A federal lawsuit against Allied Home Mortgage Capital Corp. sheds light on the corrupt practices of mortgage brokers who are operating with almost no oversight. The U.S. Consumer Financial Protection Bureau, which was created in the wake of the 2008 financial crisis to monitor brokers, has yet to provide oversight in the industry because the Senate has not appointed a director. This has allowed companies like Allied to fool federal computers used for oversight purposes simply by changing brokerage branch addresses and placing branches in other names to avoid closure for bad practice. Meanwhile, the system has allowed thousands of new brokers to open businesses despite having criminal records. For more on this continue reading the following article from TheStreet.
Mortgage brokers, many of whom originated deceptive loans that helped trigger the 2008 financial crisis, are still supervised by a dysfunctional patchwork of state and federal regulators.
A federal lawsuit against a leading mortgage broker last week exposed a gaping regulatory hole that will persist as long as Senate Republicans block appointment of a chief for the new consumer agency.
The U.S. Consumer Financial Protection Bureau created by the Dodd-Frank legislation can't examine or supervise mortgage brokers until it gets a director confirmed by the Senate. Former Ohio Attorney General Richard Cordray was nominated in July, but a Senate vote has not yet been scheduled.
Senate Republicans headed by their leader, Mitch McConnell of Kentucky, and Richard Shelby of Alabama are playing Russian roulette with borrowers' homes and assets by threatening to block Cordray's nomination. If he were to be confirmed, the consumer agency would likely have the focus and independence to prevent a massive decade-long fraud like that allegedly conducted by Allied Home Mortgage Capital Corp.
"These crises can be averted," said William Black, an economics and law professor at the University of Missouri in Kansas City who was a senior thrift regulator in the 1980s. "But if you create regulatory black holes, mortgage brokers will just move to areas where regulation is weakest."
The hazards of the status quo were highlighted by the federal civil-fraud complaint last week against Allied, which billed itself as the nation's largest privately held mortgage broker.
The allegations, if true, show how a determined broker can easily sidestep disengaged and unconnected regulators. Since 2003, three federal agencies and more than a dozen states cited or settled with Allied or a related company for misconduct, according to a 2010 ProPublica story. Yet Allied chugged along. Thousands of other mortgage brokers committed similar deception about loans they were peddling in the run-up to the financial meltdown.
In 2005, many of the $1 trillion in nonprime loans were handled by mortgage brokers, who were paid by lenders to prepare loan paperwork for borrowers, according to the Financial Crisis Inquiry Commission report.
Many of the 200,000 new brokers who began their jobs during the subprime boom had criminal records, the January report said.
It cited a Miami Herald story that said more than 10,000 brokers with criminal records entered the field in Florida between 2000 and 2007, 40% of whom had been convicted of crimes such as fraud, bank robbery, racketeering or extortion.
"Lack of accountability created a condition in which fraud flourished," Marc Savitt, former National Association of Mortgage Brokers president, told the commission.
The regulatory structure at the time, which remains in place to this day, consists largely of the states and the Federal Trade Commission, whose varied missions include consumer protection. Brokers that originate mortgages backed by the Federal Housing Administration also are monitored by that agency.
The problem with FHA oversight, as the Allied case shows, is that it relies on supervision by federal computers that are easily evaded.
No boots are on the ground in the form of federal examiners, nor is there any umbrella coordination of state efforts. The CFPB, which began operating in July, is the only government agency in the United States with the dedicated mission of protecting consumers in the financial marketplace.
"I believe that a fully functioning CFPB would be more likely to identify and prevent serious violations of law by mortgage brokers and nonbank lenders," George Washington University law professor Arthur Wilmarth said.
Without a director, CFPB can examine the 100 or so banks with assets of more than $10 billion, and has begun doing so. The agency also has asked state regulators to share information about enforcement actions taken to protect consumers against mortgage abuses.
But it can't oversee nonbank providers such as mortgage brokers and servicers, payday lenders and debt collectors. The federal suit last week alleged Houston-based Allied cost the FHA at least $834 million in insurance claims on defaulted home loans.
The broker engaged in "reckless mortgage lending" in originating 112,324 FHA-backed loans, most to low- and middle-income borrowers, from 2001 to 2010, the complaint contended. About a third of those loans defaulted, leaving thousands of homeowners facing eviction.
Allied, headed by Jim Hodge, who also was sued, did not reply to requests seeking comment. The broker successfully evaded housing regulators through a series of maneuvers, prosecutors alleged.
When an Allied branch office approached unacceptably high default rates, the company made a subtle change to the office address to fool FHA computers and ostensibly create a new branch with a blank default slate.
All the broker had to do to hoodwink the government was change "Street" in the address to "St.," or add a suite number, the suit alleged.
When the FHA upgraded its system to prevent such manipulation, Allied simply switched ownership of its branches to a successor entity with a slightly different name.
And in 2006, when the FHA barred a North Carolina branch of Allied from originating loans, the broker said the mortgages were from a different branch with a cleaner slate, according to the suit.
In Congress, the Republican charge is being led in part by Shelby, by far the leading 2010 recipient of campaign contributions from finance and credit companies, according to the non-partisan Center for Responsive Politics. Shelby, the top Republican on the banking committee, and 43 other Senate Republicans sent a May letter to President Obama calling for revisions in the Dodd-Frank law.
Their letter called for "accountability" for the consumer agency -- oddly, the same concept said to be lacking for mortgage brokers during the subprime boom.
The Republicans threatened to block the appointment of any agency director unless CFPB was headed by a bipartisan board rather than a single director. The agency also should be funded by Congress rather than through the self-supported Federal Reserve, they said.
Under Senate rules, it would take 60 votes to halt the filibuster threatened by the 44 Republicans. The White House has not disclosed its plans nor whether it is holding any back-room talks with Senate Republicans.
But this is a clear-cut issue -- the protection of consumers against the potential greed of mortgage brokers -- on which the president should stand tall.
This article was republished with permission from TheStreet.