Federation of Exchange Accommodators Moves To Petition Federal Trade Commission For 1031 Exchange Reform!

ftc.jpg

In their boldest, hard line action to date, the Federation of Exchange Accommodators, 1031 Exchange Industry’s sole professional organization, has petitioned the Federal Trade Commission to “adopt a regulation that would apply the force of federal law to accepted industry standards and conduct that are intended to protect consumers who engage the services of exchange facilitators.”

fea-logo.jpg

According to Smartmoney.com, the historic significance of this petition is to put safeguards in place to “measure competency” of qualified intermediaries, financial safeguards for consumers, and Federal Trade Commission standard operating procedures in cases of enforcement.

The following is the guts of the petition presented by Smartmoney:

Exchange Facilitators Must Demonstrate Competency

“– An exchange facilitator must first register with the
Commission, providing specific identifying information, and
the results of a national fingerprint background check for
certain facilitators.”

In my opinion this safeguard is long over due. As when you are fingerprinted for your driver’s license, QI’s should be forced to provide fingerprints, voiceprints, and while we are at it maybe even DNA samples.

“– A facilitator must designate and maintain an exchange
facilitator officer (e.g., an attorney, CPA or individual with
at least three years experience as a facilitator) who has
demonstrated experience and training to act as an exchange facilitator.”

In my opinion the FEA’s Certified Exchange Accommodator’s certification should be mandated by the FTC as a requirement to be fulfilled by these “designated” facilitators.

Financial Safeguards

“– An exchange facilitator would have to act as a custodian of
exchange funds and invest in a manner that provides sufficient
liquidity and preserves the principal of the exchange funds.”

Any safeguard that will “preserve the principle of exchange funds” will then protect consumers.

“– A facilitator would have to maintain certain specified levels
of insurance, bonds, letters of credit, and/or deposits.”

In my opinion this is a natural safeguard but has it really been as effective a safeguard as background investigations of potential Qualified Intermediaries?

Federal Trade Commission

“– Must review applications for compliance with the registration
requirements. Authorized to revoke or suspend a registration
for misrepresentations, failing to account for property
belonging to others, or deceptive conduct.”

This is the “teeth” of the petition in my opinion. If the FTC will step up and levy heavy fines, pursue criminal proceedings, and revoke licensing, then the 1031 Industry will restore order and consumer confidence.

If you have any information or opinions on this developing story between the FEA-FTC and the 1031 Exchange industry please comment or write to Dean Guadagni at ddguad@aol.com



					
Advertisements

4 thoughts on “Federation of Exchange Accommodators Moves To Petition Federal Trade Commission For 1031 Exchange Reform!

  1. We have addressed these things before. What the FEA is asking for is essentially window dressing

    You will note that the FEA does not ask the FTC to require QI’s to disclose all their fees and all the interest they (not the exchanger) might be earning on the funds held. That is kept a deep dark secret

    They do not ask to require all accounts to be segregated so they can be easily protected, followed and secure. That is because 95% of all QIs make some or all of their fees on interest earned and that requires commingled (not segregated) accounts.

    Bonds, insurance and the like does not really help. Any protection they might provide will be far too late to protect the actual exchange (due to time limitations)

    Fingerprinting and background checks will not help. Almost all the recent losses have been caused by people that would easily pass those checks.

    The only way the industry will survive is to make it completely transparent as to fees and earnings, and to require all funds to be held subject to joint control with the exchanger.

    One hopes the FTC will hear from sources other than the FEA on this proposal and maybe we could see some real reform

  2. Rob,

    I appreciate your wisdom and experience on this matter.

    I am less concerned about what the QI will make on interest. I see this as a similar cost of doing business as a loan officer’s Yield Spread Premium aka Bank kickback.

    I do understand that the comingling is necessary in order for the QI to derive a interest commission for doing a deal. That is a problem.

    Is there a solution that you see that has more teeth, less risk for consumers, and will appease the exchanger’s right to a reasonable profit?

    Dean

  3. I disagree on the interest aspect.

    Yield spread in th world of lending does not directly change the economics to the borrower, yet in the world of QIs this interest does change what an exchange will cost the exchanger.

    In lending ALL costs are required to be disclosed by lenders, but not fees paid to or interest earned by QIs.

    Why not simply require it to be an entirely fee based service where all interest is passed through to the exchanger?

    The risk to the exchanger ALWAYS flows from the need for the QI to earn interest on the exchangers funds.

    If that risk is eliminated by eliminating the ability of a QI to earn this interest, security necessarily increases.

    Remember that the IRS is looking at requiring the exchanger to be taxed on ALL interest earned even if p[aid to the QI.

    That would also help

    Make security simple and clear cut by requiring all exchangers to have joint control over funds held.

    That way the funds can never disappear or be lost without the exchanger’s complicity

  4. Rob,

    I can always count on you for great insight. Thank you again for commenting!

    I must say we agree to disagree on yield spread premiums. As a former mortgage broker and owner, the biggest confusion for borrowers is ysp. I have to say that in my experience the yield spread premium does in fact directly change the “economics to the borrower.”

    Borrowers rarely understand how a LO’s commission works and how the banks compensate them. If borrowers were more savvy they would negotiate knowing that every 1/4pt represents a fat increase in commission paid to the LO by the bank.

    The game LOs play is the old buy your rate down game. The borrower, not understanding this game, then pays points on top of the junk fees in closing which are purely added commissions to the brokerage.

    If consumers understood the ysp, they would, in negotiations, announce their knowledge of this compensation and refuse to be hammered on the front end by points charged or higher interest rate locks.

    Sorry enough of that stuff. . .

    I am WITH YOU ALL THE WAY: why not make it an entirely fee based service?
    I love the idea. I would love to see that concept make it’s way into the mortgage business as well.

    In addition I totally agree with your arguement for “joint control” of funds during the exchange. This would end the rip offs and slinking out of town in the middle of the night fiascos.

    Excellent ideas. When are you going to run for office?

    Dean

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s