CFPB Eliminates Disparate Impact

YOUR QUESTION 

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You may have heard about a major change to Regulation B. They eliminated disparate impact. I also learned that they changed a few other areas that were working to reduce discrimination. As an underwriter, I think this is wrong-headed. I think this reduces fair lending protection. 

We met with our lawyer because we have a second review process, which weeds out potential discrimination in our loan process. Our lawyer says there is a shift away from not having to prove intent to discriminate to now having to prove intent. She says that this is a problem because proving intent is extremely difficult. In other words, discrimination is now possible without having to prove intent to discriminate – only the outcome matters. 

So, if I get this right, even if the outcome is discrimination, the company that discriminated won't be held responsible if you can't prove an intent to discriminate. I don't understand why disparate impact protection is being weakened. It’s scary! 

Do the changes to Regulation B basically eliminate disparate impact? 

OUR COMPLIANCE SOLUTION 

Policies and Procedures 

OUR RESPONSE 

I am going to be blunt: the CFPB's April 2026 Final Rule ("Rule") amending Regulation B eliminates the "effects test" – that is, "disparate impact" – of the Equal Credit Opportunity Act (ECOA), while also restricting special-purpose credit programs (SPCPs), and narrowing the definition of "discouragement" of applicants or prospective applicants. This is clearly a significant regulatory shift away from fair lending restrictions. 

However, saying it eliminates disparate impact and fair lending is not accurate. The Rule eliminates disparate impact liability specifically under ECOA and Regulation B. That's significant, but ECOA is only one of several legal frameworks that govern lending discrimination. The Rule does not affect several others that remain fully intact. 

The Fair Housing Act (FHA) still recognizes disparate impact for mortgage lending. The Supreme Court confirmed this in Texas Department of Housing v. Inclusive Communities Project (2015), and the Rule expressly does not touch FHA liability. So a mortgage lender whose policies produce racially skewed outcomes can still face a disparate impact challenge under the FHA, which is a completely separate statute.

State fair lending laws are arguably the bigger remaining protection. Many states – for instance, California, New York, Illinois, and others – have their own anti-discrimination statutes that incorporate disparate impact standards, and federal rulemaking cannot preempt those. State attorneys general were among the most vocal opponents of the Rule precisely because they intend to continue using their own authorities. 

The Department of Justice retains independent enforcement tools. And the Community Reinvestment Act, which addresses lending patterns in lower-income communities, operates on its own separate framework. 

HOW DID THIS HAPPEN? 

The CFPB received over 64,500 public comments, including ours. The overwhelming majority of comments opposed the Rule. Nevertheless, the Rule is now law. The compliance effective date is July 21, 2026. Whatever the comments offered, pro or con, the Rule largely finalizes a November 2025 proposal, with only clarifying edits rather than substantive revisions. 

Since your question specifically involves the change to disparate impact, I will discuss it primarily. The other changes are also very significant and should be incorporated into your policies and procedures. 

Eliminating the “effects test,” a change supposedly meant to lower compliance costs, actually gives lenders greater freedom to target protected groups. 

WHAT IS THE EFFECTS TEST? 

The purpose of the “effects test” is ultimately to protect against disparate impact. The "effects test" is actually a legal doctrine used to determine if a lender’s facially neutral policy creates a discriminatory, disproportionate impact on a protected class (for instance, race, gender, or age). It means a creditor can be liable for discrimination, even without discriminatory intent, if their practices have a discriminatory effect. 

Most regulators know full well that they can challenge lending policies that, while appearing neutral, create a negative impact on protected groups. Most compliance lawyers know full well that a financial institution can expose itself to a disparate impact violation by creating a pattern or practice that results from defective lending policies. And most financial institutions know, or should know, that if a policy has a discriminatory effect, they must prove that a legitimate business necessity justifies it. 

What the CFPB has done is to remove the “effects test” from Regulation B, thereby promulgating that ECOA does not recognize disparate impact liability. The focus now is on the intent to discriminate.

Shadow AI in Mortgage Banking

Podcast | Substack

QUESTION 

Everyone in our company received a message from management warning us about the use of Shadow AI. Most of us have never heard of Shadow AI. Next week, a company-wide video session is taking place to learn about it. Attendance is mandatory. 

So, I started reading about it. I found that it involves going to websites like ChatGPT. The management notice says that some of us are going online to AI websites and using them to replace our own knowledge and experience. Until further notice, we have been told not to use ChatGPT and other AI websites. 

A few of us got together to find out how this could affect us. We are underwriters, processors, loan officers, and quality control people. It's just a small group. You have written articles on AI and have AI policies. Please tell us how Shadow AI affects mortgage banking.

How does Shadow AI affect mortgage banking? 

Our Compliance Solution 

We recommend our AI Policy Program for Mortgage Banking. 

A well-constructed AI Policy Program is a proactive means designed to avoid and mitigate risks associated with Artificial Intelligence. Responsible AI practices can help align AI system design, development, and use with applicable legal and regulatory guidelines. 

RESPONSE TO YOUR QUESTION 

Shadow AI is not as spooky as it sounds, but it can adversely impact mortgage banking entities. Our AI Policy Program for Mortgage Banking addresses Shadow AI and many other features of artificial intelligence. Keep in mind that the pace of AI development is brisk, somewhat unstable, and rapid. Updates to policies and procedures are necessary for the foreseeable future. You should expect to see more alerts, notices, updates, and training. 

If you want to learn more about AI and mortgage banking, consider our recent articles on artificial intelligence. 

Shadow AI 

What is Shadow AI? Essentially, it is the unauthorized use of artificial intelligence tools, apps, or features by employees within an organization, bypassing official IT and security oversight, often for productivity gains. Unfortunately, it introduces significant risks, including data leaks, compliance failures, bias, regulatory non-compliance, and intellectual property loss. 

Shadow AI is not "Shadow IT," which is quite a bit different, but, in a way, it is adjacent, because Shadow IT manifests where any technology (for instance, software, hardware, cloud services, and apps) is used by employees without the company's IT department approving it. 

COMPONENTS OF SHADOW AI 

Shadow AI refers to the unauthorized use of AI tools like ChatGPT, Midjourney, Claude, Bard, Microsoft 365 Copilot, Salesforce Einstein, or AI plugins, which create vulnerabilities because these tools are not vetted for corporate security or data policies. In other words, employees may be using these AI tools for various purposes – such as summarizing documents, drafting emails, generating content, providing knowledge, and so forth – although IT has not formally approved their use by employees. 

Sometimes, employees use workarounds by accessing AI tools from their personal accounts. Employees may even use their personal logins for AI services that process company data. 

UNAUTHORIZED USE OF AI 

The potential adverse consequences of unauthorized use of AI tools include data leakage, compliance issues, regulatory and legal problems, lending practices, security vulnerabilities, a lack of control and oversight, and inaccurate or biased output. Shadow AI, therefore, can really hobble a company's risk profile. 

Assuming the best of intentions in using Shadow AI tools, I can understand an employee wanting to be more efficient, but such use bypasses crucial safeguards, turning productivity tools into major security and governance risks for the business. 

Rather than outright banning Shadow AI tools, most organizations address Shadow AI by establishing clear governance, monitoring usage, and providing secure, approved AI alternatives. The focus is usually on striking a balance between innovation and essential security and compliance standards. 

ADVERSE RISKS OF SHADOW AI 

Depending on the Shadow AI tool used, there are numerous risks to mortgage banking, among which are surely the following, as I have mentioned in the aforementioned articles.

Non-Delegated Lenders: Quality Control for Non-QM Loans

Podcast | Substack

QUESTION 

I am one of the underwriters for a non-delegated lender. We received a request from an investor to conduct quality control. My boss says we do not have to do quality control. His position is that, at most, we need only a limited quality control audit. I came from another non-delegated lender, and they always did QC. 

He says we do not have to perform most aspects of QC audits, including credit analysis, re-verifications, credit reports, appraisal reviews, adverse action reviews, EPD issues, and GSE/FHA-VA underwriting reviews. Because we originate non-QM loans, he says QC is minimal. I read your Bulletin 2017-12, and it clearly shows that non-delegated lenders should do QC. 

I would like you to discuss QC requirements for non-delegated lenders. 

Does a non-delegated lender have to do quality control for non-QM loans? 

OUR COMPLIANCE SOLUTIONS 

We recommend the following compliance solutions for quality control support: 

Quality Control Audits

Our audits focus on risk mitigation, compliance, error correction, process improvement, verification, and ongoing monitoring. 

QC Tune-up®

This is our Second Line of Defense review that focuses on predictable output, reliable data, investor confidence, and reduced production cost. 

RESPONSE TO YOUR QUESTION

The question about a non-delegated lender having to conduct quality control seems to be one of those perennial questions that pop up from time to time. There is no mystery to the requirement. I appreciate that you have been reading our Bulletins. Anyone who wants to subscribe to our free Bulletins, please sign up! 

Whether you are originating QM or non-QM loans, you should be conducting quality control audits. Fannie Mae's non-delegated quality control (QC) requirements include having a comprehensive written QC plan, a process for selecting loans for prefunding and post-closing reviews, and a system for reporting and taking corrective action. 

If you're a non-delegated lender originating QM loans, the QC plan should be independent of the production process, and, among other things, you must conduct a minimum number of prefunding and post-closing QC reviews each month, based on a percentage of total loan volume. 

If you're a non-delegated lender originating non-QM loans, you should have QC processes in place. Because non-QM loans do not meet the criteria for purchase by Fannie Mae or Freddie Mac, the lender assumes all the risk, making a robust QC program essential to manage the loan quality and potential defects. 

Let's look somewhat broadly at the QC requirements. You must have a written QC plan that outlines your QC philosophy, objectives, and risks, with a process for selecting loans for review using random and/or discretionary methods across all products. The QC function must be independent of the production process, or, at a minimum, reviews must be conducted by personnel not involved in underwriting the specific loans subject to audit. 

The QC plan for QM loans must cover both prefunding and post-closing reviews, ensuring compliance with the Fannie Mae Selling Guide, the lender contract, and applicable laws. You can check out Fannie's requirements in the Lender Quality Control Programs, Plans, and Processes section. 

With respect to pre-funding, a minimum number of prefunding reviews must be completed each month, with the loan selection meeting at least the lesser of 10% of the prior month's total loans, 10% of current month projections, or 750 loans. 

Regarding post-closing, loans must be selected for monthly reviews, and the entire QC cycle must be completed within 90 days of loan closing. 

You must have documented procedures for reporting QC findings to management, documenting loan level findings for resolution, and taking timely corrective actions. All QC-related documentation must be retained for at least three years. An internal audit of the QC process itself should be performed annually to ensure compliance with the lender's policies and procedures. Our QC Tune-up®, a Second Line of Defense function, provides such support.

The 50-Year Mortgage – Pros & Cons

The 50-Year Mortgage – Pros & Cons

QUESTION 

I am the underwriting manager for a mid-sized regional lender. Recently, an investor asked us if we would be interested in originating 50-year mortgages. This mortgage loan has been in the news a lot recently because the president has been pushing it. 

Yesterday, our loan committee met and decided to look into the pros and cons of 50-year mortgages. Next week, we have to present a report to senior management, and they will decide if it should be brought to the board for discussion. 

I do not want to parrot the mortgage news. Some of this news media seems more interested in driving sales than in what might be good for borrowers or the risks to lenders. I am asking you to share your perspective with us. I know you do not mix words. 

What are the pros and cons of 50-year mortgages for borrowers and lenders?  

COMPLIANCE SOLUTION 

We recommend our Compliance Library. 

A dynamic, digital compliance library consisting of master policies and procedures, reflecting a financial institution's size, complexity, and risk profile, ensuring conformance with primary regulatory guidelines and federal and state mortgage and consumer loan originations. 

RESPONSE 

The promoting of this loan product, such as it is, has been stirred up recently by the president's remarks and massive news coverage. In my opinion, the president is recommending a flawed loan that is detrimental to a consumer's long-term financial interests, and the news media, as usual, is chasing a shiny object that supposedly highlights sales over substance. 

A 50-year residential mortgage is a home loan with a repayment period of 50 years (600 months!), significantly longer than the standard 30-year term. Its primary benefit is lower monthly payments, which can make homeownership more accessible. Fair enough! However, this comes at the cost of paying substantially more in total interest over the life of the loan, and it results in much slower equity accumulation. 

I suppose that stretching the loan over a longer period reduces the monthly principal and interest payments. To that extent, it could help some first-time buyers qualify for a mortgage or afford a more expensive home. The term "affordability" has become quite a hobby horse these days, given that monthly payments could open up homeownership to more people, especially in expensive housing markets. Ultimately, it will not beneficially resolve the affordability issues that consumers face today. 

But a 50-year mortgage seems like a form of indentured servitude. Over 50 years, the total amount of interest paid on the loan can be hundreds of thousands of dollars more compared to a 30-year mortgage. A central pillar of building equity in our society, home ownership, is seriously derailed because of slower equity growth. A much larger portion of early payments goes toward interest, meaning you accumulate equity much more slowly. It could take 30 years or more to build up significant equity, compared to about 12-13 years for a 30-year mortgage (excluding appreciation and down payment). 

Plus, the interest rates are higher. Lenders will charge a higher interest rate on a 50-year mortgage to compensate for the increased risk of lending for a longer period. Thus, mortgage originations would tread into uncharted territory. This is a new product, and lenders may be uncertain about the long-term risks, which could impact its availability and cost. 

Let's discuss these primary factors involved in 50-year mortgages: 

·       Feasibility

·       Alternatives

·       Legislative and Regulatory Changes

·       Impact on the Housing Market

·       Impact on the Economy

·       Inflationary Risk 

FEASIBILITY 

The 50-year mortgage is currently an idea under consideration, not an approved policy. But ideas often have a way of working themselves somehow into politics and policies. I am skeptical that certain key issues can be disposed of through politically palatable, economically viable, and financially responsible policies, even by way of legal and regulatory compliance. I'll mention but a few that come to mind.

Financial Penalties for Advertising Violations

YOUR QUESTION 

We have been using a marketing company for our advertising. We relied on their compliance to make sure the advertisements met the guidelines. Unfortunately, a banking department just cited us for violations in our advertising. So, we fired the marketing company. Meanwhile, we're stuck. The banking department has asked for all our advertising going back three years!   

My partner hired a lawyer to handle our case. The lawyer reviewed the advertisements from the last three years and informed us that there are many violations in them. It is scary how much money we will need to pay in financial penalties. The lawyer says there could also be remuneration to the borrowers. We don't have the money for all of these violations. We just don't. We may have to close down the company. We're going to meet with the department next week to discuss the situation. 

I need some more guidance. I want to be more prepared for the meeting. I need to know what we're facing in penalties. We have been told that your firm conducts advertising reviews before their publication, so I hope you can enlighten me about what to expect. 

What are the financial and other penalties for violations of mortgage advertisements? 

COMPLIANCE SOLUTIONS 

Advertising & Marketing Compliance Reviews 

Advertising Tune-up 

Advertising Manual 

Please contact us to discuss these solutions!

ANSWER TO YOUR QUESTION 

I am sorry to learn of this happening. This situation is avoidable, yet many companies get caught up in the dragnet of defective advertisements. You can't farm out your liability to marketing companies. Many of them claim to have compliance staff, but in reality, their compliance is sparse, if it exists at all. And forget about the testimonials of their awesome success; for goodness sake, they are marketing companies – what kind of testimonials do you expect them to provide? 

Yes, we provide relatively inexpensive advertising and marketing campaign reviews. We've offered advertising compliance for twenty years. The advertising review is expeditious. We hold the final masters in our extranet, so that clients can access them at any time. Our staff works with the client to ensure the advertisements both meet their marketing goals and comply with regulatory mandates. Some clients have even retained us to review the compliance procedures of their marketing companies.

If you want assistance with advertising compliance, please contact me. Get your company into a reliable advertising compliance program. Forget the bells and whistles. Forget the marketing company route! 

If you are not an expert in advertising compliance, you need compliance support. 

A hefty violation could cost you the company! 

Here's what happens when your advertising compliance is not reliable.

 

Recently, a company was shuttered for alleged deceptive advertising. Its home office was located in California. It was licensed in 30 states and Puerto Rico. In that case, specifically, the mortgage lender allegedly used the names and logos of the VA and FHA in its advertisements, described loan products as part of a "distinctive program offered by the U.S. government," and instructed consumers to call the "VA Interest Rate Reduction Department" at a phone number belonging to the mortgage lender, thus implying that government agencies sent the mailings. The result of this matter was a consent order permanently banning the company from engaging in any mortgage lending activities, or from "otherwise participating in or receiving remuneration from mortgage lending, or assisting others in doing so." In addition, the company, while neither admitting nor denying the allegations, was required to pay a $1 million civil money penalty. 

Fortunately, many compliance departments have a very good understanding of the restrictions on advertising, which are meant to protect consumers from misleading practices and ensure fair access to credit. 

Here is a list of a few basic Acts and regulations. 

Some Acts and Regulations 

Truth in Lending Act (TILA) (Regulation Z) 

TILA requires clear and accurate disclosure of loan terms, including the annual percentage rate (APR), loan amount, loan term, and repayment terms, presented clearly and conspicuously. Certain "trigger terms" (for instance, specific interest rates or monthly payment amounts) require additional disclosures.

Artificial Intelligence Disclosure

QUESTION 

I am the General Counsel and Compliance Officer of a mortgage lender. Our footprint is currently in 35 states. Recently, we have begun to use Artificial Intelligence in our loan origination process. However, I have some concerns about proper consumer disclosure. 

In my view, we should be disclosing our specific use of AI to borrowers. We should disclose the role AI plays in our loan applications from the point of sale to close, and, if applicable, beyond. But I do not find much regulatory guidance to lean on. I would appreciate your views on AI disclosure and, if possible, which areas would be subject to such disclosure. 

Is there a requirement for a mortgage lender to issue an AI consumer disclosure? 

What regulatory areas are potentially impacted by AI, thereby causing AI disclosure? 

COMPLIANCE SOLUTIONS 

AI Tune-up® 

Artificial Intelligence Statement  

RESPONSE 

There is currently no broad legal requirement for lenders to disclose the general use of AI in loan applications. However, under existing consumer protection and fair lending laws, lenders are legally required to disclose specific, accurate reasons for adverse actions, such as a loan denial, even if a complex AI or algorithmic system made the decision. 

This transparency is mandated by the Equal Credit Opportunity Act (ECOA), and regulatory bodies like the Consumer Financial Protection Bureau (CFPB) have issued guidance emphasizing that the complexity of AI is not an excuse for failing to provide a clear explanation. 

Regulatory Mandates 

Take, for instance, the regulatory mandates involving adverse action disclosure. The CFPB has directly addressed the issue of "black-box" models, which are AI systems whose logic is not clear even to their developers. The CFPB emphasizes that lenders cannot point to a broad category from a checklist, such as "purchasing history," if a consumer is denied credit based on AI analysis. Instead, the lender must provide specific details, such as the types of goods or places that influenced the decision. 

Also, there is no "AI exemption." A lender's use of AI or machine learning does not create a special exemption from fair lending laws. The CFPB has made it a priority to ensure that the use of technology does not allow lenders to circumvent established consumer protection regulations. In addition to the CFPB, regulators and the Federal Trade Commission have warned that there is no "AI exemption" for existing fair lending and consumer protection laws. Therefore, undisclosed AI could be found to violate these laws, leading to enforcement actions. 

The Colorado Artificial Intelligence Act 

Some state laws specifically address AI disclosure. For example, the Colorado Artificial Intelligence Act (CAIA) requires developers to test for algorithmic discrimination in consequential decisions, and some state consumer protection statutes allow for prosecution if an AI's biased outcomes cause consumer harm. This is a landmark act in many ways. If you are originating loans in Colorado, you should review the relevant regulations. However, you would do well to conduct a statewide review of AI legislation in all states where you are licensed to originate mortgage loans. 

CAIA may be a model for the direction states are going with respect to AI disclosure. The Act defines algorithmic discrimination, which is the unlawful differential treatment that disfavors an individual or group on the basis of protected characteristics. The algorithmic discrimination would be caused by high-risk artificial intelligence systems, defined as any system that, when deployed, makes — or is a substantial factor in making — a "consequential decision," which generally relates to those involving education, employment, financial services, housing, health care, or legal services. 

Under the CAIA, there are stipulated requirements for developers to clearly display on their website or in public use an up-to-date disclosure of any high-risk AI systems they have developed and make available how they manage known or reasonably foreseeable risks of algorithmic discrimination. Any determination that the AI system has caused or is reasonably likely to cause algorithmic discrimination must be brought to the attention of the Colorado attorney general, among others.

Shared Equity Loans – Pros and Cons

QUESTION 

I am a mortgage broker in northern California. It's just me and my husband. In the last few months, several clients have come to me for a shared equity mortgage. I admit, I didn't know too much about them in the past, but all of a sudden, people want them. The more I look into them, the more I think they can really hurt my clients in the long run. 

There are some lenders who have pitched us on offering these shared equity loans. However, we haven't done them yet. We provide other second lien options to our clients. But one client is now insisting on it, even after I told her about the way she could lose in the long run. I know she's desperate for money and will do anything. If we don't give her a shared equity loan, she's going to another broker to get it. 

Maybe you have an opinion about share equity loans. We use your Brokers Compliance Group on the hourly plan, and you've been so helpful to us. So, we've got the compliance angle covered. But we need your straight talk on the consequences of the shared equity loan. 

What are some consequences of a shared equity loan? 

SOLUTION 

HEC Tune-up® 

(Home Equity Contracts)

RESPONSE 

Just prior to the advent of the new Administration, on January 15, 2025, the CFPB published an overview entitled Home Equity Contracts: Market Overview.[i] 

In that outline, the CFPB offers the following definition:

Home equity contracts are financial agreements in which a homeowner gets an upfront cash payment from a company and, in exchange, must repay a lump sum amount in the future that is based, in part, on their home's value. These contracts are often called "home equity investments" (HEIs), "home equity agreements," or "shared equity agreements." 

Shared equity mortgages are sometimes confused with shared appreciation mortgages. While both involve a lender benefiting from home appreciation, in a shared equity mortgage, the lender actually owns a portion of the property, whereas in a shared appreciation mortgage, the lender simply receives a share of the appreciation upon sale or refinancing.

 The CFPB first publicly addressed home equity contracts in the January 2025 issuance cited above, when it took three coordinated actions related to them. These actions included filing an amicus brief, issuing a consumer advisory, and publishing a market overview. While not binding, these actions signaled the CFPB's interest in monitoring and potentially regulating contracts of this type. 

Specifically, on January 15, 2025, the CFPB: 

·       Filed an amicus brief: In Roberts v. Unlock Partnership Solutions AOI, Inc.,[ii] a case involving a home equity agreement.

·       Issued a consumer advisory: Warning consumers about the risks associated with home equity investment contracts.

·       Published an issue spotlight: Providing a market overview of home equity contracts.

 

Share Equity Loan Arrangement 

Here's a brief synopsis of the CFPB's example of a shared equity arrangement:[iii] 

·       Homeowners typically repay the home equity contract company with a single large payment, often referred to as the "repayment amount" or "settlement amount."

·       Repayment is due by the end of the term (usually 10 to 30 years) or upon a triggering event, such as when the homeowner sells the home.

o   Example: Homeowner gets a $50,000 upfront cash payment:

§  After three years, the homeowner repays between $68,045 (if the home depreciated by an average of 1% per year) and $71,538 (if the home appreciated by any amount).

§  If the homeowner waits the full 30 years, the estimated repayment amount ranges from $25,183 (if the home depreciates by an average 1% per year) to $831,000 (if the home appreciates by an average 5% per year).[iv]

Loan Officer Compensation Reform

QUESTION 

We are a Mini-Correspondent located in the Northwest. We mostly originate QM loans. When we do non-QM loans, we broker them. We've been in business for almost twenty years, and there are eight of us. All our compensation comes from the originating. 

I am interested in all the talk about how Congress plans to change the LO compensation regulations. Frankly, what I've read is complicated. I want to know what issues are involved. And, I want to know how Congress is planning to deal with those issues. 

My mortgage broker organization has put out some information about their position. And the lenders' organization has taken a position. But I am not sure what all the complaining is about. I'm not saying that some change is not needed. I just can't figure out what the change is supposed to be.

 My question is, what reforms are they trying to make to the LO compensation rule? 

SOLUTION 

Loan Officer Compensation Policy 

RESPONSE 

The arguments and proposals for loan officer compensation reform are somewhat complicated. So, trying to navigate their implications can be daunting. The Community Home Lenders of America (CHLA) recently released a white paper advocating for reforms to the loan originator (LO) compensation rule, specifically calling for Congress to narrow the scope of the current regulations.[i] The CHLA argues that the current rules, designed to prevent predatory lending practices, have unintended consequences that harm consumers and stifle competition within the mortgage industry. 

I'll provide you with some of the positions outlined in the CHLA's white paper. We are tracking these suggested reforms, as we do virtually all other federal and state regulatory compliance matters that affect banks and non-banks involved in residential mortgage loan origination and servicing. When appropriate, we will issue updates and alerts through our newsletters. 

I will outline the reform issues by outlining some of the main concerns, the proposed reforms, and the actions suggested to effectuate change. My outline contains sections and subsections to reduce the complexity of the subject issues. In the last section, I will delve a bit deeper. Keep in mind, though, there is considerable complexity, and my explication is not meant to be comprehensive. 

The CHLA's Main Concerns 

The CHLA has expressed several concerns. The following four, in broad strokes, are perhaps the main concerns. 

Harm to Consumers 

The CHLA argues that the current LO compensation rules, which restrict how much lenders can pay their loan originators, can effectively prevent lenders from matching competitors' offers and potentially result in borrowers missing out on better deals. 

Stifled Competition 

The CHLA claims that these rules create an uneven playing field, where brokers can offer more flexible compensation structures than retail lenders, hindering competition and limiting borrower choices. 

Unintended Consequences 

The CHLA contends that the rigid regulations discourage loan officers from working with borrowers over extended periods and make it less attractive for lenders to offer loans through State Housing Finance Agency (HFA) bond programs, which are crucial for low-income and minority borrowers. 

Focus on Inter-Firm Compensation 

The CHLA suggests that the original intent of the Dodd-Frank Act's LO compensation rule was to address yield spread premiums between firms, not to restrict compensation within a lender's own organization. 

the CHLA's Proposed Reforms 

Allow Matching Competitor Offers 

The CHLA proposes allowing lenders to reduce compensation to their loan originator employees to match a competing offer for the same borrower.

Endorsements and Testimonials - FTC Rules

QUESTION 

I am the Director of Marketing at a mortgage lender in the Northwest. We are developing a marketing campaign using endorsements and testimonials on social media, social media influencers, press, radio, YouTube, and TV. While our compliance and legal departments are happy to review these promotions, they are not giving us clear guidelines to follow. 

Our legal department tells us that, because of the wide distribution of our campaign channels, some of the rules we must follow are based on the Federal Trade Commission's rules. I don't know if this is so, but I do know those rules can be kind of strict. I need to find out about some of the FTC's regulations involving endorsements and testimonials. 

What are some FTC guidelines for endorsements and testimonials? 

SOLUTION 

Advertising Tune-up

Marketing Tune-up

Advertising Manual

Advertising Compliance  

RESPONSE 

The Federal Trade Commission's (FTC) regulations are essential to follow for marketing campaigns. Indeed, the FTC implemented the Mortgage Acts and Practices – Advertising (MAP) rules![i] MAP rules are designed to prohibit misrepresentations regarding mortgage products. Yes, there are other Acts, regulations, and laws – federal and state – such as the following (to name a few salient ones): 

·       Fair Housing Act,

·       Equal Credit Opportunity Act,

·       Truth-in-Lending Act,

·       FHA/HUD, VA, USDA Regulations,

·       Real Estate Settlement Procedures Act,

·       State Regulations,

·       Fair Lending,

·       Unfair, Deceptive, or Abusive Acts or Practices, and

·       Federally required logos and disclosures. 

The Federal Trade Commission's MAP rules must be implemented in your marketing campaign. 

Advertising and marketing compliance is a highly complex area that requires very careful consideration prior to launching a marketing campaign. If you do not handle endorsements and testimonials appropriately, you can easily cause legal disputes and attract regulators. 

I have listed a few compliance solutions above. You can always contact me to discuss your particular marketing plan. We have worked for years with banks and nonbanks on their marketing campaigns. Here are just a few articles we've published on advertising compliance. 

The FTC requires endorsers to clearly and conspicuously disclose their sponsorship by the advertiser and requires that endorsements reflect the honest experience or opinion of the endorser and not contain representations that would be deceptive or unsubstantiated if the advertiser made them directly.[ii] Therefore, if an endorsement represents that the endorser uses the advertiser's product, the endorser must actually use the product at the time they endorse it.[iii] 

Advertisers using "consumer endorsements" must make clear whether the endorser's experience reflects the actual experience of typical consumers who use the product rather than the experience of a few individuals.[iv] Ensuring this clarity is critical because, in 2009, the FTC revised its guidance regarding consumer endorsements to eliminate the safe harbor previously provided for the use of disclaimers in conjunction with non-representative consumer testimonials, such as "results not typical" and "not all consumers will get this result." In other words, these disclaimers are no longer acceptable because the FTC believes they are not sufficient to overcome the misleading implication that a non-representative result depicted in an advertisement is what consumers will generally experience.

CFPB’s Massive Withdrawal of Guidance

QUESTION 

The CFPB recently withdrew guidance for many policies and legal interpretations. As my company’s  Chief Risk Officer and General Counsel, I was asked by our Board to provide an outline of the CFPB's withdrawn guidance and the effect such withdrawal will have on lending and servicing. I have reviewed all the withdrawn documents and written an analysis of their impact. However, I still can’t figure out the difference that the withdrawn guidance makes in our legal and regulatory risks. 

So, I am writing you for some feedback. I don’t need an outline of every withdrawn document. What I’m looking for is some insight into the overall impact of withdrawing the guidance. Our external law firm provided an excellent overview. But I would like something more conclusory with respect to the practical effect caused by the withdrawal. 

Long time subscriber! Thank you for your outstanding articles. We appreciate your clarity and straightforward responses. 

What impact does the withdrawal of the massive withdrawal of CFPB guidance documents have on mortgage originators and servicers? 

SOLUTION 

CMS Tune-up

RESPONSE 

Thank you for your kind words! My articles are a labor of love. I enjoy writing them, and I am grateful that you read them. Before I dig into the implications of the CFPB’s withdrawal of numerous guidance issuances, let me offer a few historical facts. 

Recent History 

The withdrawals of guidance stems from an Executive Order (EO) 13891 that goes back to 2019, which directed agencies to avoid using guidance documents to create regulatory burdens on the private sector.[i] President Trump issued the EO in his first term, and the Biden administration later rescinded it. 

The CFPB is maintaining that the principles the EO outlined are consistent with the requirements of the Administrative Procedure Act (APA), which are noted in the CFPB’s April 11, 2025 internal memo. The memo imposed a moratorium on the issuance of new guidance documents and initiated a full review of all existing guidance. The CFPB is supposed to complete the review by April 25^th. Any guidance not explicitly flagged to be retained, with a clear justification, would be subject to rescission.[ii] 

Three Reasons for the Withdrawal 

There are three ostensible reasons for the withdrawal of these guidance issuances: 

1.   The CFPB will now only issue guidance when it is truly necessary and when such guidance will lower, rather than raise, compliance burdens for regulated entities. 

2.   In response to President Trump’s deregulatory initiatives aimed at reducing bureaucracy, the CFPB is scaling back its enforcement activities and, as a result, does not require interpretive guidance to remain in effect at this time. 

3.   The CFPB has determined that there are no significant reliance interests justifying the retention of the withdrawn guidance. This is because parties generally recognize that guidance is nonbinding and does not create substantive rights. 

The Bureau says that while some guidance, or parts thereof, may be reinstated, it does not intend to prioritize enforcement against parties that do not conform to them during the period of withdrawal. 

What a Difference a Difference Makes 

In your inquiry you state that you “can’t make sense of the difference it makes in our legal and regulatory risks.” Frankly, I think your confusion is justified. I will explain shortly. Suffice it to say, for now, that withdrawal of the guidance documents will have little legal effect. Before getting to my view, let me mention a few areas that seem to be headlining as regulatory issues.

Common Red Flags in Money Laundering

QUESTION

I am the COO of a mid-sized lender in the Midwest. We have contacted your firm to do an Anti-Money Laundering Risk Assessment. One of the big issues we have is trying to identify the most common red flags. 

In streamlining our system AML reporting, we are using AI to determine common red flags. Unfortunately, AI is not able to provide real-world data. We need practical experience, which is why I would like you to let me know the kinds of common red flags you find in your audits. 

What are the common red flags for money laundering in mortgage banking? 

SOLUTIONS 

• AML TESTING
• AML TRAINING
• AML RISK ASSESSMENT 
• AML PROGRAM [Written Policy]

RESPONSE 

Since 2003, FinCEN has issued a number of analyses, reports, and advisories regarding emerging trends in mortgage fraud, money laundering, and terrorist financing activity involving residential mortgage loans. 

While FinCEN publishes a list of potential red flags, we often find that our list of activities that could trigger the filing of Suspicious Activity Reports continues to expand. At this point, we have hundreds of such findings. 

Thank you for retaining us to provide the AML Risk Assessment. 

Lenders Compliance Group was the first compliance firm in the country to provide AML audit tests to non-bank residential mortgage lenders and originators. Of course, we have also offered AML audits to banks involved in residential mortgage banking for many years. 

So, by this point, we have rock-solid indicia and identifiers that help us review for AML compliance. There are many common red flags. I am going to provide a half-dozen of them that keep turning up in our audits with the proviso that the list is not comprehensive. 

Activities considered red flags in mortgage banking include: 

(1) A loan secured by pledged assets held by a third party unrelated to the borrower. 

(2) A loan secured by deposits or other readily marketable assets, such as securities, when owned by apparently unrelated third parties. 

(3) A borrower default on a case-secured loan or any loan that is secured by assets that are readily convertible into currency. 

(4) A loan made for, or paid on behalf of, a third party with no reasonable explanation. 

(5) A customer, to secure a loan, purchases a certificate of deposit using an unknown source of funds, particularly when funds are provided via currency or multiple monetary instruments. 

(6) A loan that lacks a legitimate business purpose, provides the depository institution with significant fees for assuming little or no risk, or tends to obscure the movement of funds (i.e., loans made to a borrower and immediately sold to an entity related to the borrower). 

It is important to ensure that your system solution requires the reporting of any activity that is suspected of violating a criminal statute. Additionally, the federal money laundering criminal statutes consider money laundering to be the handling of the proceeds of criminal activity, with mortgage fraud considered to be a predicate offense for the money laundering criminal statutes. Mortgage-related criminal activity is a specific predicate offense. 

Jonathan Foxx PhD., MBA
Chairman & Managing Director

Lenders Compliance Group