What brokers and lenders must know when dealing with AGs with little mortgage knowledge
The downsizing of the Consumer Financial Protection Bureau (CFPB), combined with the government shutdown, has left mortgage professionals finding a wide range of new enforcement efforts at the state level.
And while the move of enforcement back to the states was expected as part of the changes at the federal level, the amount and types of enforcement have varied from state to state. One expert believes some of that enforcement has been politically motivated.
Peter Idziak (pictured top), senior associate and mortgage attorney at Polunsky Beitel Green, noted that one of the biggest impacts he’s hearing is that attorneys general (AGs) in certain states, who have limited knowledge of the inner workings of mortgage lending, are getting involved in enforcement.
“As you've seen the CFPB step back, under Dodd Frank the states have the authority to enforce federal consumer financial protection laws,” Idziak told Mortgage Professional America. “There has definitely been an uptick among especially blue states and especially AGs. And that brings a whole other interesting wrinkle.
“Where you have your state regulators in the space, financial regulators, they're very familiar with consumer credit mortgages, because it's what they do every day.”
Attorney general enforcement
Idziak noted that attorneys general are generalists. As a state's top legal official, they have to be well-versed in a wide range of legal topics. And while some likely have a mortgage lending background, others might come to brokers and lenders not knowing exactly what is involved.
“If you have an AG reaching out, you definitely need to be aware that, even if you don’t think there’s anything here, this is obviously partially a political issue,” he said. “You are going to be telling your story for the first time to someone who isn’t familiar with what you do. I was talking to a lawyer, and he said they had a meeting with a state AG, and they said, ‘So, what’s the difference between a banker and a broker?’”
He said this can be an opportunity for brokers and lenders to take control of the narrative from the beginning.
“It’s important to be able to, in these initial conversations, tell your story,” Idziak said. “Create a narrative that accurately explains whatever issues and why you’ve done what you’ve done. Because you might be talking to people who, outside of applying for a mortgage themselves, don’t really have any history or experience with the industry.”
Another major challenge for brokers and lenders who operate in multiple states is that each state may have a different interpretation of a federal regulation.
“You still have the issue that different states are going to interpret things differently,” Idziak said. “If you get outside your footprint and you’re coming into a new state, like we get lenders coming into Texas from out of state, they’re sometimes surprised that we have some fairly robust consumer protections.
“There are idiosyncratic little things in different states. Overall, it’s better than it would have been 5 to 10 years ago. There’s more of a uniform standard, and the state regulators are working on that.”
A little more political
For brokers and lenders who might undergo questioning from a state attorney general, they will need to realize it could be a very different experience. Not only might it be more political, but they could also interpret the law differently than the CFPB did in the past.
“You have to recognize that there might be sort of a political factor to it that doesn’t come in whenever you are having an examination from your local or state financial regulator,” Idziak said. “And then you have the fact that states may have different interpretations of federal law.”
For states' financial regulators who have been conducting examinations for a while, many have lost the help line they relied on when they had questions about a regulation.
“I was talking to a state regulator, and asked him what they did historically when enforcing a federal regulation that might be a little unclear,” he said. “He said, ‘I called the CFPB. It’s their regulation, I’m going to see how they’ve interpreted it.” With the reduction in staff, that communication is apparently a little bit less.”
With CFPB downsizing, states are ramping up oversight. Daniella Casseres of Mitchell Sandler told brokers at NAMMBA Connect to prepare for more investigations and stricter compliance rules.
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One thing Idziak continues to remind his clients is that there could be an opportunity for future administrations to reverse the cuts to the CFPB. A reinforced federal enforcement branch could review transactions from this period.
“Until a regulation changes, that’s still on the books,” he said. “With the look back period for a lot of these that could go into a future Democratic administration in 2028, you can’t just be under the assumption that things will change. Just because you know it’s no longer an enforcement or supervision priority for the Bureau, it might be in the future.”
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