Regulatory Tsunami Hits

Regulatory creep and large financial penalties increase compliance costs. The CFPB was established as a new bureau through the authorization of the Dodd-Frank Wall Street Reform and Consumer Financial Protection Act of 2010. It has overwhelmed each of the industries it has entered (Student loans, Automobile loans, Credit cards, and Mortgages) and, given its short but impressive history, there is every indication it will have a significant impact on national, large, and/or diversified real estate groups. The intent behind its creation is to: • Give consumers a vehicle to enforce the provisions of the Dodd-Frank Act and other consumer financial protections laws. • Educate the public about financial transactions. • Utilize research to prevent future financial crises, such as another housing bubble. In its mission to rebuild the mortgage banking landscape, the CFPB has attempted to examine every aspect of the home buying transaction and the roles of the various participants facilitating the transaction. Its investigations haven’t been limited to the lenders whose practices were a large contributor to these recent changes; the investigations have extended to real estate brokerages. Important to note here is that the CFPB was also granted responsibility to oversee the Real Estate Settlement Procedures Act (RESPA), which was formerly overseen by the U.S. Department of Housing and Urban Development (HUD).

Only time will tell how much of an impact the CFPB will have on real estate brokers, resulting in increased costs due to compliance, increased risk for small brokers with limited capital, increased scrutiny on marketing agreements, and the increased risk of agents moving to firms with strict compliance in place. What we do know is that the failure to comply at any level is not an option, and the penalties for failure will be costly. Those who suggest that real estate service providers are not vulnerable under the Financial Services provisions need to remember that there has been little or no effective RESPA enforcement by HUD over the past decade. Most brokerage companies are either ignorant of the fact or believe they are in compliance with CFPB/RESPA regulations, however most are likely in violation already.