States Issue Exotic Guidance

The Guidance on Nontraditional Mortgage Product Risks for state agencies that regulate residential mortgage brokers and companies was distributed by the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators, according to an announcement.

The two organizations said they encourage the agencies to adopt the guidance and issue it for use by their regulated entities as a means to clarify how nontraditional mortgage products can be offered in a way that clearly discloses the risks that borrowers may assume.

To promote consistent regulation of the mortgage market, the state guidance was based on the final interagency guidance for lenders and their subsidiaries released in September by the Office of the Comptroller of the Currency, the Federal Reserve Board, the Federal Deposit Insurance Corp., the Office of Thrift Supervision and the National Credit Union Administration.

The conference and association decided to develop the guidance for state-regulated brokers and firms because the interagency guidance does not cover “a majority of loan originations,” they said in its 12-page state guidance document.

“We are hopeful the interagency guidance and parallel state-issued guidance will serve to inform and protect consumers and enhance the safety and soundness of the industry,” said Neil Milner, conference president and chief executive, in the announcement.

The Mortgage Bankers Association expressed some concerns but praised the states’ guidance overall.

“We commend [the Conference of State Bank Supervisors] for its efforts and are pleased to see its template closely follows the guidance issued … by the federal regulators,” said MBA Chairman John M. Robbins in the statement.

While the state guidance substantially mirrors the interagency guidance, sections inapplicable to nondepository institutions were deleted, allowing the opportunity to gauge the impact on consumer behavior and the overall mortgage market, according to the conference and association.

MBA said it was glad to see the conference decided to remove many of the “safety and soundness” sections the federal guidance encompassed, as those provisions have no application in the regulation of the nondepository providers conference members regulate at the state level.

“We strongly endorse [the Conference of State Bank Supervisors’] suggestion to its members that the regulating bodies adopt the [Conference of State Bank Supervisors’] model ‘as is’, without modification,” Robbins added. “If each state creates its own guidance, it will create a patchwork of 50 separate regulations that are all different, producing a compliance nightmare for our members who operate in multiple states.

“MBA is also concerned about how any such state regulation would be enforced. Each state regulator has differing levels of enforcement authority,” the group said. “Further, we question whether this model state guidance may give rise to private rights of action which could result in uncertain legal environments for mortgage lenders and investors in a state.

“These are all issues we look forward to addressing and are eager to work with [the Conference of State Bank Supervisors] and the regulatory bodies as the process unfolds.”

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