RESPA reform took center stage in June 2002, when HUD announced sweeping changes in the act by proposing a "homebuyer bill of rights." This was aimed at reforming the regulatory requirements in the federal rule and stressed the need for greater disclosure to homebuyers. Although the reform was withdrawn in late 2004, it is resurfacing.

While HUD reform stalled, state and local governments moved forward. From 1999 through January 2004, 36 states and 13 city or county governments passed predatory-lending legislation. More than 16 states enacted loan-officer licensing by 2002, and the trend has now become a tidal wave across the nation.

Enforcement efforts increase

Armed with a larger budget, HUD tripled its enforcement staff by 2003 and retained an outside agency of former FBI and CIA agents to investigate mortgage-compliance cases. An example of the extent of their scrutiny came in the Znet Financial case, which was settled in late 2003. HUD successfully challenged Znet's practice of making real estate agents into employees and paying them $400 per file to source borrowers and complete loan applications. The company completed 23 transactions.

Most recently, in October 2005, HUD's director of RESPA enforcement, Ivy Jackson, announced a new twist: HUD will start going after recipients of kickbacks, in addition to the payers.

The Office of Thrift Supervision, the U.S. Office of the Comptroller of the Currency, the Federal Reserve System, the Federal Deposit Insurance Corp. and the National Credit Union Association issued a joint credit-risk-management guideline in May 2005. It warned financial institutions that they must have sound risk-management systems to monitor mortgage brokers. The systems should: include comprehensive due diligence on originators before entering a relationship; audit procedures and controls to verify that originators are not being paid to generate fraudulent mortgage applications; monitor quality of loans by origination source; and retain oversight of all critical loan-processing activities conducted by brokers, such as appraisals and income and employment verification.

Wholesale lenders are responding to the joint risk-management guideline, which is evident in light of increasing buyback demands.

The Federal Trade Commission (FTC) targeted the mortgage industry in late 2004 to assess compliance with the Gramm-Leach-Bliley Act (GLBA) Safeguards Rule. This year, it reached settlements with Nationwide Mortgage Group Inc. and Sunbelt Lending Services Inc. for not having reasonable protections for customers' sensitive information.

State governments are also taking action. The Washington State Department of Financial Institutions is introducing legislation modifying the Mortgage Broker Practices Act. Changes will impose direct liability on the designated broker and principals of a company for certain violations and will require loan-officer licensing and education. They also will expand coverage to include all laws relating to the mortgage industry, such as the Privacy and Fair and Accurate Credit Transactions Act (FACTA); expand liability to acts outside of loan-origination and processing activities; and authorize random audits.

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