Wednesday, December 31, 2014

Loan Originator Titles

Could you provide clarification on what titles are allowed for Licensed Residential Mortgage Loan Originators? Can such titles as “Advisor,” “Specialist,” “Consultant,” “Loan Officer,” be used in representing themselves on marketing collateral and websites? It seems there are many titles being used in the industry even though the license is under the title Residential Mortgage Loan Originator.

The SAFE Act (“Act”) defines "loan originator" as "an individual who (I) takes a residential mortgage loan application; and (II) offers or negotiates terms of a residential mortgage loan for compensation or gain." [Section 1503(3)(A)(i)]

Acronyms used for this definition are “MLO” and “RMLO.”

The Act also provides a section, entitled "Other Definitions Relating to Loan Originator," which further elaborates that the RMLO is an individual who “assists a consumer in obtaining or applying to obtain a residential mortgage loan” by, among other things, advising on loan terms (including rates, fees, other costs), preparing loan packages, or collecting information on behalf of the consumer with regard to a residential mortgage loan. [Section 1503(3)(B)]

The definition of “loan originator” encompasses any individual who, for compensation or gain, offers or negotiates pursuant to a request from and based on the information provided by the borrower. Such an individual would be included in the definition of “loan originator,” regardless of whether the individual takes the request from the borrower for an offer (or positive response to an offer) of residential mortgage loan terms directly or indirectly from the borrower.

Ultimately, in order to determine the accuracy and acceptability of a title, the title itself really is not as important as the actual activity conducted by an individual, with respect to the definition in the Act of a “loan originator.”

Other titles suggested, such as “Advisor,” “Specialist,” and even “Consultant” are freighted with inferences that may impact the use of these titles in the context of the Act’s specificity. It is obviously the case that the Act has clearly defined the title “loan originator” and, to that extent, using this term or a modest variation of this term, such as “loan officer,” would be most conducive to clarity.

Jonathan Foxx
President & Managing Director
Lenders Compliance Group

Wednesday, December 24, 2014

Finance Charge: Foreclosure Refinance

It is my understanding that TILA provides the finance charge tolerances on all residential mortgage loans. Recently, however, we originated a foreclosure refinance loan that was kicked back to us by our investor for a tolerance violation. What caused this violation?

The investor no doubt saw the disclosed finance charge as a tolerance violation with respect to a consumer’s right to rescind. With respect to the rescission right, Regulation Z (the implementing regulation of the Truth in Lending Act, or “TILA”), mandates a higher tolerance for certain loans and a lower tolerance in foreclosure situations, such as in the case of a foreclosure refinance.

For purposes of the right of rescission of certain residential mortgage loans, the disclosed finance charge is accurate if:
  1. It is understated by no more than 1/2 of 1 percent of the face amount of the note or $100, whichever is greater. In other words, the finance charge is less than the finance charge required by Regulation Z by no more than one-half of 1% of face amount of the note or $100, whichever is greater; or,
  2. It is greater than the amount required to be disclosed; that is, the disclosed finance charge exceeds the finance charge required by Regulation Z. [12 CFR § 226.23(g)(1)] 

However, there is a lower tolerance in foreclosure situations, where (a) there is a new creditor, (b) the loan is not a HOEPA loan, and (c) there is no new advance or a consolidation of existing loans.

Given the foregoing caveat, for purposes of the right of rescission in a foreclosure situation, the disclosed finance charge is accurate if:
  1. It is understated by no more than 1 percent of the face amount of the note or $100, whichever is greater. In other words, the finance charge is less than the finance charge required by Regulation Z by no more than 1% of the face amount of the note or $100, which is greater; or,
  2. It is greater than the amount required to be disclosed; that is, the finance charge exceeds the finance charge required by Regulation Z. [12 CFR § 226.23(g)(2)] 

Jonathan Foxx
President & Managing Director
Lenders Compliance Group

Thursday, December 18, 2014

Affiliated Business Arrangement Exemption

We are a builder that owns a mortgage company and a title company. Recently, we were told that we are exempt from the RESPA section 8 requirements. I do not want to violate RESPA and I would like a better understanding. Are relationships such as ours subject to being an affiliated business arrangement?

Actually, the relationship you describe is a classic case of an affiliated business arrangement, known by its most common acronym “ABA”. If you do not conform to the applicable RESPA guidelines for ABAs, your firm would be in violation of section 8. There are exemptions, but your ownership of a mortgage company and a title company does mandate compliance with the ABA requirements.

Specifically, there are three conditions for satisfying an exemption, if and only if certain requirements are implemented.

I will summarize these three conditions, cautioning you to consult with a regulatory compliance professional for guidance in satisfying all the requirements of these conditions. 

The following three conditions pertain to exemptions, such that, if implemented, the relationship between the parties to an ABA would not be viewed as violating RESPA:

The person making each referral has provided to each person whose business is referred a written disclosure, in the format of the Affiliated Business Arrangement Disclosure Statement, which outlines the nature of the relationship (i.e., explaining the ownership and financial interest) between the provider of settlement services (or business incident thereto) and the person making the referral and of an estimated charge or range of charges generally made by such provider. The disclosures must be provided on a separate piece of paper no later than the time of each referral or, if the lender requires use of a particular provider, the time of the loan application.

Choice of Provider. 
No person making a referral has required any person to use any particular provider of settlement services (or business incident thereto), except if such person is a lender, for requiring a buyer, borrower or seller to pay for the services of an attorney, credit reporting agency, or real estate appraiser chosen by the lender to represent the lender's interest in a real estate transaction, or except if such person is an attorney or law firm for arranging for issuance of a title insurance policy for a client, directly as agent or through a separate corporate title insurance agency that may be operated as an adjunct to the law practice of the attorney or law firm, as part of representation of that client in a real estate transaction.

Thing of Value. 
The only thing of value that is received from the arrangement - other than payments specifically exempted in RESPA and Regulation X - is a return on an ownership interest or franchise relationship. [24 CFR § 3500.15(b)]

Jonathan Foxx
President & Managing Director
Lenders Compliance Group

Thursday, December 11, 2014

Violating CAN-SPAM: Misleading Headers

We were recently cited by our regulator for violations of CAN-SPAM. Specifically, the header of our email was considered to be misleading. How do we determine when a header is violating the CAN-SPAM requirements?

CAN-SPAM is the acronym for Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003. The Act governs the use of commercial email as a marketing tool as well as other activities relating to commercial email that is deemed to be abusive.

It is unlawful to initiate a transmission to a protected computer of a commercial electronic mail message, or a transactional or relationship message, that contains, or is accompanied by, header information that is materially false or materially misleading.

Generally, a “protected computer” is a computer used in interstate or foreign commerce or communication, including a computer located outside the United States that is used in a manner that affects interstate or foreign commerce or communication of the United States. [LVRC Holdings LLC v. Brekka, 581 F.3d 1127, 1131 (9th Cir. Nev. 2009)] Gradually this definition has been expanded to include all networked computers, inside the U.S. or outside. [Shurgard Storage Centers, Inc. v. Safeguard Self Storage, Inc., 119 FSupp2d 1121 (WD Wash 2000)] Briefly put, computers on the Internet are “protected computers.” [US v. Fowler, Case No. 8:10-cr-65-T-24 AEP (MDFL Oct. 25, 2010)]

Header information is considered materially misleading if the header:

1. Is technically accurate but includes an originating electronic mail address, domain name, or Internet Protocol address the access to which for purposes of initiating the message was obtained by means of false or fraudulent pretenses or representations; and,

2. Fails to identify accurately a protected computer used to initiate the message because the person initiating the message knowingly uses another protected computer to relay or retransmit the message for purposes of disguising its origin. [15 USC § 7704(a)(1)(A), (C)]

Furthermore, CAN-SPAM prohibits initiating a transmission of a commercial electronic mail message to a protected computer if there is actual knowledge, or knowledge fairly implied on the basis of objective circumstances, that a subject heading of the message would be likely to mislead a recipient, acting reasonably under the circumstances, about a material fact regarding the contents or subject matter of the message. [15 USC § 7704(a)(2)] 

Jonathan Foxx
President & Managing Director
Lenders Compliance Group

Thursday, December 4, 2014

Gross versus Net Defect Rates

We have developed Net Defect Rate Targets, but we do not see the need to set targets for Gross Defect Rates. Is this acceptable?

No, it is not acceptable for several reasons. First of all, Fannie Mae requires lenders to set targets for both Gross and Net Defect Rates and then to track their performance with respect to meeting these target levels each month through their Post-Closing Quality Control Program.

More importantly, lenders need to track and monitor their Gross Defect Rates, because this percentage measures the efficiency or inefficiency of their loan origination process. In other words, how good of a job are they doing at originating, underwriting and closing mortgage loans? With today’s mortgage origination environment and ever shrinking profit margins, it is imperative that lenders have an efficient and cost effective process of producing viable mortgage loans. 

Gross Defect Rates are an excellent way of measuring and monitoring, over time, how good the production operation is performing, as this metric indicates the condition of the loan file documentation as received by the lender’s quality control department, directly from the production operation. 

Net Defect Rates, on the other hand, indicate the condition of the loan file documentation of the sample of loans after findings or errors have been fixed, remedied or explained away. Keep in mind that defect rates are calculated from the errors or findings found in the sample of loans, not the lender’s total book of business for the audit period.

If a lender has a high Gross Defect Rate but a low Net Defect Rate, that indicates it is good at fixing findings in the loans being sampled, but it is failing to realize that a high Gross Defect Rate in the sample indicates a high error rate in the total loans originated – assuming that the sampling method resulted in the sample being statistically representative of the total population. High error rates in a lender’s total book of business is costly and could increase the probability that loans will be originated that end up as ineligible for sale to investors.

Many lenders will concentrate on their Net Defect Rates in order to get an excellent Final Quality Control Audit Report to show their senior management, board of directors, and investors; but, these lenders are missing an important element of quality control, which is evaluating the cost effectiveness of their production operation.

I urge you to set targets and track your Gross Defect Rates, in addition to your Net Defect Rates.

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

Wednesday, November 26, 2014

Corrective Actions for Understated APR

We are a lender that made a USDA Rural Development loan to a borrower. We provided the borrower with a Truth-in-Lending Act (TILA) disclosure statement that disclosed the RD guarantee fee.

However, we failed to include the RD guarantee fee as a prepaid finance charge in annual percentage rate (APR) calculation. This failure to include resulted in an understated annual percentage rate (APR) in excess of 0.125% of the disclosed APR. We closed on the loan less than 60 days ago and borrower has not yet made any payments with respect to the loan.

What can we do to rectify the situation?

Under the provisions of the TILA, there will be no civil or regulatory liability if, within 60 days of discovering the error, the lender notifies the consumer of the error and “makes adjustments necessary to assure that the person will not be required to pay an amount in excess of the charge disclosed or the dollar equivalent of the annual percentage rate actually disclosed, whichever is lower”. [15 U.S.C. § 1640(b)] 

Thus, the consumer is to pay no more than the lesser of the finance charge actually disclosed (which would require the reimbursement of the undisclosed guarantee fee) or the dollar equivalent of the APR actually disclosed. In the scenario outlined above, you must notify the borrower and reimburse the borrower for the RD guarantee fee.

Joyce Pollison
Director/Legal & Regulatory Compliance
Lenders Compliance Group

Thursday, November 20, 2014

Mortgage Insurance Escrow Cushion at Closing

Our Company offers loans requiring mortgage insurance (MI) but collect the MI premiums with the monthly mortgage payment, with no upfront MI premiums collected at closing. 

May we collect a cushion to avoid an escrow shortage at the end of the year?

Bottom Line Up Front: You would not collect a “cushion” at closing but you may collect an “escrow deposit” to ensure that the consumer’s mortgage insurance premiums are paid in a timely manner, ahead of due dates as applicable, to avoid penalty or harm to the consumer, and to avoid a potential escrow shortage.

A “cushion” or “reserve” should not be confused with the “escrow deposit” collected at closing. Even though these terms are often used and understood interchangeably, Regulation X, the implementing regulation of the Real Estate Settlement Procedures Act (“RESPA”), provides that that in addition to the escrow deposit, the servicer may charge the borrower a cushion that shall be no greater than one-sixth of the estimated total annual payments from the escrow account (i.e., two monthly payments cushion as a maximum allowable reserve). Regulation X defines cushion or reserve as “funds that a servicer may require a borrower to pay into an escrow account to cover unanticipated disbursements or disbursements made before the borrower's payments are available in the account”. 

If the escrow deposit is accurately calculated and collected at closing, the borrower’s payments will be available in his or her escrow account to cover the premiums when due.  Mortgage premiums disbursed on a consistent monthly schedule (as described in the question) cannot be considered “unanticipated” and, therefore, would never be a need to collect a “cushion” to cover unknown disbursements as allowed with other categories of escrow payments under Regulation X. 

The prepaid escrow MI deposit would be included on the HUD as with other prepaid escrow items. For example, the mortgage insurance escrow deposit required would be entered on Line 1003 of the HUD to reflect the corresponding amount disclosed on line 9 of the GFE.

The escrow deposit amount should be the least amount possible to ensure that payments can be made when due, and at the same time achieving a target balance of zero dollars remaining at the end of projected escrow year. Of note, the escrow year is defined under Regulation X as twelve consecutive months, not necessarily twelve calendar months. If the escrow deposit is accurate at closing, there should be no need to collect a “cushion” for monthly mortgage insurance premiums.

When MI is collected upfront at closing, the premium is typically added to the total cash settlement and financed into the mortgage. In your scenario, the insurance premium is not a settlement cost to be paid at closing. HUD Line 902 would indicate “zero” as would the disclosed amount of line 3 of the GFE. The consumer should understand the difference between MI escrow deposits and upfront MI premiums.  

Final Note Except for the advance escrow deposit allowable at closing, no pre-accrual deposits can be collected during the servicing life of the loan. Servicers may resolve escrow shortages under annual escrow analysis adjustments. When complying with Regulation X’s escrow requirements, remember that each of the follow require distinct compliance procedures:

·        Initial Escrow Account Analysis [12 CFR 1024.17(c)(2) and (3) and 12 CFR 1024.17(k)]
·        Annual Escrow Account Statement requirements [12 CFR 1024.17(i)]
·        Shortages, Surpluses, and Deficiency requirements [12 CFR 1024.17(f)]

Wendy Bernard
Director/Legal & Regulatory Compliance
Lenders Compliance Group

Thursday, November 13, 2014

AML Program for Mortgage Brokers

I own a small mortgage brokerage and have an Anti-Money Laundering Program in place pursuant to the Bank Secrecy Act (“BSA”) and FinCEN guidelines. We have an AML officer. In addition, in August of 2012, my employees and I completed a training webinar on AML. 

Is there anything more I am required to do to be compliant with the Anti-Money Laundering (“AML”) rules?

Yes.  We previously answered the question (see our FAQ, October 10, 2013). Yet, based upon what we are seeing, many non-banks and mortgage brokers and are still confused with the BSA requirements.

As of August 13, 2012, non-banks and mortgage brokers (regardless of size) have been required to comply with the anti-money laundering and suspicious activity reporting requirements of the BSA. Having a policy in place and completing the initial training are just two of these requirements. 

The following are additional requirements under the BSA:

 1) All entities are required to perform an annual risk assessment (or sooner if circumstances dictate). The risk assessment should determine factors such as the AML vulnerabilities of the non-bank’s or broker’s products and services, the AML risks associated with the geographies in which it operates, and the AML risks of the customers with which it deals. 
[31 CFR 1029.210(b)(1)]

2) All employees of the non-bank and mortgage broker are required to receive training in AML compliance immediately upon commencement of their employment and annually thereafter. Evidence of such training and the training materials must be maintained by the entity and ready to be produced upon request. 
[31 CFR 1029.210(b)(3)]

3) All non-banks and mortgage brokers must perform an independent test (i.e., audit) of their AML program by an outside, independent, qualified third-party or internally by a qualified member of the staff who is completely independent from an entity’s AML compliance team. This test must be performed within 12-18 months of the August of 2012 implementation date and every 12-18 months thereafter.
[31 CFR 1029.210(b)(4)]

Please note that the foregoing is not intended to be a list of all of the requirements under the BSA.

Michael Barone
Director/Legal & Regulatory Compliance
Lenders Compliance Group

Thursday, November 6, 2014

USA Patriot Act: Information Sharing and Disclosure

As a non-bank residential mortgage lender and originator, I know that our company is now required to file SARs with FinCEN, but are we also subject to the information sharing and disclosure provisions of Sections 314(a) and (b) of the USA PATRIOT Act? 

Yes as to both 314(a) and (b). 

The plain language of the regulation (31 CFR §1029.500) states that “[l]oan or finance companies are subject to the special information sharing procedures to deter money laundering and terrorist activity requirements set forth and cross referenced in [subpart E of part 1029],” which, in turn, makes reference to the general regulations implementing 314(a) and (b) contained in 31 CFR §1010, subpart E. Accordingly, RMLOs are specifically subject to the information sharing provisions of 314(a) and (b).

However, as a practical matter, unless a financial institution receives a 314(a) request from FinCEN requiring it to search for and disclose records, they have no obligation under the 314(a) rule. And, although not required to do so, RMLOs can participate in protected information sharing under 314(b) by completing and submitting the electronic information form on the FinCEN site ( and selecting “Other” for the “Primary Federal Regulator” field.

Brennan T. Holland
Director/Legal & Regulatory Compliance
Lenders Compliance Group

Thursday, October 30, 2014

Identity Theft Prevention: Interagency Guidelines

We are a bank and we are particularly interested in the Interagency Guidelines relating to identity theft prevention. What do these guidelines say about detection, prevention, and mitigation?

There are seven elements that the Interagency Guidelines outline for implementation by financial institutions and creditors. These elements are incorporated in the Identity Theft Prevention Program, including a Supplement thereto that sets forth certain Red Flags (a list that is not meant to be exhaustive).

[12 CFR pt. 334: Appendix J (FDIC); 16 CFR pt. 681: Appendix A (FTC); 12 CFR pt. 222: Appendix J (FRB); 12 CFR pt. 41: Appendix J (OCC); 12 CFR pt. 717: Appendix J (NCUA). See also Identity Theft Red Flags and Address Discrepancies under the Fair and Accurate Credit Transactions Act of 2003, Final Rule: Federal Register: November 9, 2007, 72/217, Rules and Regulations: 63717-63775]

These elements are:

1) Identity Theft Prevention Program,
2) Identify relevant Red Flags,
3) Detect Red Flags,
4) Prevent and mitigate identity theft,
5) Update the Program,
6) Administer the Program, and
7) Legal requirements.

Regarding the Red Flags, these are categorized into five groups, as follows:

1) Alerts, notifications, and warnings from a consumer reporting agency.
2) Suspicious documents.
3) Suspicious personal, identifying information.
4) Unusual use of, or suspicious activity related to, the covered account(s).
5) Notice from customers, victims of identity theft, law enforcement authorities or other persons regarding possible identity theft in connection with covered accounts held by the financial institution or creditor.

[12 CFR pt. 334: Appendix J, Supplement A (FDIC); 16 CFR pt. 681: Appendix A, Supplement A (FTC); 12 CFR pt. 222: Appendix J, Supplement A (FRB); 12 CFR pt. 41: Appendix J, Supplement A (OCC); 12 CFR pt. 717: Appendix J, Supplement A (NCUA)]

Jonathan Foxx
President & Managing Director
Lenders Compliance Group