Rules, Regulation, and Enforcement

If you have read the newspapers for the last two years, you have probably concluded that the mortgage industry needed much more regulation. After all, it was the mortgage industry and all the toxic loans it spawned that were the proximate causes of the great financial mess we are in right now.

The industry has had several more layers of regulation laid on it recently, and a bunch more is in the pipeline depending on what Congress does with the bill that is now circulating. So I think that it might be instructive to examine the current state of affairs and see if what is being proposed will improve things.

The first thing to consider is that the mortgage industry is, on the surface, a highly regulated industry, and the current set of regulations goes back more than 30 years. The Real Estate Settlement Procedures Act is administered by HUD and dates back to 1974. The Truth-in-Lending Act administered by the Federal Reserve goes back to 1968.

The Federal Trade Commission is in charge of a wide swath of activities, such as assuring that advertising practices are not deceptive. The FTC also oversees various other practices involving mortgages, including its efforts to squelch the current loan modification scams.

The Office of the Controller of the Currency plays a role in supervising the biggest banks, all of which have national charters. This is not the limit of federal regulations because it includes the FDIC and a few other agencies. Additionally, lenders ware also supervised by state agencies in every state except Alaska.

So you can see from this fair summary that this is NOT an unregulated industry. In fact, you can see that there has been a substantial body of regulations that have been in place since the current crop of homebuyers were in their cribs.

HUD-issued regulations regarding RESPA (Real Estate Settlement Procedures Act) disclosures that were passed in late 2008 and are due to take effect on January 1st, 2010. Why do we need a revision? Here’s what HUD says:

RESPA is a HUD consumer protection statute designed to help homebuyers be better shoppers in the home buying process, and is enforced by HUD.

Whooopeee! That is no different that what they said about the old law 25 years ago. In fact, while HUD has come up with a “new form”, it is just as incomprehensible to consumers as the one that has been in use for the last 35 years.

In its charge to protect consumers, the FTC has stated this objective for the new law, called the Mortgage Acts and Practices Rulemaking. In this, the FTC hopes to achieve better disclosures; one of the goals:

…. the injury must be one that consumers could not reasonably have avoided….

What does that mean? The fact is that if a consumer took the time to get educated, he WOULD have avoided the injury. But most people do NOT get educated, which is why it is easy for some unscrupulous lenders to injure them.

So a reasonable person might ask the following: If all these regulations are in place, why didn’t they work?

There are two logical answers to this question. First, there are about 40,000 mortgage transactions concluded every day. How can anyone think that it is possible to have any reasonable oversight over transactions that occur at the rate of 5,000 per hour, month in and month out. It’s not going to happen.

The second thing is that the agencies that are responsible for enforcement do not have the manpower or funding to take on any meaningful rile in enforcement. It’s one thing to pass a set of rules; it’s another thing to enforce them.

What has happened is that the law-abiding loan originators try as best they can to obey all the regulations, increasing their costs and burdening consumers. The slimy guys who are intent on deceiving their customers pay no attention to the rules because there is no enforcement.

Think of this example: Stop signs. Let’s say for the moment that everyone in town knows that the local police chief told his officers, “Don’t worry about stop signs. Don’t bother enforcing those laws.” In an act of self-preservation, you might continue to stop at all signs, but how long would it take before many others would slow down and just go on through? Not long.

HUD came up with new 86-page rule for RESPA to take effect on January 1st. The Q&A regarding this rule takes up an additional 51 pages and includes this language:

Failure to provide a GFE as required is a violation of Section 5 of RESPA.

Good Heavens! I am in my 30th year in this business and we have always been required to provide a GFE (Good Faith Estimate). So what’s new?

In late November 2009, HUD issued this announcement:

The U.S. Department of Housing and Urban Development (HUD) today announced that for the first four months of 2010, the staff of the Mortgagee Review Board (MRB) will exercise restraint in enforcing new regulatory requirements.

What a joke. I have been in this business since 1980, and neither I nor anyone I know has heard of someone being investigated for RESPA violations – not even once. So what is the meaning of delaying enforcement if there isn’t any enforcement anyway?

In fact, we all know that the subprime lenders were a source of considerable unethical and probably illegal activities in originating millions of subprime loans. Late in 2007, the FBI announced that they were going to investigate the activities of 18 different lenders. My belief is that they could have found evidence of illegal activities, but they must have given up. Here it is over two years later, no arrests have been made, and you don’t hear ANYTHING about it. You would have to assume that the investigation is dead in the water.

Bottom line: Congress is going through the politically attractive act of passing more laws, and there is no ability whatsoever to enforce them.

If you are a consumer, my advice is to not rely upon some regulator to protect you. Become well-informed and protect yourself. Start out by getting an education, and get your loan from a trustworthy person who will treat you right regardless of the regulations.