Regulatory Compliance: An Essential Skill Set For the New Business Model

December 26 2013

reconis cfpb gauntlet 2The North American real estate industry has, for many years, been quite fortunate relative to regulation. Despite its relative size in terms of the number of licensees, the dollar volume of its gross product and the significant impact its services can have on large numbers of consumer households, regulation of the industry over the past twenty-five years has been fairly limited.

The licensure of real estate professionals has traditionally been a state function since its widespread inception in the 1960s.

Industry regulation under title VIII of the Civil Rights Act of 1968 (Fair Housing Act) was intended to prohibit discrimination in the sale, rental, and financing of dwellings, and in other housing-related transactions, based on race, color, national origin, religion, sex, familial status, and disability. This program has been administered by the Department of Housing and Urban Development since 1968.

Industry regulation under the Real Estate Settlement Procedures Act (RESPA), an act passed by the United States Congress in 1974 was, until recently, managed by the Department of Housing and Urban Development. On July 21, 2011, Congress transferred RESPA regulation from the Department of Housing and Urban Development to the Consumer Financial Protection Bureau (CFPB).

So what is this not so mild mannered regulatory upstart and where has it been hiding? The Consumer Financial Protection Bureau (CFPB) is an independent federal agency that holds primary responsibility for regulating consumer protection with regard to financial products and services. The CFPB was created in 2011 as a result of the Dodd–Frank Wall Street Reform and Consumer Protection Act. Dodd-Frank was a response to the financial crisis of 2007–08, which played a significant role in creating the Great Recession. The CFPB opened for business in early 2011. Following a novel attempt by Republican lawmakers to block his appointment, Richard Cordray from Ohio was named CFPB director.

The CFPB's somewhat unclear jurisdiction includes, but is apparently not limited to, banks, credit unions, securities firms, payday lenders, mortgage-servicing operations, foreclosure relief services, debt collectors and other financial companies, and its most pressing concerns to date have been mortgages, credit cards and student loans.

More to the point, it has spent the past year investigating every aspect of the mortgage industry and is now prepared to unleash a bundle of over nine hundred separate mortgage related regulations, many of which will become effective in January of 2014. While the mortgage industry continues to shrug off the impact of this new regulatory activity, it clearly has caught the attention of many. Several attempts, unsuccessful so far, have been made to reduce the CFPB's powers, authority and process through litigation, legislation and rule making.

Of even greater interest to real estate professionals are the thoughts of a number of industry thought leaders who suggest that there is an excellent chance that the CFPB may decide to expand its jurisdiction to include "trusted advisors" whose advise includes consumer decisions regarding who can afford to own a residence and whether or not the relative financial stability of the market place makes it feasible for that transaction to take place at any given time.

None of these regulatory schemes has yet to create any real difficulties, challenges or great expense for the industry. Fair housing and RESPA are largely clerical issues and licensure has evolved into a largely unregulated cash cow for state governments. As a result of these circumstances the level of regulatory compliance in many brokerage companies is somewhat casual and falls far below what will be required in the event that a more substantial regulatory scheme were to be placed on the industry. This observation is in direct contrast to the mortgage industry that has seen their regulatory compliance related expenses move sharply upward with a concurrent reduction of profitability.

All of which brings us to the point of this discussion. A strong argument can be made for the proposition that there is a better than fifty percent chance that, over the next two years, the real estate industry is going to be the target of increased regulatory activity. If this occurs, brokerages will have to bring their regulatory compliance up to a much higher level.

Government regulation is not the only factor that could cause compliance to be reprioritized. The current high level of Wall Street participation in the ownership of franchises and brokerages may also drive this result. In the traditional agent-centric brokerage business model, agent satisfaction was the number one priority. Profitability, at least a market level return on investment, was a third or fourth level priority.

In a publically traded company the number one priority is (or better be) profits that can be returned to shareholders in the form of dividends. Agent satisfaction and consumer experiences will likely take a back seat to these priorities. Profitability in this situation will be driven by accountability, transparency and standards or best practices. To be successful all of these elements require the articulation of specific performance requirements, the periodic collection of metrics reflecting compliance with these requirements and systems to follow up when performance falls below expected requirements.

Strict compliance is not a total stranger to our industry. Without question the best example of how well executed compliance can work to create financial and management success in the real estate industry is Keller Williams. Those who love to criticize Keller Williams, and suggest that the Keller Williams vision it is driven by cultural tricks and cheerleading, would do well to stop demonstrating their lack of sophistication and spend some time learning about its compliance system. No small part of KWI's success today (high profits/high growth) is because of its "enforced without question" compliance program that monitors (and enforces) all of the accountability and standards systems deemed to be mission essential.

But fear not, it would appear that many within the industry will have a chance to rise to this level of compliance relative to both regulatory and financial performance questions.

Firms would do well to start today preparing for the onset of the new regulated industry profit and performance environment. Here are some recommendations to get the process started:

  • Do some basic research into the area of regulatory and standards compliance programs
  • Understand basic compliance Theory
  • Recognize that compliance programs are driven by staff higher up the food chain than many currently on board
  • Recognize that compliance is the ultimate internal control and that, from a compliance perspective, agent centricity is a no go. Compliance requires that someone be in command.
  • Develop a general awareness of the types of technologies that are currently available
  • Be prepared to make a significant investment. Compliance is not a risk takers game. One violation can bankrupt a company.
  • One of the most important roles that compliance plays is to demonstrate for regulators and the public the depth of the firm's commitment to doing it right. Compliance without commitment becomes obvious even to the casual observer.

All hands to your compliance stations. We can do this.

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