As published in Scotsman Guide's Residential Edition, May 2011.
As the dust of the economic downturn begins to clear, state regulators are turning out in full force to investigate financial-services providers, including mortgage brokers and loan originators, with respect to past actions and future compliance. In addition to investigating what happened and how to stop it from happening again, regulators are examining who is to blame and liable.
Their heightened scrutiny translates to greatly increased risk and liability across the board. The regulatory pursuit of answers may also come with unintended casualties, but so far, that's a price state regulators appear willing to pay.
So who do the regulators consider bad actors in all of this? Among the providers in the headlights of state regulators are payday lenders, car-title lenders, mortgage servicers, loan originators and mortgage brokers.
To blame or not to blame?
No one questions that there were individuals and entities who behaved badly and who, whether on a micro or macro level, contributed to events culminating in the economic crisis. These providers have found little sympathy in public opinion or the press and are at the forefront of regulatory and criminal proceedings.
In mid-2009, for example, federal agents dismantled the largest mortgage-fraud conspiracy in Washington state's history. The indictment began with 40 counts against two mortgage brokers, an escrow company and at least one real estate agent. Many of the charges included a scheme of flipping properties through the use of straw buyers. Inaccurate appraisals, false information on loan applications and poor underwriting also have formed the basis of criminal and civil proceedings.
A less obvious category, however, comprises those financial-services providers who had no direct involvement in fraudulent activities but who failed to recognize and correct widespread employee misconduct. Although these providers' involvement does not rise to the level of fraud, failure to ensure proper monitoring can result in steep fines, investigative costs, and restitution to consumers who may have been harmed by employee misconduct.
In the absence of adequate oversight — as undefined as that concept is — there are few defenses to substantive and procedural violations of state and federal regulations.
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