Explaining Interest Rates to Borrowers

QUESTION 

I am a new loan officer working for a mortgage broker. I graduated from college two years ago, and I still live with my parents because I can't find a decent job. A friend became a loan officer and said I should do it too. So, I got involved as a side hustle. I've been doing this for nine months. 

At this point, I have made loans for a few family members and a good friend, and I have 6 loans in the pipeline from real estate offices. My borrowers always talk about the rates. It's probably their number one question. They then ask me to explain how rates are determined. No matter how I explain it to them, they get confused, and I don't blame them. The rate is always changing and seems unpredictable. 

How should I explain interest rates to my borrowers?

Thank you! 

A Newbie Loan Officer 

OUR COMPLIANCE SOLUTION

We recommend:

LENDERS COMPLIANCE GROUP, established in 2006. It is the first and only full-service, mortgage risk management firm in the United States. It specializes in residential mortgage compliance and provides the largest suite of compliance solutions for banks, non-banks, credit unions, independent mortgage professionals, and mortgage servicers. 

BROKERS COMPLIANCE GROUP, the first full-service, mortgage risk management firm in the United States. It specializes in outsourced mortgage compliance and offers a full suite of services to mortgage brokers and mini-correspondents. 

OUR ANSWER 

For my response, I am going to assume that your loan applicant is not particularly interested in the secondary and capital markets, the factors that determine mortgage rates, or the securitization factors that affect them. 

That said, I am going to assume that you want a straightforward explanation that you can provide to your loan applicants. I hope to offer a non-technical view that they will understand while you are sitting with them to take the loan application. 

As a new loan officer, please note that when the applicant is sitting down to take the application (or interacting with you online), the point of sale is often a make-or-break moment. 

The point of sale is the most important part of loan sales because it is the primary point where trust is established between the loan officer and the applicants. If you can't explain how mortgage rates are determined, you can lose their trust in your expertise, a factor that could determine if they go with you or somebody else. 

Components that Determine Mortgage Interest Rates

There are essentially two significant components that determine mortgage interest rates: market and economic conditions, and what I'll call personal and lender-specific influences. 

Let's consider each of them. 

Market and Economic Conditions 

Several market and economic factors affect the baseline for all mortgage rates and are largely outside a borrower's control. 

Let's discuss! 

Bond Market & Treasury Yields 

Mortgage rates are directly tied to the yields on U.S. Treasury notes, particularly the 10-year Treasury yield, and mortgage-backed securities (MBS). These are considered "safe havens" for preserving financial assets. When investor demand for these safe-haven assets increases – most often during times of economic uncertainty – yields, and thus mortgage rates, tend to fall. Conversely, low demand pushes rates up. 

Now, this may confuse your borrowers. So, you should tell them that these financial instruments work inversely to interest rates because their "fixed coupon" payment becomes more or less valuable as new such financial instruments offer different rates. So, when market rates rise, existing bonds with lower fixed payments become less attractive, and their prices fall to a competitive yield; and when rates fall, existing bonds become more valuable, and their prices rise. This inverse relationship means if you sell an old bond when rates are up, you'll get less; if you sell when rates are down, you'll get more. 

Inflation 

High inflation leads lenders and investors to demand higher interest rates to offset the erosion of the purchasing power of future payments. When inflation is low, rates tend to be lower. 

An example would be when high inflation prompts the Federal Reserve to raise interest rates, making mortgages more expensive (for instance, from 3% to 6%). Hence, a buyer of a $300,000 home pays more monthly, and when investors demand higher yields on bonds to compensate for their future earnings, they buy less. At the same time, low inflation allows for lower borrowing costs, stimulating spending and investment.

Loan Officer Compensation Reform

QUESTION 

We are a Mini-Correspondent located in the Northwest. We mostly originate QM loans. When we do non-QM loans, we broker them. We've been in business for almost twenty years, and there are eight of us. All our compensation comes from the originating. 

I am interested in all the talk about how Congress plans to change the LO compensation regulations. Frankly, what I've read is complicated. I want to know what issues are involved. And, I want to know how Congress is planning to deal with those issues. 

My mortgage broker organization has put out some information about their position. And the lenders' organization has taken a position. But I am not sure what all the complaining is about. I'm not saying that some change is not needed. I just can't figure out what the change is supposed to be.

 My question is, what reforms are they trying to make to the LO compensation rule? 

SOLUTION 

Loan Officer Compensation Policy 

RESPONSE 

The arguments and proposals for loan officer compensation reform are somewhat complicated. So, trying to navigate their implications can be daunting. The Community Home Lenders of America (CHLA) recently released a white paper advocating for reforms to the loan originator (LO) compensation rule, specifically calling for Congress to narrow the scope of the current regulations.[i] The CHLA argues that the current rules, designed to prevent predatory lending practices, have unintended consequences that harm consumers and stifle competition within the mortgage industry. 

I'll provide you with some of the positions outlined in the CHLA's white paper. We are tracking these suggested reforms, as we do virtually all other federal and state regulatory compliance matters that affect banks and non-banks involved in residential mortgage loan origination and servicing. When appropriate, we will issue updates and alerts through our newsletters. 

I will outline the reform issues by outlining some of the main concerns, the proposed reforms, and the actions suggested to effectuate change. My outline contains sections and subsections to reduce the complexity of the subject issues. In the last section, I will delve a bit deeper. Keep in mind, though, there is considerable complexity, and my explication is not meant to be comprehensive. 

The CHLA's Main Concerns 

The CHLA has expressed several concerns. The following four, in broad strokes, are perhaps the main concerns. 

Harm to Consumers 

The CHLA argues that the current LO compensation rules, which restrict how much lenders can pay their loan originators, can effectively prevent lenders from matching competitors' offers and potentially result in borrowers missing out on better deals. 

Stifled Competition 

The CHLA claims that these rules create an uneven playing field, where brokers can offer more flexible compensation structures than retail lenders, hindering competition and limiting borrower choices. 

Unintended Consequences 

The CHLA contends that the rigid regulations discourage loan officers from working with borrowers over extended periods and make it less attractive for lenders to offer loans through State Housing Finance Agency (HFA) bond programs, which are crucial for low-income and minority borrowers. 

Focus on Inter-Firm Compensation 

The CHLA suggests that the original intent of the Dodd-Frank Act's LO compensation rule was to address yield spread premiums between firms, not to restrict compensation within a lender's own organization. 

the CHLA's Proposed Reforms 

Allow Matching Competitor Offers 

The CHLA proposes allowing lenders to reduce compensation to their loan originator employees to match a competing offer for the same borrower.

Defining “Mortgage Loan Originator”

QUESTION 

The banking department claims that our “mortgage loan officer” category is incorrectly defined. As a result, they think we are not licensing MLOs who should be licensed, leading to us originating unlicensed loans. Now, they are auditing our loans for licensing violations. 

Our attorney believes that our policy clearly states how we define an MLO. However, she is concerned that we do not provide examples of the activities and services offered by Mortgage Loan Originators. 

We are in the process of preparing our defense but need some assistance in coming up with examples of MLO activities that the examiners will accept. They are currently auditing us, so we would appreciate your prioritizing our questions. Thanks for your commitment to us all! 

What is the definition of a Mortgage Loan Originator? 

What are some examples of MLO activities? 

COMPLIANCE SOLUTION 

MLO Tune-up 

Policies and Procedures 

ANSWER 

You have asked questions about the term Mortgage Loan Originator (“MLO”), a term that has been defined and redefined, construed and misconstrued, litigated and relitigated, embedded in and cross-referenced among several foundational regulations, and, to some extent, continues to be elucidated and attenuated ad nauseum. 

If your organization employs one or more mortgage loan originators, you must adopt and follow written policies and procedures designed to assure compliance. These policies and procedures must be appropriate to the nature, size, complexity, and scope of the financial institution's mortgage lending activities and apply only to those employees acting within the scope of their employment. 

If you have not recently done a deep dive into the written policy document, contact us, and we’ll get it done. Better yet, ask us to provide an MLO Tune-up, one of our pioneering Compliance Tune-ups. Banking departments expect you to perform such self-assessment reviews. 

I will give you a brief tour and promptly provide some examples. 

S.A.F.E. ACT AND REGULATION G

Let’s go first to the S.A.F.E. Act, implemented through Regulation G,[i] which defines a mortgage loan originator and which individuals within your organization must be registered (banks) or licensed (non-banks). 

This definition states that an MLO is an individual who: 

·       Takes a residential mortgage loan application and 

·       Offers or negotiates terms of a residential mortgage loan for compensation or gain. 

However, like many things in regulatory compliance, it is often not what a definition includes but what it excludes that counts! I don’t care what title you give a person because what the person does matters most, not what title he happens to hold. 

So, here are activities that are excluded[ii] from the MLO category: 

1.     An individual who performs purely administrative or clerical tasks on behalf of an individual who is an MLO under the broad definition above; 

2.     An individual who only performs real estate brokerage activities[iii] and is licensed or registered as a real estate broker under applicable State law, unless the individual is compensated by a lender, a mortgage broker, or other mortgage loan originator or by any agent of such lender, mortgage broker, or other mortgage loan originator, and meets the definition of mortgage loan originator in the above definition; or 

3.     An individual or entity solely involved in extensions of credit related to timeshare plans, as that term.[iv] 

Now, we are often asked if administrative and clerical tasks are excluded. If you can demonstrate purely “administrative or clerical tasks,”[v] as I’ve outlined above, then, for purposes of exclusion, it is necessary to explicate the “tasks” that would be considered administrative and clerical. 

In that context, “administrative or clerical” generally means the receipt, collection, and distribution of information common for the processing or underwriting of a loan in the residential mortgage industry and communication with a consumer to obtain information necessary for the processing or underwriting of a residential mortgage loan. 

I use the term “residential mortgage loan” to mean[vi] 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 (as defined in the Truth in Lending Act,[vii] or residential real estate upon which is constructed or intended to be constructed a dwelling, and includes: 

·       Refinancings; 

·       Reverse mortgages; 

·       Home equity lines of credit; and 

·       Other first and additional lien loans that meet the qualifications listed in this definition. 

In short, virtually any consumer loan secured by a dwelling falls under this definition, meaning employees who originate these loans must be registered or licensed as MLOs. 

DE MINIMIS EXCEPTION

Another question that usually comes up regards the so-called “de minimis exception.” Some people think that de minimis means “at a minimum.” But that is not the case. The term is Latin for “at least.” Generally, in the context of regulatory compliance, de minimis action is slight, minor, nearly trivial, or even insignificant. What constitutes de minimis is codified in applicable regulations not only in mortgage banking but also in a wide spectrum of regulations. 

From a regulatory point of view, there is a de minimis exception[viii] from registration and licensing requirements for individuals who originate very few mortgage loans during the year. Under this exception, the registration and licensing requirements do not apply to an employee who has never been registered or licensed through the Nationwide Mortgage Licensing System and Registry or Registry[ix] (“Registry”) as a mortgage loan originator if, during the past 12 months, the employee acted as a mortgage loan originator for five or fewer residential mortgage loans. 

However, before engaging in mortgage loan origination activity that exceeds the five-loan exception limit, the employee must register or license via the Registry under the rules. In addition, institutions are prohibited from engaging in any act or practice to evade the limits of the de minimis exception. 

Also, once employees are registered or licensed, they cannot go back and rely on the de minimis exception even if their originations fall below the five-loan threshold. The de minimis exception only applies to employees who have never been registered or licensed. 

You have asked for some examples of MLO activities. Please keep in mind that my answer is not meant to be comprehensive. The examples I offer are suggestive and generally illustrative. If you are unsure about activities performed by your MLOs, you should contact us or consult a competent compliance professional. 

SOME EXAMPLES OF MLO ACTIVITIES 

To help clarify the definition of mortgage loan originator and aid in the understanding of activities that would cause an employee to fall within or outside the definition of mortgage loan originator, the S.A.F.E. Act provides Appendix A,[x] which provides examples illustrating the application of the definition of an MLO. 

As the Appendix makes abundantly clear, these examples are “not all-inclusive and illustrate only the issue described and do not illustrate any other issues that may arise under the rules.”[xi] 

Taking a Loan Application 

The following examples illustrate when an employee takes or does not take a loan application. 

Taking an application includes: 

·       Receiving information provided in connection with a request for a loan to be used to determine whether the consumer qualifies for a loan, even if the employee: 

o   has received the consumer’s information indirectly to make an offer or negotiate a loan;

o   is not responsible for verifying information;

o   is inputting information into an online application or other automated system on behalf of the consumer; or

o   is not engaged in approving the loan, including determining whether the consumer qualifies for the loan. 

Taking an application does not include: 

·       Any of the following activities performed solely or in combination: 

o   contacting a consumer to verify the information in the loan application by obtaining documentation, such as tax returns or payroll receipts;

o   receiving a loan application through the mail and forwarding it, without review, to loan approval personnel;

o   assisting a consumer who is filling out an application by clarifying what type of information is necessary for the application or otherwise explaining the qualifications or criteria necessary to obtain a loan product;

o   describing the steps that a consumer would need to take to provide information to be used to determine whether the consumer qualifies for a loan or otherwise explaining the loan application process;

“Woke” Policies in Mortgage Banking

QUESTION 

There was a big argument in a sales meeting last week. The loan officers got into a verbal fight over the use of the word “woke.” After the meeting, the whole company was talking about it. HR and Compliance got involved. I’m not sure what will happen next. But there is a lot of hate churning up in the company. This has never happened before. We were all friends, but now everyone is taking sides. All over the word “woke.” 

During the sales meeting, they discussed expanding into a mostly minority area. One of the loan officers got up and said he refuses to go into that area and is sick and tired of these “woke” policies that make him do deals with people based on their being minorities. Another loan officer got up and said he agreed and none of the loan officers should be forced to abide by these “woke” rules. 

The loan officers said they were not being racist or discriminatory. They just said they don’t feel safe and that loans from that area don’t close. There was a lot of pushback. Most loan officers disagreed, saying they never feel threatened, and most of their loans do close. There was a big shouting match. The sales manager ended the meeting, and everyone left, but they continued shouting at each other in the parking lot. 

I know this is a touchy subject. But you have taken on controversial subjects many times. I hope you can help to shed some light on the situation we’re in. I want things to go back to normal. 

Is there really a “woke” policy that forces loan officers to take applications in minority areas? 

COMPLIANCE SOLUTION 

ECOA Tune-up 

ANSWER 

Several benign words have come into the American idiom that morphed into a malignant meaning, and “woke” is one of those words. A few years ago, it meant being aware or well-informed politically or culturally. I believe it first entered the Oxford English Dictionary in 2017. 

“WOKE” 

The word “woke” was derived from Black culture. I believe it goes back to the 1940s. To be “woke” or to “stay woke” meant to wake up in the sense of being alert to social justice and preserving African American rights. Recently, the term has had negative overtones, especially in the context of demeaning the politics relating to the left-of-center, a kind of weaponizing by right-of-center and far-right politicians as a way to denigrate left-of-center politics. 

Because right-of-center politicians have adopted “woke” from Black culture, sociologically speaking, it is a form of “cultural appropriation,” although I’ve heard it described as “cultural theft.” Cultural appropriation happens when a majority group adopts elements of a minority group in an exploitative, disrespectful, and stereotypical way.[i] So, if “woke” is used in such a manner, it is inherently a racist term. 

Not all cultural appropriation is intrinsically wrong when there is proper attribution and respectful use of the cultural artifact, keeping honestly to its use and meaning. People who use the term to disparage are not necessarily racist, but if used improperly – lacking attribution, not using it respectfully, being dishonest in use and meaning – it is a proxy for taboo words that are more explicitly racist. 

“WOKE” POLICIES 

Thus, in your specific scenario, when a loan officer says a policy is “woke,” they may be using it disparagingly, generalizing left-of-center policies, which they deem unacceptable to their right-of-center and far-right politics. Their use of the word doesn’t make them racists. They may simply be identifying a left-of-center policy they do not want to accept. However, it could also be a proxy for socially unacceptable racist lingo. 

There are no “woke” policies in mortgage banking. The regulations that financial institutions follow are extensively vetted over generations and many federal and state administrations. A mountain of litigation determines the legal interpretation of the applicable statutes. The rules are often refined to respond to economic demands and ensure appropriate consumer protection, such as the protection afforded through fair lending prohibitions relating to a protected class. 

PROTECTED CLASS 

I have heard grumbling over the years about “protected classes.” These are the categories of groups that are legally protected. I have listened to complaining for and against age as a protected class. From time to time, someone moans about allowing protected class status for sexual and transgender orientation. 

A CEO I spoke to a few years ago felt that political affiliation should never be a protected class. His view was that he is legally allowed to discriminate against an at-will employee or candidate as a direct result of their political beliefs or activities. He held that First Amendment protections do not apply to private employment. He need not fear. Title VII of the Civil Rights Act of 1964 does not deem political affiliation to be a protected class. Public employees have a few more rights regarding political activity protections, but these rights are not absolute. 

GOING ROGUE 

Your loan officers who refuse to work in minority areas are walking on thin ice. The sales manager may choose to assign them elsewhere, but this is a very litigious terrain. There are two primary acts relating to protected classes. I fail to see that either of them falls into the black hole of being “woke”— unless “woke” means acts whose goal is to allow consumers to be treated fairly in the marketplace. 

If loan officers object to treating consumers fairly, maybe they should find another line of work. Lenders strive mightily to build a strong and upstanding reputation. They don’t need some rogue loan officers undermining their reputation or putting them at regulatory risk. 

In any event, I suggest you retain competent counsel to ensure that a decision to withhold loan origination personnel from a minority area would not violate the law, especially the two following acts. 

REGULATIONS 

The Fair Housing Act (FHAct), among its list of illegal, discriminatory practices, includes this example of lending discrimination:

 

Providing a different customer service experience to mortgage applicants depending on their race, color, religion, sex (including gender identity and sexual orientation), familial status, national origin or disability.[ii] [My emphasis.] 

A different “service experience” would be discrimination in approvals and denials, loan terms, advertising, mortgage broker and other loan originator services, property appraisals, mortgage servicing, loan modification assistance, and homeowners insurance. 

Be advised: anyone can file a complaint with the Department of Housing and Urban Development (HUD), which administers and enforces the FHAct. Once the complaint is filed, the Office of Fair Housing and Equal Opportunity (FHEO) immediately opens an investigation to enforce applicable policies and laws. And, I can assure you, a complaint may be filed if a member of a minority community believes your firm is deliberately curtailing or shutting down access to loans in their area. 

The Equal Credit Opportunity Act (ECOA), taken together with the FHAct, covers a wide spectrum of anti-discrimination protections. For instance, the ECOA prohibits discrimination in any aspect of a credit transaction. Prohibitions consist of discrimination based on race or color, religion, national origin, sex, marital status, age (provided the applicant can legally contract), applicant’s receipt of income derived from any public assistance program, or the applicant’s exercise, in good faith, of any right under the Consumer Credit Protection Act.[iii] 

Under both the ECOA and the FHAct, it is illegal for a lender to discriminate on a prohibited basis in a residential real estate-related transaction. And, among other things, under one or both of these acts, a lender may not:

 

·       Fail to provide information or services or provide different information or services regarding any aspect of the lending process, including credit availability, application procedures, or lending standards.

 

·       Discourage or selectively encourage applicants concerning inquiries about or applications for credit. 

BUZZSAWS 

Without more information than you provided, it seems your loan officers – and, by extension, your company – risk running straight into the buzzsaw of a prohibited factor! Indeed, to go further, a lender may not discriminate on a prohibited basis because the present or prospective occupants of either the property to be financed or the characteristics of the neighborhood or other area where the property to be financed is located. Deliberately avoiding minority communities with respect to originating loans substantially increases legal and regulatory risk. 

If your firm were to pull back from or shut down originations in a minority area, it could trigger disparate treatment violations. All it takes for an illegal disparate treatment allegation to be set in motion is the establishment either by statements revealing that a lender explicitly considered prohibited factors (overt evidence) or by differences in treatment that are not fully explained by legitimate, nondiscriminatory factors (comparative evidence).[iv] 

Indeed, when a lender applies a racially or otherwise neutral policy or practice equally to all credit applicants but disproportionately excludes or burdens certain persons on a prohibited basis, the policy or practice is described as having a disparate impact. 

Your scenario manages to trigger all three types of lending discrimination: overt evidence of disparate treatment, comparative evidence of disparate treatment, and evidence of disparate impact. Here’s how. 

First, there is overt evidence of disparate treatment because, as described above, your firm would be openly discriminating on a prohibited basis. 

Secondly, there is comparative evidence of disparate treatment because your firm would treat a credit applicant differently based on one of the prohibited bases. It does not require any showing that the treatment was motivated by prejudice or a conscious intention to discriminate against a person beyond the difference in the treatment itself. 

Third, there is a disparate impact because your firm would apply a racially or otherwise neutral policy or practice equally to all credit applicants, disproportionately excluding or burdening persons on a prohibited basis. 

REDLINING 

A final word about redlining, a form of disparate treatment that your loan officers seem to be suggesting. Your firm may be exposing itself to a redlining allegation if it provides unequal access to credit or unequal terms of credit because of the race, color, national origin, or other prohibited characteristic(s) of the residents of the area in which the credit seeker resides or will reside or in which the residential property to be mortgaged is located. Redlining is a double-whammy: it often violates both the FHAct and the ECOA. 

Hopefully, your loan officers will worry less about “woke” policies and more about not violating fair lending laws. If your firm treats similar applicants differently based on a prohibited factor, it must explain the difference in treatment. If the explanation is not found to be credible, a supervision and enforcement agency may find that your financial institution discriminated.

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director 

Lenders Compliance Group

---

[i] See What Is Cultural Appropriation?, Encyclopedia Britannica, December 2023

[ii] Fair Lending: Learn the Fact, Fair Lending Guide, U.S. Department of Housing and Urban Development

[iii] § 1002.5(b), Title 12, Chapter X, Part 1002

[iv] Consumer Compliance Examination Manual, March 2021, IV. Fair Lending – Fair Lending Laws and Regulations, Federal Deposit Insurance Corporation

Endorsements and Testimonials

QUESTION 

Our banking department called us out for publishing testimonials that our loan officers use. We were contacted by an examiner who said they had checked out some of the testimonials and endorsements and found that some were either bogus or misleading. 

First of all, I didn’t know a banking department could go so far as to check out the veracity of testimonials. 

Secondly, our loan officers are honest and get their business from referrals, but the banking department makes them look like they were intentionally making up bogus testimonials. 

Thirdly, the loan officers have hundreds of endorsements and testimonials. I don’t see how we can verify every one of them. 

I think the department is way out of line! It feels like they are harassing us. I would like to know your opinion about this kind of advertising. Endorsements and testimonials are a big part of our marketing strategy. 

What are some guidelines for endorsements and testimonials?

COMPLIANCE SOLUTION 

Policies and Procedures: Advertising Compliance 

ANSWER 

Endorsements and testimonial advertising are an important and valuable part of overall marketing. Of course, scrutinizing advertisements is an inherent responsibility of banking departments. As consumer advocacy agencies, they must ensure that the public is properly informed of a loan product or service. 

Many interlocking regulations have a substantive impact on advertising compliance because contact with the public by means of advertising is one of the most prevalent ways a financial institution can encourage consumers to use its services. 

The banking department is not “way out of line.” It monitors your loan flow process from the earliest advertisement that leads to an application, thence to underwriting, loan closing, and beyond. If you believe verifying the testimonials is too big a task, don’t publish them! A banking department will want to see that you documented a validity review of a testimonial or endorsement. 

Most loan officers are certainly honest. They are the lifeblood of mortgage banking. Everyone works together to ensure the consumer has a good experience. However, loan officers are on the front lines, most working on commission; they bring in the loans and the ones who financially suffer the most when sales slow or loans don’t close for some reason. There is no reason for them to be defensive when a banking department finds errors in their testimonials. But you need to watch out for a “pattern or practice” of bogus endorsements and misleading testimonials. 

So, let’s focus on the nature of endorsements and testimonials and not get all huffed up in righteous indignation. I will offer some thoughts on this subject and suggest you share them with your loan officers. Contact me here if you need advertising compliance. We have a team devoted solely to advertising and marketing compliance. 

DEFINITION 

As you probably know, I like to get a definition in place for a cogent discussion. 

Here’s how I define endorsements and testimonials:[i] 

Endorsements and testimonials are any advertising message that consumers are likely to believe reflects the opinions, beliefs, findings, or experiences of a party other than the sponsoring advertiser, even if the views expressed by that party are identical to those of the sponsoring advertiser. 

RULES OF THE ROAD 

There are certain indisputable rules of the road that you must apply. For this article, I use the terms endorsement and testimonial interchangeably. These are the four most important rules to follow. 

1.     Honesty 

Endorsements must reflect the endorser's honest opinions, findings, beliefs, or experiences. Furthermore, an endorsement may not convey any express or implied representation[ii] that would be deceptive if made directly by the advertiser. 

2.  Context 

Although the endorsement does not need to be the exact words of the endorser – unless the endorser requests it - the endorsement may not be presented out of context or reworded to distort in any way the endorser’s opinion or experience with the product. 

3.  Bona Fide User 

When the advertisement represents that the endorser uses the endorsed loan product or service, the endorser must have been a bona fide user of it at the time[iii] the endorsement was given. 

4.  Full Disclosure 

Advertisers are subject to liability for false or unsubstantiated statements made through endorsements or for failing to disclose material connections between themselves and their endorsers.[iv] (Be careful here! Endorsers may be liable for statements made in the course of their endorsements.) 

GUIDELINES FOR ENDORSEMENT TYPES 

Generally, three types of endorsements are encountered in mortgage banking: consumer, expert, and organization. I will provide a brief overview of each. 

Consumer Endorsements 

For the most part, there are three types of consumer endorsements.[v] Here’s a brief outline. 

1.     A consumer endorsement about the performance of an advertised product or service will be interpreted as representing that the product or service is effective for the purpose depicted in the advertisement. 

2.     An advertisement containing an endorsement relating the consumer’s experience on a central or key attribute of the product or service will likely be interpreted as representing that the endorser’s experience is representative of what consumers will generally achieve with the advertised product or service in actual, albeit variable, conditions of use.

 

3.     Advertisements presenting endorsements by what are represented, directly or by implication, to be “actual consumers” should utilize actual consumers in audio and video, or clearly and conspicuously disclose that the persons in such advertisements are not actual consumers of the advertised product.

 

Expert Endorsements

 

There are two primary guidelines involving expert endorsements,[vi] as follows:

 

1.     If an advertisement represents, directly or indirectly (viz., by implication), that the endorser is an expert concerning the endorsement, the endorser’s qualifications must state factually the endorser has the requisite expertise with respect to the endorsement.

 

2.     Although the expert may, in endorsing a loan product, take into account factors not within their expertise, the endorsement must be supported by an actual exercise of that expertise in evaluating the product’s features or characteristics to the extent to which they have relevant knowledge and expertise,[vii] and which are relevant to an ordinary consumer’s use of or experience with the product and, importantly, are available to the ordinary consumer.

 

Organization Endorsements 

Endorsements from organizations can be tricky. There is one essential guideline. 

1.     Organization endorsements, especially expert ones, represent the judgment of a group whose collective experience exceeds that of any individual member, and whose judgments are generally free of subjective factors that vary from individual to individual.

 

This is the tricky part because an organization’s endorsement must be reached by a process sufficient to ensure that the endorsement fairly reflects the collective judgment of the organization. Moreover, if an organization is represented as being an expert, then, in conjunction with a proper exercise of its expertise in evaluating the product,[viii] it must utilize an expert or experts recognized as such by the organization or standards previously adopted by the organization and suitable for judging the relevant merits of such products. 

MATERIAL DISCLOSURE 

A few words about material disclosure. If there’s a connection between the endorser and the seller of the advertised loan product or service that might materially affect the weight or credibility of the endorsement – for instance, where the audience does not reasonably expect the connection – such connection must be fully disclosed. 

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director 

Lenders Compliance Group

---

[i] 16 CFR Part 255, § 255.0(b): “…including verbal statements, demonstrations, or depictions of the name, signature, likeness, or other identifying personal characteristics of an individual or the name or seal of an organization.” For the purpose of this article, I refer the reader to Guides Concerning the Use of Endorsements and Testimonials in Advertising, Federal Trade Commission, 16 CFR Part 255.

[ii] §§ 255.2(a) and (b) regarding substantiation of representations conveyed by consumer endorsements.

[iii] § 255.1(b) regarding the “good reason to believe” requirement.

[iv] § 255.5

[v] § 255.2

[vi] § 255.3

[vii] See § 255.1(d) regarding the liability of endorsers.

[viii] Ibid

Working from an Unlicensed Remote Office

QUESTION
Due to the pandemic, most of our loan officers moved to remote. Basically, they work from home. 

Some of them have come back to the office, but most prefer to work from their home office. Our management has no problem with this arrangement. Whatever works and is safe – that’s management’s view. But their homes are not licensed locations. 

However, our banking department is starting to take the view that there are certain features of licensing that may require their home offices to be licensed. We are concerned. 

What would you say are the types of home office situations for our remote loan officers that require licensing requirements?

ANSWER
Indeed, some banking departments have begun to monitor remote locations for possible licensing violations. Generally, this comes under the rubric of telecommuting as it relates to licensing requirements. 

Telecommuting is a catchall phrase for financial services activities taken by employees on behalf of their employers through the Internet, email, telephone, or direct mail. In such cases, an employee makes contact with potential applicants or consumers in person, by phone or email, or through direct mail while, at all times, representing their business location as a licensed office of the individual’s employer. 

That configuration can come up against a banking department’s rule that a mortgage broker or mortgage lender may only engage in covered activities at any location for which it holds a license. That said, I have noticed that many banking departments are fully aware of the challenges caused by the pandemic. There seems to be an understanding that technological changes, such as remote computing, are continuing trends that grow unabatedly. So, the departments are grappling with how to balance their licensing rule while ensuring that opportunities to work in non-commercial locations are acceptable under certain conditions. 

There’s not much debate about applying business location licensing requirements in instances where an individual employee or the individual’s employing company does not indicate that the employee is engaging in particular financial services activities on behalf of the licensee at any unlicensed location. 

I would suggest that at least three remote practices implicate licensing requirements, as follows:

 

1. Advertising, or including within any business documents or forms (except in documents used in communications directly between the individual employee and their employer), an address that is not a licensed business location;

 

2. Advertising, making available to the general public, or including within any business documents or forms (except in documents used in communications directly between the individual employee and their employer), a telephone number in a manner that indicates an employee conducts activities at a place other than a licensed business location (i.e., using a published residential telephone number in promotions); and,

 

3. Representing, in any manner, directly or indirectly, a location at which financial services activity on behalf of the licensee may occur if such representation indicates the activity would occur at an unlicensed location or would mislead a consumer to believe an unlicensed location is an authorized location from which the employee or their employer conducts licensable financial services activity. 

I would also suggest, at minimum, three cautionary practices need to be implemented for the unlicensed, remote locations, as follows:

 

1. Data security requirements should include provisions for the employee to access the company’s secure origination system from any out-of-office device the employee uses through the use of a VPN or other system that requires passwords or identification authentication.  The company is responsible for maintaining any updates or other requirements to keep information and devices secure;

 

2. Neither the employee nor the company is to do any act that would indicate or tend to indicate that the employee is conducting business from an unlicensed location. Such acts include but are not limited to:

a. Advertising in any form, including business cards and social media, the unlicensed residence address or landline telephone or facsimile number associated with the unlicensed residence;

b. Meeting consumers at, or having consumers come, to an employee’s unlicensed residence;

c. Holding out in any manner, directly or indirectly, by the employee or company licensee, the residence address that would suggest or convey to a consumer that the residence is a licensed location for conducting licensable activities; and,

 

3. Employees and companies must exercise due diligence in safeguarding company and customer data, information and records, whether in paper or electronic format, and protecting them against unauthorized or accidental access, use, modification, duplication, destruction, or disclosure.

 

Finally, I suggest a separate policy and procedures for telecommuting. You should train on the document, provide it to the affected employee, and require an attestation of receipt thereof from the employee involved in telecommuting activities.

Jonathan Foxx, Ph.D., MBA

Chairman & Managing Director

Lenders Compliance Group