Pulling Credit: Issuing the Adverse Action Notice

QUESTION

As a mortgage broker, we are trying to minimize our responsibility to issue denial letters. If we do not have the six pieces of information or otherwise take an application, but pull a consumer’s credit through a credit vendor rather than our LOS software, do we need to issue a denial? 

ANSWER

If you are pulling credit, regardless of whether you are doing so from your own LOS software versus a credit vendor, and a credit decision is being made (i.e., declining the loan based on credit) and communicated to the consumer, under the Equal Credit Opportunity Act (“ECOA”) and its implementing regulation, Regulation B, an adverse action notice must be sent to the consumer within 30 days. 

Under ECOA and Regulation B, a notice of action taken must be provided within thirty days of receipt of a completed application. [12 CFR § 1002.9(a)(1)] For ECOA and Regulation B purposes, a creditor has a completed application when the creditor has received all of the information that the creditor regularly obtains and considers in evaluating applications for the amount and type of credit requested. [12 CFR § 1002.2(f)]  

The ECOA definition of application differs from the definition of an application under the TILA-RESPA Integrated Disclosure Rule (“TRID”). Under TRID, a creditor has an application upon the consumer’s submission of his name, income, social security number to obtain a credit report, the property address, an estimate of the value of the property, and the mortgage loan amount.  [12 CFR § 1026.2(a)(3)(ii)] 

Under ECOA, it is how the creditor treats the information submitted by the consumer that determines if the creditor has an application. It is entirely possible that the creditor may have an application under ECOA prior to receiving the six pieces of information required under TRID. For example, if in discussing a prequalification or any other request with a consumer, the loan officer obtains the consumer’s permission to pull credit, actually pulls and reviews the credit report, determines that the consumer will not qualify for any of the lender’s programs, and communicates this decision to the consumer, those actions trigger the need for a Regulation B adverse action notice.

It should be noted that as a mortgage broker does not have the authority to participate in a credit decision, it is the lender who should issue the adverse action notice.  The caveat to this general rule is that a broker may issue the notice on behalf of the lender; however, if it does so, the notice must include the identity of the lender which declined the loan. [12 CFR 1002.9(g)] So, essentially, a broker must seek a lender’s denial for the consumer in order for the Regulation B notice to issue.

Joyce Wilkins Pollison

Director/Legal & Regulatory Compliance 

Lenders Compliance Group

Transitional Licensing for Loan Officers

QUESTION

I heard there is a bill pending before Congress related to transitional licensing for Mortgage Loan Originators (“MLOs”).  What does the bill propose to do and what is its current status?

ANSWER

Under the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (the “SAFE Act”), MLOs employed by non-banks must be licensed in every state in which they originate loans. State licensing requirements are much more arduous than federal registration requirements in that they generally require pre-licensing and continuing education, a testing component, and criminal and financial background checks. Meanwhile, MLOs working for banks are exempt from individual state licensing requirements and may originate loans in any state provided they are employed by a federally-insured institution and register in the Nationwide Multistate Licensing System & Registry (“NMLS”).

Non-bank industry professionals have been advocating for a form of transitional authority to originate mortgages since the enactment of the SAFE Act. Transitional licensing would allow a MLO employed by a bank to move to a non-bank mortgage lender and maintain a valid license to originate residential mortgage loans for a period time while the MLO completes state licensing requirements. Many industry professionals have argued that transitional licensing would allow for a more level playing field in that it would permit non-banks to more easily recruit MLOs. Specifically, MLOs would be more willing to transition from bank to non-bank employment since their livelihood would not be disrupted and they would be able to continue to originate loans and receive compensation during the transition period.  

Currently, H.R. 2121 – SAFE Transitional Licensing Act of 2015 (“H.R. 2121”) is pending before Congress.  Introduced in April, 2015, this bill proposes to amend the SAFE Act by requiring states to issue a temporary license for 120 days to registered MLOs (1) moving from a financial institution to a state-licensed non-bank originator, or (2) moving interstate to a state-licensed loan originator in another state. These individuals would be able to continue originating loans during this time period when they move to a non-depository lender or to a new state.   

Recently, H.R. 2121 has made significant headway. In particular, on March 2, 2016, the bill was sent to Committee for review. The House Financial Services Committee unanimously approved the bill, which means it will advance to the next step in the law making process, which is the House floor. The Mortgage Bankers Association (“MBA”) has been a big proponent of the bill since inception. Its grassroots advocacy arm, the Mortgage Action Alliance (“MAA”), has been issuing Calls-to-Action to its members urging them to contact their representatives in support of the bill. Most recently, the MAA issued another Call-to-Action on March 16, 2016 advocating for broader support of the bill in order to ensure that it is considered by the full House. 

Michael Barone 

Executive Director/Lenders Compliance Group 

Director/Legal & Regulatory Compliance

Risk-Based Pricing Disclosure: Exceptions

QUESTION

We have heard that there are exceptions to providing a risk-based pricing notice. Could you provide some information about a few of these exceptions?

ANSWER

There are several exceptions to the risk-based pricing notice. Important exceptions concern notice regarding specific terms, adverse action, and prescreened solicitations.

A residential mortgage lender is not required to provide a risk-based pricing notice to the consumer if a consumer applies for specific material terms and is granted those terms, unless (1) the terms were specified by the lender using a consumer report after the consumer applied for or requested credit, and (2) after the person obtained the report. For purposes of the exception, “specific material terms” means a single material term, or set of material terms (i.e., such as an annual percentage rate of 10%, and not a range of alternatives, such as an annual percentage rate that may be 8%, 10%, or 12%, or between 8% and 12%). [75 FR 2724, codified in 2011 at 12 CFR § 222.74(a) – FRB; 16 CFR § 640.5(a) – FTC]

A lender is also not required to provide a risk-based pricing notice to the consumer if the lender provides an adverse action notice to the consumer pursuant to the Fair Credit Reporting Act requirements. [75 FR 2724, codified in 2011 at 12 CFR § 222.74(b) – FRB; 16 CFR § 640.5(b) – FTC]

With respect to prescreened solicitations, a lender is not required to provide a risk-based pricing notice to a consumer if the lender obtains a consumer report that is a prescreened list and uses the report for the purpose of making a firm offer of credit to the consumer. The exception applies to any firm offer of credit made by the lender to a consumer, even if the lender makes other firm offers of credit to other consumers on more favorable material terms. [75 FR 2724, codified in 2011 at 12 CFR § 222.74(c) – FRB; 16 CFR § 640.5(c) – FTC]

Jonathan Foxx

President & Managing Director

Lenders Compliance Group

In-House Quality Control

Question

Our company is looking at performing our pre-funding and post-funding quality control reviews in-house. What are the pros and cons for handling the reviews?

Answer

The pros and cons are numerous and there are many factors to consider. Here are a few to consider.  

Bringing or maintaining in-house, pre-funding and post-funding quality control reviews must be performed by an operations staff that is separate from the mainstream processing and underwriting departments, either at the branch or corporate level. In order to maintain the integrity of the reviews, there cannot be any overlap into the operations. In some cases, the Quality Control department is even located in a different section or on a different floor of the building to ensure distinct department and function boundary lines that may not be crossed. The con in this scenario is hiring additional staff which need to be trained and managed.

A good outsourced quality control firm will perform these reviews at a cost that is most likely comparable to, and usually less than, the aggregate cost of maintaining and training employees to perform the same tasks. The pro in this case is – or should be! – the quality control company’s staff are subject matter experts in the areas of quality control procedures, underwriting and compliance. That said, not all QC auditors are efficient in delivering reports in a timely manner; provide comprehensive, statistically derived analytics; or maintain adequate resources and training for their auditors. Some cannot handle high volume or fall behind in processing review times. An internal Quality Control department can occasionally be pushed to meet reporting deadlines by sending to the outsourced alternative the overflow files subject to audit.

An internal quality control department also requires periodic testing for compliance with federal, state, and investor requirements. The test must be able to demonstrate not only the implementation of the quality control plan but also validate that the department has a full, written outline of its processes and procedures. A “check the checker” test must also be able to demonstrate the absence of bias in determining the overall performance and fulfillment of pre-funding and post-closing reviews.

Brandy George

Executive Director/LCG Quality Control

Director/Underwriting Operations Compliance 

Lenders Compliance Group

NMLS Examination Management Tool Suite

QUESTION

As a stateside licensed mortgage lender in many states, I am frustrated with the process of managing the examination process. Are there any plans in place to streamline the process?

ANSWER

Back in August of 2012, the CSBS Technology Task Force prepared a proposal which introduced the NMLS Examination Management Tool Suite (EMTS). In the interim, the CSBS EMTS State Regulator Working Group was staffed and an Executive Steering Committee was formed to oversee the requirements phase, vendor selection and development. The SRR Board approved the Request for Proposal (RFP) which was issued in July of 2015. The purpose of the initiative is defined as the development of a full-service examination management suite of tools for state agency use for single, multistate, and state/federal non-depository examinations while aligning with, to the fullest extent practicable, the examination tool being developed by CFPB.

The tool must incorporate a federated-type system of management between CSBS and the individual state agencies while maintaining autonomy of use by each participating state agency. Specifically, the tool must be housed within NMLS and go beyond the mortgage space by including Money Service Businesses and other non-depository entities. The tools must also work equally well for both single-state and multi-state supervision. 

The system was designed to solve three major business problems:

• Current state systems for examinations do not allow for efficient collaboration among state agencies and/or with federal agencies.
• Multistate supervisory efforts, such as the Multistate Mortgage Committee (MMC) and the Multistate MSB Examination Taskforce (MMET) require a coordinating system to fully realize their goals of improved supervision and efficiency for licensees.
• Not all current systems provide licensees with an efficient and secure manner to exchange documents and communicate with one or multiple regulators.

The functional pieces of the system are categorized as either Primary or Support.

The functional pieces of the system are categorized as Primary or SPrimary functions are those activities that are directly focused on creating and delivering an examination product or service. Some of the elements include core examination management functions such as selection of the examinee, the scope and schedule of the exam, information requests, conducting the exam itself, the examinee portal and post exam activities.

The support functions and systems are defined as activities and systems used by one or more primary functions to improve their effectiveness and efficiency. Examples include data integration and security, workflow and document management, system integration, security and access control, workflow and document management and reporting, to name a few.

Finally, what are the benefits or deliverables that will be provided by the system? The system will: 

• Enhance the uniformity and efficiency of the single state, multi-state and CFPB coordinated exams as many states do not have a complete examination system;
• Drive the building of best practices for examination processes for states and CFPB;
• Promote consistent terminology, standard workflows and facilitate data sharing between a CFPB and state system where possible;
• Allow state agencies to retain depository examination materials in a secure manner so that they can be used for future work; and
• Provide a secure portal to exchange examination communications and documentation between the examiner and examinee.

At this time, a thorough, on-going RFP review process is in place and a system implementation plan is being developed. You will be hearing more about the progress of this initiative in the coming months.

Alan Cicchetti

Director/Agency Relations

Lenders Compliance Group

Executive Director

Brokers Compliance Group