What is the CFPB and how might it affect YOUR real estate business?

The Consumer Financial Protection Bureau (CFPB) is an independent agency of the United States government responsible for consumer protection in the financial sector. Its jurisdiction includes banks, credit unions, securities firms, payday lenders, mortgage-servicing operations, foreclosure relief services, debt collectors and other financial companies operating in the United States.

The Great Recession of ‘07-‘08, the catalyst of which was the meltdown in the secondary mortgage market, proved a difficult time for many Americans. As residential home values depreciated rapidly over the coming years while the market for employment concurrently contracted, many homeowners defaulted on their upside down mortgages. The resulting mass judicial exercise of rights under the respective mortgage agreements led to what has been since dubbed as “foreclosure gate.” The largest mortgage holders in the country, including Bank of America, JP Morgan, Wells Fargo, etc. (not to mention thousands of others) were literally holding billions of dollars of defaulted mortgage paper, with only a time consuming and costly foreclosure action as their exit.

Foreclosure proceedings are highly technical endeavors, and even seemingly simple noncompliance with the multitude of technicalities can result in an invalid proceeding. The policy behind such rigid rule adherence is for the protection of the consumer. The bank is, after all, reclaiming someone’s home.

The process can be difficult enough when dealing with one defaulted borrower. It can be downright impossible during a tidal wave of tens of thousands of foreclosures all occurring at or around the same time. This was especially true in some of the most heavily impacted areas of the country, where literally thousands of foreclosed properties were going to sheriff’s sale on the same day of the month. The Sheriff, as required by most state foreclosure statutes, cannot literally conduct an auction, in a “loud and audible voice” in the lobby of the Parish courthouse for two thousand foreclosures. Thus, some of the technical corners were cut. Mass production of false and forged execution of mortgage assignments, satisfactions, affidavits, and other legal documents related to mortgage foreclosures and legal matters were created by persons without knowledge of the facts being attested. In addition, much of the documentation for these mortgages that were foreclosed upon was either “improper” or “missing”.   Thus, mortgage lenders were using materially flawed paperwork to evict homeowners.

In response to this capital market crisis, Congress reacted and in 2010 the Dodd–Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) was signed into law. Dodd-Frank, has as its stated aim “To promote the financial stability of the United States by improving accountability and transparency in the financial system, 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.” One of the major goals is the protection of consumer personal information.

Title XIV of Dodd-Frank, the Mortgage Reform and Anti-Predatory Lending Act, focuses on standardizing data collection for underwriting and imposes many other obligations on mortgage originators, and is administered by the Consumer Financial Protection Bureau (CFPB). In an effort to ensure compliance with the purpose of Dodd Frank, the CFPB began its regulatory push and has had the effect of placing potentially huge liabilities on mortgage lenders for noncompliance. In fact, the lender’s liability extends to the noncompliant acts of affiliates and other service providers as provided for in CFPB Bulletin 2012-03. Thus, any vendor of closing or settlement services potentially creates an avenue of liability for the lenders! Closing agents, notaries, and attorneys are not exempt, and potentially all create liability to the lender on a particular transaction.

Understandably, mortgage lenders found themselves scrambling to find service providers that wouldn’t expose them to financial loss. With the intent to create a suitable benchmark by which lenders could have some idea of how various closing agents measured up, the American Land Title Association (ALTA), in conjunction with many of the major mortgage players and with representatives from the CFPB, devised a framework intended to serve as a proxy for lender supervision. checklistALTA Best Practices is the resultant system by which closing agents will be graded. If a closing/settlement agent cannot get a certification of Best Practices compliance, it is highly likely that the agent will not get/remain on the lender’s approved list.

The consequences are enormous. Many “mom and pop shop” closing agencies will not have the resources to become compliant and will ultimately be regulated out of business. Keep in mind that Dodd-Frank and the CFPB do not regulate these service providers directly, and as such, do not restrict a non compliant attorney or title company from performing settlement services. Additionally, there is no deadline by which all closing agents must be compliant. Nevertheless, the regulatory squeeze on the lenders is felt down the commerce stream as it is their best interest to use only compliant affiliates. We can only surmise as to when lenders will start putting the compliance pressure on their vendors, but my guess is soon.

Perhaps the more relevant question is whether or not your preferred title company/attorney is already Best Practices compliant or working toward it.

~ Andrew S. Mendheim