Changed Circumstance and Increasing the Origination Fee

QUESTION 

If the origination fee is a percent of the loan amount, and the loan amount INCREASES due to a higher appraised value than originally used on the GFE, is the origination fee charged at settlement allowed to increase under the COC, with proper re-disclosure? 

ANSWER
Bottom Line Up Front: “Yes, but only if issuance of a revised GFE is permissible under 24 CFR § 3500.7(f). In particular, if the loan amount changes and all or a portion of Block 1 is calculated as a percentage of the loan amount, then that portion in Block 1 may be recalculated.” (HUD RESPA FAQs, April 2, 2010)

In the answer quoted above, HUD was responding to the following: “If all or a portion of the charge in Block 1 is calculated as a percentage of the loan amount, and the loan amount changes, can the loan originator issue a revised GFE with an updated charge in Block 1?” 

Your question differs from the question HUD answered in one significant way. Your question premises the increased origination fee on the increased loan amount, and the increased loan amount on the increased appraisal value. HUD points out that “yes”, the origination fee may increase if charged as a percentage of the increased loan amount, and if permissible under RESPA. It does not address your implied, underlying question of whether the higher appraised value may be the causal justification for higher origination fees.

The analysis is important because the loan originator bears the burden of demonstrating compliance when a GFE is revised for purported “Changed Circumstances”, and documentation of that reason must be maintained with the loan records for examination by your regulator. Revisions to the GFE charges are allowed if permissible under 24 CFR § 3500.7(f), (which points to 24 CFR (§3500.2(b); §3500.7(f)(1) and (f)(2)), in other words, “Changed Circumstances”. Your increased origination fee is not permissible if based merely on “a higher appraised value than originally used on the GFE”.

A higher appraisal value may be an alluring opportunity to increase the loan amount as a proxy in justification of higher origination fees. It is well established that a consumer is not obliged to increase the requested loan amount on the basis of improved valuation of over GFE. In fact, the consumer could choose to reduce the requested loan amount. As long as the loan amount remains unchanged, or lowered, there would be no permissible reason to increase origination charges. A loan originator engages in the prohibited conduct of steering if he or she persuades a consumer to obtain a higher loan amount for the purpose of generating higher origination fees.

Increased appraisal valuations may justify compliant GFE revisions, including consumer requested increase in the loan amount, resulting in organic, permissible increase in origination charges. Another permissible change occurs when a higher appraised value decreases the LTV and eliminates the need for previously estimated PMI charges. Conversely, a lower appraised value could increase settlement charges and trigger PMI costs. It is important to have thoroughly documented information supporting any “Changed Circumstances”, and the verifiable and compliant reasons for such change. Under RESPA a loan originator must provide the revised GFE within three business days of the borrower’s requested change.

Wendy Bernard
Director/Legal and Regulatory Compliance
Lenders Compliance Group

Multiple Advertisements

QUESTION

We have an advertisement on our website and we also send out an email advertisement that is the same as the website advertisement. Are these considered a single advertisement? If so, what are the obligations for each advertisement?

ANSWER

Multiple advertisements in any media, such as web page advertisements on a website corresponding to a newsletter blast or in a catalog, are considered a single advertisement if the following criteria apply: (1) a trigger term is used; (2) such term requires a table or schedule in order to provide information regarding a finance charge associated with the trigger term, or any other term is used that appears in the opening disclosures; (3) the advertisement clearly and conspicuously sets forth or is required to set forth the foregoing table or schedule; and (4) these advertisements are required to refer and/or provide access to such table or schedule.

Put otherwise, single advertisement guidelines apply for any advertisement where a statement of finance charge is required for a trigger term, or disclosure is required in opening disclosures for any other term, where the trigger term or other term appear in a catalog or advertisement, thereby requiring clear and conspicuous reference to the page or location where the mandated table or schedule begins. [12 CFR § 226.16(c)(1), 2010]

For instance, in any advertisement where a trigger term necessitates a statement of finance charge – indeed, any other term that appears in opening disclosures pursuant to Regulation Z § 226.6 – the advertisement must clearly refer to the page, web page, or any media location where a table or schedule is found and begins.

Therefore, in each online, website advertisement and its corresponding newsletter advertisement, a hyperlink to the table or schedule containing required additional information should be provided for a trigger term requiring a statement of finance charge and/or any other term that appears in opening disclosures. [12 CFR Supplement I to Part 226 – Official Staff Commentary 12 CFR § 226.16(c)(1)-2, 2010]

Jonathan Foxx
President & Managing Director
Lenders Compliance Group

Changed Circumstance and Redisclosure

QUESTION
It is my understanding that unless there is a “changed circumstance”, a Good Faith Estimate (GFE) is binding on the lender. What constitutes a “changed circumstance” such that a revised GFE may be redisclosed and what is the time frame for redisclosing? 

ANSWER 

As a general rule, the GFE is binding on the lender until its expiration. The exception to this rule is if there is a “changed circumstance”.

A “changed circumstance” includes: 

• Acts of God, War, Disaster or other emergencies.
• New information obtained that was not relied upon when the initial GFE was provided.
• Identification of inaccurate information provided by the Borrower used to prepare the GFE.
• Borrower requested changes in loan terms.
• Other changes particular to the Borrower or transaction, including without limitation, boundary disputes, need for flood insurance, or environmental problems.

Additionally, a GFE must be redisclosed if the rate is locked after the initial GFE was provided. 

[12 CFR §1024.2(b)(1), §1024.7(f)]

None of the information collected by the loan originator prior to issuing the GFE may later become the basis for a “changed circumstance” upon which a loan originator may redisclose the GFE unless the loan originator can demonstrate that there was a change in the particular information or that it was inaccurate, or that the loan originator did not rely on that particular information in issuing the GFE.

The loan originator is presumed to have relied on the Borrower’s name, the Borrower’s monthly income, the property address, an estimate of the value of the property, the mortgage loan amount sought, and any information contained in any credit report obtained by the loan originator prior to providing the GFE.

Examples of situations where the reissuance of a GFE is warranted include, without limitation, the following:

• Rate lock expiration or Borrower requests a rate lock extension at a cost to Borrower.
• Loan amount changes due to Borrower request, change to payoff amount, change to obligations.
• Borrower requests an escrow waiver or decides to no longer waive escrow.
• Borrower estimated property value not supported by appraisal.
• Credit quality change due to new information received such as FICO score, DTI, undisclosed debts, judgments, income change.
• Occupancy change (i.e., property initially thought to be a primary residence becomes investment property).

Some situations must be evaluated on a case-by-case basis to determine if a changed circumstance occurred. Such situations include, without limitation:

• Borrower not proceeding quickly to closing.
• Parties added or removed from title.
• Signing documents using a power of attorney.
• Vendor for a settlement service goes out of business.
• Property type changes (i.e., single family residence is actually multi-family).
• GSE, FHA, mortgage insurance program changes.

Situations which do not qualify as a changed circumstance include, without limitation, the following:

• Lender does not accept broker issued GFE.
• Market fluctuations on a locked loan.
• Borrower’s name.
• Information in a credit report generated before the issuance of the GFE.
• Any change which is known or should have been known by the loan originator at the time the initial GFE was issued.

If a changed circumstance exists, a revised GFE must be provided to the Borrower within 3 business days of receipt of information sufficient to establish a changed circumstance.

It is important to bear in mind that information related to a changed circumstance may come from a party other than a borrower (i.e., an appraisal with a value other than expected which increases or decreases the loan amount). 

The revised GFE can only reflect the changes which increased as a direct result of the changed circumstance. The changed circumstance should be documented and all documentation and information must be maintained for at least 3 years.

The above discussion reflects regulations in effect as of this date.  The reader should bear in mind that the Consumer Financial Protection Bureau has proposed a rule integrating mortgage disclosures under the Real Estate Settlement Procedures Act (Regulation X) and the Truth-in-Lending Act (Regulation Z) which will alter the definition of “changed circumstance”. The proposed rule can be found at https://federalregister.gov/a/2012-17663.

Joyce Pollison
Director/Legal and Regulatory Compliance
Lenders Compliance Group

Anti-Money Laundering Program–Requirements

QUESTION 

I am the Anti-Money Laundering Program officer. I want to know three things: what are the required sections of the program, how to determine the core procedures that need to be in the program, and what are my responsibilities as the AML officer?

ANSWER 

There are four elements to the Anti-Money Laundering Program (“AML”) required by the Financial Crimes Enforcement Network (“FinCEN”). 

These are:
1. Policy and Procedures
2. AML Compliance Officer
3. Training
4. Independent Testing

In order to determine the core procedures that an organization requires, it is necessary to assess its size, complexity, and risk profile, with respect to exposure to money laundering activity and terrorist financing schemes. Generally, the policy statement should contain actionable and measurable implementations in accordance with the Bank Secrecy Act (“BSA”). For instance, if the residential mortgage lender or originator obtains its loan applications not only through a retail channel but also through a wholesale or correspondent channel, or any other channel, its agents, brokers, or any similarly situated entity, must be included in the operational structure of its AML compliance requirements. Methodologies for reviewing all internal and agent relationships for compliance with the AML guidelines are part of the AML program.

The AML officer’s responsibilities are considerable. The primary responsibility is to oversee the implementation of the AML program. To accomplish this, the AML officer monitors compliance with AML guidelines in all loan origination channels as well as internally among employees, promptly updating and ratifying the program, when required, implementing training initiatives, and ensuring that independent testing is effectuated. Additionally, the AML officer’s oversight includes taking actions to assure that Safe Harbor guidelines are always followed.

Jonathan Foxx
President & Managing Director
Lenders Compliance Group

Monitoring the Quality Control Auditor

QUESTION

Our investor has told us that we need to monitor our quality control vendor.  Exactly how do we do this?

ANSWER
Your investor is correct. It is very important to monitor your quality control provider to ensure that the firm is performing the audit work in accordance with your Quality Control Plan (“Plan”) and pursuant to industry requirements. Even though it is acceptable to outsource the quality control function, as the lender you are ultimately responsible for the administration and performance of your quality control program. The following are our suggestions to properly monitor your quality control vendor.

At least annually, review your Quality Control Plan with your quality control provider to ensure that the Plan is up to date with respect to any changes in investor and regulatory requirements, and also to verify that the quality control provider is aware of the changes and has incorporated them in its audit procedures. 

Closely review the quality control audit reports you receive each month from your quality control provider and do not hesitate to question the findings and conclusions. As part of your required process to determine the cause of the findings and to take appropriate action to prevent the re-occurrence of the errors, you will be able to verify the correctness of the findings as reported by your provider. If you have documentation that disputes the findings, discuss these matters with your provider, and if they made a mistake require them to issue a revised report.

Periodically, request from your quality control provider copies of the audit work papers, checklists and all supporting documentation for a sample of loans that have been audited. It is not necessary or practicable to re-audit the files; instead, check to make sure that all questions or audit steps on the checklists have been answered and satisfactorily completed. Also review the documentation to ensure that there is adequate proof that the auditor did, in fact, satisfactorily re-verify the credit documents supporting employment, income, assets and gifts, and so forth, used by the underwriters.

Some lenders will rely on their Internal Audit Departments or independent, outside auditors to perform this task as part of their annual audit of internal control systems, of which Quality Control is a major secondary internal control point.

Other lenders will perform this task monthly or quarterly rather than waiting until the end of the year audits. In fact, Fannie Mae, in their recent Selling Guide Announcement SEL-2013-05, stated that “the lender must perform a monthly review of a minimum of 10% of the loans reviewed by the vendor to validate the accuracy and completeness of the vendor’s work. The 10% sample must include loans for which the vendor identified defects and for which no defects were identified. This review must be performed by the lender itself, and may not be contracted out.” This Announcement was issued on July 30, 2013 and can be implemented immediately, but must be implemented by January 1, 2014. The new 10% requirement might seem extreme; however, it is an excellent way to monitor your quality control vendor to ensure that it is providing you with top quality service at all times.

Bruce Culp
Director/Quality Control and Loan Analytics
Lenders Compliance Group