Bank Lawyer's Blog

For Whom The Toll Bells

Erin Toll, a BLB fave, is back in the trade news again, and, as might be expected, it's not because she's shilling for businesses. Ms. Toll, the Director of Real Estate for the State of Colorado, was last seen running scofflaws out of the mortgage brokerage business, following her death match with the title insurance industry during her stint as Deputy Insurance Commissioner.

These days, she smells a RESPA rat in Colorado, and she’s about to go DEFCON 1 on it.

Speaking in New Orleans to more than 100 members of the Real Estate Services Providers Council, Inc. –or RESPRO — Toll said that real estate marketing agreements “look a lot like captive reinsurance agreements, which looked a lot like sham affiliated business arrangements.” Toll also suggested that such agreements violate the Real Estate Settlement Procedures Act.

Toll said she first became aware of these agreements, most of which are closely guarded confidential arrangements, when a disagreement between two parties led to a suit in Colorado court. Seeing the previously secret agreement in the court documents led Toll to begin investigating the increasingly popular arrangements. What she saw, the former litigator said, appears to her — and, just as importantly, appears to HUD — to be an illegal arrangement.

“First, the exclusivity spelled out in the agreements I have seen is very troubling,” said Toll. “Next, the fluctuating fees based on monthly reports with capture rates sure looks like a referral fee.” Fees given or received for referrals are illegal under RESPA. Also troubling, Toll said, is the secrecy spelled out in many such documents, along with the very high fees paid — as much as $1,000,000 per year.

“Each discrete piece of the marketing agreements real estate services companies are entering into may be legal,” said Toll. “But that doesn’t mean that the arrangement as a whole is legal.”

“The bottom line is, I don’t like these agreements,” said Toll, who said that HUD officials share her concern over possible RESPA violations tied to the agreements. “If participants were to get rid of the secrecy and eliminate the anti-competitive nature of these agreements, there might be a way to develop an agreement that does not violate RESPA,” she said.

It never ceases to amaze me, how clear is the “spirit” of the anti-referral provisions of RESPA and how impure is the spirit of the industry participants who think they’ve found the next-best-thing to circumvent those provisions. As I’ve reiterated repeatedly, all these schemes are nothing more than invitations for civil money penalties. Not that such worries will stop the flow of them. No matter how many times HUD and/or state regulators like Ms. Toll slap the hands of offenders for one discredited scheme or another, a new one pops up. HUD must feel like it’s playing regulatory “Whack-A-Mole.”

Ms. Toll’s parting comment, in answer to an audience member’s question, is one near and dear to my heart, being a line I’ve used so many times over the years that I was beginning to wonder if I, like Denny Crane, might have “the Mad Cow.”

When questioned by a member of the audience as to why these agreements are illegal when many other industries utilize similar arrangements, Toll said it all relates to RESPA. “I get this question on a regular basis,” said Toll. “The answer is, other industries aren’t covered by RESPA. The real estate industry is.”

She diplomatically refused to add: “This law's been around for over thirty years, for crying out loud! If this is news to you, get a job in the fast food industry, Bozo!”

I'll bet she wanted to, though.

HUD Stubs Toe On RESPA

Yeah, this is old news, but we've been busy and are just getting around to reading old blog posts and newsletters. We never promised you up-to-date news, just unvarnished snark.

We've been yammering about violations of RESPA's anti-kickback and anti-referral prohibitions since this blog first inflicted itself upon an unsuspecting public. Instead of barking at numbskulls in the private sector, I guess we should have been laughing at HUD, which is the agency charged with enforcing those prohibitions. Somehow, I overlooked this story when it first ran last week (h/t Housing Wire).

Some Michigan mortgage experts want the U.S. Department of Housing and Urban Development (HUD) to admit it erred when it launched an incentive program for real estate brokers that possibly violated its own consumer protection act.

Last week, HUD stopped the 3-month-old program, which offered $500 bonuses to real estate brokers who got HUD home buyers into Federal Housing Administration (FHA) home loans, after Bloomfield Hills attorney Howard Lax contacted HUD and claimed the program was an illegal kickback.

Lax said the program violated the Real Estate Settlement Procedures Act -- a claim HUD officials denied last week. The act, also called RESPA, is a consumer protection statute that is enforced by HUD.

Pava Leyrer, legislative chair for the Lansing-based Michigan Mortgage Brokers Association, also said she believes the program was illegal.

Howard Lax is a heavyweight in the world of mortgage banking law, and if someone put a gun to my head and forced me to choose between Howard and HUD, Howard would win, hands down. By the way, Howard's firm publishes an excellent newsletter on mortgage banking law. You can find it here.

Being a government agency, HUD couldn't merely say "Oops! My Bad!" and move on. No, it had had to get snippy about it.

"What would have been nice is if they would have gone out and made a public apology," Leyrer said.

HUD awarded the $500 bonus to about 200 brokers since November, including 67 in Michigan, said HUD spokesman Brian Sullivan.

Under RESPA, anyone who awards kickbacks for referrals can face fines up to $10,000 and a possible 1-year prison sentence, said Sullivan. Often out-of-court settlement agreements are made, he said.

Sullivan said the initiative was dissolved because it was perceived to be inappropriate, not because it broke the law.

"There is absolutely no admission on our part that there was a violation," he said.

It's always nice when a government agency gets "lawyered up" and starts talking like a mouthpiece for the late Ken Lay, isn't it? I'm sure HUD's been getting plenty of practice since Alphonso ("Curly") Jackson's been in charge.

Although Howard was gracious, mortgage brokers were less forgiving.

Lax said he believes HUD had good intentions but that the department should have sought to pass the bonus onto buyers by taking $250 off FHA loan fees.

Mortgage brokers like Leyrer and Audrey Acquisti, president of the Michigan Mortgage Brokers Association, say HUD should be held accountable for its actions.

"If anyone should know those laws," Acquisti said, "it would be HUD."

No, Audrey, that would be Howard Lax.

Mortgage Reform: The Beating Continues

For those who couldn't participate in today's conference call, moderated by Rod Clement of the ABA's Mortgage Lending Committee, that I mentioned in a post last week, here are a few highlights.

Michael Winston gave a quick overview of the Mortgage Reform and Anti-Predatory Lending Act of 2007 and had the following comments:

• Representative Brad Miller, one of the sponsors, is reported to have warned fellow Democrats that "we have to be careful now because since we're in the majority, what we propose might actually become law."
• The law, if it ever becomes law, is likely to be a litigation bonanza. Michael, being a litigator, has mixed emotions about that prospect, I'm sure.
• Yield spread premiums as a form of broker compensation will be "killed."
• If states don't pass licensing laws that meet the standard set by this Act and that cover all mortgage lenders and brokers in the state who are not otherwise subject to regulation, those "unlicensed" lenders and brokers will have a fiduciary duty to the borrowers.
• The Act will eliminate "stated income loans" ("liar loans," Chaz Schumer likes to call them). What do you do with the borrowers who already have one and need to refinance, but can't qualify for a "truth teller loan"?
• Section 202's requirement that the loan provide a "net tangible benefit" to a borrower who is refinancing and that the lender make the determination in "good faith" will have litigators licking their chops and manning the battle stations.
• The assignee liability and due diligence obligations placed on securitzers by Section 204 essentially eliminate the "holder-in-due-course" protection that assignees have traditionally enjoyed. You think there's a credit squeeze now?
• Section 206 provides that upon foreclosure, the "successor in interest" to the borrower takes the property subject to "bona fide" leases entered into by "bona fide" tenants prior to notice of foreclosure. Michael stated that the adverse effect upon real estate loan pricing could be substantial.

Katya Gill briefly discussed a proposed HUD Form 1 and a proposed Good Faith Estimate that attempt to disclose loan terms in more detail, but, in my estimation, aren't likely to make a dent in the thick craniums of many borrowers or elevate their financial awareness one iota. Then again, I could be wrong.

Katya also noted that Senators Obama and Schumer both introduced subprime mortgage bills last April and June, but that not one centimeter of movement has been observed on either piece of legislation since it was introduced. A cynic might assume that those beached whales were floated for no other sake than appearances.

I sure wish Congress would seriously consider my "Sam Kinison" approach to subprime mortgage lending disclosure. If your goal is to stop mortgage lending dead in its tracks, let's at least have a laugh and help a homeless person gain useful employment and exercise his lungs while we're at it.

Michael also discussed bankruptcy legislation (previously discussed here) which would allow "equity stripping" and "loan modifications" by bankruptcy courts in Chapter 13 cases. He indicated that prospects for passage are "not good" (from his lips to God's ear!). The negative impact on the repricing of outstanding securitized loans, as well as on future residential loan pricing, would be substantial.

Why do I have the sneaking suspicion that this is all hat and no cattle?

A Little Link Love

I'm late, I'm late for
A very important date.
No time to say hello, good-bye,
I'm late, I'm late, I'm late

No, we're not pregnant, just busy. So, it's time for a few hot links to brighter lights and a hardy "Hi-O Silver, Away!" At least, until next week.

First up comes the following e-mail received today and directed to members of UMKC law professor Patrick Randolph's BrokerDirt newsletter (subscribe here). It was sent by Jackson, Mississippi lawyer Rod Clement, on a topic that Rod thought might be of interest to readers:

The ABA Mortgage Lending Committee will have a telephone conference on Tuesday, October 30, 2007 at 11:00 am CST.  Katya Gill and Michael Winston will report on matters relevant to mortgage lending from the recent Mortgage Bankers Association meeting.  Katya will discuss recent statements and guidance issued by the Federal financial regulatory agencies as well as proposed new forms of the HUD-1 closing statement and the Good Faith Estimate of Settlement Charges. Michael will discuss proposed legislation intended to address subprime mortgage problems, including The Mortgage Reform and Anti-Predatory Lending Act of 2007, which was introduced in Congress on October 23, 2007.  A copy of the proposed HUD forms and the Mortgage Reform and Anti-Predatory Lending Act of 2007 are posted on the website of the Mortgage Lending Committee, http://www.abanet.org/dch/committee.cfm?com=RP282000. We also will have a brief summary of the status of the ACORD working group’s work on revising the ACORD 28 Evidence of Commercial Property Insurance form. 

There is no registration or fee for this telephone conference.  The dial-in number is 800-504-8071 and the pass code is 9885651.  The call will start at 11:00 am CST and will end at approximately 11:30 am CST

An article in today's American Banker (paid subscription required) reports that in Congressional testimony yesterday, both Comptroller of the Currency John Dugan and OTS Director John Reich voiced concerns over portions of The Mortgage Reform and Anti-Predatory Lending Act of 2007, including that its overly tight underwriting restrictions would choke off mortgage credit to those subprime borrowers who are going to need it, while FDIC Vice Chairman Martin Greunberg sided with consumer advocates in not only supporting the the underwriting standards, but urging Congress to go even further. The FDIC's stand in opposition to that of the other bank regulators was no surprise. Greunberg was there is place of FDIC Chairman Sheila Bair, a well-known consumer advocate, who was home ill. You need to be careful whose butt your kissing in D.C. these days, what with that antibiotic-resistant strain of staph infection making the rounds.

On a totally different issue, now that I have apologized to Pepperdine University School of Law Professor Mark Scarberry on screwing up his official title, I've decided to become an unabashed pimp for his legal articles. He's got a recent one posted on the American Bankruptcy Institute's website entitled "Interpreting Bankruptcy Code Sections 502 and 506: Post-Petition Attorneys' Fees in a Post-Travelers World." It discusses the recent US Supreme Court "Travelers" decision and should be of interest to bankruptcy wonks. My main interest in it was that it involved yet another overturning of a crack decision by the Ninth Circuit Court of Appeals (motto: "No Precedent? No Problem!"). You can view and download a copy of Professor Scarberry's article by clicking the "New York, USA" button at the bottom of the summary page to which I've linked.

Finally, HUD circulated the following notice today via e-mail:

FHA will issue official guidance regarding implementation of the regulation regarding a mortgagor’s cash investment.  In the interim, to address the questions raised by many industry partners, FHA is providing the following information:

1. Nehemiah Corporation of America, due to a previous Settlement Agreement and as discussed in the rule, is granted relief from the effective date of the rule until April 1, 2008.

2. HUD has agreed to grant the AmeriDream Downpayment Assistance Program relief from the effective date of the rule until February 29, 2008.

3. All other similar downpayment assistance providers have not been granted relief from the effective date of the rule, which is October 31, 2007.

To read the final rule in its entirety and for more information please visit: http://hudclips.org/sub_nonhud/cgi/pdf/4846a.pdf

Alert readers will recall that AmeriDream sued HUD to attempt to stop the implementation of the final HUD rule on seller-funded downpayment assistance programs. It looks like it bought itself a little time before getting the boot.

Ohio Anti-Predatory Lending Law Pushes Mortgage Brokers Into The Arms Of Banks

The current craze to crack down on the crooked cretins who purvey predatory  loans to credulous consumers, in addition to presenting me with an opportunity to satisfy my near-fetishistic fascination with alliteration, may soon prove to be a boon to banks, if Ohio's experience is a precursor of what things may come. SB 185, the Ohio predatory lending bill that took effect January 1, 2007, has prompted previously "free and easy" mortgage bankers to hire on as hired guns to regulated financial institutions.

For some, not renewing a mortgage broker license doesn't mean the end of peddling mortgages in Ohio. It just marks the start of working for a bank.

In Ohio, only nonbank mortgage brokers must be licensed with the state and adhere to the new rules laid out in Senate Bill 185, a comprehensive mortgage lending bill.

So some mortgage brokers, to avoid the potential effects of S.B. 185, closed up shop and joined the staffs of banks, where they fall under state and federal banking regulations and not those of the new bill.

Michael Reeve, the owner of a private mortgage banking company in Ohio, closed up shop and moved his entire operation over to a commercial bank because he thought that the disparity of treatment under the law between banks and non-banks created an "uneven playing field." An unlevel playing field also bugs me, especially when I'm playing football, and some young female ball carrier blows by me before I can snag her flag. I always blame that on turf problems.

"I think that over time on the broker side that pricing is going to get worse because of the increased risk, and it also creates liability for the company's owner," he said.

Reeve worries the bill could open the door for litigation from borrowers looking to get out of their mortgages by alleging violations of the new laws.

Also of concern is that the secondary market - investors who buy loan portfolios from lenders, essentially providing capital to the mortgage market - will either pay less for Ohio loans or won't buy them out of fears of lawsuits.

Reeve's solution was to take his 16 brokers and four loan processors to Guernsey Bank, which created a division for the mortgage unit, said bank President Bob Patrella. By switching to the bank, Reeve and his brokers didn't need to renew their licenses with the state because they're no longer needed. They also retained their Zanesville office, which is now a part of Guernsey.

A thinking man's mortgage broker might also want to consider a variation on the above theme: an operating subsidiary of a national bank or federal savings bank. After Watters v. Wachovia, what little doubt remained as to federal preemption applying to operating subsidiaries has been removed. Thus, the mortgage operations will be free from state laws like SB 185 that explicitly exempt financial institutions, and also from many other pesky state laws that do not. Perfect for a multi-state operation. Plus, as an operating subsidiary, up to 49% of the voting ownership interest (and all of the non-voting "preferred ownership interest") could be owned by the owners of the mortgage banking company that comes on board. The bank or thrift has to have "operational control" of the operating subsidiary, but that leaves plenty of leeway for structuring "equity upside" and "incentives" for mortgage bankers. There are other issues (like RESPA compliance) that can complicate life, but it's one option to consider.

I wonder if Ohio legislators thought that when they passed SB 185, they would be pushing mortgage brokers into the arms of financial institutions that were exempt form the law, and, perhaps ultimately, into nationally chartered financial institutions, to the detriment of locally regulated lenders. What are the odds? Ohio may end up with a "law to nowheresville." Great consumer protections, and no one subject to them.

For anyone interested in SB 185 (and we assume that Ohio attorneys are already familiar with it), the Ohio Mortgage Bankers Association web site contains a page with links to the law and to a summary and an analysis prepared by local firms.

I've Been Slimed!

A story that simply refuses to die is the spat between title insurance company LandAmerica Financial and former Colorado Deputy Insurance Commissioner (and current Director of the Colorado Division of Real Estate) Erin Toll. Toll led a multi-state campaign to "ding" title insurance companies over alleged schemes to pay illegal referral fees to real estate agents and homebuilders through "captive reinsurance" companies. As everyone involved in the residential mortgage banking business should know, paying compensation to a person or entity for the referral of "settlement services" violates anti-kickback provisions of RESPA and various state laws.

Toll had extracted settlements out of other title insurance companies, but ran into a harder nut in LandAmerica. Toll took a tough settlement posture with LandAmerica and claimed that she represented other states by virtue of "proxies" given to her by the insurance commissioners of those states. LandAmerica believed, with some justification (at least according to telephone conversations with appropriate state officials) that with respect to Nevada, where LandAmerica had major problems, Ms. Toll was lying about her authority to represent that state. Personally, it would hard for me to believe that anyone not named "Lucky," "Vito" or "Big Lips" could possibly be authorized to settle anything for the State of Nevada, but then again, I might be a little too much of an "old school" type when I consider a state built by a guy named Bugsy.

LandAmerica tried to play hardball to get Ms. Toll out of the loop as to any state other than  Colorado (and even there, if it was able), by raising less-than-completely-specific allegations of "conflicts" that Ms. Toll had as a result of past relationships that her stepfather had with companies that were, at one point or another, affiliated with LandAmerica, by business dealings her sister (or more than one sister) had with LandAmerica, and by the fact that her ex-husband or current husband (Ms. Toll's photographs indicate that she might be a serious heart breaker, so I became distracted and lost count at some point) represented LandAmerica or an affiliate. Last March, before Ms. Toll was scheduled to testify before the U.S. House of Representatives Financial Services Committee on behalf of the National Association of Insurance Commissioners, a LandAmerica officer, Peter Kolbe, called Minnesota's insurance department and attempted to get an official there to "derail" Ms. Toll's testimony on behalf of the NAIC, as well as her multi-state representation, by threatening to raise publicly these conflicts.

Portions of a transcript of that telephone conversation, and of a subsequent conversation, are attached to a report issued by the staff of the Financial Services Committee and constitute a prime example of how trying to play hardball can sometimes result in a foul ball that glances off the bat, hits the plate, and bounces right back up to clobber the unprotected nether regions of the batter.

The next day, Kolbe was on the phone with Paul Hanson, the chief examiner of the enforcement division of the Minnesota Department of Commerce -- one of the states LandAmerica was hoping to reach a settlement with outside of the process Toll had hoped was being established by NAIC.

The call was tape-recorded. According to a transcript of a portion of the call published by the committee, Kolbe told Hanson "Erin has extremely serious ethical conflicts with the entire title insurance industry, as well as LandAmerica. And we had not said anything about that, figuring that, hey, if she wants to beat up on the industry through the state regulatory system, that's fine. We'll suck it up."

Toll went too far, Kolbe said, by taking her concerns to Oxley. LandAmerica viewed that move "as going well beyond her regulatory role. We think that is an ego-driven thing. We think it is hostile to the concept of state regulation of insurance by telling Congress, essentially, you guys need to look into this because we as state regulators can't seem to handle it."

In the portions of the March 9 phone conversation between Kolbe and Hanson published by the committee, and during a second call March 22, Hanson was unsympathetic.

"Quite frankly, I would think more regulators would suspect she's biased in favor of you guys because her sister is connected to you and her ex-husband was connected to you," Hanson said. In talking to colleagues in other states, Hanson told Kolbe, "I'm not finding anybody really getting too interested in going down that path," meaning Toll's alleged conflicts of interest. In fact, Hanson said, several regulators he discussed the issue with "were not real happy that this was a topic of discussion. So I didn't win any friends bringing this stuff up, OK?"

The dreaded "backfire." That must not have sounded like good news to LandAmerica.

Hanson proceeded to tip off Toll, who told the Committee staff, which then prepped members of the Committe to ask Toll about it, on the record, at the hearing. In turn, that led House Financial Services Committee Chairman Michael Oxley to announce that he was probing the alleged "threats" to Ms. Toll and that he had demanded documentation on the matter from LandAmerica. That announcement certainly didn't help LandAmerica in the public relations war. Nor did the fact that Colorado's Insurance Commissioner responded to a request by LandAmerica to remove Toll from the settlement negotiations with "not only 'No', but 'Hell No'." The Commissioner then characterized the entire conflict of interest allegations as nothing more than a "smokescreen" by LandAmerica to try to cover up its wrongdoing. LandAmerica kept teeing the ball up, and the regulators kept stroking the long drives right down the middle of the fairway.

A couple of months later, the parties announced a settlement in Colorado. Interestingly, the settlement covered only Colorado, as was LandAmerica's original goal, so perhaps the mudslinging achieved that desired result. A few days later, Toll took over the Real Estate Division. All's well that ends well, right?

Not quite.

On December 18, 2006, the majority staff of Oxley's committee released a report that details the efforts made by LandAmerica to "get" Ms. Toll. In addition to the lengthy industry newsletter report linked above, the Rocky Mountain News revived the story here and here. LandAmerica can shout all it wants about taking excerpts from transcripts out of context, biased editing, and presenting less than a complete picture. The upshot is that Ms. Toll gets more good publicity, a couple of candid photos displaying her foxy self at work, and short photo captions that characterize her as the babe with balls and brains who "led a national charge to investigate kickbacks in the title insurance industry." I'd say she's teed up for higher office, should she decide to seek it.

If any interested reader's December snow-storm-ravaged brain took anything away from those stories (other than "Erin Toll looks hot"), it's that that Erin Toll sure stood up to those LandAmerica scum-buckets who tried to intimidate her by dragging her family members through the mud. How many people will actually read the e-mail (attached to the Staff Report) from Mr. Kolbe where he relates his conversation with insurance department officials in Nevada who not only refute Ms. Toll's assertion that she was authorized to negotiate for Nevada, but were upset with her for making that claim? Well, other than the author of this blog, who has nothing better to do. More than a handfull? I doubt it.

A Chinese proverb that is often used here on BLB comes to mind: "If you wallow in the mud with pigs, you get dirty." I might add "and only the pigs end up loving it."

Nice try, LandAmerica, but when you're dealing with professionals at shading the spin and leaking the one-sided story, its best not to even play their game at all. They've got the resources and the practice to out-slime you almost all of the time.

HUD's Plan To Become An Open Book Is Not Dead

Martha Bridegam at Housing Finance Blog mines the following nugget from HUD's six-month regulatory agenda:

1525. [bull] ACCESS TO COMPLIANCE GUIDANCE (FR-5064)

Priority: Substantive, Nonsignificant

Legal Authority: 42 USC 3535(d)

CFR Citation: 24 CFR 11

Legal Deadline: None

Abstract: This rule would establish new regulations designed to assist 
HUD program participants and regulated entities in their compliance 
with HUD statutes and regulations by providing, in certain 
circumstances, advance informal legal guidance on matters that may 
otherwise lead to enforcement actions. Specifically, the regulations 
would offer participants in HUD programs, including HUD's assistance 
programs (all forms of assistance) and loan insurance and guarantee 
programs, and entities regulated under statutes administered by HUD, 
such as the Real Estate Settlement Procedures Act, the opportunity, 
under specified conditions, to seek informal legal guidance in the form 
of interpretative letters or no-action letters (compliance guidance) 
from HUD.

As Martha observes, this item makes it apparent that former HUD General Counsel Keith Gottfried's proposal to issue SEC-like "no action" letters has survived his resignation. That's good news for those of us who can use all the transparency we can get out of HUD. As I've discussed previously, a handy "no action" letter will be just the thing to either give the go-head to, or quash, the next "innovative" plan to pay referral fees for settlement services reasonable compensation for services actually rendered without violating the anti-kickback provisions of RESPA.

Martha comes at the issue with a perspective somewhat different (and less cynical) than those held by the author of Bank Lawyer's Blog, who's spent his professional life in thrall to the capitalist oppressors of the working class, a constant seeker of loopholes in any system that would restrain the unbridled acquisition of wealth beyond all dreams of avarice, and a man whose jackbooted heel has sometimes been found on the supine neck of society's downtrodden.

Speaking as an old welfare lawyer myself, I'll add that it's also something an advocate for the pawns in the system has to love, because it's one more step toward regulatory transparency. Of course defining the rules consistently, in detail, for everyone to see, doesn't prevent decisions from sometimes being unfair to people without much power -- but if there is going to be unfairness, at least more of it has to happen out in the open, so advocates can talk specifics instead of wasting their time trying to nail jelly to the wall. It would be great, for example, if a consumer lawyer hearing about a new mortgage company dodge could see if it's mentioned in an index of HUD no-action letters on the subject, comparable to this one over at the SEC. For that matter it sounds like a legal aid lawyer might now become able to request a definite opinion on a rule that appeared to be inconsistently enforced at different public housing projects. Really, seriously, what's not to like?

Unless the "no-action" letters take an inordinate amount of time to secure (I once had the OTS take over 13 months to issue an interpretive letter, which effectively thwarted my client's plans, and then got a burr under its saddle when I had the gall to complain), I can't think of a thing not to like.

Post Mortem on Gottfried's Resignation at HUD

Martha Bridegam of HousingFinance.com asked me in the comments section to her blog last week, what my take is on the resignation of Keith Gottfried as General Counsel of HUD. My initial reaction was the same as most observers: I was surprised and disappointed. When Mr. Gottfried announced in June that he was planning to institute a "No Action" letter process at HUD that would be similar to the process used by the SEC, I was pleased. As I observed at the time (amidst the usual throw-away snarkiness on Bank Lawyer's Blog):

If HUD makes no action letters available publicly, which would be expected given the SEC model that Gottfried proposes to use, you'll be able to gain guidance as to the parameters of transactions that have worked for others. That very "transparency" of the process might (perversely) deter the occasional client who believes that he has constructed the "better mousetrap" and doesn't wish to share his "brilliant innovation" with potential competitors. However, if there's any doubt, prudence will dictate that you obtain a No-Action Letter.

What's not to like?

As Martha noted last Monday, there's been speculation in the press and in the "blogosphere" that his resignation was the result of his advocacy of "transparency," which might have engendered a typical bureaucratic knee-jerk negative reaction. There's also idle speculation that "forces of darkness" within HUD have something to hide, although that sounds a bit too "Oliver Stone-ish" to me. Martha also linked to the Dow Jones Newswire story (by reporter Damian Paletta) that suggests that his resignation is related to HUD's Inspector General's investigation into allegations that HUD Secretary Alphonso Jackson has pressured staff to award contracts to friends of the Bush Administration and to deny contracts to the Administration's opponents.

"I have heard rumors," Gottfried said, according to the IG report. "I've heard rumors from time to time that, certain people, being friends of the Secretary, that there was - I think the statement I heard is the Secretary would like for us to work with vendor, would like for HUD to work with this vendor. I have heard that statement from some folks."

Gottfried also told the IG that he wasn't "close" to Secretary Jackson, and was not part of Jackson's "inner circle."

A HUD spokesman denied the connection between Gottfried's statements to the IG and his resignation, of course. In a letter sent to friends and colleagues, Gottried didn't shed much light on that aspect, stating, "As some of you may have recently heard, I have decided that the time has come for me to pursue other opportunities and challenges. Accordingly, after struggling with my decision for weeks, on Oct. 20, 2006, I delivered to President Bush my resignation as general counsel of the U.S. Department of Housing & Urban Development, effective as of Nov. 5, 2006."

The "leaving to pursue other opportunities and challenges" line is one often used as code for either "I was pushed out the door" or "I couldn't stand another second in this snake pit."

As the Dow Jones' Paletta notes, Gottfried is the third general counsel to leave HUD under Jackson's brief tenure (less than three years). That could mean nothing more than bad luck, or that Jackson's simply a hard man to get along with. It might even mean something more sinister, but at this point, there's no smoking gun.

Regardless of the organization, when the general counsel is not part of the CEO's "inner circle," that's a dysfunctional relationship. The chief legal officer of the organization must have the ear of senior management (and of the "board of directors" or its equivalent), as well as its backing, if the organization is to stay on the true and narrow path. Recent history is full of instances where general counsel was either excluded from the "inner circle," with disastrous results for the organization, its employees and stakeholders. Shutting out your lawyer is often a sign that there's trouble at the top.

Although the jury's still out on the reason for Gottfried's resignation, and what, if anything, it portends for HUD, I'm personally sorry to see him go. I'm not the only one.

In his resignation letter, Gottfried noted that he was “proud, that as general counsel, I have been able to lay the framework for enhancing regulatory transparency and compliance assistance at HUD, two of the causes that I have championed since the day I was sworn-in. I continue to believe very strongly that enhancing regulatory transparency and compliance assistance are critical initiatives that need to be vigorously championed.” But the industry is left wondering what will happen to Gottfried’s proposals now that he is no longer “vigorously championing” them at HUD.

We'll see.

HUD Promises More RESPA "Transparency"

In remarks made last month to the National Settlement Services Summit, HUD General Counsel Keith Gottfried proposed that HUD establish a "no-action" letter process similar to that used by the SEC, so that businesses that propose to take a course of action that might violate RESPA would have some comfort that HUD will not take action against them if they proceed. The pertinent portion of his remarks are as follows:

We also need better processes to institutionalize and publicize our guidance through timely and active disclosure. We need better processes for consultation with our private sector partners. We need better processes to promote predictability and reduce compliance friction.

In one of my past lives, I was a securities lawyer and practiced extensively before the Securities and Exchange Commission. During that time, if I had a client that wanted to proceed with a transaction, but it was unclear whether such a transaction was in compliance with the securities law because the law was ambiguous, I had the option as a securities lawyer of preparing a request for a no-action letter to the SEC. The no-action letter would explain to the SEC what my client was seeking to do, what the applicable law provided, what the SEC had said in previous no-action letters and why I thought the proposed transaction was in compliance with applicable law and regulations. The letter would seek the SEC’s concurrence and their commitment not to recommend enforcement action against the client if the client proceeded with the transaction as described in the letter. It may also be the case that, during the course of preparing such a letter, I would discover that there were so many no-action letters almost exactly on point that I felt comfortable advising my client to proceed with the transaction without the need for a no-action letter. I ask you, why can’t we have a similar process for RESPA reform? Certainly, if we had such a process, we would increase predictability, reduce compliance friction, and encourage more creativity to be applied to the home buying process.

The National Association of Realtors reported that "the announcement was greeted with near-universal approval." I can imagine.

"Near-universal"? I wonder who was the dissenter who made the approval less-than-unanimous? Certainly, he or she was not a lawyer. I mean think about it, seriously.

Your client who is a mortgage broker or banker, a title company, a realtor, a bank, a homebuilder or a potential "referral source" comes to you and proposes yet another cock-eyed scheme for circumventing ("of course, in a completely legal fashion") the anti-kickback and anti-referral provisions of RESPA. In the spirit of "no stone left unturned -- especially when billing by the hour," you now can not only bill him for the research and "noodling," you can bill additional time in preparation of, submission, conferring about, following up, and securing a "No-Action Letter" from HUD. If obtained, you can then proceed to implement the arrangement without the nervous butterflies fluttering in the pit of your stomach because -- let's be honest -- you suspect that if there's a way to deviate from the straight and narrow, your client will "find a way."

If HUD makes no action letters available publicly, which would be expected given the SEC model that Gottfried proposes to use, you'll be able to gain guidance as to the parameters of transactions that have worked for others. That very "transparency" of the process might (perversely) deter the occasional client who believes that he has constructed the "better mousetrap" and doesn't wish to share his "brilliant innovation" with potential competitors. However, if there's any doubt, prudence will dictate that you obtain a No-Action Letter.

What's not to like? There's nothing more squirrely creative than a mortgage banker on the scent of commissions. I predict much fun will be had by all, especially attorneys at HUD, who, I assure you, will be presented with brain twisters that will try their patience and expand their personal definition of the term "surreal."

Gentlemen, start your engines. Let the race begin!

RESPA Anti-Kickback Violations Slammed

Yesterday's Realty Times has a disturbing article on last week's Congressional hearings on violations of RESPA's "anti-kickback" provisions.

Homeowners title insurance and "affiliated business" joint ventures between title agents, Realtors and lenders came in for withering criticism last week on Capitol Hill.

At a House financial services subcommittee hearing, state and federal regulators, consumer groups and even a title agent from Minnesota, charged that widespread illegal kickbacks, sham and "shell" companies have led to excessive title fees for millions of home purchasers.

Representatives of the title and affiliated settlement industries disputed the claim that fees are too high, but generally applauded state and federal regulators' efforts to crack down on illegal kickback schemes.

Fees are not too high, eh? Some people testifying cited figures that demonstrate that might not be the case where title insurance is concerned.

A consumer group representative, J.Robert Hunter of the Consumer Federation of America, broadened the focus of the hearing to the huge revenues paid by home purchasers and refinancers compared with the minuscule claims paid out by title insurers. Hunter, a former Federal Insurance Administrator, said consumers spent $17 billion on title premiums last year -- twice what they paid in 2000 and four times what they spent in 1995.

Claims paid out by insurers were about 5 percent -- compared with 86 percent of premiums for HMOs and 60 percent for auto insurance. Equally significant, said Hunter, is the fact that 80 to 92 percent of the premiums paid for title insurance go to middlemen -- title and settlement agents, escrow agents and lawyers -- who in turn often split their fees with affiliated realty and mortgage partners.

Storm clouds appear on the horizon for title insurance companies.

The Government Accountability Office (GAO) has begun a year-long study of title insurance industry pricing and business practices. It offered no advance conclusions or recommendations for reforms at the hearing. But Financial Services Committee chairman Rep. Michael G. Oxley (R-OH) was surprisingly critical of the industry. He said GAO had already found that consumers have been overcharged "tens of millions of dollars" because of illegal kickbacks and sham tie-ins among title, realty, mortgage and building firms.

"At some point," he said, "(Congress) will have to address" the problem, presumably with corrective legislation.

For lawyers, of course, the term "corrective legislation" is sometimes translated as "lawyer relief acts."