Saturday, October 3, is the effective date of the Consumer Financial Protection Bureau’s (CFPB’s) “Know Before You Owe” mortgage rules. The rules were originally slated to be rolled out on August 1, but CFPB approved an extension. Also known as the TILA-RESPA Integrated Disclosure rules, they require easier-to-use mortgage disclosure forms that clearly lay out the terms of a mortgage for a homebuyer. The RESPA rules (circa 1974) speak for themselves.
News of the extension to October 3 was met by the real estate industry with a number of responses. A significant segment within the industry didn’t notice it at all, choosing to ignore the rules as they have done from their initiation some two years ago. Another element within the industry simply elected to ignore the notice. Finally, there is that segment that realizes that these rules will have a significant impact upon their businesses, but are, as of yet, uncertain what actions to take.
This piece is directed to the last group. If, after all of the information, commentary and “wake up” calls that have been distributed, a brokerage firm or its management team still believes that the new rules will have no impact, then the foundations of one amazing surprise have been laid. Try not to gasp when you see the amount of the fine.
The following information is provided for those brokerage executives and managers who recognize that they must take some action, and soon, to avoid a regulatory catastrophe.
Let’s set the stage first. One morning or afternoon on a date after Saturday, October 3, your receptionist (hereinafter referred to as your first line of defense) will look up from her or his desk to see one or more individuals introducing themselves as being from the Consumer Financial Protection Bureau. They will not be in uniform, but they will produce acceptable identification. They may announce that they are present to conduct a TTILA/RESPA audit. They will ask to be provided with a space from which to conduct their work. They will further request that certain files be produced.
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. The likelihood of a fine is almost a certainty since few brokerages, regardless of size or management sophistication, have recently gone through either a TITLA or a RESPA audit. In 2014, such fines against brokerages ranged from $10,000 to hundreds of thousands of dollars.
At this point in the process, one could compare what is about to happen 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 first point of contact respond? Leaving the CFPB personnel standing in the lobby while we contact the broker, calling the brokerage legal counsel, asking if the Bureau has a warrant or demonstrating a generally belligerent attitude or bearing isn’t the right answer.
The correct answer is that the first point of contact, and all subsequent contacts within the brokerage, whether they have been there five minutes, one day, 10 years or just happen to be walking by, should respond as if the brokerage is prepared for such an audit. The auditors, who will, for the first few months or so, understand that the brokerage is likely not fully prepared, judge the brokerage on the basis of what due diligence is in effect.
If the auditors’ request to see the firm’s TITLA/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 the magic file(s) is the evidence of what efforts the brokerage has made to date 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. The file might contain evidence that the firm has undertaken the following:
- To be aware of the new TITLA rules and existing RESPA regulations and be committed to protecting clients and consumers to the fullest extent
- To inform its staff and agents that these rules and regulations exist and to have evidence of their agreement to comply
- Provide competent orientation, training and coaching on the new rules and existing regulations for all responsible parties, staff and agents
- To establish competent policies and procedure that inform and protect customers and clients regarding the new rules and existing regulations
- To designate specific individuals to be responsible for various elements of its compliance program
- To initiate specific procedures to monitor compliance and respond to possible violations including written warnings and appropriate sanctions
- To monitor the CFPB website for new developments
The creation of the file doesn’t require lawyers, experts or days of work, nor does it guarantee that there won’t be a fine. These are common sense steps that any reasonably competent executive or manager should be able to complete. There will be plenty of time for bureaucratic complexities. As the Bureau and the industry experience with these matters grows, so will the file and the programs it supports. In the meantime the sage advice is to “show you give a darn and DO SOMETHING!”