Whistleblowers and Bounty Hunters

Americans have often had an ambivalent view of whistleblowers. When we feel that the whistleblowing serves some righteous cause, the whistleblower's actions are worthy of a medal; but when the whistleblower's cause is considered to mask self-aggrandizement, then we often contend that some jail time might be a more suitable reward, whatever the cause. Still, one person's justification for such actions may be castigated by another person as an act of perfidy.

In a rather morally twisted way, recent law has combined the act of whistleblowing with the remuneration of bounty hunting, the latter being yet another concerning happenstance of American ambivalence.

Let's call this new ethical imperative the "Dope for Dough" compact.

In this article:

• A Snitch In Time Saves Crime
• If You See Something, Say Something
• Welcome to the Office of the Whistleblower
• Bounty Hunter
• Tips, Complaints and Referrals
• Anonymity More-or-Less
• Preventing Retaliation More-or-Less
• First Do No Harm

A Snitch In Time Saves Crime

Being a snitch is not exactly the kind of job position somebody must apply for, even in these days of high unemployment. It's not a career opportunity. A snitch doesn't want to be a snitch, hates snitching, and would rather not have to snitch at all. Being a snitch does not bestow a badge of honor! There are no annual conferences for snitchers. A snitch is not born a snitch; something has to happen to make a snitch snitch.

Often, the stakes for snitching are very high. Being a snitch means subjecting oneself to potential ostracism, being fired, not being hired, jail time, and even community time (yes, courts have held that "community service" may be a proxy for prison time). Snitchers know that whenever people pass them by, there will be fingers pointed at them and breathless whispers behind their backs about the supposed damage done by, or the great good achieved through, their snitching. Snitching has a wake all its own and the snitcher can never get out of it, whatsoever the tattletale tattled.

The list of snitch martyrdom is long and, depending on the results and society's comfort zone, contains patriots and traitors, saints and the damned, reformists and reactionaries, the sempiternal loyalists and the double-crossing turncoat. Even if the weaseling betrayer squeals the unvarnished truth, the very act of making manifest the heretofore hidden may bring with it many dangers impinging on the tipster's physical, let alone social, survival.

If You See Something, Say Something!

We constantly hear, "if you see something, say something." Implied in that statement is the moral judgment that we do know when something is wrong and when something is right, and, knowing that difference, when we know something wrong is happening, we should share such knowledge with somebody else. The phrase does not say, "if you see something, say something, and if you do we'll pay you for the information." It does not say, "if you see something, say something, but if you do you will put yourself and perhaps all of your loved ones at personal risk." And it does not say, "if you see something, say something, but if you do you may go to jail or you may not." Finally, it does not say, "if you see something, say something, though if you do we will ignore what you have to say and nobody will ever know something wrong happened."

The instinct for self-preservation is strong. Especially strong in a stoolie! This is obviously why a recent study shows that 78 percent of Americans said they would report something wrong only if they could be anonymous informants, be assured of evading retaliation, and nevertheless get a reward for information, whether such information was pilfered, pinched, purloined, or professed.

Pity the poor snitch! So misunderstood, often the butt of ridicule, and only occasionally appreciated for the grumbling sacrifice of life and liberty. But now a new era of gratitude, tribute, and prestige has begun for the deep throated canary that yearns to sing.

Welcome to the Office of the Whistleblower

Henceforth, we will need to replace the term snitch with a new title, the "whistleblower," and appoint an overseer to protect the whistleblower's rights, prevent retaliation, and offer remuneration for blowing the whistle and assisting with any investigation or judicial or administrative action that follows from the information thereby obtained.

Section 924(d) of the Dodd-Frank Act (Dodd-Frank) directs the Security and Exchange Commission (Commission) to establish a separate office within the Commission to administer and to enforce the Section 21F provisions of the Securities Exchange Act of 1934 (Exchange Act). On February 18, 2011, the Commission appointed an overseer or Chief, Sean X. McKessy, to head the newly-created Office of the Whistleblower in the Division of Enforcement (Whistleblower's Office). Chief McKessy is looking for a Deputy Chief, and there are several attorneys among the staff.

The ostensible purpose of the Whistleblower's Office is to provide assistance to a whistleblower who knows of possible securities law violations, such as identifying possible fraud and other violations, much earlier than might otherwise have been possible. The result, presumably, will be to minimize the harm to investors, preserve confidence in capital markets, and hold accountable those responsible for unlawful conduct.

Bounty Hunter

For remunerating the whistleblower, the Commission is authorized by Congress to provide monetary awards to eligible individuals who come forward with "high-quality original information" that leads to a Commission enforcement action in which over $1,000,000 in sanctions is ordered. The range for awards is between 10% and 30% of the monetary sanctions collected (which I will term the Bounty Fee).

This Bounty Fee of 10% to 30% is particularly robust, compared to the usual 10% (or less) of bail collected these days by bounty hunters. Of course, the whistleblower's Bounty Fee is not quite the same as the fee paid to a bounty hunter for capturing a fugitive outlaw. Bounty hunters are usually employed by bail bondsmen. But there is, shall we say, a resemblance.

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.

Boom or Bust?

COMMENTARY

Jonathan Foxx

President and
Managing
Director

There is an astonishing contrast regarding the condition of the housing market as depicted by the FRB, the Obama Administration, the ratings agencies, and many real estate and mortgage industry resources. 

If you feel a sense of confusion, perhaps it is because the differing views are like a patchwork quilt of political posturings, actual financial data, and too many opinions.

Housing Finance

Today, June 9, 2011, Standard & Poor's will hold a meeting in New York City, entitled Housing Summit 2011: Boom, Bust, & Beyond. It is all sold out.

The meeting will cover affordable housing, housing finance reform, limiting the government's role, government-sponsored programs, and insurance enhancements. The principal speaker will be Valerie White, S&P's Senior Director and Analytical Manager, who is an expert in the financing issues involving the U.S. affordable housing market in the aftermath of the 2008 housing bust. If you will not be attending, here is her view.

Essentially, Ms. White believes that interest rates, among other factors, are the most significant challenge still facing low to moderate income borrowers, because lower rates put credit pressure on bond programs.

What is Affordable?

While I think S&P's view is worth considering, I'm not so sure the housing market's sorry condition results from merely an interest rate issue. I realize that affordable housing is only one bell weather, but it is important and, in many ways, S&P's observation may be generalized to many aspects of the housing finance market.

Upside Down

It is one thing to have a large supply of foreclosed-on houses, or rate arbitrage issues, but it is quite another when millions of mortgaged houses are underwater. Negative equity - or, now its new sibling, "near-negative equity" (for less than 5% equity remaining in the property) - are riotously rampant, like a forest fire out of control with no fire fighters in sight.

Who does not know that negative equity occurs because of a decline in value, an increase in mortgage debt, or some combination of both?

CoreLogic issued a report for the first quarter 2011, released yesterday, in its ongoing series about negative equity. The report shows that 10.9 million (22.7%) of all residential mortgaged properties were in negative equity at the end of the first quarter of 2011, and an additional 2.4 million borrowers had near-negative equity.

Together, negative equity and near-negative equity accounted for 27.7% of all residential mortgaged properties!

By the way, that statistic has gone down infinitesimally: in the fourth quarter 2010, these two categories stood at 27.9%.

The Real Picture

I'll let CoreLogic's chart tell it like it is:

New Analysis Highlights The Role Of Home Equity Extraction In Negative Equity Risk
Page 4, 6/7/11, CoreLogic

Praising Limited Progress

Yet we continue to hear glowing reports from the Obama Administration, especially regarding the HAMP program, such as:

• "The Administration's efforts have helped millions of families deal with the worst economic crisis since the Great Depression."

• "Tens of thousands of new homeowners continue to receive real payment relief from HAMP every month."

• "Mortgage delinquencies continued a downward trend compared to early 2010 and foreclosure starts and completions remain below peak."

I have written extensively about the failure of HAMP, so I will not revisit my concerns. 

Please visit the Commentary section of our Archive to read my comments.

Positive Economic Growth or Negative Equity Growth

Negative equity is a critical indicator. Borrowers in negative equity positions may be willing and able to pay their monthly mortgage payments, but they are probably also enduring income shock, whether it be caused by loss of a job, divorce, or death - and, these borrowers continually are on the precipice of foreclosure and short sale.

High rates or low rates, the negative equity condition is not improving much at all. In fact, it has yet to crest.

If you want to believe the FRB, economic growth may be temporarily stalled, but will soon turn around. Economic recovery is just around the corner, or maybe the next corner. Obviously, a sustained growth in the economy will mitigate risk and bring down the negative equity condition as well as offer strengthening to borrowers' incomes.

But for the mortgage industry, negative equity and near-negative equity should be considered leading indicators, foretelling the presence or absence of any possible recovery to a robust housing finance market. Their very existence depresses sales and debilitates refinances.

If rates were the issue, the mortgage market would have long since revived!

What do you think?

I would welcome your comments.

Please feel free to email me at any time.

CFPB: Announces Forthcoming Rules Transfer

As required by the Consumer Financial Protection Act (Act) of 2010, the Consumer Financial Protection Bureau (CFPB) published a list of the rules and orders that it will enforce.  Section 1063(i) of the Act required publication in the Federal Register. The issuance is dated May 31, 2011.

A final list will be published not later than July 21, 2011, the Designated Transfer Date of the enumerated laws. Any orders for inclusion in the list should be noted by the deadline for comments. After considering any public comments, the CFPB will publish a final list in the Federal Register not later than the Designated Transfer Date.

 Comment Period Deadline: June 30, 2011

TRANSFER OF AUTHORITIES *

* Issuance contains specific citations.

Visit Library (See Below)

Under the Act, certain consumer financial protection authorities will transfer from seven (7) transferor agencies to the CFPB, and the CFPB will also assume certain new authorities.

Subject to the limitations and other provisions of the Act, the CFPB will be authorized to enforce, inter alia, rules and orders issued by the transferor agencies under the enumerated consumer laws.

Categorized by their current, respective Agency oversight, the following is the list of enumerated authorities that will be transferred on the Designated Transfer Date.

Board of Governors of the Federal Reserve (FRB)  

1. Equal Credit Opportunity Act (Regulation B)

2. Home Mortgage Disclosure (Regulation C)

3. Electronic Fund Transfers (Regulation E)

4. Registration of Residential Mortgage Loan Originators (Regulation H, Subpart I) (12 CFR 208.101-105 & Appendix A to Subpart I)

5. Consumer Leasing (Regulation M)

6. Privacy of Consumer Financial Information (Regulation P)

7. Fair Credit Reporting (Regulation V), except with respect to §§ 222.1(c) (effective dates), 222.83 (Disposal of consumer information), 222.90 (Duties regarding the detection, prevention, and mitigation of identity theft), 222.91 (Duties of card issuers regarding changes of address), & Appendix J (Interagency Guidelines on Identity Theft Detection, Prevention, and Mitigation)

8. Truth in Lending (Regulation Z)

9. Truth in Savings (Regulation DD)

Federal Deposit Insurance Corporation (FDIC)  

1. Privacy of Consumer Financial Information

2. Fair Credit Reporting, except with respect to §§ 334.83 (Disposal of consumer information), 334.90 (Duties regarding the detection, prevention, and mitigation of identity theft), 334.91 (Duties of card issuers regarding changes of address), & Appendix J (Interagency Guidelines on Identity Theft Detection, Prevention, and Mitigation)

3. Registration of Residential Mortgage Loan Originators (12 CFR 365.101-.105 & Appendix A to Subpart B)

Office of the Comptroller of the Currency (OCC)   

1. Adjustable-Rate Mortgages (but only as applied to non- federally chartered housing creditors under the Alternative Mortgage Transaction Parity Act ("AMTPA"))

2. Registration of Residential Mortgage Loan Originators (12 CFR 34.101-.105 & Appendix A to Subpart F)

3. Privacy of Consumer Financial Information

4. Fair Credit Reporting, except with respect to §§ 41.83 (Disposal of consumer information), 41.90 (Duties regarding the detection, prevention, and mitigation of identity theft), 41.91 (Duties of card issuers regarding changes of address), & Appendix J (Interagency Guidelines on Identity Theft Detection, Prevention, and Mitigation)

Office of Thrift Supervision (OTS)

1. Adjustments to home loans (but only as applied to non-federally chartered housing creditors under AMTPA)

2. Alternative Mortgage Transactions (but only as it relates to AMTPA)

3. Registration of Residential Mortgage Loan Originators (12 CFR 563.101-.105 & Appendix A to Subpart D)

4. Fair Credit Reporting, except with respect to §§ 571.83 (Disposal of consumer information), 571.90 (Duties regarding the detection, prevention, and mitigation of identity theft), 571.91 (Duties of card issuers regarding change of address), & Appendix J (Interagency Guidelines on Identity Theft Detection, Prevention, and Mitigation)

5. Privacy of Consumer Financial Information

National Credit Union Administration (NCUA)     

1. Loans to members and lines of credit to members (but only as applied to non-federally chartered housing creditors under AMTPA)

2. Truth in Savings

3. Privacy of Consumer Financial Information

4. Fair Credit Reporting, except with respect to §§ 717.83 (Disposal of consumer information), 717.90 (Duties regarding the detection, prevention, and mitigation of identity theft), 717.91 (Duties of card issuers regarding changes of address), & Appendix J (Interagency Guidelines on Identity Theft Detection, Prevention, and Mitigation)

5. Requirements for Insurance, but only with respect to §§ 741.217 (Truth in savings), 741.220 (Privacy of consumer financial information), & 741.223 (Registration of residential mortgage loan originators)

6. Registration of Mortgage Loan Originators

Federal Trade Commission (FTC)      

1. Telemarketing Sales Rule

2. Privacy of Consumer Financial Information

3. Disclosure Requirements for Depository Institutions Lacking Federal Depository Insurance

4. Mortgage Assistance Relief Services

5. Use of Prenotification Negative Option Plans

6. Rule Concerning Cooling-Off Period for Sales Made at Homes or at Certain Other Locations

7. Preservation of Consumers' Claims and Defenses

8. Credit Practices

9. Mail or Telephone Order Merchandise

10. Disclosure Requirements and Prohibitions Concerning Franchising

11. Disclosure Requirements and Prohibitions Concerning Business Opportunities

12. Fair Credit Reporting Act (16 CFR Subchapter F, Parts 603 et seq.), except with respect to Part 681 (Identity Theft Rules), Part 682 (Disposal of Consumer Report Information and Records), & Appendix A to Part 681 (Interagency Guidelines on Identity Theft Detection, Prevention, and Mitigation)

13. Procedures for State Application for Exemption from the Provisions of the Fair Debt Collection Practices Act

Department of Housing and Urban Development (HUD)      

1. Hearing Procedures Pursuant to the Administrative Procedure Act

2. Civil Money Penalties: Certain Prohibited Conduct (but only as applied to the Real Estate Settlement Procedures Act of 1974 ("RESPA") and the Interstate Land Sales Full Disclosure Act ("ILSA"))

3. Land Registration

4. Purchasers' Revocation Rights, Sales Practices, and Standards

5. Formal Procedures and Rules of Practice

6. Real Estate Settlement Procedures Act

7. Investigations in Consumer Regulatory Programs (but only as applied to RESPA and ILSA)

Visit Library for Issuance

Bureau of Consumer Financial Protection
Identification of Enforceable Rules and Orders, Notice for Public Comment
Federal Register, Vol. 76, No. 104.
May 31, 2011 - Rules and Regulations

Singular destiny where the goal keeps shifting ...

COMMENTARY: 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.

In the last few years, the US has been undergoing significant economic and political changes - some of which have their roots in many past decades. We find the momentum of these changes, now forcefully underway, to be altering many of our financial, political, and professional plans.

Change is not easy to experience. Nor is crisis, fraught with uncertainty.

The Chinese character for crisis conveys our current circumstances: a perilous situation, an incipient moment when something begins or changes, and when one should be especially wary.

Reflections

We are a unique generation of Americans, blessed with the benefits of advanced technologies, more affluent than our forebears, more aware of the world around us, able to explore our galaxy and see into the far reaches of the universe, indeed able to look deeply into the infinitesimally small, physical world within our own human being.

But no matter how much we learn about ourselves and our world, we will never open a brain and find the traces of a compassionate thought, or open a heart and find the feeling of love. Yet we do know what we think and how we feel. As both surveyors and inhabitants of our world, as its caretakers and caregivers, there are many ways and means to improve the quality of life for all living beings. Living not only for ourselves, we want to pass on a better world to the next generation. Yet it is through the application of knowledge, howsoever derived, that risks emerge and shape the future.

Goals and Destiny

In these last few days of this year, reflecting on the crises facing the mortgage industry, it is clear that change has been blunt, quick, and irreversible. Many industry members have lost their jobs and their savings and, in some instances, their companies. A plethora of new regulations, new proposed regulations, new consumer protection laws, financial reform legislation, new federal and state disclosure requirements, and new rules regarding mortgage originator compensation, seem to be promulgated without end. Some market actors have been caught up in a dragnet of disputes, such as in foreclosuregate, loan modification delays, loss mitigation failures, mortgage loan fraud, appraisal fraud, identity theft scams, strategic defaults and high mortgage default ratios. FHA, Fannie, and Freddie are barely hanging on to their missions and corporate charters, even with potential or actual "bailouts" from taxpayers. Litigation and lobbying abound!

And yet, there are those on Wall Street who believe that subprime securitization will return soon. There are those who want to delay financial reform. There are those who want to deactivate plans for a consumer financial protection agency. There are those who believe that regulators should serve the banks, rather than to assertively monitor them on behalf of taxpayers and to preserve the public trust.

We have clients that have fought valiantly to stay in business at a time when their peers have had to shut down - and, to the former's credit, they have made it through the struggle. And we have clients that proactively come to us now and seek guidance in implementing the many new regulatory compliance requirements. Because I have witnessed our clients' commitment, fortitude, and drive, I know the mortgage industry will survive and continue to foster innovative leadership.

Crossroads

In general, actors in a market have conflicting goals. The mortgage and financial markets are no exception. Conflicts are necessarily delineated between certain market participants.

At the crossroads of politics and economics, our democracy will find its way forward. But out of the differing expectations, all of us need to forge bold goals and transgenerational resolutions. And we need to identify the risks associated with our goals.

Perhaps 2011 will bring decisive options and opportunities, heretofore unrecognized, to bring closure to some of the mortgage industry's most pressing concerns.

As we meet the future, let's be mindful that we will be judged not on what we thought or felt, but on what we actually did at a time of crisis!

Singular destiny where the goal keeps shifting …

Please consider Beaudelaire's penetrating verse,
as we boldly, compassionately, and humbly
seek our own precious goals in 2011:

Singulière fortune où le but se déplace,
Et, n'étant nulle part, peut être n'importe où!
Où l'Homme, dont jamais l'espérance n'est lasse,
Pour trouver le repos court toujours comme un fou!

Singular destiny where the goal keeps shifting,
And, being nowhere, can perhaps be anywhere!
Where Man, whose hope never grows weary,
Is always seeking a short respite like a fool!

"Le Voyage" (The Voyage)
from Les Fleurs du Mal - Charles Beaudelaire. (My translation)

Best wishes from all of us to all of you -

for a safe, joyous, and fulfilling New Year!

I would welcome your comments.

Please feel free to email me at any time.

Dodd-Frank Act - Part II: Legislation - Reactive or Proactive

Commentary 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.

Lenders Compliance Group is the first full-service, mortgage risk management firm in the country and pioneers in outsourcing solutions in regulatory compliance.

Published in the September 2010 Edition of National Mortgage Professional Magazine.

_______________________EXCERPT_______________________

In the wake of the recent financial collapse, the mortgage industry finds itself today faced with a blizzard of new regulations. There are reformist politicians who advocate for these new regulations, giving forth an apologetic that rival the reasoning of the most eloquent, ancient rhetoricians; and, there are politicians who condemn these same, new regulations, proclaiming that the prior existing regulations should have been (but were not) enforced, and that interposing new regulations in a deteriorating economy only adds to the industry's already hefty and costly regulatory burden.

The "Wall Street Reform and Consumer Protection Act," known as the "Dodd-Frank Act" (Act), is the federal government's response to the financial collapse, offering financial reform of the financial system in general, and to the mortgage industry in particular. It has been legislated into law at a time when fear pervades politics and the economic climate continues to worsen, with high unemployment, an eroding tax base, a swelling budget deficit, trillions of dollars in debt, and increasingly compressed corporate profit margins.

The Act hopes to provide that salvific safety, certainty, and stability that will calm our fears. But it is legislation that reacts to events past, and it is not necessarily proactive about possible events that may yet transpire. Financial bubbles, after all, exist due to the blindness of market participants, not their foresight.

___________________________________________

This new article, the second article in a 3-part series that dissects the landmark financial reform legislation now known as the Dodd-Frank Act, is entitled Part II: Legislation - Reactive or Proactive, A New Era of Mortgage Reform.

In this article, I summarize certain salient aspects of the Mortgage Reform and Predatory Lending Act (Mortgage Reform Act). It is a primary component of the Dodd-Frank Act and requires careful review and analysis in order to implement properly. And, I provide a matrix of the Mortgage Reform and Predatory Lending Act, with respect to the minimum standards for mortgages.

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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.

Appointing a Director to the CFPB

Commentary: 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.

Many clients and colleagues have asked me why it is that a Director for the newly legislated Consumer Financial Protection Bureau (CFPB) has not been appointed by this point. After all, the financial reform legislation became the law of the land on July 21, 2010. It is now over two months later and there is still no appointment to that post.

The reason for the delay can be given in one word: politics.

At this point, there really is no excuse for the usual cover story that explains such delays - "getting it right" in finding the most qualified person.

Would you think that the person is qualified who actually initiated the concept of the CFPB and has advocated for its implementation all along - before the politicians got their hands on the idea? Would somebody who has been a consistent public voice for consumer protection advocacy be qualified?

How about an individual who has published numerous scholarly articles, and teaches contract law, bankruptcy law, and commercial law at Harvard Law School - and has taught law at several top law schools - is that a decent enough credential? Indeed, somebody whose legal expertise and experience have led to being considered a nominee to serve as a Supreme Court Justice, for the position previously held by Justice John Paul Stevens (and now held by Justice Elena Kagan) - that kind of legal skill and integrity - would that qualify?

Given the "mortgage meltdown" and Wall Street's financial fiasco, what about choosing the person who actually is the chair of the Congressional Oversight Panel, charged with investigating the Troubled Asset Relief Program (otherwise known as "TARP," and otherwise known as the "Bailout")? Maybe somebody willing to challenge the U. S. Treasury Department's handling of the Bailout and demanding more accountability?

Maybe a mature person of 61 years of age, somebody who is not an ivory tower scholar, having grown up in Oklahoma, attended non-Ivy League colleges, and received a JD from Rutgers University? Think about a person who has been the Vice President of the American Law Institute as well as a former Sunday School teacher.

That person is Elizabeth Warren.

Only one problem: politics. Inscrutable politics.

For instance, the retiring Senator Christopher Dodd (D-CT), who led the Senate's work on the financial reform legislation, has been making statements that indicate an unwillingness to understand or accept his own law. That law, eponymously named after him and his cohort in the House, Barnie Frank (D-MA), provides for an Interim Director, appointed by the Treasury Secretary - and the appointment does not require the Senate's approval. Yet Senator Dodd has said that such a power is not in the new law and the Senate's approval is required. Maybe he should read what he signed!

The Dodd-Frank Act's Title X, Subtitle F - "Transfer of Functions and Personnel; Transitional Provisions," Sections 1066 (a) and (b), inter alia, specifically state that the Treasury Secretary is "authorized to perform the functions of the Bureau" and may provide "administrative services necessary to support the Bureau before the designated transfer date" of the many regulatory authorities to it.

In other words, the Treasury Secretary runs the Bureau until such time as the Bureau runs itself as an agency within the Treasury, and therefore the Treasury Secretary has the authority to appoint an Interim Director. An Interim Director appointment would likely lead to a permanent Director position, but, given the spectacle of DC politics recently, that may also lead to yet another partisan blockade or filibuster.

So why not get started right now?

Meanwhile the public is waiting and wondering.

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So, What Do You Think?

I would welcome your comments and views.

Please feel free to email me at any time.

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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.

SAFE Act: Final Rules for Mortgage Loan Originators

MORTGAGE COMPLIANCE

On July 28, 2010, the federal agencies issued final rules requiring residential mortgage loan originators (MLO) who are employees of national and state banks, savings associations, Farm Credit System institutions, credit unions, and certain of their subsidiaries (agency-regulated institutions) to meet the registration requirements of the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act).

An MLO as an individual who: (i) takes a residential mortgage loan application; and, (ii) offers or negotiates terms of a residential mortgage loan for compensation or gain.

Excluded from the registration requirement are individuals engaged in modifications and assumptions, since those transactions do not result in the extinguishing of an existing loan and the replacement with a new loan.

The SAFE Act does not require employees of mortgage loan servicers to be licensed as MLOs; indeed, the Dodd-Frank Wall Street Reform and Consumer Protection Act excludes servicers, providing in its separate definition of "mortgage originator" under the Truth in Lending Act that those persons, among others, do not include servicers and their employees, agents, or contractors.

The newly created Consumer Financial Protection Bureau (CFPB) will be assuming HUD's role of determining whether states have met the SAFE Act's minimum requirements, and undoubtedly the CFPB will clarify whether the SAFE Act requires employees of mortgage loan servicers to be licensed as originators.

As part of this registration process, MLOs must furnish to the Nationwide Mortgage Licensing System and Registry (Registry) information and fingerprints for background checks. The SAFE Act generally prohibits employees of agency-regulated institutions from originating residential mortgage loans unless they register with the registry.

The agencies' final rules establish the registration requirements for MLOs employed by agency-regulated institutions and requirements for these institutions, including the adoption of policies and procedures to ensure compliance with the SAFE Act and the final rules.

Importantly, the agencies anticipate that the Registry could begin accepting federal registrations as early as January 28, 2011.

Employees of agency-regulated institutions must not register until the agencies instruct them to do so. The agencies will provide an advance announcement of the date when the registry will begin accepting federal registrations, beginning on the date the Agencies provide in a public notice that the Registry is accepting initial registrations, and agency-regulated institutions and their applicable employees will have 180 days from that date to comply with the initial registration requirements.

Final Rule Effective: October 1, 2010.

If you have any questions about this matter or would like assistance with mortgage compliance, please contact Jonathan Foxx, Managing Director.

Highlights

Registration of Mortgage Loan Originators (MLO)

• Registration requirement. Each employee of a national bank who acts as a mortgage loan originator must register with the Registry, obtain a unique identifier, and maintain this registration in accordance with the requirements of the final rule.

• Implementation period for initial registration. An employee of a national bank who is a mortgage loan originator must complete an initial registration with the Registry pursuant to the final rule within 180 days from the date that the OCC provides in a public notice that the Registry is accepting Registrations.

• Employees previously registered or licensed through the Registry. In general. If an employee of a national bank was registered or licensed through, and obtained a unique identifier from, the Registry and has maintained this registration or license before the employee becomes subject to the final rule at this bank, then the registration requirements of the SAFE Act and the final are deemed to be met, provided that certain conditions are met.

Policies and Procedures

• A national bank that employs one or more MLOs must adopt and follow written policies and procedures designed to assure compliance with the final rule.

• Policies and procedures must be appropriate to the nature, size, complexity, and scope of the mortgage lending activities of the bank, and apply only to those employees acting within the scope of their employment at the bank.

Use of Unique Identifier

• A national bank shall make the unique identifier(s) of its registered mortgage loan originator(s) available to consumers in a manner and method practicable to the institution.

• A registered mortgage loan originator shall provide his or her unique identifier to a consumer:

1. Upon request;

2. Before acting as a mortgage loan originator; and

3. Through the originator's initial written communication with a consumer, if any, whether on paper or electronically.

Visit Library for Issuance

Registration of Mortgage Loan Originators - Final Rule
Federal Register, Vol. 75, No. 144, 44656-44708, (7/28/10)

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.

FINANCIAL REFORM: Restricts Loan Officer Compensation

OVERVIEW

On May 20, 2010, by a vote of 59-39 the Senate passed the so-called "Finance Reform Bill," otherwise known as Restoring American Financial Stability Act of 2010 - Amendment (S 3217) (Act). Nearly sixteen hundred pages long, it passed as an Amendment to the House's own version of over sixteen hundred pages (HR 4173), the Restoring American Financial Stability Act of 2010 (HR 4173).

On June 10, 2010, the Senate and House began reconciling their respective financial regulatory reform bills. Thus began the process of "reconciliation" between Senate and House versions to produce a final version that is supposed “to end 'too big to fail,' to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.”

In a Summary published by the the House Financial Services Committee, a brief outline was provided which, among other things, confirms the adoption of restrictions on a mortgage originator's compensation through Yield Spread Premiums (YSP).

The reconciled version:

●Clarifies that mortgage compensation can only be financed if all originator compensation is paid by the borrower (not third parties) and the borrower pays the entire fee by financing it; and,

●Permits compensation through rate for all mortgages as long as they satisfy the "borrower pays fee" financing provision (previously the House bill only required this for "Qualified Mortgages").

Under the rubric of "anti-steering regulations," the YSP  would now be  restricted as compensation to the mortgage originator.

The restrictions on loan officer compensation are meant to reconcile the Senate and House versions of the Act and will presumably be in the final version to be signed by the President.

HIGHLIGHTS

Section 1073 (Page 1444 - HR 4173)
PROHIBITED PAYMENTS TO MORTGAGE ORIGINATORS

PROHIBITION ON STEERING INCENTIVES

(1) IN GENERAL: For any consumer credit transaction secured by real property or a dwelling, no loan originator shall receive from any person and no person shall pay to a loan originator, directly or in-directly, compensation that varies based on the terms of the loan (other than the amount of the principal).

(2) RESTRUCTURING OF FINANCING ORIGINATION FEE:

  (A) IN GENERAL: For any consumer credit transaction secured by real property or a dwelling, a loan originator may not arrange for a consumer to finance through the rate any origination fee or cost except bona fide third party settlement charges not retained by the creditor or loan originator.

  (B) EXCEPTION: Notwithstanding sub-paragraph (A), a loan originator may arrange for a consumer to finance through the rate an origination fee or cost if:

    (i) the loan originator does not receive any other compensation, directly or indirectly, from the consumer except the compensation that is financed through the rate;

    (ii) no person who knows or has reason to know of the consumer-paid compensation to the loan originator, other than consumer, pays any compensation to the loan originator, directly or indirectly, in connection with the transaction; and

    (iii) the consumer does not make an upfront payment of discount points, origination points, or fees, however denominated (other than bona fide third party settlement charges).

(3) RULES OF CONSTRUCTION: No provision of this subsection shall be construed as:

  (A) limiting or affecting the amount of compensation received by a creditor upon the sale of a consummated loan to a subsequent purchaser;

  (B) restricting a consumer's ability to finance, at the option of the consumer, including through principal or rate, any origination fees or costs permitted under this subsection, or the loan originator's right to receive such fees or costs (including compensation) from any person, subject to paragraph (2)(B), so long as such fees or costs do not vary based on the terms of the loan (other than the amount of the principal) or the consumer's decision about whether to finance such fees or costs; or

  (C) prohibiting incentive payments to a loan originator based on the number of loans originated within a specified period of time.

Visit Library for HR 4183: Section 1073 and Full Text

Visit our Library for Issuances

 

●Restoring American Financial Stability Act of 2010 (HR 4183)
●Restoring American Financial Stability Act of 2010 - Amendment (S 3217)
●HR 4183: Section 1073 - Prohibited Payments to Mortgage Originators