Loan Originator Titles

QUESTION

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.

ANSWER

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

Finance Charge: Foreclosure Refinance

QUESTION

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?

ANSWER

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

Affiliated Business Arrangement Exemption

QUESTION

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?

ANSWER

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:

Disclosure. 

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

Violating CAN-SPAM: Misleading Headers

QUESTION

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?

ANSWER

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

Gross versus Net Defect Rates

Question

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

Answer

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