualified mortgages as a way to meet TILA’s ability-to-repay
requirements, review the qualified mortgage terms to determine whether they contain any
prohibited terms. Please refer to the TILA examination procedures for Qualified Mortgages
Section 1026.43(e), and the procedures that follow regarding TILA, 12 CFR 1026.43(e)-(f)
for more information.
20. If the creditor originates qualified mortgages, determine whether the points and fees are
within the required limits. Please refer to the TILA examination procedures for Qualified
Mortgages Section 1026.43(e), and the procedures that follow regarding TILA, 12 CFR
1026.43(e)-(f) for more information.
21. If the creditor originates high-cost9 mortgage loans, reverse mortgage loans, or higher-
9
A “high-cost” loan is a consumer credit transaction secured by the consumer’s principal dwelling, in which either:
The APR at consummation will exceed by more than 6.5 percentage points for first-lien mortgage loans, or by more
than 8.5 percentage points for subordinate-lien mortgage loans, the average prime offer rate (APOR); or
The total points and fees (as defined in the regulation) payable by the consumer at or before loan closing will exceed
the greater of 5 percent of the total loan amount or, for transactions of less than $20,000, the lesser of $1,000 or 8%
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priced
10
mortgage loans, assess compliance with TILA provisions concerning those mortgage
loans. Please refer to the TILA examination procedures for High-Cost Mortgages, Reverse
Mortgages and Higher-Priced Mortgages – Sections 1026.32, 1026.33, and 1026.36,
regarding TILA, 12 CFR 1026.32 and 1026.34, for more information.
22. Determine whether the creditor structures a high-cost or higher-priced mortgage loan as an
open-end plan to evade the requirements of Regulation Z. Please refer to the TILA
examination procedures on Evasion of Minimum Standards for Loans Secured by a Dwelling
– Section 1026.43(h)
23. Determine whether agreements for consumer transactions secured by a dwelling contain
terms that require arbitration or whether terms have been applied or interpreted to bar a
consumer from bringing a claim in court. Please refer to TILA examination procedures on
Prohibition on Mandatory Arbitration Clauses and Waiver of Certain Consumer Rights,
regarding TILA, 12, CFR 1026.36(h).
24. Determine whether a creditor finances, directly or indirectly, premiums or fees for credit
insurance. Please refer to TILA examination procedures on Prohibition on Financing Credit
Insurance, regarding TILA, 12, CFR 1026.36(i).
25. Review policies and procedures regarding rate locks, and review the loan file to determine
whether there are instances where consumers lose their rate locks prior to their expiration,
resulting in the consumer being placed in more expensive mortgage products, despite
obtaining a rate lock and submitting all required documentation within required time frames.
percent of the loan amount.; or
There is a prepayment penalty over 2% percent of the amount prepaid that can be charged more than 36 months after
consummation or account opening.
See the FFIEC rate spread calculator: http://www.ffiec.gov/ratespread/newcalc.aspx, and the APOR spreadsheet at:
http://www.ffiec.gov/ratespread/aportables.htm.
10
A “higher-priced” mortgage loan is a consumer credit transaction secured by the consumer’s principal dwelling with an APR
that exceeds the average prime offer rate for a comparable transaction as of the date the interest rate is set by:
1.5 or more percentage points for loans secured by a first lien on a dwelling;
2.5 or more percentage points for loans secured by a first lien with a principal obligation at consummation that exceeds
the limit in effect as of the date the transaction's interest rate is set for the maximum principal obligation eligible for
purchase by Freddie Mac; or
3. 5 or more percentage points for loans secured by a subordinate lien on a dwelling.
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Module 4 – Underwriting, Appraisals, and Loan Originators
Underwriting, appraisals, and loan originator compensation restrictions and qualification
requirements are important parts of the origination process and important areas for review.
Underwriting
This section of the Procedures applies only to mortgage lenders, not mortgage brokers.
TILA, Regulation Z
Ability-to-Repay mortgages
1. Determine whether the lender meets the requirement to consider ATR for consumer-
purpose, closed-end loans secured by a dwelling, and whether the lender verified and
maintains a record of the information it relied on. Please refer to the TILA examination
procedures for Section 1026.25(c)(3) Records related to certain requirements for mortgage
loans and to Minimum Standards for Transactions Secured by a Dwelling – Section
1026.43, and Ability to Repay – Section 1026.43(c), regarding TILA, 12 CFR 1026.43(c),
for more information.
Qualified Mortgages
2. Determine whether the lender meets the ATR requirements by making loans that meet the
requirement for qualified mortgages (QMs). Please refer to the TILA examination
procedures for Qualified Mortgages Section 1026.43(e), and the procedures that follow
regarding TILA, 12 CFR 1026.43(e)-(f) for more information
3. Determine whether the lender making standard QMs calculates debt to income ratios in
accordance with Appendix Q. Please refer to the TILA examination procedures for
Qualified Mortgages Section 1026.43(e), regarding TILA, 12 CFR 1026.43(e) for more
information.
High-Cost or Higher-Priced Mortgage Loans
4. If the entity originates high-cost mortgage loans (12 CFR 1026.32) or higher-priced
mortgage loans (12 CFR 1026.35), assess compliance with provisions concerning the
borrower’s repayment ability for, high-cost mortgages, including required documentation
of income and assets. Please refer to the examination procedures regarding Regulation Z,
12 CFR 1026.32 and 1026.35, for more information.
Other Risks to Consumers
5. Review the mortgage lender’s underwriting policies and guidelines to determine whether
they contain:
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a. Verifiable standards for qualifying borrowers, including ranges/limits for applicable
debt-to-income (DTI) ratios, credit scores, and loan-to-value (LTV) ratios for the
different loan products offered by the institution.
b. Authenticated processes and bases for approving exceptions to underwriting
standards.
c. Standards and methods for determining, verifying, and documenting that the
borrower has the ability to repay the loan.
6. Review communication logs or notes in the mortgage loan files, and interview sales and
production staff of the mortgage lender or broker to determine the independence of
underwriters from the sales or production unit, with an emphasis on any influence
mortgage loan originators may have over underwriters.
7. Review the loan file to determine whether loan documentation, including income
documentation, has been altered or forged. Any indications of fraud should be handled in
accordance with CFPB internal consultation procedures, and examiners should refer them
to other authorities as appropriate.
8. Determine whether the compensation systems for underwriters (whether in-house or
contracted) affect their incentives concerning the speed and quality of their underwriting.
9. If the lender offers non-traditional or subprime loan products:
a. Determine if underwriting standards take adjusted payments into account in
considering borrower ability to repay at expected payment change dates.
b. If the lender offers loans that have two or more risky characteristics (called “risk
layering”), determine whether risk layering is taken into account as part of the
underwriting policies, whether any mitigating factors are required for approval,
and whether actual underwriting practices conform with policies. Risky
characteristics are any of the following:
Limited or no documentation of income, assets, and/or employment;
Simultaneous second lien;
Negative amortization, option payment, or interest-only features;
Introductory rate 200 basis points or more below fully-indexed rate;
Borrowers with subprime characteristics;
No escrow for property taxes and homeowner’s insurance;
Extended amortization period or extended loan terms; or
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Balloon clauses.
c. Determine whether a customer is referred up to a prime loan if he qualifies for a
prime loan and whether the referral is structured or framed to discourage the
customer from applying for a prime loan.
10. Review the documentation used to make underwriting decisions, including applications, tax
returns, verifications of income, assets, and employment, credit reports, and all other
required documentation to determine that the entity complied with applicable underwriting
policies and procedures and with regulatory requirements. If not, determine the reasons for
and frequency of exceptions.
11. For loans made using automated underwriting systems, determine whether the originator
entered the correct inputs and that all of the conditions on the feedback certificate were
satisfied and documented before the loan was funded.
12. Confirm that the lender has an adequate quality assurance program both pre-funding and
post-closing to detect and correct any violations of its underwriting policies.
13. Determine whether the lender has appropriate policies and procedures related to
underwriting of loans to be sure that the borrower is able to repay without selling the home
or refinancing the loan and whether the lender is adhering to its policies.
14. Determine whether the lender frequently uses exceptions to override underwriting
decisions in order to allow a greater volume of loans into the pipeline.
15. Review underwriting guidelines and use of exceptions for changes and deterioration in
lending standards.
ECOA
16. Assess compliance with ECOA’s prohibition against discrimination or discouragement on a
prohibited basis. Please refer to the examination procedures regarding ECOA / Regulation
B, 12 CFR 1002.4, for more information. See Module 6 for more information on fair
lending examinations.
Appraisals
17. Review appraisal policies and procedures. Interview employees about their relationships
with independent third-party appraisers to determine whether there are conflicts of interest.
Determine whether the entity has an affiliated appraisal company or appraisal management
company.
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TILA, Regulation Z – Valuation Independence
18. Determine whether the lender complies with the Regulation Z requirements for valuation
independence. Please refer to the TILA examination procedures, Valuation Independence,
regarding Regulation Z, 12 CFR 1026.42 for more information.
ECOA, Regulation B – Providing Appraisals and Other Written Valuations
19. Determine whether the regulated entity provides copies of appraisals and other written
valuations developed in connection with an application for credit to be secured by a first
lien on a dwelling to applicants in accordance with Regulation B, 12 CFR 1002.14. Please
refer to the examination procedures regarding Regulation B, 12 CFR 1002.14(a), for more
information.
Other Risks to Consumers
20. Determine whether the regulated entity originates higher-priced mortgage loans as defined
under Regulation Z, 12 CFR 1026.35, and if so, whether these are not qualified mortgages
as defined under Regulation Z, 12 CFR 1026.43, or other rules issued by HUD, USDA, or
VA. If the entity does originate higher-priced mortgage loans that are not qualified
mortgages, determine whether the lender complies with the Regulation Z appraisal
requirements for those loans. Please refer to the TILA examination procedures, Higher-
priced mortgage loans: Appraisals, regarding Regulation Z, 12 CFR 1026.35(c) for more
information.
21. Determine whether practices of the mortgage lender or its employees undermine appraisal
independence.
22. Confirm that the entity maintains adequate oversight of the appraisers it uses (including
termination where necessary) and safeguards against appraisal fraud.
Loan Originators
23. Review compensation policies and procedures. Interview employees to assess the entity’s
actual compensation practices. Review loan files and originator compensation records to
confirm that the entity is complying with its applicable policies and procedures.
TILA, Regulation Z – Prohibited Payments to Loan Originators
24. Determine that, in connection with a consumer credit transaction secured by a dwelling, no
loan originator receives and no person pays to a loan originator, directly or indirectly,
compensation that is based on any of the transaction’s terms or a factor that is a proxy for a
term. (12 CFR 1026.36(d)(1)(i).
11
Please refer to the TILA examination procedures
11
The amount of credit extended is not deemed to be a transaction term, provided compensation received by or paid to a loan
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Prohibited Payments to Loan Originators regarding Regulation Z, 12 CFR 1026.36(d)(1)(i)
for more information.
TILA, Regulation Z – Prohibition on Dual Compensation
25. Determine whether any loan originator receives compensation directly from a consumer
and from any person other than the consumer in a consumer credit transaction secured by a
dwelling. Please refer to the TILA examination procedures Prohibition on Dual
Compensation regarding Regulation Z, 12 CFR 1026.36(d) for more information.
TILA, Regulation Z – Prohibition on Steering
26. Confirm that, in connection with a consumer credit transaction secured by a dwelling, a
loan originator does not direct or “steer” a consumer to consummate a transaction based on
the fact that the originator will receive greater compensation from the creditor in that
transaction than in other transactions the originator offered or could have offered to the
consumer, unless the consummated transaction is in the consumer’s interest (12 CFR
1026.36(e)(1)).
The rule provides a safe harbor to facilitate compliance with the prohibition on steering in
12 CFR 1026.36(e)(1). The loan originator is deemed to comply with the anti-steering
prohibition if the consumer is presented with loan options that meet specific conditions for
each type of transaction in which the consumer expressed an interest. Please refer to the
TILA examination procedures Prohibition on Steering regarding Regulation Z, 12 CFR
1026. 36(e)(1), for more information.
TILA, Regulation Z – Loan Originator Qualifications and Documentation
27. Determine whether the loan originator organization and its individual loan originators are
registered or licensed as required by applicable state and federal law.
28. Determine whether the loan originator organization, including a creditor:
complies with state law qualification requirements for legal existence and foreign
qualification, to the extent applicable;
ensures its individual loan originators are licensed and/or registered to the extent
required under the SAFE Act and state law; and
29. For individual loan originator employees who are not licensed and do not have to be
licensed:
obtains, among other things, a criminal background check, a credit report, and ,
originator, directly or indirectly, is based on a fixed percentage of the amount of credit extended. Such compensation may be
subject to a minimum or maximum dollar amount.
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information about administrative, civil or criminal findings;
makes certain determinations, including financial responsibility, where applicable; and
provides periodic training.
Please refer to the TILA examination procedures Loan Originator Qualifications and
Documentation regarding Regulation Z, 12 CFR 1026.36(f).
ECOA
30. Assess compliance with ECOA’s prohibition against discrimination or discouragement on a
prohibited basis. Please refer to the examination procedures regarding ECOA / Regulation
B, 12 CFR 1002.4, for more information. See Module 6 for more information on fair
lending examinations.
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Module 5 – Closing
In addition to making sure they comply with the disclosure requirements covered in Module 3 –
Mortgage Disclosures and Terms, lenders are responsible for the way their closings are
conducted. If the document review or consumer complaints indicate potential violations in these
areas, examiners also may conduct interviews of consumers from the sample and ask questions
relevant to each topic area below.
1. Determine whether the entity has adopted written policies and procedures to ensure that all
disclosures required to be provided to the borrower at or before closing, including the final
TILA disclosure, HUD-1 (or HUD-1A), servicing transfer disclosure, PMI cancellation
notice, and privacy and opt-out notices, were provided.
2. Determine whether the entity allows borrowers to choose their title insurer or requires the
borrowers to use an affiliated settlement service provider. Please refer to the RESPA
examination procedures, Purchase of Title Insurance – 12 CFR 1024.16; Payment or
Receipt of Referral or Unearned Fees– 12 CFR 1024.14, and Affiliated Business
Arrangements – 12 CFR 1024.15, for more information.
3. Review the sample of loan files to assess the entity’s closing procedures.
4. Determine whether the settlement agent established escrow accounts for taxes and
insurance as required for higher-priced mortgage loans under Regulation Z, 12 CFR
1026.35(b). Please refer to the TILA examination procedures Higher-priced mortgage loans:
Escrow Accounts regarding Regulation Z, 12 CFR 1026.35(b), for more information.
5. If escrow accounts were established, determine whether the borrower received an initial
escrow account statement. Please refer to the examination procedures regarding RESPA, 12
CFR 1024.17, for more information.
6. Determine whether each borrower received two (2) copies of the notice of the right to
rescind required by Regulation Z for a non-purchase money loan secured by a principal
dwelling. Please refer to the TILA examination procedures Disclosure Forms regarding
TILA, 12 CFR 1026.15 (open-end credit) and 1026.23(b) (closed-end accounts), for more
information.
7. Review policies or scripts that explain loan terms to consumers, in connection with loan
closings, to determine that they are not written in a deceptive manner.
8. Determine whether the entity’s practices obscure or obfuscate key loan terms, fees, or
provisions. Compare initial and subsequent GFEs and TIL disclosures with final HUD-1
settlement statements and final TIL disclosures for any evidence of bait-and-switch tactics
with respect to the interest rate, points, closing costs, or the loan product or loan features.
9. Review complaints and closing files for evidence of coercion of or fraud against the
borrower at settlement.
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Module 6 – Fair Lending
The purpose of a fair lending examination is to determine whether the creditor discriminated on a
prohibited basis in any aspect of its credit operations. This includes examining whether any of the
creditor’s policies and procedures has an adverse impact on a prohibited basis, and is not supported
by a legitimate business need that cannot be met by a less discriminatory alternative. Most fair
lending examinations will involve requesting loan-level data and detailed information concerning
lending practices. Headquarters staff will perform statistical modeling and analysis based on entity-
specific information and data. Examiners are responsible for collecting and reviewing policies and
procedures, interviewing bank employees, and conducting comparative file reviews. Examiners
and Headquarters staff will work together to scope the fair lending examination.
For fair lending scoping and examination procedures, refer to the FFIEC Interagency Fair Lending
Examination Procedures which are referenced in Section B of the CFPB’s ECOA Examination
Procedures. When conducting a fair lending examination, consult and work with Headquarters.
HMDA, Regulation C
1. Use HMDA data for fair lending examinations. See HMDA Examination Procedures.
2. CFPB already has HMDA data that financial institutions routinely provide to the CFPB on
an annual basis as required by the statute. In addition, institutions must compile HMDA
data on a quarterly basis, even though that data is submitted to the CFPB only once a year
When conducting a fair lending examination consult with Headquarters in deciding what
additional non-HMDA data fields we will ask the entity to produce.
ECOA, Regulation B
3. Assess compliance with ECOA’s prohibition against discrimination or discouragement on a
prohibited basis. Please refer to the examination procedures regarding ECOA /Regulation B,
12 CFR 1002.4. See Section B (Fair Lending Examination Procedures) of the ECOA
Examination Procedures for details.
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Module 7 – Privacy
Financial institutions often sell and share consumer information. The main objectives for
evaluating privacy and information sharing are to ensure consumers’ nonpublic information is
protected as required by federal consumer financial law. Mortgage lenders and brokers must
adhere to disclosure requirements and information sharing restrictions under the Gramm-Leach-
Bliley Act (GLBA) and its implementing regulation, Regulation P, as well as the FCRA and its
implementing regulation, Regulation V.
GLBA, Regulation P
GLBA and Regulation P govern the treatment of nonpublic personal information about
consumers by financial institutions and restrict the sharing of nonpublic personal information
with unaffiliated third parties. GLBA requires financial institutions to disclose their privacy
policies to consumers. GLBA also permits consumers to opt out of certain sharing practices.
1. Determine whether the entity’s information sharing practices and privacy policies are
consistent with the requirements of the GLBA and implementing rule. Please refer to the
examination procedures regarding Regulation P, 12 CFR 1016.4, for more information.
FCRA, Regulation V
FCRA’s privacy provisions cover information sharing among affiliates. In general, entities may
share customer transaction and experience information with affiliated entities under certain
circumstances. However, an entity may not use information received from an affiliate to market
its products or services to a consumer, unless the consumer is given notice and a reasonable and
simple method to opt out of the making of such solicitations.
2. Assess compliance with FCRA’s affiliate marketing rule. Please refer to the examination
procedures regarding Regulation V, 12 CFR 1022.20 – 1022.27, for more information.
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Module 8 – Examiner Conclusions and Wrap-Up
To conclude this supervisory activity, examiners must complete all steps under this section,
regardless of the entity’s risk profile.
1. Summarize the findings, supervisory concerns, and regulatory violations.
2. For the violations noted, determine the root cause by identifying weaknesses in internal
controls, audit and compliance reviews, training, management oversight, or other factors.
Determine whether the violation(s) are pattern or practice, or isolated.
3. Identify action needed to correct violations and weaknesses in the institution’s compliance
management system, as appropriate.
4. Discuss findings with the institution’s management and, if necessary, obtain a commitment
for corrective action.
5. Record violations according to Bureau policy in the Report of Examination/Supervisory
Letter and CFPB’s electronic database system to facilitate analysis and reporting.
6. If the examiner believes enforcement action may be appropriate, contact appropriate
agency personnel for guidance.
7. Prepare a memorandum for inclusion in the work papers and CFPB’s official system of
record that outlines planning and strategy considerations for the next examination and, if
appropriate, interim follow-up.
