1031 Regulation Part of CFPA Bill

Representative Michael Michaud (D-ME2) successfully added an amendment to the the "Wall Street Reform and Consumer Protection Act of 2009". HR 4173 would establish the Consumer Financial Protection Agency as the primary regulatory body over 1031 Exchange Qualified Intermediaries.

The CFPA bill was quickly introduced on December 8th and passed the House late last Friday by a vote of 223 to 202. It now moves to the Senate. If passed there and signed into law, the bill would usher in, what CNN describes as, “the most sweeping set of changes to the banking regulatory system since the New Deal.”

Michaud's amendment requires that the Director of the CFPA conduct a review of Federal laws and regulations relating to the protection of individuals that utilize exchange facilitators , submit to Congress recommendations on the steps necessary to ensure appropriate protection of such persons and establish and carry out a program, utilizing the authority of the CFPA, to protect individuals that utilize exchange facilitators.

Calls for reform, in light of the previously covered Okun 1031 Tax Group and LandAmerica Exchange fraud and failure, have come from consumers as well as many within the QI industry. A few states, including Colorado, have established their right to regulate 1031 exchanges within their borders. However, the federal bill and the Michaud amendment makes no mention of what protections should be established. Instead it puts the power to decide solely in the hands of the CFPA Director.

Some in the QI industry, that appear to have pushed for the bill amendment without industry association support, have suggested regulatory requirements that Qualified Intermediaries have specific prohibitions against illiquid investment vehicles and require the exchange facilitator to hold funds in a segregated bank account. They have also called for audits of Qualified Intermediaries.

While not in disagreement with these sound financial business principles, the wild card in any government intervention into the financial markets is what the CFPA Director decides to recommend. Many within the financial industry are concerned the legislation creates sweeping new powers for the federal government and may have unintended consequences that reduce access to credit and financial services while increasing the costs. One thing seems logical...such a "superagency" regulator, would further increase costs of running the federal government and increase costs to those within the financial industry - costs that will undoubtedly get passed on to consumers.