QUESTION
In our recent examination, the banking
department cited us for S.A.F.E. Act violations. The worst offenders were in
our online group.
The way we’re set up, the online loan officers separate between those who take an application and those who just answer phones and direct the applicants to loan officers.
It became a licensing issue based on the definition of “taking an application” and whether anyone who spoke to the applicant was licensed in the property’s state.
Some of the things we now have to do are install a call recording service, monitor all the calls, additional training, quarterly review of all loan officer licenses, complete description of the “hand-off” procedures, and compliance with the S.A.F.E. Act’s definition of originating mortgage loans.
The biggest problem we face is defining what the banking department calls “mortgage loan originator activities.” We want to revamp the online group, beginning with a new definition.
What are “mortgage loan originator activities” according to the S.A.F.E. Act?
ANSWER
There are several aspects of your inquiry
leading up to the question itself. I have repeatedly said that a financial
institution should not go online unless it has the appropriate policies and
procedures in place. It appears that your company did exactly what I have
argued against doing! I understand the need to get into online sales, but it
should not be at the expense of courting regulatory violations.
If you had come to us to build an online platform, we would have had you work with our checklist and document review that guide you in establishing an online sales group. We would be interacting every step of the way until you launch the platform.
Such requirements would include not only the items you mention but also many more features that standardize and stabilize the interaction with consumers and ensure federal and, where applicable, state banking law compliance.
Our firm already has the policies and procedures to conform to your business model. There are several necessary policy documents. But that’s just one feature of the build.
You need periodic call calibration. Call calibration, which we offer, is an oversight process to monitor, rate, and report on call compliance by listening to recorded calls. Ideally, this should be done by a compliance professional.
There are numerous disclosure requirements, both oral and written.
And the threat of being trapped in a licensing violation is real. We have worked with clients that fell into multistate licensing violations and paid millions of dollars in civil monetary penalties. When you say “hand-off procedures,” I say be careful!
And, most important, you need to understand what constitutes “mortgage loan originator activities” as defined by the S.A.F.E. Act (“Act”),[i] whose implementing Regulation H describes specific requirements for S.A.F.E. Act-compliant state mortgage loan originator licenses and the Nationwide Mortgage Licensing System and Registry.[ii]
To answer your question, I will treat three fundamental elements that constitute mortgage loan originator activities. The three components are (1) taking an application, (2) offering or negotiating loan terms, and (3) compensation or gain for rendering such services.
These are not all the possible scenarios but about as comprehensive as I can provide in the space available for this article. If you want more information, please get in touch with me HERE.
I will base my response on an appendix to the Act.[iii] This appendix is best understood as providing possible examples to aid in understanding activities that would cause an individual to fall within or outside the definition of a mortgage loan originator. Even then, they illustrate only the issue described and do not illustrate any other issues that may arise.
Let’s begin by describing a residential mortgage loan as any 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[iv] or residential real estate upon which is constructed or intended to be constructed a dwelling.[v]
And, broadly, a loan application is a request, in any form, for an offer (or a response to a solicitation of an offer) of residential mortgage loan terms, and the information about the borrower or prospective borrower that is customary or necessary in a decision on whether to make such an offer. I know this language seems legalistic – and I guess I can’t help myself! – but in this case, every single word counts. Read it again!
Taking an Application
The act of taking a residential mortgage loan application means receipt by an individual for the purpose of facilitating a decision whether to extend an offer of loan terms to a borrower or prospective borrower.[vi]
Here are some examples of taking or not taking an application.
An individual “takes a residential mortgage loan application” even if the individual:
· Has received the borrower or prospective borrower’s request or information indirectly, which means an individual takes an application whether they receive it “directly or indirectly” from the borrower or prospective borrower.[vii] It also means that an individual who offers or negotiates residential mortgage loan terms for compensation or gain cannot avoid licensing requirements simply by having another person physically receive the application from the prospective borrower and then pass the application to the individual;
· Is not responsible for verifying information. The fact that an individual who takes application information from a borrower or prospective borrower is not responsible for verifying that information – for example, the individual is a mortgage broker who collects and sends that information to a lender – does not mean that the individual is not taking an application;
· Only inputs the information into an online application or other automated system; or
· Is not involved in the approval of the loan, including determining whether the consumer qualifies for the loan. Similar to an individual who is not responsible for verification, an individual can still “take a residential mortgage loan application” even if they are not ultimately responsible for approving the loan. For instance, a mortgage broker can take a residential mortgage loan application even though it is passed on to a lender to decide whether the borrower qualifies for the loan and the ultimate loan approval.
An individual does not take a loan application merely because the individual performs any of the following actions:
· Receives a loan application through the mail and forwards it, without review, to loan approval personnel. The Bureau interpreted the term “takes a residential mortgage loan application” to exclude an individual whose only role with respect to the application is physically handling a completed application form or transmitting a completed form to a lender on behalf of a borrower or prospective borrower.[viii]
· Assists a borrower or prospective borrower who is filling out an application by explaining the contents of the application and where particular borrower information is to be provided on the application;
· Generally describes for a borrower or prospective borrower the loan application process without a discussion of particular loan products; or
· In response to an inquiry regarding a prequalified offer that a borrower or prospective borrower has received from a lender, collects only basic identifying information about the borrower or prospective borrower on behalf of that lender.
Offering or Negotiating Terms of a Loan
The following examples illustrate when an individual offers or negotiates terms of a loan[ix] and, conversely, what does not constitute an offering or negotiating terms of a loan:
Offering or negotiating the terms of a loan includes:
· Presenting for consideration by a borrower or prospective borrower particular loan terms, whether verbally, in writing, or otherwise, even if:
o
Further verification
of information is necessary;
o
The offer is
conditional;
o
Other individuals must
complete the loan process;
o
The individual lacks
authority to negotiate the interest rate or other loan terms; or
o The individual lacks the authority to bind the person that is the source of the prospective financing.
· Communicating directly or indirectly with a borrower or prospective borrower to reach a mutual understanding about prospective residential mortgage loan terms, including responding to a borrower or prospective borrower’s request for a different rate or different fees on a pending loan application by presenting to the borrower or prospective borrower a revised loan offer, even if a mutual understanding is not subsequently achieved.
Offering or negotiating terms of a loan does not include any of the following activities:
· Providing general explanations or descriptions in response to consumer queries, such as explaining loan terminology (i.e., debt-to-income ratio) or lending policies (i.e., the loan-to-value ratio policy of the lender), or describing product-related services;
· Arranging the loan closing or other aspects of the loan process, including by communicating with a borrower or prospective borrower about those arrangements, provided that any communication that includes a discussion about loan terms only verifies terms already agreed to by the borrower or prospective borrower;
· Providing a borrower or prospective borrower with information unrelated to loan terms, such as the best days of the month for scheduling loan closings at the bank;
· Making an underwriting decision about whether the borrower or prospective borrower qualifies for a loan;
· Explaining or describing the steps that a borrower or prospective borrower would need to take to obtain a loan offer, including providing general guidance about qualifications or criteria that would need to be met that is not specific to that borrower or prospective borrower’s circumstances;
· Communicating on behalf of a mortgage loan originator that a written offer has been sent to a borrower or prospective borrower without providing any details of that offer; or
· Offering or negotiating loan terms solely through a third-party licensed loan originator, so long as the non-licensed individual does not represent to the public that they can or will perform covered activities and does not communicate with the borrower or potential borrower.
Examples:
- A seller who provides financing to
a purchaser of a dwelling owned by that seller where the offer and negotiation
of loan terms with the borrower or prospective borrower are conducted
exclusively by a third-party licensed loan originator.
- An individual who works solely for a lender, when the individual offers loan terms exclusively to third-party licensed loan originators and not to borrowers or potential borrowers.
Compensation or Gain
An individual acts “for compensation or gain”[x] if the individual receives or expects to receive, in connection with the individual’s activities, anything of value, including, but not limited to, payment of a salary, bonus, or commission.
Note: The concept “anything of value” is interpreted broadly and is not limited only to payments contingent upon the closing of a loan.
An individual does not act “for compensation or gain” if the individual acts as a volunteer without receiving or expecting to receive anything of value in connection with the individual’s activities.
Jonathan Foxx, Ph.D., MBAChairman & Managing Director
Lenders Compliance Group
_____________________________
[i] 12 CFR Part 1008 – S.A.F.E. Mortgage Licensing Act – State Compliance and Bureau Registration System (Regulation H)
[ii] Regulation H was issued by the Consumer Financial Protection Bureau to implement the Secure and Fair Enforcement for Mortgage Licensing Act of 2008, title V of the Housing and Economic Recovery Act of 2008 (S.A.F.E. Act) (Pub. L. 110-289, 122 Stat. 2654, 12 U.S.C. 5101 et seq.)
[iii] See Appendix A to Part 1008
[iv] As defined in section 103(w) of the Truth in Lending Act
[v] Ibid, as defined
[vi] See § 1008.103(c)(1)
[vii] Ibid
[viii] This interpretation is consistent with the definition of “loan originator” in section 1503(3) of the S.A.F.E. Act.
[ix] See § 1008.103(c)(2)
[x] See § 1008.103(c)(2)(ii)
