Regulatory Overload Requires Knowledgeable Consultants Now More than Ever

By Guy Puccio

The greatest recession ever experienced has facilitated an overwhelming amount of new statues and regulations. These new rules are promoted by those who believe expanding federal government control is the solution to prevent a future economic crisis. Much of this regulatory overload affects the financial services industry. For example, the “Dodd-Frank Act” is approximately 2000 pages of legislation—including trailer bills—with an additional 6000 pages expected in implementing rules and regulations.

If you run a small-to-moderate size business, do you have the tools or the time to absorb and apply this sea change without the assistance of knowledgeable consultants?

Consider the following: The Board of Governors of the Federal Reserve (“FRB”) has asserted authority to regulate “all mortgage loans.” It does not matter who originated the loan, government regulated entity or not. The FRB also claims authority to regulate non-banks, which include mortgage brokers, finance lenders and mortgage bankers.

Soon regulations promulgated by the new Consumer Financial Protection Bureau (“CFPB”)—established as an office within the Federal Reserve Bank will add to this regulatory overload. The new regulations include a federal layer of jurisdiction over (among others) material loan terms and conditions, loan-to-value ratios, underwriting standards, and minimum FICO scores and borrower equity capital. These rules will also regulate the amount of compensation paid to loan originators (“MLOs”).

A knowledgeable consultant can give you information and the edge to not only survive, but actually succeed in this difficult regulatory climate.

Will commercial-business purpose loans remain exempt from federal regulatory oversight of non-banks?

Up until now, nearly all agreed the FRB, the Federal Trade Commission, and HUD under Truth-In-Lending and the Real Estate Settlement Procedures Act had jurisdiction over loans made for personal, family, or household purposes. The borrower must be a natural person, the maker of the loan must be a lender/creditor (“lender”) as defined, and the loan is to be a federally related residential mortgage with the security property consisting of 1 to 4 residential units.

This is about to change.

Does “all mortgage loans” now mean any real property secured loan regardless of the purpose of the loan or the status of the borrower?

Reportedly, the FRB is interpreting the “Dodd-Frank Act” as extending its jurisdiction to loan transactions other than federally related residential mortgages, even when originated by non-banks.

Further, the FRB is claiming jurisdiction over seller “carry backs,” notwithstanding the definition generally applied to identify covered loan transactions requires a federally related residential mortgage, whether under TILA, RESPA, the “Dodd-Frank Act,” or the “SAFE Act.”

The FRB’s assertion of jurisdiction over seller “carry backs” ignores that such transactions are not loans, forbearances, or extensions of credit by a “lender.” Up until now, seller “carry backs” were not included in the definition of a “federally related residential mortgage loan” and it remains in dispute whether the “Dodd-Frank Act” adequately addressed this distinction.

Legislation at the federal and state levels should be considered to establish that seller “carry backs” negotiated in a purchase transaction are not subject to federal regulatory oversight. This is an important constitutional issue and may require litigation to resolve.

The FRB, the CFPB, and other related federal agencies should not have jurisdiction over seller “carry backs”, unless a seller qualifying as a lender-creditor is extending this form of credit when liquidating an REO. This would exclude the casual seller in purchase transactions not subject to TILA and RESPA. (California Civil Code Section 2956 et seq.)

Another Level of Jurisdiction, “Dodd-Frank Act,” and Limits on Compensation

The “Dodd-Frank Act” imposes a 3-percent cap on compensation for MLBs originating residential mortgage loans as MLOs performing as third-party agents of borrowers. The FRB has indicated it will not move on the compensation cap and on other newly authorized regulatory oversight until after the CFPB commences official operations in July 2011.

Forty-four U.S. Senate Republicans recently sent a letter to the President requesting enhanced accountability for the CFPB by removing this agency from the Federal Reserve Bank, establishing an oversight board, requiring Congressional review, and imposing public comment periods prior to the promulgation of any regulations.

Since private lenders typically fund residential mortgage loans in transactions through a Mortgage Broker acting as their agent, does this new regulation allow the borrower to separately compensate another Mortgage Broker who is exclusively representing the borrower?

As of April 1, 2011, compensation may not be paid to the Mortgage Broker (“MLB”) by both the borrower and the lender. The proper handling of compensation needs to be reviewed and clearly understood.

Relying on “what the other guy is doing” or “word on the street” may well set the MLB/MLO on the path to expensive litigation and damages. Clearly, this is another example of the need for consulting assistance to clarify and properly apply these new FRB regulations. The survival of the mortgage brokerage industry requires retention of knowledgeable consultants acting through legal counsel for the necessary advice and guidance to manage this expanded and complex regulatory maze.

How do I hire a consultant AND preserve the highest level of the confidentiality?

The 3 Wisemen recommends having your attorney retain our services so your information and our advice are protected under attorney-client and work product privilege.

To find out more about how The 3 Wisemen’s mortgage industry experts can help you navigate the web of legislation and ensure the survival and growth of your business in these complex economic times, call us to schedule a consultation appointment—and register for our next Make More Money Now workshop on June 11, 2011.


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