When State Regulators Come Knocking - Brokers Should Understand What To Do Before And After Enforcement Actions

Author:Mr John Bley and Laura Marquez-Garrett
Profession:Foster Pepper PLLC

Reprinted from Scotsman Guide Residential Edition and scotsmanguide.com, October 2009

The financial industry is in a state of turmoil. Daily headlines resound with the closing of more financial institutions and new bankruptcies — and questions. Amid theories of what caused this, elected officials and the public blame financial-industry professionals as a whole.

As a result, state regulators are cracking down on mortgage companies and pursuing financial institutions more aggressively than ever.

For mortgage brokers, this means a higher likelihood of regulatory examinations. Such investigations could result from the introduction of new regulations, which bring the potential for new mistakes. It is therefore critical that industry professionals ensure compliance; update procedure manuals; bolster internal audit and compliance procedures; and properly train their employees.

Knowing what to expect and how to respond when state regulators approach your business is the key to survival in today's regulatory environment.

Basic Compliance A certain amount of paperwork comes with any profession that requires licensing. Submitting this paperwork — which includes everything from routine licensing and renewal documents to annual reports — is the most frequent interaction companies have with state regulators. But when companies do not follow the rules properly, routine interactions can pave the way for steep regulatory backlash.

Most, if not all, of the requisite forms and rules can be found on states' regulatory Web sites. If forms are returned incomplete or if a company attempts to shut down without following the appropriate procedures, state regulators often will first informally request immediate compliance. These requests should not be ignored, as an inadequate response or none at all may lead to later and stricter regulatory action.

Such action likely will come with fees and fines, the purpose of which is to compensate the regulator for time spent and to deter future noncompliance. As violation fees accrue, a small fine can snowball into thousands of dollars.

From a cost-benefit standpoint, brokers often can handle many basic compliance and maintenance issues without an attorney's help. Nonetheless, they require careful attention, thorough research, documentation, and sometimes an experienced attorney's assistance or oversight.

Pre-Examination Regulatory examinations generally are initiated in one of two ways:

Many regulators conduct routine examinations as a means of monitoring industry compliance across the board. These...

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