States are filling the CFPB enforcement gap, creating fresh compliance challenges for brokers
One of the biggest stories in the mortgage industry over the last 16 months has been the changes at the Consumer Financial Protection Bureau (CFPB), with staffing reductions changing its role in oversight and enforcement.
Because the CFPB didn’t have the same level of workers to carry out its tasks, states have been forced to step up enforcement and oversight, which has led to some issues.
Some states interpret federal standards one way, while other states may have a different interpretation. For mortgage brokers and brokerages operating in multiple states, this can really cause some issues.
Now, some states are taking things one step further. In the state of Illinois, a bill that is currently at the committee level would create a state CFPB for oversight and enforcement, something that one executive is keeping an eye on.
Bob Perry (pictured top), executive director of the Illinois Mortgage Professionals Association, said many other states are also considering this type of action to fill a gap that the federal CFPB left behind.
“We’re watching a bill in the Illinois legislature, which is currently sitting in committee,” Perry told Mortgage Professional America. “They are seeking to create a state CFPB. Other states are doing that, primarily Democrat-run ones. And I’m not trying to make an indictment of Democratic states. The reality of it is that they’re looking to regulate where they see a hole.”
Not creating transparency
While it’s unclear when the “mini CFPB” bill might become law in Illinois, it is on the heels of current legislation that would make things much more difficult for commercial brokers and non-bank entities. That bill, called the “Small Business Financing Transparency Act,” could cause more confusion for business customers.
“I want to shed light on what is going on in this state and probably in others, from entities like the Responsible Business Lending Coalition, who are trying to mislead business consumers of lending products,” Perry said. “This does not help them by making residential-style contracts. If that were the case, the federal government would have done it.
“Commercial lending has never been that way. It has run effectively for many, many years without any involvement in the residential style of doing business loans. I find it ridiculous.”
Creating a state-level CFPB could cause the same type of issue with consumer loans. It could pit federal regulations against state regulations, which could make things challenging for brokers and lenders trying to follow the rules.
“Clearly, you have the Conference of Bank Supervisors, which has addressed a lot of that stuff,” Perry said. “The NMLS system has done that. The SAFE system has also done that. State laws can vary from time to time. Federal law is already embedded in everybody’s transactional awareness of how they conduct themselves. The reality of it is that this is not good for consumers. At the end of the day, it is not creating clarity.”
Battle on the horizon
The cutbacks at the CFPB left a lot of small brokerages and lenders struggling for answers, according to Peter Idziak, senior associate and mortgage attorney at Polunsky Beitel Green.
“In the past, and I've heard this from more than one regulator, if they're looking to a federal rule, like a CFPB rule, they'll call up the CFPB and ask them how they interpret it,” Idziak told Mortgage Professional America. “And one regulator told me, ‘It's their role. I'm going to follow their interpretation.’ But if there's no one to call anymore, this is where you get regulators, because the CFPB isn't responding, now they feel they have more freedom. They’re creating or interpreting rules in their own way.”
Anthony Casa, president and CEO of UMortgage, called the current conditions the “Wild West” of compliance, and warned brokers to walk the straight and narrow.
“I think there's a lot of stuff going on right now that is going to be an issue for some of these companies and some of these people down the line,” Casa told MPA. “I think right now, there's limited federal regulation. I think the states are starting to step up, but there's definitely a void.”
While many expect changes if the Democrats control Congress in 2028, there could be a CFPB resurgence before that. That’s because President Donald Trump’s housing executive order calls for actions that the CFPB would need to handle through rulemaking. This could eventually lead to battles between new state regulatory bodies and the CFPB.
In the short term, Idziak said it could force a strengthening of the CFPB.
“A lot of people think an executive order changes the law or changes regulations,” Idziak said. “But it's really an order to heads of executive agencies to do things, to undertake studies, revise rules, that sort of thing. There was a recent court decision that requires the CFPB to still be funded, some indication that you've got to operate it at a level that actually can accomplish the statutorily required functions of the CFPB.
“The CFPB will have work, and it may even require hiring additional personnel, hiring back the personnel that may have left the bureau, to undertake this work. The executive order requires a significant amount of study and rule writing, which the current level of staffing may struggle to get through in a short amount of time.”
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