Property Inspection Waivers

QUESTION       

We have a loan in which the FNMA DU Findings indicated the subject is eligible for a Property Inspection Waiver. The Approve/Eligible results were achieved prior to a hurricane and declaration by the Federal Emergency Management Agency (FEMA) that the county where the subject property resides has been declared a natural disaster. The property did not sustain any damage due to the natural disaster, as evidenced by the consumer and a drive-by inspection by the Loan Officer. Can we move forward with the closing utilizing the PIW?

ANSWER

Sadly, the answer is no. Once the natural disaster has occurred, FNMA revokes offers of the Property Inspection Waiver ("PIV"). They do so by following the declared areas as set forth by FEMA. If the loan has not closed and funded prior to the occurrence and is located in the disaster-impacted area, FNMA will only accept the loan for delivery if a full appraisal is prepared after the disaster occurred to ensure it has not been damaged by fire, wind, falling or rising water, or other causes of loss and destruction. If a property is located in a condo or co-op project, both the condition of the unit and the condition of the building in which the unit is located must be assessed. Loan case files must be resubmitted to DU for refreshed AUS results.

In the case where the loan has closed but has not been delivered to FNMA, the lender must determine if the condition of the property has materially changed since the note date. The lender may exercise the appraisal waiver if the condition has not materially changed. 

In any event, the lender is expected to make prudent and reasonable actions to determine whether the conditions of the property may have materially changed. The lender is ultimately responsible for determining if an inspection of the property and/or a new appraisal is necessary to supports its representations.

Lenders should use the following criteria when determining if the mortgage loan can be delivered to Fannie Mae -

• If the property has been damaged and the damage does not affect the safety, soundness, or structural integrity of the property and the repair items are covered by insurance, the lender may deliver the mortgage to Fannie Mae. In these circumstances, the lender must obtain documentation of the professional estimates of the repair costs and must ensure that sufficient insurance proceeds are available for the borrower's benefit to guarantee the completion of the repairs. 
• If the property was damaged and the damage is uninsured or the damage affects the safety, soundness, or structural integrity of the property, the property must be repaired before the mortgage loan is delivered to Fannie Mae.
• FNMA DU may not be current in relation to disaster-affected areas and could return allowable PIW AUS results. The lender, again, is responsible for determining if the subject property has been affected and how best to support and defend the collateral supporting the mortgage loan.

Brandy George, Six Sigma

Director/Underwriting Operations Compliance

Executive Director/LCG Quality Control

Charging Fee for Preapprovals

QUESTION

As a lender, we frequently receive requests for preapprovals from consumers so they can shop for their home with knowledge as to what they can afford in terms of a loan. We pull a credit report prior to issuing the preapproval. Currently, we do not charge any fees in connection with the preapproval. 

Can we charge a “preapproval” or “preapplication” fee prior to pulling credit?

ANSWER 

You do not state the type of loan the preapproval is being issued with respect to.  For purposes of this response, the assumption is that consumer is seeking preapproval for a consumer loan secured by a one to four-unit residential property in which the consumer intends to reside. Thus, if the preapproval results in a mortgage application, it will be subject to the TILA-RESPA Integrated Disclosure (“TRID”). 

You also do not provide any information regarding the extent of your verification process, other than to state that you will pull a credit report prior to issuing the preapproval. For purposes of this response, and without delving into the issue of preapproval versus prequalification and UDAAP concerns raised by whether a preapproval program comports with the Home Mortgage Disclosure Act’s (“HMDA”) definition of preapproval, the assumption is that the preapproval program does not qualify as a HMDA preapproval program.

Under TRID, a creditor is barred from imposing any fee on a consumer in connection with the consumer’s mortgage loan application, such as an application, appraisal or underwriting fee, prior to the consumer’s receipt of a Loan Estimate and the consumer thereafter indicating an intent to proceed. The one exception to this prohibition is that a creditor may impose “a bona fide and reasonable fee for obtaining the consumer’s credit report” prior to the issuance of the loan estimated”. [12 CFR 1026.19(e)(2)]. Thus, at any time prior to the delivery of a loan estimate in connection with the application, the creditor may impose a credit report fee.

TRID also prohibits a creditor from requiring the consumer to submit documents verifying information related to the consumer’s mortgage loan application prior to the creditor proving the Loan Estimate. [12 CFR 1026.19(e)(2)(iii)] However, TRID does not prohibit the consumer from voluntarily submitting verification documentation such as bank statements, W-2s, etc. In that instance, the creditor is permitted to use the information as part of its verification process.  Notwithstanding, there can be no requirement that the consumer provide such information prior to the creditor’s issuance of the Loan Estimate.

So, back to the question, can a “preapproval” or “preapplication” fee be charged with respect to a request for a preapproval prior to a creditor pulling credit? 

In support of charging a fee, the typical creditor argument is that at this point, we do not have all 6 pieces of information for a TRID application (consumer’s 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 sought), so TRID does not apply and therefore nothing prevents us from charging such a fee.  Typically, the missing piece is the property address.

At the outset, the assumption is that the “preapproval” or “preapplication” fee exceeds the bona fide and reasonable fee which a creditor may charge for the credit report. If the fee simply equates to the charge for the credit report fee, it is certainly permissible, and it would be advisable in that instance to call it a credit report fee rather than rename it a “preapproval” or “preapplication fee”. Transparency is key in eliminating any UDAAP concerns. 

If the “preapproval” or “preapplication” fee exceeds the credit report fee and is intended to be an additional application or underwriting fee, charging the fee based on the fact that the creditor does not have a TRID application (notwithstanding that the approval is for a loan that will be subject to TRID), sends a creditor down a slippery slope. And, absent further regulatory guidance, it is a business decision as to whether you as the creditor want to walk down this slope. The cautious position is that once the missing 6^th piece of information is obtained, usually the property address, the preapproval application morphs into a TRID application and thus, the charge of the “preapproval” or “preapplication” fee becomes a TRID violation. Additionally, to the extent the creditor required the consumer to provide verification documentation in order to obtain the preapproval, there is another TRID violation. The creditor may assert that the creditor did not require the consumer to provide verification documentation. But, realistically, if the creditor is charging a fee and gives the consumer a list of documents that consumer may “voluntarily” provide, it is difficult to believe that a consumer will believe s/he is does not need to provide the documents in order to obtain the preapproval.

As an aside, it is important to remember that if you as the creditor have pulled credit and decided to deny the application based on the credit report and communicated such to the consumer, you must issue an adverse action notice under the Equal Credit Opportunity Act.  [12 CFR 1002.9]

Joyce Wilkins Pollison

Director/Legal & Regulatory Compliance

Lenders Compliance Group

Loan Officer Compensation and Internal Referral Fees

QUESTION

If one of loan officer needs to price a loan lower than what our company normally requires in order for the officer to be eligible for compensation, could an “internal referral” of the loan be made to a non-commissioned loan officer/manager who then pays the originating loan officer a referral fee?  For example, John Smith has a deal in which he is competing with a local credit union offering a 4.5% rate. But to be paid his 2% commission under the company’s compensation rules, Smith has to offer the client a rate of 4.75%. Could the loan be “referred internally” to a non-commissioned manager who then gives the borrower the 4.5% rate to be competitive, and pays the LO a flat referral fee?

ANSWER

Regulation X, the implementing regulation for the Real Estate Settlement Procedures Act (“RESPA”) does authorize payment of compensation for certain “internal referrals.” Thus, as an exception to the anti-kickback provisions of RESPA Section 8, Regulation X [12 CFR §1024.14(g)(iv) and (vii)] specifically authorizes:  

“(iv) A payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed;” and 

“(vii) An employer's payment to its own employees for any referral activities.” (Emphasis added.)

However, Regulation X is not the only regulation to consider.  In that regard, for at least two (2) reasons, I believe this arrangement, as you describe it, would probably violate the Loan Officer Compensation Rules in Regulation Z, the implementing regulation of the Truth in Lending Act:

First, the loan officer’s compensation appears to be based on term of the loan, or a proxy for such a term.  In that regard, Regulation Z provides at 12 C.F.R. §1026.36(d)(1) that:

 (i) Except as provided in paragraph (d)(1)(iii) or (iv) of this section, in connection with a consumer credit transaction secured by a dwelling, no loan originator shall receive and no person shall pay to a loan originator, directly or indirectly, compensation in an amount that is based on a term of a transaction, the terms of multiple transactions by an individual loan originator, or the terms of multiple transactions by multiple individual loan originators. If a loan originator's compensation is based in whole or in part on a factor that is a proxy for a term of a transaction, the loan originator's compensation is based on a term of a transaction. A factor that is not itself a term of a transaction is a proxy for a term of the transaction if the factor consistently varies with that term over a significant number of transactions, and the loan originator has the ability, directly or indirectly, to add, drop, or change the factor in originating the transaction.” (Emphasis added.)

Under Section 1026.36(d)(ii) of Regulation Z, “[t]he amount of credit extended is not a term of a transaction or a proxy for a term of a transaction, provided that compensation received by or paid to a loan originator, directly or indirectly, is based on a fixed percentage of the amount of credit extended…” (Emphasis added.) However, the interest rate most assuredly is a term of the transaction. And the so-called “referral fee” is actually compensation to the loan officer, the amount of which is indeed based on a term of the transaction or a proxy for a term; i.e., the interest rate. As you have described it, the loan officer is paid the referral fee only when the interest rate to the borrower is adjusted below what is normally required by the company for the loan officer to earn a commission. 

Second, the arrangement at least appears to violate (or encourage violation of) the “anti-steering” provisions of the Loan Officer Compensation Rules in Regulation Z. In that regard, the loan officer operating under the proposed arrangement would be dis-incentivized to make an “internal referral” of loans at the lower interest rate since the flat referral fee would presumably be less than the amount of compensation the loan officer would ordinarily receive under his or her regular compensation formula if the loan were made at the higher interest rate. The applicable provisions of Regulation Z [12 C.F.R. §1026.36(e)] read as follows:   

 “(1) General. In connection with a consumer credit transaction secured by a dwelling, a loan originator shall not direct or “steer” a consumer to consummate a transaction based on the fact that the originator will receive greater compensation from the creditor in that transaction than in other transactions the originator offered or could have offered to the consumer, unless the consummated transaction is in the consumer's interest.” (Emphasis added.)

Here, it is difficult to see how the consummated transaction would be “in the consumer’s interest” since the loan interest rate would be higher than what the consumer would have to pay under the referral fee arrangement. In that regard, Section 1026.36(e) goes on to state:

“(2) Permissible transactions. A transaction does not violate paragraph (e)(1) of this section if the consumer is presented with loan options that meet the conditions in paragraph (e)(3) of this section for each type of transaction in which the consumer expressed an interest. For purposes of paragraph (e) of this section, the term “type of transaction” refers to whether:

(i) A loan has an annual percentage rate that cannot increase after consummation;

(ii) A loan has an annual percentage rate that may increase after consummation; or

(iii) A loan is a reverse mortgage.

(3) Loan options presented. A transaction satisfies paragraph (e)(2) of this section only if the loan originator presents the loan options required by that paragraph and all of the following conditions are met:

(i) The loan originator must obtain loan options from a significant number of the creditors with which the originator regularly does business and, for each type of transaction in which the consumer expressed an interest, must present the consumer with loan options that include:

(A) The loan with the lowest interest rate;

(B) The loan with the lowest interest rate without negative amortization, a prepayment penalty, interest-only payments, a balloon payment in the first 7 years of the life of the loan, a demand feature, shared equity, or shared appreciation; or, in the case of a reverse mortgage, a loan without a prepayment penalty, or shared equity or shared appreciation; and

(C) The loan with the lowest total dollar amount of discount points, origination points or origination fees (or, if two or more loans have the same total dollar amount of discount points, origination points or origination fees, the loan with the lowest interest rate that has the lowest total dollar amount of discount points, origination points or origination fees).

(ii) The loan originator must have a good faith belief that the options presented to the consumer pursuant to paragraph (e)(3)(i) of this section are loans for which the consumer likely qualifies.

(iii) For each type of transaction, if the originator presents to the consumer more than three loans, the originator must highlight the loans that satisfy the criteria specified in paragraph (e)(3)(i) of this section.” (Emphasis added.)

Here, there is no indication that the terms of the above “options” exception have been satisfied. Accordingly, I would not recommend this suggested method of loan officer compensation.

Michael Pfeifer

Director/Legal & Regulatory Compliance

Lenders Compliance Group &

Servicers Compliance Group

Harvesting Electronic Mail

QUESTION

We hired a telemarketing and website lead company to get new loan applicant leads. In the company's contract, they state that they provide disclosure involving the “harvesting” of electronic mail. What is meant by harvesting?

ANSWER

As I have said many times, you should be retaining a firm such as ours to review your telemarketing policies. There are so many ways that a relationship with a telemarketer or a website used to generate leads can go wrong, that you really need a careful review of this kind of relationship.

However, it is important to know what “harvesting” means, especially as it relates to the services provided by a lead source. 

“Harvesting” refers to the process of obtaining the electronic mail address of a recipient. By "electronic mail address," I mean a destination, commonly expressed as a string of characters, consisting of a unique user name of mail box and a reference to an Internet domain, whether or not displayed, to which an electronic mail message can be sent. [15 USC § 7006(1)]

An "electronic mail message" is simply a message sent to a unique electronic mail address. [15 USC § 7006(2)]

Harvesting takes place by using an automated means from the Internet website or proprietary online service operated by another entity, and such website or online service included, at the time the address was obtained, a notice stating that the operator of such website or online service will not give, sell, or otherwise transfer addresses maintained by such website or online service to any other party for the purposes of initiating, or others to initiate, electronic mail messages. [15 USC § 7006(3)]

Jonathan Foxx

Managing Director

Lenders Compliance Group