Identity Theft Prevention: How to Catch a Thief

Jonathan Foxx, PhD, MBA

Chairman & Managing Director

Here are four scenarios involving identity theft that mortgage originators encounter from time to time. Read them and then keep them in mind as I discuss how to ask for additional information in order to prevent identity theft.

1.       A law enforcement report containing detailed information about the identity theft and the signature, badge number, or other identification information of the individual law enforcement official taking the report should be sufficient on face value to support a victim’s request.

Question: Without an identifiable concern, such as an indication that the report was fraudulent, would it be reasonable for an information furnisher or Consumer Reporting Agency (CRA) to request additional information or documentation?

Answer: It would not be reasonable.

2.       A consumer might provide a law enforcement report similar to the above report, but certain important information such as the consumer’s date of birth or Social Security number may be missing because the consumer chose not to provide it.

Question: The information furnisher or CRA could accept this report, but would it be reasonable to require that the consumer provide the missing information?

Answer: It would be reasonable.

3.       A consumer might provide a law enforcement report generated by an automated system with a simple allegation that an identity theft occurred to support a request for a tradeline block or cessation of information furnishing.

Question: Would it be reasonable for an information furnisher or CRA to ask that the consumer fill out and have notarized the Commission’s ID Theft Affidavit or a similar form and provide some form of identification documentation?

Answer: It would be reasonable.

4.       A consumer might provide a law enforcement report generated by an automated system with a simple allegation that an identity theft occurred to support a request for an extended fraud alert.

Question: Would it be reasonable for a consumer reporting agency to require additional documentation or information, such as a notarized affidavit?

Answer: It would not be reasonable.

In these scenarios, a financial institution should be responsive in accordance with certain guidelines. Specificity of action must be appropriate, reasonable and proportional to the challenge. However, total reliance on the CRA is inappropriate.

Credit Committees: Central Hub of Mortgage Banking

Jonathan Foxx, PhD, MBA

Chairman & Managing Director

Many clients have credit risk management committees, sometimes referred to as loan committees, lending committees, or credit committees. Let’s just call them “credit committees” or, for the purposes of this article, “Committees.” For small mortgage lenders, the Committees wind up consisting of the owner and perhaps a second company official. Howsoever this internal entity is configured, it is very important to ensure continuity between the origination process flow and, where possible, the interaction with a loan committee that sets policy standards and, as needed, makes decisions on whether to approve a risky loan transaction.

When we are retained by a client to review its departments and functions, for instance to conduct an internal audit or a GSE readiness audit – one of the factors we consider is the lending function itself. This activity is in fact actually distributed over many departments. But the loan flow process must come under a set of review criteria which, when challenged, often requires resolution by a committee constituted to manage the loan transaction’s risk.

First and foremost, it is important to emphasize that an institution’s quality control, compliance, and audit procedures should focus on mortgage lending activities that pose high risk. Controls to monitor compliance with underwriting standards and exceptions to those standards are especially important.

To break this down further, the quality control function should regularly review a sample of loans from all origination channels. A representative sample of underwriters should be subject to quality control auditing in order to confirm that policies are being followed. When control systems or operating practices are found deficient, business-line managers should be held accountable for correcting deficiencies in a timely manner. This means, in effect, that the deficiency should be identified, mitigated through system and training solutions, monitored, and periodically tested.

Since some loans permit a borrower to defer principal and, in some cases, interest payments for extended periods, institutions should have strong controls over accruals, customer service and collections. Servicing must be an intrinsic part of the loan committee’s considerations. The exceptions made by servicing and collections personnel should be carefully monitored to confirm that practices such as re-aging, payment deferrals, and loan modifications are not inadvertently increasing risk. One suggestion would be to have servicing and collection personnel involved in the Committee. At the very least, servicing should be informed of credit decisions that affect its purview. Customer service and collections personnel should receive product-specific training on the features and potential customer issues with these products.

The Hedgehog and the Fox: A Regulatory Parable

The 7^th century BCE Greek lyric poet, Archilochus, observed: "the fox knows many things, but the hedgehog knows one big thing.”[i] Twenty-two centuries later, Erasmus transliterated Archilochus’s dictum by precisely rendering it into the Latin aphorism: “multa novit vulpes, verum echinus unum magnum.”[ii] When it comes to these two ways of thinking and acting, things didn’t change much between the 7^th century BCE and the 16^th century CE, when Erasmus penned his elucidation.

Isaiah Berlin, the British political philosopher, whose life span stretched nearly the whole 20^th century,[iii] wrote a well-known essay in 1953, inspired by Archilochus’s apothegm. It was entitled “The Hedgehog and the Fox: An Essay on Tolstoy's View of History.”[iv]

Of Berlin’s essay, Arnold Toynbee, one of the great historians of our time, wrote:

“This fragment of verse by the Greek poet Archilochus describes the central thesis of Isaiah Berlin's masterly essay on Tolstoy, in which he underlines a fundamental distinction between those people (foxes) who are fascinated by the infinite variety of things and those (hedgehogs) who relate everything to a central, all embracing system.”[v] 

Since its inception, it seemed clear to me that the Consumer Financial Protection Bureau (the “Bureau”) is a hedgehog. It tends to view the world through the lens of a single defining idea: consumer financial protection. In accordance with this idea, the Bureau exercises this vision through a single, predominant, and coherent framework of regulations. As a hedgehog, the Bureau stays focused on this one foundational principle and repeatedly, unvaryingly, and rigidly seeks to implement that overriding proposition by applying the same methods and solutions, usually to the exclusion of other possible remedies.

This predilection is not simply a matter of judgment or style. Hedgehogs actually have one grand theory which they seek to extend into many domains, furthering their rule through a fervent belief in the guiding principle. They express their views with confidence; assurance; coolness; obstinacy; unrelenting drive; generally rigid adherence to an impliable mission; unwavering obedience and devotion to a regnant objective; a proclivity to roll results up into an aggregate value; and, a tendency to express themselves with such idiomatic phrases as “mission critical,” “the ends justify the means,” “by and large,” “ball-park figure,” “jack-of-all-trades,” “grand strategy,” “seeing the larger picture,” and “the system is the solution.” Usually, hedgehogs have a unique vision that gives rise to the ability to notice complex circumstances and discern the underlying patterns. In effect, their reach exceeds their grasp. Examples of hedgehogs are Plato, Dante, Proust and Nietzsche.

Residential lenders and originators (the “RMLOs”) are, as a group, foxes - they draw on a wide variety of experiences and do not believe for a second that the world can be boiled down to a single idea, evinced through an all-embracing framework, howsoever cogent it appears to be.

Foxes are skeptical about grand theories. They are constrained in their forecasts, and adaptive to actual events. They tend to be more accurate in their predictions than hedgehogs, since they are more agile in assigning probabilities to their expectations. While hedgehogs see the larger picture, thereby missing opportunities, foxes notice each and every pixel contributing to it, and thus quickly find opportunities. Because the fox is acutely aware of each part of the whole, it devises complex strategies to gain an advantage on the hedgehog. Often, it succeeds in its plans due to this advantage.

The kinds of idiomatic expressions that foxes use are “zero in on something,” “devil's in the details,” “under construction,” “mixed feelings,” “barking up the wrong tree,” “at this stage,” “first in class”, “trying something new,” and “let’s get another pair of eyes on this matter.” Foxes are centrifugal: they pursue divergent ends and usually possess a sense of reality, which keeps them from designing a logistical framework that purports to contain all possibilities. They instinctively know that complexity does not conduce to a unitary structure. Although foxes may have a broad vision and much agility in complex interactions, often their grasp exceeds their reach. Examples of foxes are Montaigne, Balzac, Goethe and Shakespeare.

Foxes pursue many ends at the same time, with much energy and cunning. They see the world in all its complexity. Hedgehogs simplify a complex world into a basic principle or concept that unifies and guides everything. Foxes tend to be scattered, diffused, and inconsistent. For hedgehogs, the world is reductive; that is, all challenges and dilemmas are reduced to simple hedgehog ideas, and anything that does not correlate to the hedgehog idea is without relevance. Hedgehogs see what is essential and ignore the rest.

Generally, the fox’s style is often deprived of rigorous models, specific goals, and global metrics. Foxes learn incrementally, over many iterations of experience. The foxy RMLO has a succinct advantage in swaying the hedgehog Bureau, because it nimbly responds to new information, constantly reconfiguring its market knowledge in reaction to changing circumstances. Such vital information leads to greater performance and the ability to provide solutions that open up new ways for the Bureau to fine tune its single overarching vision.

The Bureau has set compliance effective dates in January 2014 for many new rules that will affect RMLOs. As these rules go into effect, we enter the New Year noting a rather obvious example of the hedgehog’s vision and the fox’s hastening to fulfill it. Their relationship is bound by the unwavering path of the Bureau and the serpentine path of the RMLO. The Bureau’s grand vision presents a broad plan of action that must be implemented. In complying with the Bureau’s rules, the RMLO must bestir itself to be particularly attuned to working with the minutiae of details that are a part of the practical experience of actually originating and servicing residential mortgage loans.

In 2014, here are three questions to keep in mind about the relationship between the Bureau and the RMLO:

1) How prepared is your financial institution to comply with the Bureau’s expectations?

2) Are you ready to implement the Bureau’s complex requirements?

3) Does your company act like the visionary hedgehog or the nimble fox?

Foxes are cunning and have the advantage of knowing how reality works, poking holes in the hedgehog’s grand scheme of things, even as the many spindled hedgehog rolls into a big bulky ball. But beware of that ball! The hedgehog and the fox have learned never to underestimate each other. Although the fox is clever, swift, skilled in action, and knows many tricks, the hedgehog knows one big decisive trick: it can roll itself into a ball of sharp and painful spikes!

__________________________________________________________

 Jonathan Foxx
President & Managing Director
Lenders Compliance Group
Brokers Compliance Group

National Mortgage Professional Magazine - December 2013

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[i] Archilochos (c. 680–c. 645 BC) was a Greek lyric poet from the island of Paros in the Archaic period.

[ii] Adagia, ("Erasmus") Desiderius Erasmus Roterodamus (October 27, 1466-July 12, 1536), Paris, 1500, from Robert Bland, Proverbs, Chiefly Taken from the Adagia of Erasmus, with Explanations; and Further Illustrated by Corresponding Examples from the Spanish, Italian, French & English Languages, Volumes 1-2, London, 1814

[iii] Sir Isaiah Berlin, (June 6, 1909-November 5, 1997), British social and political theorist, philosopher and historian of ideas.

[iv] Berlin, Isaiah, The Hedgehog and the Fox: An Essay on Tolstoy's View of History, Weidenfeld & Nicolson, London, 1953.

[v] Idem

The Enforcement Powers of the Consumer Financial Protection Bureau

For several months, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) has implemented a spate of enforcement actions against banks and nonbanks. My interest in this article is neither to re-litigate those cases nor single out any particular financial institution for further scrutiny.* Sometimes we must learn our lessons at somebody else’s expense, rather than to castigate another for unseemly conduct. None of us, however, is absolved of the responsibilities, the violations of which could lead to enforcement actions against us or the financial institution where we are employed.

It is important, therefore, to have some sense of what is meant by the term “enforcement,” especially with respect to the CFPB’s authorities. The CFPB received a host of enumerated laws and related authorities on July 21, 2011[i], and, pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), a concomitant set of defined rules were established[ii] that gave the Bureau numerous enforcement powers, including the powers to conduct investigations and implement enforcement actions to enforce federal consumer financial law.[iii]

For instance, Section 1052 of the Dodd-Frank authorizes the CFPB to engage in joint, interagency investigations and requests for information, including matters relating to fair lending. Though the statute specifically provides that, “where appropriate,” the Bureau may conduct “joint investigations” with the Secretary of Housing and Urban Development, the Attorney General of the United States, or both, it also sets forth lengthy provisions governing subpoena powers and civil investigative demands.

______________________________________________________

IN THIS ARTICLE

Hearings and Adjudications

Scope of Legal Remedies

Blowing the Whistle on Violations

Policy Statement and Whistleblower Protection

Locking Horns with the Department of Labor

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Hearings and Adjudications

On November 7, 2011, the Bureau issued CFPB Bulletin 2011-04 (entitled “Enforcement”),[iv] the first in a series of bulletins relating to policies and priorities of the Bureau’s Office of Enforcement. The Bulletin announced that before the CFPB commences an enforcement proceeding, it may (or may not) give the subject of the proceeding notice of the nature of the potential violations and may (or may not) offer the subject the opportunity to submit a written statement in response. The Bulletin also gave specific instructions regarding the submission requirements of the written statement, such as the paper size, spacing, font size, and length, while also mandating that the response had to be received by the CFPB by no more than 14 calendar days after the notice.[v]

Almost a year after the CFPB received its authorities, it adopted rules, on June 29, 2012, regarding the procedures it expected to follow when investigating whether a “person” (a legal term for an individual or entity) is or has been engaged in conduct that would constitute a violation of any provision of federal consumer financial law.[vi]

Indeed, Dodd-Frank authorizes[vii] the Bureau to conduct hearings and adjudication proceedings to ensure or enforce compliance with the following applicable items:

• Title X, which established the Consumer Financial Protection Bureau as an independent agency within the Board of Governors of the Federal Reserve System, including any rules prescribed by the CFPB under Title X; and
• “… any other Federal law that the Bureau is authorized to enforce, including an enumerated consumer law, and any regulations or order prescribed thereunder, unless such Federal law specifically limits the Bureau from conducting a hearing or adjudication proceeding and only to the extent of such limitation.”

Furthermore, Section 1053 of Dodd-Frank sets forth the rules for Cease-and-Desist proceedings and enforcement orders.

Statutorily, Dodd-Frank authorizes the CFPB to apply to the United States district court within the jurisdiction of which the principal office or place of business of the person is located, for the purposes of enforcing any effective bulletin or notice, outstanding notice, or order.

Thus it was that, soon after the Bureau announced its rules for investigating violations, in July 2012 the CFPB announced its first enforcement action. That action consisted of a consent order in which Capital One agreed to refund $140 million to 2 million customers and pay a $25 million penalty. The enforcement was the consequence of alleged deceptive marketing tactics used by Capital One’s vendors to coax consumers into paying for add-on products when they activated their credit cards.[viii]

Dodd-Frank authorizes the CFPB to commence a civil action against any person who violates a federal consumer financial law and to impose a civil penalty or to seek all appropriate legal and equitable relief including a permanent or temporary injunction.

When commencing a civil action, the Bureau must notify the Attorney General and, with respect to a civil action against an insured depository institution or insured credit union, the appropriate prudential regulator. Except as otherwise permitted by law or equity, no action may be brought under Title X more than three years after the date of discovery of the violation.

Indeed, the CFPB published an interim rule regarding its awarding of attorney fees and other litigation expenses in certain situations, as required by the Equal Access to Justice Act.[ix]

Social Media Compliance: Frequently Asked Questions

Last month, I discussed some of the salient compliance requirements associated with using Social Media.* Then, a few days later, I offered to you my article, entitled Social Media and Networking Compliance. This month, on March 6th, I was one of three presenters who gave a webinar for American Banker on Social Media, with special reference to the new rules of the Federal Financial Institutions Examination Council (FFIEC). The proposed rule, issued January 23rd, is entitled "Social Media: Consumer Compliance Risk Management Guidance."

My webinar topic: Social Media – Employee Manual. 

The webinar was very well attended by a diverse cross-section of financial institutions. I found it quite interesting that, when polled during the webinar, by a factor of two to one these companies did not have an Employee Manual, even if about a third of them have policies and procedures relating to Social Media.

I have harped on a certain point regarding policy statements, so here it goes again: policies and procedures are a rather abstract concept to employees; employee manuals, however, for certain rules and regulations, are the most effective means to ensure compliance. Training is an important and an ancillary tool, but employees do not always mentally retain training information. Keep this in mind: an employee manual is a constant reminder of a company's expectations and policies.

One aspect of social media that deserves considerable attention is trolling, using anonymity, and general blogging guidelines. Everybody knows that, for the most part, blogging is electronically available to the public. However, with regard to an individual's employment with a financial institution, what restrictions should be placed on an employee who blogs? From my own research and experience, it would seem that many employees actually have no idea of the implications, requirements, and, in some cases, the potential to easily cross over into violations of federal law or state law.

Here are the risks at stake in social media networking and blogging - though by no means less so for forms of advertising through and use of social media: financial risk, regulatory risk, sales risk, reputation risk, legal risk, strategic risk, and operational risk, such as adverse consequences to business plans, projects, Internet Technology and Information Security protections, and many core departmental functions.

In this article, I will offer a high level FAQs about the use of Social Media (SM), with some additional emphasis on blogging. I will also provide bulleted guidelines to give to employees.

________________________________________________

What is Social Media?

SM is a form of interactive online communication in which users can generate and share content through text, images, audio and/or video.

________________________________________________

Do companies use Social Media?

HubSpot found that by November 2012 companies that blog incurred an average of 55% more visitors to their sites than companies that did not blog. Statistically, blogging companies may generate 97% more external website links and 434% more indexed pages, both of which are critical to a company’s search rank. And a global survey by McKinsey of approximately 1,700 corporate executives finds that 69% of respondents claim measurable advantages from social media, including a lower cost of doing business, better access to knowledge, increased marketing effectiveness, insight for developing more innovative products and services, and higher revenues.

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Does SM cover micro-blogging?

SM includes, but is not limited to, micro-blogging sites (i.e., Facebook, Google Plus, MySpace, and Twitter); forums, blogs, customer review websites and bulletin boards (i.e., Yelp); photo and video sites (i.e., Flickr and YouTube); sites that enable professional networking (i.e., LinkedIn); virtual worlds (i.e., Second Life); and social games (i.e., FarmVille and CityVille).

________________________________________________

How do some financial institutions use SM?

SM has been used to receive and respond to complaints, provide loan pricing, and offer generic information about products and services.

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Social Media and Networking Compliance

When you think of advertising, do you include social media? These days, most of you do!

However, social media compliance - which I shall call "SMC" - is a considerable undertaking, far more involved than just issuing a policy and procedure. Often, implementing SMC includes working with internet technology and information security professionals, collaborating with sales, compliance, legal, marketing, and human resources personnel, and ensuring that virtually all employees understand their own obligations with respect to using internet communications.

We have drafted SMC policy statements that call for constant vigilance by management and appointed staff to monitor for and find the appropriate remedies to transgressions relating to use of a company's name, logo, products, and services, in casual and even formal social media interactions.

Recently, Federal Financial Institutions Examination Council (FFIEC) issued a request for comments, entitled Social Media: Consumer Compliance Risk Management Guidance ("Notice"). FFIEC issued this notice on behalf of its six members, Office of the Comptroller of the Currency (OCC); the Board of Governors of the Federal Reserve System (Board); the Federal Deposit Insurance Corporation (FDIC); the National Credit Union Administration (NCUA); the CFPB (collectively, the "Agencies"); and the State Liaison Committee (SLC). Succinctly put, whatever the federal agencies eventually adopt, the states will issue the final guidance as a supervisory guidance not only to the institutions that are, by extension, under its supervision but also through the State Liaison Committee, thereby encouraging state regulators to adopt the guidance.

This means that institutions will be expected to use the forthcoming guidance in their efforts to ensure that their policies and procedures provide oversight and controls commensurate with the risks posed by their social media activities. State agencies that adopt the guidance will expect the entities that they regulate to use the guidance in their efforts to ensure that their risk management and consumer protection practices adequately address the compliance and reputation risks raised by activities conducted via social media.

In this article, I will consider certain features of FFIEC's social media Notice as well as some important subjects to be addressed in constructing an SMC policy and procedure.*

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IN THIS ARTICLE

Defining Social Media

Use of Social Media

Risks of Social Media

Risk Management

Risk Areas

Laws and Regulations

Major Risks

Policy and Procedures

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Defining Social Media

Social media has been defined in a number of ways. For purposes of the proposed guidance, the Agencies consider social media to be a form of interactive online communication in which users can generate and share content through text, images, audio, and/or video.

Social media can take many forms, including, but not limited to, micro-blogging sites (i.e., Facebook, Google Plus, MySpace, and Twitter); forums, blogs, customer review Websites and bulletin boards (i.e., Yelp); photo and video sites (i.e., Flickr and YouTube); sites that enable professional networking (i.e., LinkedIn); virtual worlds (i.e., Second Life); and social games (i.e., FarmVille and CityVille).

A simple test to distinguish social media from other online media in that the social media communication tends to be more interactive.

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Use of Social Media

Financial institutions use social media in a variety of ways, including marketing, providing incentives, facilitating applications for new accounts, inviting feedback from the public, and engaging with existing and potential customers.

For instance, social media has been used to receive and respond to complaints. They have been used to provide loan pricing. Since this form of customer interaction tends to be informal and occurs in a less secure environment, it presents some unique challenges to financial institutions.

Disclosure Integration, High Cost, and Counseling

On July 9, 2012, the CFPB issued its proposed integration of RESPA and TILA disclosures into the "integrated" forms, entitled "Loan Estimate" and "Closing Disclosure". These new forms are derived from the Good Faith Estimate (GFE), the Truth-in-Lending (TIL) Disclosure, and the HUD-1/1A Settlement Statement. This assemblage has been duly dubbed with the euphemism "integration".

Excluded from the forthcoming integration are reverse mortgages, home equity lines of credit (HELOCs), chattel dwelling loans, and de minimis originations consisting of loans made by creditors who make five or fewer otherwise covered loans per year.

I have covered the process of constructing these forms in several newsletters and articles, including HERE, and HERE.*

The CFPB is not expecting to finalize the integration before the end of this year. Comments are due November 6, 2012.

However, there is a comment deadline of September 7, 2012 - which will lead to rulemaking before January 2013 - regarding the extent to which the rule applies to loans previously exempted from RESPA or TILA and the further redefining of the term “finance charge” to include most costs associated with residential mortgage loans.

By its own admission, the CFPB has stated that the proposal to "broaden" the definition of a "finance charge" by adopting certain adjustments or accommodations in its HOEPA implementing regulations under Regulation Z, would "cause more loans to exceed the APR and points and fees triggers and be classified as high-cost mortgages under HOEPA."

The CFPB has also set forth proposed rules to implement Dodd-Frank amendments regarding high-cost mortgages and also to provide homeownership counseling provisions that would affect mortgage lending generally (with no exclusion for HELOCs).

The implications of these rules, taken together, are far reaching. I would suggest that you visit our Library for further information.

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IN THIS ARTICLE

“Loan Estimate” and “Closing Disclosure”

Integration

High-Cost Mortgages

Homeownership Counseling

Library

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“Loan Estimate” and “Closing Disclosure”

• The Loan Estimate replaces the GFE and early TIL, while the Closing Disclosure replaces the HUD-1/1A and final TIL.

• HUD's Special Information Booklet will still be required.

• The CFPB's proposal would combine five pages (seven if typical appraisal and servicing disclosures were to be counted) of TILA/RESPA data into a three-page Loan Estimate, not counting the written list of available providers that must be separately provided if the creditor allows a consumer to shop for a settlement service.

• The Closing Disclosure is five pages.

Integration

The integration not only provides an entirely new format but also reconciles certain existing differences between Regulation X, the implementing regulation of RESPA and Regulation Z, the implementing regulation of TILA.

Highlights

• Redefines the term “application” by deleting the 7th component from the definition adopted by HUD, as outlined in its New RESPA Rule FAQs, as “any other information deemed necessary by the loan originator.”

• Alters the coverage of the disclosure requirements so they would apply to home loans, except for the aforementioned exemptions.

• Changes the timing and responsibility rules for providing closing disclosures.

The Cost of Consumer Financial Protection

Recently, I met with several accomplished compliance professionals for lunch. There was considerable discussion about the continuing growth of the regulatory frameworks, the bureaucracies to maintain them, and economic burden on financial institutions. *

One individual expressed the importance of financial protection of the consumer, while recognizing that such protection causes incremental compliance requirements; another individual agreed that such protection was needed, but worried that the costs to provide that protection would ultimately be borne by the consumer through increased pricing. 

In a way, these views reflect an ethical dilemma, and I would like to explore this seeming conundrum and offer a resolution.

IN THIS ARTICLE

An Unfettered Market
Pricing
Framework
Regulations
Protecting the Consumer
"Remember that credit is money."
Ethical Dilemma
Discussion Forum

An Unfettered Market

There is no political economy that we know of, since the dawn of recorded history, in which an unfettered market has existed.

Theories abound about how such a market might function. Whether we term such markets as "unfettered" or use the more emotionally appealing word "free," these markets are nonetheless only theories, howsoever popular in the public mind, and have virtually no extrapolation into economic reality. Better to call such theoretical legerdemain "utopian markets" and leave them to their rightful place in speculative philosophy and treatises on metaphysics.

Of course, utopias are attractive and always will be, even if we instinctively know that their viability is inherently unsupported by human experience and their imagined structure is ultimately dissolved in the unsentimental crucible of human history.

Pricing

All markets are a remunerative way of exchanging information, which we call goods and services. Pricing is that information means by which markets communicate value relative to goods and services. And pricing is communicated through the conveyance of planning.

Markets contain an element of planning - some in extreme, others much less so. The plan, or the framework, is often in control of market participants by virtue of the very act of pricing. It is not possible to remove pricing from a market. Even a market predicated on bartering utilizes the "quid pro quo" as its informational pricing signal.

Framework

In the absence of a framework there is no market. It is not the framework that encourages commerce; rather, it is the commerce itself that encourages the formation of the framework. Innovative commerce often bleeds through and beyond an old framework, thus creating the need for a new framework.

And there is often reactionary resistance to the new framework. Those market participants who are paying attention to the informational signals of a new market are already finding ways and means to act in the new framework, while those whose commerce has not kept pace with innovation tend to resist the change mightily, hopelessly trying to preserve what they have by "fighting the tape."

Regulations

Over the years I have found that the word "regulations" has become a euphemism for all manner of mischief perpetrated by politicians and market participants. Notice I differentiate the two: while some politicians may be market participants, most market participants are not politicians. Yet politicians spend quite a bit of their time crafting regulations! The mischief takes the form of viewing regulations as not only coercive (which they are) but also capricious (which they are not).

Both the politicians and the market participants rail on and on between and amongst each other about the coercion and the capriciousness of regulations, yet none of them ever really defines what actually is an efficient regulation. That is because, often, neither side has any idea how best to define such a thing.

But I'll define an "efficient regulation" right here and now:

An efficient regulation is the means by which the framework is preserved. Nothing more.

An inefficient regulation is the means by which the framework is destroyed. QED.

Consumer Financial Protection: Bureau or Bureaucracy?

Part III of a Three-Part Series on Financial Reform Legislation
Dodd-Frank: Legislation - Reactive or Proactive
Author: Jonathan Foxx
Published in National Mortgage Professional Magazine
First Published: October 2010

Although Elizabeth Warren has left the Consumer Financial Protection Bureau, her views continue to provide inspiration to its management and staff. Perhaps it would be wise to read the article I wrote last October, outlining the CFPB, its mandates, and its prospects.

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Society is founded not on the ideals but on the nature of man

and the constitution of man rewrites the constitutions of states.

But what is the constitution of man?[i]

Will and Ariel Durant

In the first two parts of this 3-part series,[ii] we have explored the basic structure of the new financial reform law, known as the Dodd-Frank Act (“Act”), as it affects residential mortgage loan originations.[iii] We have already given consideration to the many mortgage loan regulatory provisions that the Act covers[iv] and especially to the Mortgage Reform and Predatory Lending Act, a primary component of this landmark financial legislation.[v]

Now, we will turn our attention to the very core of the Act itself vis-à-vis the mortgage industry and consumer financial protection: the Bureau of Consumer Financial Protection (known also as the “Consumer Financial Protection Bureau,” or “CFPB,” and hereinafter as “Bureau”).[vi]

But first, a Thought Experiment.[vii]

A vast, entangled array of very small and sleek wires, super strong magnets, and very wide and long cables extend out omnidirectionally – all of which lines and circuits are laid throughout a network of interlocking, electrically generated devices that are held in place in their respective positions on a shaky iron scaffold by fraying, single-knotted ropes. The devices are needed to power vital and critical services to a community. But, due to wear and tear on their bindings, some devices are about to break free, threatening to pull down with them the entire array of wires, magnets, cables, and other devices. Any device can plummet at any time. Before it is too late, all the lines must be disentangled, traced to each of the devices, and rerouted to a new and more stable grid; plus, the devices themselves must be transferred, one by one, to the new grid without damaging them, and then reconnected to their lines. But the collapse can take place at any time. A “crisis” looms!

So, how are you going to accomplish this heroic task quickly and effectively?

Now let’s consider this analogue: the energy source is Constitutional authority; the grid is the financial regulatory framework; wires and cables are the ways and means that implementing regulations affect one another; magnets are the legal foundations (i.e., case law precedents (stare decisis), statutes (federal and state), Constitutional laws or rights) on which all subject enumerated laws (see below) rest; devices are the existing regulations; and ropes are the various governmental agencies that are charged with enforcement of and monitoring compliance with specific implementing regulations.

By the end of this article, I hope you will have decided how best to solve the above-described and admittedly convoluted “crisis.” This article and the preceding articles in this series outline how Congress decided!

Please keep in mind that this series on the Dodd-Frank Act is meant to provide an overview. However, the legislation itself is extremely detailed and extensive. Therefore, for guidance and risk management support, I strongly recommend that you consult a risk management firm, residential mortgage compliance professional, or regulatory counsel to develop policies and procedures to implement the Act’s requirements.

One Bureau, Many Bureaucrats

Nothing is more destructive of respect for the government

and the law of the land than passing laws

which cannot be enforced.[viii]

Albert Einstein

There are numerous existing consumer protection laws that will be included in the transfer to the Bureau by July 21, 2011, the Designated Transfer Date,[ix] thereby giving it exclusive rulemaking and examination authority.[x]

These “enumerated laws” include:[xi]

• Alternative Mortgage Transaction Parity Act (AMTPA)[xii]
• Community Reinvestment Act (CRA)[xiii]
• Consumer Leasing Act (CLA)[xiv]
• Electronic Funds Transfer Act (except the Durbin interchange amendment) (EFTA)[xv]
• Equal Credit Opportunity Act (ECOA)[xvi]
• Fair Credit Billing Act (FCBA)[xvii]
• Fair Credit Reporting Act (except with respect to sections 615(e), 624 and 628) (FCRA)[xviii]
• Fair Debt Collection Practices Act (FDCPA)[xix]
• Federal Deposit Insurance Act, subsections 43(c) through 43(f)(12) (FDIA)[xx]
• Gramm-Leach-Bliley Act, sections 502 through 509 (GLBA)[xxi]
• Home Mortgage Disclosure Act (HMDA)[xxii]
• Home Ownership and Equity Protection Act (HOEPA)[xxiii]
• Real Estate Settlement Procedures Act (RESPA)[xxiv]
• S.A.F.E. Mortgage Licensing Act (S.A.F.E. Act)[xxv]
• Truth in Lending Act (TILA)[xxvi]
• Truth in Savings Act (TISA)[xxvii]
• Omnibus Appropriations Act– Section 626 (OAA)[xxviii]
• Interstate Land Sales Full Disclosure Act (ILSFDA)[xxix]

As I have discussed elsewhere, the Bureau would be assigned primary authority to enforce the aforementioned laws, but other federal regulators, including the Department of Housing and Urban Development (“HUD”), the banking agencies, and the Federal Trade Commission, would retain overlapping, secondary enforcement authority over certain requirements. State Attorneys General would be empowered to enforce federal laws under the Bureau (subject to any existing limitations in the laws to be transferred to the Bureau's authority).[xxx] And state consumer financial protection laws would not be preempted, except to the extent that they are inconsistent with federal law (although such state laws could be stricter than the federal laws, in which case they would not be preempted by federal law).[xxxi]

CFPB: The Headless Horseman

COMMENTARY: by JONATHAN FOXX

Jonathan Foxx, former Chief Compliance Officer of two publicly traded financial institutions, is President and Managing Director of Lenders Compliance Group, the nation’s first full-service, mortgage risk management firm in the country.

At this writing, we are almost a week away from the Designated Transfer Date - the date on which the Consumer Financial Protection Bureau (CFPB) receives its enumerated authorities - and nobody has been chosen, appointed or nominated to head the new agency. Several suggestions for the principal position abound, primarily Elizabeth Warren.

How can such a monumental lack of political discipline, by Democrats and Republicans alike, be accounted for?

CFPB: Laws

The CFPB, created by the Dodd-Frank Act, on July 21st it will receive authority over:
-Alternative Mortgage Transaction Parity Act (AMTPA)
-Community Reinvestment Act (CRA)
-Consumer Leasing Act (CLA)
-Electronic Funds Transfer Act (except the Durbin interchange amendment) (EFTA)
-Equal Credit Opportunity Act (ECOA)
-Fair Credit Billing Act (FCBA)
-Fair Credit Reporting Act (except with respect to sections 615(e), 624 and 628) (FCRA)
-Fair Debt Collection Practices Act (FDCPA)
-Federal Deposit Insurance Act, subsections 43(c) through 43(f)(12) (FDIA)
-Gramm-Leach-Bliley Act, sections 502 through 509 (GLBA)
-Home Mortgage Disclosure Act (HMDA)
-Home Ownership and Equity Protection Act (HOEPA)
-Real Estate Settlement Procedures Act (RESPA)
-S.A.F.E. Mortgage Licensing Act (S.A.F.E. Act)
-Truth in Lending Act (TILA)
-Truth in Savings Act (TISA)
-Omnibus Appropriations Act- Section 626 (OAA)
-Interstate Land Sales Full Disclosure Act (ILSFDA)

In just a few days, the CFPB is going to have authority over the above-stated enumerated laws through rulemaking, orders, guidance, interpretations, policy statements, examinations, and enforcement actions.

The CFPB will be assigned primary authority to enforce the aforementioned laws, but other federal regulators, including the Department of Housing and Urban Development (HUD), the banking agencies, and the Federal Trade Commission, will retain overlapping, secondary enforcement authority over certain requirements. State Attorneys General will be empowered to enforce federal laws under the CFPB (subject to any existing limitations in the laws to be transferred to the CFPB's authority). State consumer financial protection laws would not be preempted, except to the extent that they are inconsistent with federal law (although such state laws could be stricter than the federal laws, in which case they would not be preempted by federal law).

CFPB: Products

The CFPB will have oversight over many financial products and services, including, but not limited to, credit extension; credit counseling; loan servicing; Credit Reporting Agencies, their agents and affiliates; real property leases; real estate settlement services; real estate appraisals; depository accounts; financial advisory services; exchange of funds and transmittal of funds; consumer custodial fund services; so-call "stored value cards;" check cashing; debt management, settlement, and collection services; payment processing services; and, a catch-all "other products and services" (as the CFPB so defines).

CFPB: New Offices

There will be various units and offices: a research unit to monitor the consumer financial products and services market, and a unit to collect and track complaints; three new offices to be established within one year of the Designated Transfer Date, an Office of Fair Lending and Equal Opportunity, an Office of Financial Education, an Office of Service Members Affairs; and, an Office of Financial Protection for Older Americans, which must be established within 180 days after the Designated Transfer Date. Furthermore, there will be a Private Education Loan Ombudsman to process complaints from borrowers of private education loans.

CFPB: Staff

In addition to the CFPB's responsibility to build its own staff and administrative operations, it will collaborate with the federal banking agencies and HUD to choose employees to be transferred from their agencies to the CFPB. All such employee transfers are to be fully effectuated not later than 90 days after the Designated Transfer Date.

CFPB: Director

The Director must establish all units and offices within specific time frames, include various coordinating and administrative mandates, provide for reporting requirements to Congress, and must see to it that the various components of the CFPB function through interacting participation within and across all CFPB units and, where applicable, certain federal and state agencies and regulators.

In addition to the foregoing, the Director must also establish the Consumer Advisory Board and appoint its members. By July 21st, as well as its receiving other authorities pursuant to Dodd-Frank, the CFPB must, among other things, conduct research relating to consumer financial products and services, develop its nationwide consumer complaint response center, plan and take steps to implement the risk-based supervision of non-depository entities, and prepare for the opening of outreach offices.

"You say yes, I say no / You say stop and I say go, go, go"  (Beatles)      

Whatever your political persuasion these days, it is irrefutable that this new agency is soon coming into its powers!

Some people believe that the Director should be industry friendly; others believe the Director should be consumer friendly. Does it occur to any of them that these predilections are not mutually exclusive?

Some legislators want to defund the CPFB or "defang" it (as one Congressperson has opined); others want it to have full funding and all the enforcement powers granted by Dodd-Frank.

But defunding an agency that is set to receive all the enumerated laws is entirely counterproductive, inasmuch the industry will depend on it for oversight of these laws. And the CFPB, as required by Dodd-Frank, that is deprived of enforcement powers is virtually no agency at all: this is to "defang" it without regard for the consequences.

Every compliance officer knows that compliance means nothing without enforcement!

"I say high, you say low / You say why, and I say I don't know" (Beatles)

We all know that the President cannot make a recess appointment if Congress is not in recess, notwithstanding the "pro forma sessions" that may be conducted in order to keep the Congress "in session." Essentially, the tactic is for opposition legislators - primarily Republicans - to prevent an appointment of anybody at all to the CFPB unless the CFFB is changed.

As to confirming an appointment, at this time the President has put forth almost 300 civilian appointments this year, but fewer than 100 of them have been confirmed by the Senate - and these are instances where there is no opposition! Indeed, there are 15 judge nominees who have already been unanimously approved by the Senate Judiciary Committee, but their nominations have not even been sent to the floor of the Senate.

Importantly - and, at this late date, inexplicably - President Obama has not even announced his choice for the Director! How can consumers or industry expect congressional action when the President himself won't choose?

At this time, Elizabeth Warren is standing up the CFPB. She is the very person who devised the idea of a consumer financial protection agency and then advocated in the halls of Congress, in speeches, lectures, and interviews throughout the United States, for its creation. Since September 17, 2010, she has been building the CFPB in accordance with the requirements of Dodd-Frank.

While proponents and opponents lambast each other, and a Director is not appointed, the stakes for the mortgage industry continue to grow ever higher and perilous. The many enumerated laws being fully empowered into the CFPB on July 21st affirmatively require substantive, continuous, and very careful oversight.

The individual who manages that agency matters!

Headless Horseman      

• "The dominant spirit, however, that haunts this enchanted region, and seems to be commander-in-chief of all the powers of the air, is the apparition of a figure on horseback, without a head. It is said by some to be the ghost of a Hessian trooper, whose head had been carried away by a cannon-ball, in some nameless battle during the Revolutionary War, and who is ever and anon seen by the country folk hurrying along in the gloom of night, as if on the wings of the wind."

    - Washington Irving, "The Legend of Sleepy Hollow"

The principal character in "The Legend of Sleep Hollow" is Ichabod Crane, a school teacher. Sleepy Hollow is believed to have been located in the area of Tarrytown, NY. Ichabod is killed quite dramatically when the headless horseman, a ghost - and it is believed that ghosts can't cross water! - throws his severed head across a bridge, over the water, and hits poor Ichabad off his horse. The next morning, Ichabod's hat is found nearby, and beside it is a shattered pumpkin. Ichabod was never seen in Sleepy Hollow ever again. In Irving's story, one is led to conclude that the headless horseman was really no ghost at all, but Abraham van Brunt (aka "Brom Bones"), Ichabod's rival for the hand in marriage of Katrina van Tassel, the beautiful daughter of a rich farmer.

Any agency without a head is crippled, but, given the mandates arrogated to the CFPB, not to have a Director immediately is especially debilitating to consumers and mortgage industry participants alike.

Instead of being rivals, like Ichabod Crane and Brom Bones, it is in the interest of both consumers and industry to lobby for a strong CFPB, under the direction of a wise, knowledgeable, and experienced leader.

This is not a job for a career bureaucrat. It requires a Director with considerable managerial, legal, political, and financial knowledge, all of which ideally would be expressed through a balanced temperament, a focused and incisive mind, a fierce consumer advocacy, and sophisticated communication skills.

It seems that Sleepy Hollow has relocated to the Congress of the United States.

What do you think?

I would welcome your comments.

Fannie & Freddie: Administration To "Wind Them Down"

Today, the Obama Administration has delivered a 32-page report to Congress that outlines plans to "wind down Fannie Mae and Freddie Mac and shrink the government's current footprint in housing finance on a responsible timeline."

Released jointly through the Treasury and HUD, it is entitled Reforming America's Housing Finance Market - A Report to Congress, February 2011, the report is meant to lay out reforms to continue fixing the "fundamental flaws in the mortgage market" through stronger consumer protection, increased transparency for investors, improved underwriting standards, and other critical measures. 

It provides guidelines to provide "targeted and transparent support to creditworthy but underserved families" that want to own their own home, as well as affordable rental options.

We will be analyzing the various policy suggestions in this report and publish an outline in the near future, especially as it affects residential mortgage compliance.

Overview of Report

1. Wind Down Fannie Mae and Freddie Mac and Help Bring Private Capital Back to the Market.

Phasing in Increased Pricing at Fannie Mae and Freddie Mac to Make Room for Private Capital, Level the Playing Field.

Reducing Conforming Loan Limits.

Phasing in 10 Percent Down Payment Requirement.

Winding Down Fannie Mae and Freddie Mac's Investment Portfolios.

Returning Federal Housing Administration (FHA) to its Traditional Role.

2. Fix the Fundamental Flaws in the Mortgage Market.

Helping Consumers Avoid Unfair Practices and Make Informed Decisions About Mortgages.

Increasing Accountability and Transparency in the Securitization Process:

Creating a More Stable Mortgage Market.

Servicing and Foreclosure Processes.

Forming a New Task Force on Coordinating and Consolidating Existing Housing Finance Agencies.

3. Better Target the Government's Support for Affordable Housing.

Reforming and Strengthening the FHA.

Rebalancing the Housing policy and Strengthening Support for Affordable Rental Housing.

Ensuring that Capital is Available to Credit-worthy Borrowers in All Communities, Including Rural Areas, Economically Distressed Regions, and Low-income Communities.

Supporting a Dedicated Funding Source for Targeted Access and Affordability Initiatives.

4. Longer-Term Reform Choices.

Visit Library

Obama Administration Plan Provides Path Forward for Reforming America's Housing Finance Market, Winding down Fannie Mae and Freddie Mac
Press Release
Treasury, 2/11/11

Reforming America's Housing Finance Market - A Report to Congress
February 2011
Treasury and HUD, 2/11/11

FTC: Seeks Comments on Revised Disclosures

On August 27, 2010, the Federal Trade Commission (FTC) published for public comment revised versions of three documents required by the Fair Credit Reporting Act (FCRA). The FCRA requires the FTC to prescribe the content of notices that consumer reporting agencies must provide to those who furnish information to them and to those who obtain consumer reports from them.

The proposed revisions incorporate changes in rights and obligations created by several new rules issued pursuant to the Fair and Accurate Credit Transactions Act of 2003 (FACTA).

Under the FCRA, consumer reporting agencies (CRAs) are required to include a summary of consumer rights with every consumer report they provide to a consumer, and the FTC is required to provide a model summary of rights to be used for this purpose.

Comments: by September 21, 2010

If you have any questions about this matter, please contact Jonathan Foxx.

Highlights

Revisions and Updates

GENERAL SUMMARY OF CONSUMER RIGHTS

"Your Rights Under the Fair Credit Reporting Act"

• Furnisher Direct Dispute Rule: which took effect on July 1, 2010, allows consumers to dispute the accuracy of information in their consumer report directly with the furnisher of that information as well as the CRA. The proposed revised Summary of Rights reflects this additional dispute right, and also directs consumers to the FTC's website for more information about disputing consumer report errors.

• Federal Agency Contacts: the current Summary of Rights incorporates a list of Federal agencies responsible for enforcing the FCRA. The proposed revised Summary of Rights makes this information available on its website in a separate document that lists the Federal agencies responsible for enforcing the FCRA, along with their addresses, phone numbers, and website addresses, which can be updated more easily.

• Format changes: include revisions to improve the clarity and readability of the document.

NOTICE OF FURNISHER RESPONSIBILITIES

"NOTICE TO FURNISHERS OF INFORMATION TO
CONSUMER REPORTING AGENCIES:
YOUR OBLIGATIONS UNDER THE FAIR CREDIT REPORTING ACT"

• Furnisher Direct Dispute Rule: reflects the new duties of furnishers provided in the Summary of Rights.

• Furnisher Accuracy Rule: new duties contained in the Furnisher Accuracy Rule, which became effective on July 1, 2010, are outlined.

• Format changes: include revisions to improve the clarity and readability of the document.

NOTICE OF USER RESPONSIBILITIES

"NOTICE TO USERS OF CONSUMER REPORTS:
YOUR OBLIGATIONS UNDER THE FAIR CREDIT REPORTING ACT"

• Risk-Base Pricing Rule: effective January 1, 2011, the Risk-Based Pricing Rule requires users of consumer reports to provide risk-based pricing notices in certain circumstances or permits such users to provide consumers who apply for credit with a free credit score and information about their credit score.
• Address Discrepancy Rule: effective on January 1, 2008, requires the user to implement reasonable procedures to verify that the consumer report relates to the correct consumer.
• Medical Information Rule: effective on April 1, 2006, prescribes the circumstances under which creditors may obtain, use, and share medical information.
• Format changes: include revisions to improve the clarity and readability of the document.

Visit Library for Issuance

Summary of Rights and Notices of Duties
Under the Fair Credit Reporting Act
Federal Register, Vol. 75, No. 166, p 52655
August 27, 2010

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Lenders Compliance Group is the first full-service, mortgage risk management firm in the country, specializing exclusively in mortgage compliance and offering a full suite of hands-on and automated services in residential mortgage banking.

NEW RULES FOR MORTGAGE ORIGINATORS: Reformation and Regulations

by Jonathan Foxx

Jonathan Foxx, former Chief Compliance Officer of two publicly traded financial institutions, is the President and Managing Director of Lenders Compliance Group, the first full-service, mortgage risk management firm in the country.

As published in the August 2010 Edition of National Mortgage Professional Magazine.

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WHO’S IN CHARGE HERE?

I never blame myself when I'm not hitting. I just blame the bat and if it keeps up, I change bats. After all, if I know it isn't my fault that I'm not hitting, how can I get mad at myself?
Yogi Berra

Let’s admit it: the tendency to pretend we’re holding somebody or some entity “accountable” for the mortgage crisis, when we’re really not, is just a fashionable avoidance of that unpleasant word: “blame.” Once that label sticks, it’s on to dealing with the nasty culprits!

Blaming is purported to be cowardly, even passive; and being held accountable is lauded as proactive and high-minded. So, the word “accountable” is now in vogue, instead of “blame.” Frankly, the word “accountable” in today’s world is merely politically-correct, euphemistic Newspeak for the fact that “you know you did wrong, I know you did wrong, everybody in the world knows you did wrong, but you’ll pay no penalties whatsoever for doing anything wrong.”

Although the tone-at-the-top mantra of the Obama Administration is “let’s look forward and not look back,” or the Bush Administration’s tactic of retroactively making lawful what was heretofore unlawful (or unconstitutional) remains beyond contest, or the on-going trading of opaque financial instruments seems to continue in an entirely unregulated market, or many government departments and agencies are still remaining reactive at best during a crisis – in the Newspeak of our times, we are assured of accountability, which now apparently means there’s nobody to blame at all, nobody held responsible for the meltdown, nobody to put in jail. Everybody’s free to go and, we’re admonished, it doesn’t do any good to blame anybody for anything, since we can’t fix this mortgage mess unless and until we all can get along, be bi-partisan, be post-partisan, and look to the better angels of our nature!

Accountability these days seems to mean no adverse consequences to the perpetrator and no blame for anybody. If you find a person to blame, that person’s not accountable; and if you find somebody who is accountable, that person is not to blame. While lobbyists, dogmatists, political catechists, and ideologues just make stuff up, they’ve found the culprit for sure, those bad actors portrayed as directly and indirectly culpable, the rapacious mortgage originators: they certainly should be blamed, reined in, re-regulated, and de-incentivized for having largely contributed to the worst financial crisis since the Great Depression!

Portraying mortgage originators as the culprit is a politically useful narrative meant for the consumption of low information voters; but, as we’ll see, there is plenty of blame in this game and, to date, not much real, old-fashioned accountability – the kind that has real world consequences – except, of course, for those who originated the mortgages in the first place.

Results are what you expect,
consequences are what you get.
Anonymous

On Tuesday, June 22, 2010, a Conference Committee met in Room 106 of the Dirksen Senate Office Building, in Washington, to reconcile Senate and House versions of H.R. 4173, known as the Wall Street Reform and Consumer Protection Act. That bill ostensibly was drafted to create a new consumer financial protection “watchdog,” bring about an end to “too big to fail” bailouts, set up an early warning system to “predict and prevent” the next crisis, and bring transparency and accountability to exotic instruments such as derivatives. Led by Representative Barnie Frank (D-MA) and Senator Christopher Dodd (D-CT), the conferees reviewed and voted on new regulations as well as additions, deletions, and revisions of existing regulations.

The list of new regulations and amendments to existing regulations, consisting of thousands of pages, read like the attenuated, convoluted, cross-tabulated Index Section of a Whodunit’s Guide to the Perplexed. Seated around a large, rectangular dais, the Committee’s politicians called one another out, speechified, postured, and legislated to protect their respective constituencies, absolved themselves of ever having allowed their own politics to contribute to the financial crisis, while the Clerk recorded votes, staff members raced around, and lawyers scurried about with various and sundry red-lined versions of financial reform legislation.

On Friday, June 25, 2010, all the backroom, sub rosa, deals were ironed out, all the special interests had their way or lost their sway, and the votes tallied up mostly across party lines: Democrats – Aye; Republicans – Nay. The Ayes had it!

Congratulations filled the conference chamber, Representatives and Senators praised one another, staff high-fived and hugged one another, and President Obama hailed the legislation as the “toughest financial reforms since the ones we passed in the aftermath of the Great Depression." Now only House and Senate approval was needed, and thence the President’s multi-pen signature, to become the law – which it did on July 21, 2010, just before noon. The legislation, now known as the Dodd-Frank Act, became the law of the land.

Among the many features of the legislation, the following was gaveled in:

• Requiring Lenders to Ensure a Borrower's Ability to Repay: Establishing a “simple federal standard” (sic) for all home loans to ensure that borrowers can repay the loans they are sold.

• Prohibiting Unfair Lending Practices: Prohibiting the financial incentives for subprime loans that “encourage lenders to steer borrowers into more costly loans,” including the bonuses known as yield spread premiums that “lenders pay to brokers to inflate the cost of loans.”

• Penalizing Irresponsible Lending: Issuing monetary penalties to lenders and mortgage brokers who don’t comply with new standards by holding them accountable for as high as three-year’s interest payments and damages plus attorney’s fees (if any), and, protects borrowers against foreclosure for violations of the new standards.

• Expanding Consumer Protections for High-Cost Mortgages: Expanding the protections available under federal rules on high-cost loans -- lowering the interest rate and the points and fee triggers that define high cost loans.

• Mandating Additional Mortgage Disclosures: Requiring lenders to disclose the maximum a consumer could pay on a variable rate mortgage, with a warning that payments will vary based on interest rate changes.

• Establishing an Office of Housing Counseling: Establishing a special office within the Department of Housing and Urban Development (HUD) to “boost homeownership and rental housing” counseling.

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Lenders Compliance Group is the first full-service, mortgage risk management firm in the country, specializing exclusively in mortgage compliance and offering a full suite of hands-on and automated services in residential mortgage banking.