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Thursday, January 25, 2018

Mortgage Call Reports: Commercial Loans

QUESTION
We are getting ready to do a loan to our parent company, to “refinance” a model home in Texas.  As this is technically a refinance, would it be reported on our mortgage call report?  

ANSWER
As this is for refinance of a commercial loan on a model home which is not “primarily for personal, family, or household use,” you do not report it on the mortgage call report. 

Analysis

NMLS

Companies that hold a state license or state registration through NMLS will be required to complete a Mortgage Call Report. [See NMLS Resource Center, State Licensing, Common Requirements, Mortgage Call Report] 

This includes a report on “Residential Mortgage Loan Activity (RMLA)”. [Idem]

The NMLS instructions define a “Loan or Residential Mortgage Loan” as “[a]ny loan primarily for personal, family, or household use that is secured by a mortgage, deed of trust, or other equivalent consensual security interest on a dwelling as defined in section 103(v) of the Truth in Lending Act) or residential real estate upon which is constructed or intended to be constructed a dwelling (as so defined).” (Emphasis added.)

Further, under the definition for “Application” as that term is used in reporting, the NMLS instructs the user to “[e]xclude any commercial/business/investment purpose encumbrances from reporting.” 

State Statutory

The Mortgage Call Report requirement of the Texas S.A.F.E. Act provides that “[e]ach licensed residential mortgage loan originator shall submit to the Nationwide Mortgage Licensing System and Registry a report of condition that is in the form and contains the information required by the Nationwide Mortgage Licensing System and Registry.” [Tex. Fin. Code Sec. 180.101]

The regulations under the federal S.A.F.E Act and state S.A.F.E. Acts define the term “residential mortgage loan” as: “a loan primarily for personal, family, or household use that is secured by a mortgage, deed of trust, or other equivalent consensual security interest on a dwelling or on residential real estate[.]” [12 CFR § 1008.23; Tex. Fin. Code § 180.002(18)]

Under federal and state requirements for the mortgage call report, only “residential mortgage loans” must be reported.

Brennan Holland
Director/Legal & Regulatory Compliance 
Lenders Compliance Group

Thursday, January 18, 2018

Anti-Money Laundering Risk Assessments

QUESTION
We know that you conduct anti-money laundering tests. But we have been told that you also conduct anti-money laundering risk assessments. What is an anti-money laundering risk assessment?

ANSWER
The anti-money laundering (AML) risk assessment is central to AML compliance. Even if a company has established the "four pillars" – an AML program, an AML compliance manager, AML training, and AML testing – it should still conduct an AML risk assessment. Implementing the four pillars is the minimum expectation. The risk assessment goes beyond the minimum by determining the risk of potential abuse for money laundering, terrorist financing, or other criminal activity.

The AML risk assessment focuses on risks presented to the organization’s products and services. It also considers where the customer base and organization are located. The risk assessment should surely review the business channels that originate and/or manage a company’s products and services. [FFIEC Exam Manual, 22, Note 10]

This type of review develops a risk profile, which is one of several tools used in developing appropriate methods to mitigate the risks of potential abuse. The risk assessment’s findings are used to independently verify and validate a company’s AML compliance in anticipation of regulatory scrutiny and banking examinations. The auditor should be independent and provide findings that a regulator can review during an examination. [FFIEC Exam Manual, 23, Note 10]

Without an AML risk assessment, a company may not be able to adequately and effectively develop the infrastructure needed to prevent the risks of money laundering and other suspicious financial activity. Indeed, an AML risk assessment should produce or inform the AML program, not the other way around. Put otherwise, as a consequence of an AML risk assessment, a financial institution can develop an AML program containing the necessary strategies to mitigate identified risks and develop procedures in its overall AML compliance, further drawing on and using applicable resources more efficiently.

Importantly, the AML risk assessment is the single most important tool for a company in building and maintaining AML compliance. The exercise of conducting the risk assessment compels the organization to catalogue and risk rate all of its products and services, give consideration to certain risk features of its customer base, and determine the risks associated with the markets in which the company does business – all done to determine how vulnerable it may be to potential abuse by money launderers and others involved in financial crimes.

Once the AML risk assessment is completed, the financial institution should focus on the ways and means available to mitigate the identified risks, including periodic audits and review of internal controls.

Jonathan Foxx
Managing Director
Lenders Compliance Group

Thursday, January 11, 2018

“Resurrecting” a Loan Application

QUESTION
We erroneously canceled a few loans due to an error by our loan processor and poor communication with the loan officer. We sent the applicant the required ECOA notice of action taken, noting the loan was withdrawn by the applicant. At this point, the applicant, as well as our company, would like to move forward with the loan. Is it possible to “resurrect” the initial application or must we require a new application and treat it as a new origination? 

ANSWER
The “cleanest” and most preferable approach would be to treat it as a new loan, requiring a new application, disclosures, etc. That being said, the Home Mortgage Disclosure Act [12 CFR Part 1003] contemplates the “resurrection” of a loan application.

In accordance with the Official Commentary, if the applicant asks the creditor to reinstate an application that was denied, withdrawn, or closed for incompleteness in the same calendar year, the creditor may treat that request as a continuation of the earlier transaction. 

If you resurrect the loan, you must be careful to ensure that you have no systems issues with your LOS and that correct information is reported. Additionally, you should have a policy addressing company actions to be taken in these scenarios, and consistently abide by the policy. 

The relevant regulation and commentary are set forth below.

HMDA 12 CFR 1003.4(a)(1)(i)(E) (Effective date 1/1/2018) (emphasis added)
For an application that was previously reported with a ULI under this part and that results in an origination during the same calendar year that is reported in a subsequent reporting period pursuant to § 1003.5(a)(1)(ii), the financial institution may report the same ULI for the origination that was previously reported for the application.

12 CFR Part 1003, Supplement I to Part 1003—Official Interpretations (Effective date 1/1/2018)
1003.4(a)(1)(i)-4.  ULI—reinstated or reconsidered application. A financial institution may not use a ULI previously reported if it reinstates or reconsiders an application that was reported in a prior calendar year. For example, if a financial institution reports a denied application in its annual 2020 data submission, pursuant to §1003.5(a)(1), but then reconsiders the application, resulting in an origination in 2021, the financial institution reports a denied application under the original ULI in its annual 2020 data submission and an origination with a different ULI in its annual 2021 data submission, pursuant to §1003.5(a)(1).

12 CFR Part 1003 Supplement I, Section 1003.4: Compilation of Reportable Data (Effective date 01/01/2019) (emphasis added)

1003.4(a)(1)(i)-4.  ULI—reinstated or reconsidered application. A financial institution may, at its option, use a ULI previously reported under this part if, during the same calendar year, an applicant asks the institution to reinstate a counteroffer that the applicant previously did not accept or asks the financial institution to reconsider an application that was previously denied, withdrawn, or closed for incompleteness. For example, if a financial institution reports a denied application in its second-quarter 2020 data submission, pursuant to § 1003.5(a)(1)(ii), but then reconsiders the application, which results in an origination in the third quarter of 2020, the financial institution may report the origination in its third-quarter 2020 data submission using the same ULI that was reported for the denied application in its second-quarter 2020 data submission, so long as the financial institution treats the transaction as a continuation of the application. However, a financial institution may not use a ULI previously reported if it reinstates or reconsiders an application that occurred and was reported in a prior calendar year. For example, if a financial institution reports a denied application in its fourth-quarter 2020 data submission, pursuant to § 1003.5(a)(1)(ii), but then reconsiders the application resulting in an origination in the first quarter of 2021, the financial institution reports a denied application under the original ULI in its fourth-quarter 2020 data submission and an approved application with a different ULI in its first-quarter 2021 data submission, pursuant to § 1003.5(a)(1)(ii).

Joyce Wilkins Pollison, Esq.
Director/Legal & Regulatory Compliance
Lenders Compliance Group

Thursday, January 4, 2018

Mortgage Insurance Disclosures

QUESTION
We have an investor who is withholding approval of a loan because the file lacks a signed Mortgage Insurance disclosure for a second home in another state. Our document vendor says they do not issue such disclosure forms for second homes other than in California. Can you provide us with any insight on how we should respond to our investor?

ANSWER
There appears to be a legitimate reason to question the investor’s demand and we recommend that you ask the investor for the specific guideline or regulation on which their demand is predicated. In that regard, we assume that the “disclosure” you are talking about is not the basic disclosure of mortgage insurance premium costs on the Closing Disclosure under the TILA-RESPA Integrated Disclosure Rule (TRID or “Know Before You Owe”) but, instead, the more detailed type of disclosure required at closing under the Home Owner Protection Act (HOPA) (12 USC 4903) which describes when and how mortgage insurance premiums can be canceled, and the contents of disclosures that must be given to borrowers in connection with such insurance.

As you are probably aware, under HOPA, in any case in which private mortgage insurance is required in connection with a residential mortgage transaction “other than a residential mortgage transaction described in section 4902(g)(1),” – the section that describes and defines certain so-called “high risk” loans – at the time at which the transaction is consummated, the mortgagee is required to provide the mortgagor with the following disclosures:

                (A) If the transaction relates to a fixed rate mortgage---

                                (i)  a written initial amortization schedule and

                                (ii) written notice---

(I)
that the mortgagor may cancel the requirement in accordance with section 4902(a) of [the statute] indicating the date on which the mortgagor may request cancellation, based solely on the initial amortization schedule;

(II)
that the mortgagor may request cancellation in accordance with section 4902(a) of [the statute] earlier than provided for in the initial amortization schedule, based on actual payments;

(III)
that the requirement for private mortgage insurance will automatically terminate on the termination date in accordance with section 4902(b) of [the statute] and what that termination date is with respect to that mortgage; and

(IV)
that there are exemptions to the right to cancellation and automatic termination of a requirement for private mortgage insurance in accordance with section 4902(g) of [the statute], and whether such an exemption applies at that time to that transaction; and

                (B) if the transaction relates to an adjustable rate mortgage a written notice that—

(i)
the mortgagor may cancel the requirement in accordance with section 4902(a) of the statute on the cancellation date, and that the servicer will notify the mortgagor when the cancellation date is reached;

(ii)
the requirement for private mortgage insurance will automatically terminate on the termination date, and that on the termination date, the mortgagor will be notified of the termination or that the requirement will be terminated as soon as the mortgagor is current on loan payments; and

(iii)
there are exemptions to the right of cancellation and automatic termination of a requirement for private mortgage insurance in accordance with section 4902(g) of [the statute], and whether such an exemption applies at that time to that transaction.

In addition, in the case of a residential mortgage transaction described in section 4902(g)(1) of the statute, the mortgagee is required to provide, at the time at which the transaction is consummated, written notice to the mortgagor that in no case may private mortgage insurance be required beyond the date that is the midpoint of the amortization period of the loan, if the mortgagor is current on payments required by the terms of the residential mortgage.

For loans falling within the disclosure requirements, there are also certain annual disclosures required. But the HOPA disclosure requirements apply only to “residential mortgage transactions” which are defined under 12 USC 4901(15) to include only loans in which the security interest is created or retained against the borrower’s “principal residence” as follows:

(15)The term “residential mortgage transaction” means a transaction consummated on or after the date that is 1 year after, in which a mortgage, deed of trust, purchase money security interest arising under an installment sales contract, or equivalent consensual security interest is created or retained against a single-family dwelling that is the principal residence of the mortgagor to finance the acquisition, initial construction, or refinancing of that dwelling. (Emphasis added.)

A second home is not the borrower’s “principal residence.” Therefore, it does not appear that the disclosure sought by the investor would be required under HOPA.

That leaves the question of whether such disclosures are required under the law of the state where the “second home” is located. State laws vary on this issue. In California, for example, Civil Code 2954.6 requires certain additional mortgage insurance disclosures, similar to those under HOPA, to be made to borrowers within 30 days after closing on all loans where mortgage insurance is required as a condition of a loan secured by a deed of trust or mortgage (i.e., not just principal residences).  Thus, Civil Code Section 2954.6 provides in pertinent part:

(a) If private mortgage insurance or mortgage guaranty insurance, as defined in subdivision (a) of Section 12640.02 of the Insurance Code, is required as a condition of a loan secured by a deed of trust or mortgage on real property, the lender or person making or arranging the loan shall notify the borrower whether or not the borrower has the right to cancel the insurance. If the borrower has the right to cancel, then the lender or person making or arranging the loan shall notify the borrower in writing of [a number of additional facts regarding operation and cancellation of the mortgage insurance.]

Other states, however, may not have such stringent requirements. Therefore, it is always helpful to check the laws and regulations of the state where the property is located, in addition to Federal laws and regulations, to determine exactly what your obligations are in this highly technical area. In that regard, as always, Lenders Compliance Group can be a useful resource for you.

Michael R. Pfeifer
Director/Legal & Regulatory Compliance
Lenders Compliance Group