Bank Lawyer's Blog

Residential Mortgage Lending: The Bloom Is Off The Rose For More Than Just The Big Banks

My friend, Colorado community and mortgage banker Pat Dalrymple's, latest "Banker's Hours" column in the PostIndependent Citizen Telegram again struck a chord with me. With permission, here it is, in case it also hits home with you:

We hear that the TBTF (Too Big to Fail) banks are getting out of the mortgage business. Can this really be true? Weren’t they reputed to be the culprits in the recent Great Recession that was reportedly triggered by all of the toxic mortgages they originated?

Well, they haven’t left the building entirely, but they’re not in residence like they once were. Here are some fairly dramatic stats:

Wells-Fargo, the nation’s No. 1 mortgage originator, funded $125 billion in mortgage loans during the fourth quarter of 2012. During the same period in 2015, that number was down to $47 billion.

Chase, the second ranking lender, did $51 billion in the last three months of 2012. In 2015, that number had shrunk to just under $23 billion. These are dramatic swings in banking, and show major ramp down of what was once a core business.

And it’s not just the big guys that are backing away from the iconic American Dream of financing home ownership. In 2007 banks made 74 percent of home loans in the country. By 2014, their share had dropped to 52 percent. At the same time, the share of nonbanks, which includes online lenders like Quicken Loans, had increased from 23 percent to 43 percent.

What’s happened? Just business; mortgage lending isn’t as profitable for banks as it once was. Interest margins on home loans held in portfolio are thinner than other lending lines. Since the Great Meltdown, the private bond market has virtually dried up for mortgage-backed securities. The cost of originating mortgages has skyrocketed, and regulatory risk has become, in the eyes of some former mortgage lenders, intolerable.

The increased cost of doing business is graphically demonstrated by the fourth quarter of 2015: Net gain on mortgages originated was down 60 percent, from $1,238 per loan to just $493. This is because lenders spent billions on re-tooling for the new RESPA-Truth in Lending disclosure protocol mandated by the Consumer Financial Protection Bureau that came online in October of last year.

As for regulatory risk, we’ve all heard of the multi-billion-dollar fines levied against the big banks for their role in originating and packaging the famous rotten mortgages that were at the root of the financial crisis. But the risk for banks is ongoing.

For example, PHH — a nonbank mortgage originator, seventh largest in the country last year at $37.57 billion — was just hit with a $109 million fine, which is certainly an attention getter. But the way it happened has lenders shaking in their Guccis. It was alleged that PHH had illegally taken kickbacks from mortgage insurers through customer referrals. The case went to an administrative law judge, who suggested a fine of $6 million.

To appreciate this story, we need to understand what an administrative law judge is. This person is trained in the law, but isn’t a real judge, as in a courtroom. Rather, he or she is employed by the agency bringing the charge. People who have been subjected to this process have likened it to walking into the Godfather’s study, who says, “Don’t worry about a thing, Joey, my consigliere here will give you a fair and impartial hearing.”

In the PHH case, the capo of the CFPB interpreted the law differently than it had been heretofore applied, so he must have said, “Geno, you were too soft on them.” He decided that the violations went back much further than the tame judge deemed, way back even before the CFPB was created, and increased the fine up to the $109 million.

Think the Mob has a long memory?

All of these factors are making big lenders think twice about being in the business. It may be the slack will be picked up by small banks, credit unions and online lenders. The jury’s out on that question.

CFPB Cracks Down On "Marketing Services Agreements"

One of the first posts I inflicted on an unspecting public, way back in 2004, when "W" was King and the bubble had not yet burst, was a rant about bogus referral arrangements that violated the anti-kickback provisions of Section 8 of RESPA. And although HUD itself once stubbed its toe over Section 8's threshold, both HUD and state regulators have been all over various schemes that attempt an end-run around RESPA's prohibition on referral fees.

With the late-night creation of Franken-Dodd, we now have the gentle ministrations of everyone's favorite benign Grandpa of a federal regulator, the CFPB, applied to Section 8, and as a recent MoFo alert advises, CFPB promises to be (in the lyrics of Jimmy Webb) a "harsh mistress."

 The CFPB entered into a Consent Order with a title company (Lighthouse) on the basis that "marketing service agreements" for "advertising" with real estate companies were, in reality, disguised referral fee arrangements. Lenders who attempt similar arrangements with real estate-related businesses, in which compensation can be related to the volume of loan business referred to the lender should take a lesson.

As evidence of the violations, the CFPB cited the following:

• Lighthouse failed to determine, or document a method for a determination of, the fair market value of the services it received under the MSAs.
• Lighthouse determined the fees it paid under the MSA, in part, based on the number and value of referrals received by the related counterparty.
• Lighthouse did not monitor whether it was receiving the services for which it contracted.
• The number of referrals provided to Lighthouse by counterparties was significantly greater if Lighthouse had entered into an MSA with the counterparty.

In sum, the CFPB asserted that Lighthouse was unable to provide a legitimate fair market basis for its pricing under the MSAs and believed that there was a strong correlation between the pricing for each counterparty and the number of referrals Lighthouse received per the subject MSA’s.

Lighthouse paid a $200,000 penalty and the CFPB imposed a $5.00 cap on the value of any consideration that the title company to "referral sources." A fiver isn't likely going to generate beaucoup business for Lighthouse, is my completely obvious conclusion.

MoFo's "takeaways" are insightful.

• As expected, the CFPB will look beyond the face of an MSA and consider the facts behind implementation, performance, and payments as between the settlement service provider and the referring party.
• The CFPB in the Consent Order created a broad definition of “marketing services agreement,” a term that is not defined in RESPA.
• The CFPB emphasized that an objective determination of “fair market value” of marketing services to be rendered must be performed with written documentation of the determination that is retained and available for review.
• In the fair market value analysis, the CFPB frowned on the settlement service provider’s consideration of what other title companies in the market were willing to pay to referral sources for marketing services.
• The necessity of monitoring MSA performance to ensure that services contracted for are actually delivered.
• MSAs that result in more business being referred to the settlement service provider than is referred by the same referral sources not pursuant to MSAs provides evidence of a violation of RESPA §8(a). How the CFPB determined these differences is not clear from the Consent Order.

Any real estate services businesses that are starting to realize that when the CFPB is on the case, there will likely be no way to ever run this dodge again get a gold star for "perception." The last takeaway asks how the CFPB could have determined how much business is referred by the same source with a "marketing services agreement" and without such an agreement. I assume the authors of the alert are displaying a dry sense of humor. As everyone knows, with the CFPB being such a self-professed "data-driven" regulator, they'll always be able to find pertinent data, even if the hiding place is an orifice on their own body.

I don't think this is the beginning of the end of these types of arrangements. I think this the end. Period.

The again, there are always those living in caves who always are the last to hear. Thus, there may be a few more Consent Orders before "marketing services agreement" as ingenuously disguised referral arrangements finally become extinct.

The Yin And The Yang of D.C.

Echoing the complaints of community bankers, the National Association of Federal Credit Unions recently sent a letter of protest to the CFPB about its proposed rule to combine Regulation Z and RESPA disclosures. NAFCU warns that the proposal could drive many credit unions out of the residential lending business.

NAFCU argues the rule, in its current form, will force some credit unions to stop serving long-time borrowers while imposing unreasonable compliance costs on credit unions that already conduct quality due diligence.

The rule would force creditors to bare responsibility for any errors or lack of timeliness issues caused by a mortgage broker.

Federal credit unions also fear electronic-record retention requirements would impose unreasonable fees on credit unions and believe the rule's overall exemption for small credit unions should go beyond firms that issue five or fewer mortgages each year to include credit unions with $175 million or less in assets.

"Many small credit unions that conduct a small number of mortgage loans to their specific membership would simply cease their mortgage operations," the NAFCU wrote in its letter. "For example, a credit union whose membership consists of teachers in a part of one state or another whose membership consists of firefighters of another state may originate twenty mortgages in a year."

The organization suggests this type of credit union would not qualify for the exemption, forcing them to end relationships with long-time borrowers.

And the odds are that the CFPB gives more than a tinker's damn about that eventuality are...??

While NAFCU fights gamely for its members against the avalanche of regulatory burdens roaring down on small banks and credit unions from D.C., the National Association of Credit Unions has other things on its mind. Things like

ABBA tribute band ABBA The Concert will kick off the Credit Union National Association's (CUNA) 2013 Governmental Affairs Conference on Feb. 24 with a dazzling performance of ABBA's iconic hits, including Dancing Queen, Mama Mia, SOS and Take a Chance on Me.

[...]

ABBA The Concert, featuring Waterloo the band, bills itself as "the best ABBA since ABBA." The tribute group was formed in 1996 and quickly became known for its stunningly ABBA-esque sound and performances. The group has always included two members of the original ABBA rhythm section, and has performed more than 1,000 shows in more than 20 countries worldwide.

CUNA Councils Vice President David Rohn said CUNA Councils is delighted to again sponsor the GAC-opening concert. "Sunday's show promises to be a memorable experience--a concert full of popular hits and high-energy fun that all attendees will enjoy," he added.

[...]

CUNA's GAC is the credit union movement's premier political event and its largest national conference, each year providing more than 4,000 credit union executives and board members an opportunity to hear influential leaders from Congress, presidential administrations and federal regulatory agencies.

GAC attendees will also have the chance to meet directly with their members of Congress here in Washington.

And, the chance to bask in the wonderfulness of a fake ABBA band. As if the real ABBA wasn't sufficiently excruciating.

How did the promo piece omit the greatness of the group's most inspired tune, Bang-A-Boomerang?

Like a bang, a boom-a-boomerang
Dum-be-dum-dum be-dum-be-dum-dum
Oh bang, a boom-a-boomerang
Love is a tune you hum-de-hum-hum
So give it away, I think you'll learn
You'll get love in return
So bang, a boom-a-boomerang is love
A boom-a-boomerang is love

Give me a minute while I recover from my swoon.

As the credit union trade official who sent me notice of this concert-of-a-lifetime so aptly put it: "You couldn't make this s*** up."

No, you couldn't. What's more, why would you want to?

CFPB: In Search Of A Search Bar

With my recent travel and work schedule, I'm just catching up with some of my regular reads from the past week. One of them, a post on The NAFCU Compliance Blog last week by Steve Van Beek, has a good compilation of, and links to, residential mortgage-related actions of the CFPB. Included are those related to mortgage origination and servicing and TIL/RESPA disclosures. It's necessary to track these issues, because, as Steve puts it, "[t]he CFPB will be pretty much changing every aspect of mortgage lending within the next couple of years." As we all know by now, Dodd-Frank is one of those changes we were all waiting for back in 2008, and, as we also know, all these thousands of pages of new regulations will ensure that nothing like what happened in the years leading up to the crash of 2008 will EVER happen again.

There's another reason that Steve's compilation and links are so useful.

It is truly amazing that a 21st century agency has not included a search bar on either the first or second design of their website. 

Steve, if the CFPB installed a search bar, it would be easier to track its sausage making. If it was easier to track its sausage making, we might have a clue to what it's really up to. If we had a clue to what's it's really up to, we'd pack up and move to Belize.

Ignorance is bliss. After all, too much knowledge in the hands of the wrong people can turn a "New Sheriff" into a "Spouting Bull."

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.