The American residential real estate industry is currently going through a quiet but particularly dramatic phase of its contemporary history. Brought about by the now almost two year old announcement by the Consumer Financial Protection Bureau that, effective August 1, 2015, it would be developing and enforcing a new set of lender mortgage disclosure and RESPA audit rules the various segments of the industry are demonstrating a number of reactions and responses.
Over the past two years the mortgage and title sectors invested significant energies and resources into creating processes and procedures that will ensure that its business practices will be in compliance with the new rules. Both deserve a hero’s medal for the millions of dollars and human resources that they have invested into making sure that the return of regulation to the industry is accomplished with as little disruption as possible.
The fourth player in this historic drama, the real estate services or brokerage sector, has also executed on a number of significant reactions and responses. Instead of acknowledging the new rules and doing their best to comply, by and large the brokerage sector has elected to effect a combination of ignoring the rules and denying any potential impact or liability.
In its defense the brokerage sector was, to some extent, relying upon representations by its advisors in organized real estate that nothing in the Dodd Frank consumer protection act of 2010 applied to them. For much of period since July of 2013 brokerage sector inquires were met with an absolute assurance that there was a specific provision and a political promise that nothing in the CFPB program was relevant to brokerages and agents.
This convenient reality remained in place until early spring of this year when inquiring minds began to realize the significance and probable impact of the new regulations and altered RESPA procedures. By early April the alarm had been sounded and, while even then the majority of the brokerage sector refused to consider the ramifications of the new regulatory threat, significant numbers of firms undertook to respond to the threat posed by the Bureau’s efforts to protect the real estate consumer.
What became relevant at this point was the internal experience of the brokerages that made the decision to respond to the new CFPB rules as they undertook to protect their consumers, agents and stockholders against the very significant downside of interacting with a regulator that is (1) consistently demonstrated over the past 48 months its commitment to make all elements of the real estate transaction safe for the American consumer (2) following an unfaltering course of notice and focus in that direction and (3) armed with both enabling legislation and a demonstrated willingness to use its ability to levy significant financial sanctions ($5,000 per day per file fines) against offending and non-complying parties.
It is sufficient to say that as brokerages have attempted to affect some level of control over their transactional operations they have discovered what many have always known. After decades of deferring command and control, they now find themselves almost totally unable to exercise even the most minimal impact over they’re most basic processes and procedures. Even when faced with the certainty of failed audits, immense fines by an agency who gets to eat significant amounts of what it kills and the high potential of lawsuits from engaged consumers whose lives become disrupted because of non-complying transactions, the internal constituencies of many brokerages refused to submit to even the most basic of best practices and transactional safeguards. It would appear that the industry’s traditional adage that “I don’t need no stinking boss” has risen to become its nemesis and “Achilles heel.”
For many brokerages going through the process, the findings have been nothing short of horrifying. The broker’s almost total lack of control coupled with the refusal of agents and, in many cases, managers, to comply with management systems and internal rules has been alarming. One of the more classic examples was a firm that discovered that the local MLS records reflected over 500 listings attributed to the firm that it didn’t know existed.
What makes these brokerage experiences even more alarming was the recent release (May 15, 2015) of the courageous NAR DANGER report. This document, commissioned by NAR and totally unrelated to the CFPB and its current initiative, the first of its kind in the industry, skillfully documents the concerns of dozens of top industry executives and decision makers that this very thing might happen.
Many within the industry saw the recent CFPB decision to defer rule enforcement by 90 days as some manner of political or strategic victory. Those who are most familiar with what is happening here realize that the delay will only serve to amplify the existing circumstances. The bureau will be that much more prepared to execute on its mandate, the mortgage and title sectors will be that much more competent in their compliance and the brokerage sector will be that much more unprepared to protect itself and its consumers.
What then can a brokerage that has not undertaken or been able to effect actions to protect itself do at this late moment with only 90 days remaining in the countdown? The simple answer is due diligence.
One morning or afternoon on a date after Saturday, October 3rd, your receptionist may look up to see one or more individuals introducing themselves as being from the Consumer Financial Protection Bureau. They may announce that they are present to conduct a TTILA/RESPA audit.
What happens from this point forward may have everything to do with the size of the fine that will ultimately be levied on your brokerage. This moment in time compares rather nicely with being pulled over for a traffic violation. Why do some drivers receive citations while others depart with a warning? As any officer will tell you it has everything to do with the driver’s respect and common sense. Enforcement discretion is never awarded to jerks.
Just as a significant percentage of drivers pulled over elect to respond by being hostile, argumentative and even combative so will a like percentage of brokerages fall into the same trap. The operative assumption on the part of auditors is that the treatment they receive is very likely to be the same treatment that the brokerage will give to a consumer with a problem.
Given these circumstances how should the brokerage respond? Leaving CFPB personnel standing in the lobby while contacting the broker, calling legal counsel, asking for a search warrant or demonstrating a belligerent attitude is not the right answer. The first contact, and all subsequent contacts within the brokerage, whether they have been there for ten-years or just happen to be walking by, should respond as if the brokerage is prepared for such an audit. To a great extent the auditors will judge the brokerage on the basis of what due diligence is in effect.
If the auditors’ request to see the firm’s TILA/RESPA Audit procedures file and the response is that “there is no such file,” what does one imagine will be the response? Does, “Oh, no sweat, we will come back next week” sound correct? If the brokerage doesn’t respect the law or the consumer enough to have such a file then there is really nothing to discuss, it is now just a matter of how much the fine is going to be.
What should be in this magic file(s) is the evidence of what efforts the brokerage has made to comply with the new rules. This effort is referred to as “due diligence.” It is the sum total of the efforts made by the brokerage to prepare for an audit. One doesn’t have to be an expert on fires to prepare for a possible fire. Initial due diligence is nothing more than common sense and respect. It is time for the industry to demonstrate these qualities. We can do this.