CFPB Finally Clarifies Rules for "Originators"

Nov 20, 2019

The most important label used by stockbrokers (acting as “investment banks”) was to label a company as an “originator”. The term had no actual meaning. There were lenders who loaned money, and there were mortgage brokers who were paid to introduce a lender and a borrower. But what was an “originator”?

The stockbrokers knew that if a term had no meaning in the world of finance it would also have no meaning in the courts. So the schemers became the “authority” on what it meant to be an “originator.” And like most of their other labels they defined it in any manner that furthered their scheme of securitization, even if it meant that the definitions were completely contradictory of each other.

In foreclosure cases the originator is generally assumed to be the lender. But as anyone in the banking industry will tell you, if they loan money they want to be called a lender which makes it crystal clear who they are and what they are doing.

And inserting MERS as “nominee” for what would then be labelled as a “lender” who in fact was nothing more than a mortgage broker or salesman does not make MERS anything, does not make the party named as lender an actual lender and does not legally create any legally enforceable agency agreement between MERS and “lender.”

The truth is that from around 2002-2009, virtually no lender was an originator and no originator was a lender. This led to inherent problems with the paperwork for the loan. No paper conveyance of a mortgage, including its initial execution and recording is legally valid without the named transferee paying for the debt. If ABC was an originator but not a lender then it should never have been payee on the note nor mortgagee on the mortgage nor beneficiary or “lender” on a deed of trust. That’s the law — and for good reason.

Residential loans are first about the money. The paperwork is required by law to follow the money. The whole problem with the securitizations scheme devised by stockbrokers is that the paperwork did not follow the money. This was intentional since it opened up opportunities to sell the paper multiple times without the money ever moving. That seems counter-intuitive (unbelievable) but it is true. It’s actually a very old scheme in a brand new coat.

So that is why an industry that was a model for expert documentation of every facet of lending became an industry rife with mostly false paperwork.

All of this was enabled largely by the use of the word “originator” which was taken to mean that “lender” could be expanded under existing law to mean something broader than the actual party making a loan. It can’t. Court decisions to the contrary are not just bending the law, they are breaking it. No court is allowed to make assumptions of act that are not in evidence. Assuming that somehow the foreclosure will be used to pay off the debt is one of those assumptions. And it is wrong.

Even if the there is a known third party who is making the loan of money, without disclosure it is a table-funded loan and against public policy in the Truth in Lending Act whose purpose is to create transparent disclosures as to the party with whom the borrower is supposedly doing business. The borrower is intended by law to be able to make a choice between lenders and to negotiate the best terms with the best lender. That is the whole point of the Act.

Disclosure would require the lender to disclose compensation, fees, commissions, profits or revenue of every kind arising from the commencement of the loan. But that would have meant telling the borrower about the profits that far outstripped any known industry standard compensation or even the amount of the loan itself.

Borrowers, in turn and pursuant to TILA, would then have the opportunity to bargain for better terms considering the outrageous profits that the lender was generating from the commencement of the loan — all as more particularly set forth in the securitization scheme that was not disclosed to any borrower.

The same holds true for the investors who were the ones who put up the money in the first place. Had they been told that compensation arising from the completion of the cycle (investment to loan and then sale of securities) would be far in excess of what was industry standard, they too would have had an opportunity to bargain for a piece of a pie that was exponentially higher than any revenue previously allowed to a stockbroker who put together a deal.

The upshot is that judges and others ask whether the borrower received the loan as though that should end the discussion. But it only ends the discussion in a conventional loan commencement. In the context of securitization the question should be who received what money as a result of the commencement of this loan? In short, full disclosure of everything.

And then the second question should be whether that allocation of revenue and profits and proceeds was part of the limited bargain between the stockbroker and borrowers and between the stockbroker and the investors — or whether the larger undisclosed bargain (issuance and sale of securities) should now be the subject of unjust and wrongful enrichment precisely because the borrowers and the investors had no opportunity to know or bargain.

Put another way — on a level transparent playing field what would be the most likely distribution of those pronogrpahic profits? How much of that allocation would offset the amount owed by the borrower? How much would offset the loss of principal by the investors?

So it may be one thing to look at a loan of $200,000 and see it as a $200,000 transaction. It might be one thing to look at an investor paying $300,000 for that loan and see it as a $300,000 investment. But it is quite another thing when you actually look at the whole transaction which generated a total of $2,400,000 for the stockbrokers, most of which was completely undisclosed to borrowers or investors.

It is a Ponzi scheme mixed with elements of both a bucket shop and a boiler room operation. The scheme works as long as there are always more investors advancing money into the scheme. The stockbrokers actually don’t care if the borrower repays the loan or not as long as enough borrowers make payments in a manner that seems to corroborate the illusion that the loan was made for interest and principal payments.

The time is coming when the effective interest rate for loans falls below zero for exactly that reason. Stockbrokers (“investment banks”) don’t care about the payments on any specific loan. They care about continuing the illusion that the unsecured certificates (“mortgage bonds”) they are selling are actually worth something. They have no inherent value because it is only an unsecured promise from the stockbroker that it will make payments to the investors — until external circumstances relieve it of that obligation.

So now the CFPB is attacking the definitions and licensing of “originators.” The thing to notice is that there were no definitions or restrictions on the activities of anyone calling themselves an “originator” before Dodd-Frank and before this latest regulatory move by the CFPB.