Question

Answer

What significant amendments are being made to the Qualified Written Request (“QWR”) rules under RESPA effective January 10, 2014?

Section 1463 (c) of the Dodd-Frank Act modifies RESPA by significantly reducing the time period mortgage servicers have to respond to a QWR from a borrower. Section 1463 (c) contains the following modifications:

The period of time for a servicer to acknowledge receipt of a borrower’s QWR is reduced from 20 days (current requirement) to 5 business days.

The period of time for a servicer to respond to a borrower’s QWR is reduced from 60 days (current requirement) to 30 business days. A servicer has a right to a 15 day extension to the 30 business day response period by notifying the borrower of the need for the extension and the reason(s) the extension is needed.

In addition, statutory damages available to a borrower have been increased. Statutory damages have been increased from $1,000 to $2,000. Lastly, statutory damages in class action lawsuits have been increased from $500,000 to $1,000,000.

Given these changes and the increased exposure to mortgage servicers resulting therefrom, mortgage servicers need to make sure that their policies and procedures are updated to avoid running afoul of the new time lines concerning responding to a QWR.

Written by Michael Barone, Partner-in-Charge of Mortgage Compliance Practice at AGMB and Director of Legal and Regulatory Compliance at Lenders Compliance Group


We are getting ready to complete our HMDA filing report and we have many prequalification requests. Are prequalifications considered “applications” under HMDA, and, therefore, must be included in our HMDA-LAR?

In general, an “application” is an oral or written request for an extension of credit through a purchase money, refinance, or home improvement in a loan transaction that is originated pursuant to a financial institution’s loan origination procedures.

A prequalification request is a request by a prospective loan applicant (other than a request for preapproval) for a preliminary determination on whether the prospective applicant would likely qualify for credit under an institution’s standards, or for a determination on the amount of credit for which the prospective applicant would likely qualify.

The Home Mortgage Disclosure Act (HMDA), and Regulation C, its implementing regulation, use the Official Staff Commentary to Regulation B, the implementing regulation of the Equal Credit Opportunity Act, to define an “application,” except HMDA does not include prequalification requests.

The ECOA does include prequalification requests as applications, such as where these requests may constitute applications under Regulation B for purposes of adverse action notices, under certain circumstances. [12 CFR part 203, Supplement I 203.2(b)-1 and (b)-2]Therefore, even if prequalifications may constitute an application under Regulation B (ECOA), they are not reported on the HMDA Loan Application Register under Regulation C (HMDA).

Written by Jonathan Foxx, President and Managing Director of Lenders Compliance Group and a Principal Advisor to AGMB’s Mortgage Compliance Practice


What is the definition of an “affiliate,” with respect to the QM 3% Points and Fees cap under the Ability-to-Repay and Qualified Mortgage rule?

The CFPB’s Ability-to-Repay/Qualified Mortgage’s (QM) rule contains a cap or limit on points and fees to qualify as a QM loan. The calculation of points and fees includes certain charges paid to affiliates of creditors. To qualify as a QM, a loan over $100,000 is limited to points and fees up to 3% of the loan amount. The 3% limit is increased on a sliding scale for loans under $100,000.

In the Small Entity Compliance Guide, the CFPB defines “affiliate” as “any company that controls, is controlled by, or is under common control with, your company” (Ability to Repay and QM Rule, Small Entity Compliance Guide, p. 34). The CFPB also issued “unofficial staff guidance” in a webinar on October 17, 2013, in which it was stated that the definition of an affiliate is any company that controls, is controlled by, or is under common control with, another company as set forth in the Bank Holding Act of 1956 (the “Act”).

The Act states that any company has control over a bank or over any company if:

(A) the company directly or indirectly or acting through one or more other persons owns, controls, or has power to vote 25 per centum or more of any class of voting securities of the bank or company;

(B) the company controls in any manner the election of a majority of the directors or trustees of the bank or company; or

(C) the Board determines, after notice and opportunity for hearing, that the company directly or indirectly exercises a controlling influence over the management or policies of the bank or company. [12 USC Section 1841 (a) (2)]Although (A) and (B) are straightforward, (C) is vague and the “unofficial staff guidance” (hopefully “official guidance” will be available down the line) is just as vague as terms such as “controlling influence” are not specifically defined and are subjective in nature.

It is noteworthy that the CFPB has not made any indication that the definition of “affiliate” will mirror the definition as set forth in RESPA. The RESPA definition is far broader in nature.

To determine whether there is an affiliate relationship under QM, the management and ownership interests of the creditor and the affiliate need to be analyzed in great detail. Only then can the specific facts be applied to the definition set forth in the Act and an answer to the question above determined. It is suggested that you spend the time required to perform an analysis, document your findings and reasoning for the determination. Most importantly, be aware of investor overlays as they may very well exceed the “unofficial guidance” provided by the CFPB.

Written by Michael Barone, Esq., the Partner-in-Charge of AGMB’s Mortgage Compliance Practice and a Director of Legal and Regulatory Compliance at Lenders Compliance Group


As a servicer, we issue a payment shock notice. I have always thought that this notice was a requirement. But I am being told that issuing a payment shock notice is optional and not a requirement. Are we required to issue a payment shock notice?

The payment shock notice is optional. Issuing the payment shock notice is not a regulatory requirement. As such, it has been viewed by HUD as a “best practices” action. The payment shock notice is usually issued when there is an adjustment in escrow that causes a higher monthly payment, such higher payment usually attributable to an increase in property taxes.

HUD outlined its reasoning for not requiring the Payment Shock Notice back in 1998, when it amended Regulation X’s section on Escrow Account Procedures in a Final Rule. [63 Federal Register, Volume 63:13, 3214, 3233, 3237-3238, 1998, Rules and Regulations]

As HUD stated in the Final Rule:

“With regard to the ‘payment shock’ problem, the Department determined…that extensive additional regulatory changes are not required and could prove detrimental to consumers. Instead, the Department determined that this problem would be better resolved by identifying and sharing best practices of servicers.” (Emphasis added.)

In part, HUD stated there was a problem involving “…disbursements for items such as property taxes [that] will increase substantially in the second year of the escrow account and where ‘payment shock’ — the consumer’s experiencing of a substantial rise in escrow payments will result. The Department has chosen to address this matter by recommending (but not mandating) a best practice for servicers: a voluntary agreement to accept overpayments.” (Emphasis added.)

Thus, HUD had identified a problem with respect to applying an escrow account procedure under Regulation X, and sought to remedy it in the Final Rule.

Written by Jonathan Foxx, President and Managing Director of Lenders Compliance Group and a Principal Advisor to AGMB’s Mortgage Compliance Practice


We are lenders and our Loan Origination System caused an error in the APR of a residential mortgage loan transaction. Given that this was not our error, but the error of the system itself, are we protected from liability?

Just because there is an error in an APR or a finance charge in a loan transaction does not constitute a violation per se. But this condition would only apply if (1) the error results from a correlative error in calculation of the Loan Origination System (LOS) used in good faith, and (2) when the error is discovered, the lender promptly discontinues use of the system for disclosure purposes. The lender should notify its Regulator in writing regarding the cause of the error. [12 CFR § 226.22(a)(1), Footnote 45d]

The dispositive feature of acting in “good faith” can be challenging to prove; therefore, the lender should demonstrate that it took steps to reasonably ensure that the LOS was functioning accurately before it was used to generate the disclosures containing APR or finance charge calculations.

Protection from liability is only available on the basis of being able to unarguably prove that the LOS, or any system used for disclosure calculations, caused the error. No protection from liability is available in instances where there is a misapplication of the law, or the lender manually causes this type of error, for instance through incorrect data entry. [12 CFR Supplement I to 226, Official Staff Commentary § 226.22(a)(1)-5]

Written by Jonathan Foxx, President and Managing Director of Lenders Compliance Group and a Principal Advisor to AGMB’s Mortgage Compliance Practice


What is RESPA’s fee splitting prohibition? Also, what is the definition of a “referral fee” and which referral fees are permitted?

The provisions on prohibition of fee splitting and the definition of a referral fee are set forth in Section 8 of the Real Estate Settlement Procedures Act (RESPA).

RESPA prohibits fee splitting. Specifically, the applicable section states that “no person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed.” [12 CFR § 3500.14(c)]

This prohibition has been clarified by the Department of Housing and Urban Development (HUD) a number of times over the years, and it has been the subject of considerable litigation. Essentially, HUD maintains that a fee for which no (or a nominal) service is conducted, or is duplicative of any other fee charged, is an unearned fee, which would therefore violate RESPA’s fee splitting provision. [For but one of numerous citations, see HUD’s Statement of Policy 2001-1]

Intrinsically, a “referral fee” is the giving or accepting of “any fee, kickback or other thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or part of a settlement service involving a federally related mortgage loan shall be referred to any person.” [12 CFR § 3500.14(b)] The litigation involving this subject is extensive.
Any referral of a settlement service, except for certain exemptions, between one settlement service provider and another, is not a compensable service.

The permitted exemptions are [12 CFR § 3500.14(g)(1)]:

  1. A payment to an attorney at law for services actually rendered.
  2. A payment by a title company to its duly appointed agent for services actually performed in the issuance of a policy of title insurance.
  3. A payment by a lender to its duly appointed agent or contractor for services actually performed in the origination, processing, or funding of a loan.
  4. 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.
  5. A payment pursuant to cooperative brokerage and referral arrangements or agreements between real estate agents and real estate brokers. (Only to fee divisions within real estate brokerage arrangements when all parties are acting in a real estate brokerage capacity.)
  6. Normal promotional and educational activities that are not conditioned on the referral of business and that do not involve the defraying of expenses that otherwise would be incurred by persons in a position to refer settlement services or business incident thereto.
  7. An employer’s payment to its own employees for any referral activities.

Written by Jonathan Foxx, President and Managing Director of Lenders Compliance Group and a Principal Advisor to AGMB’s Mortgage Compliance Practice


What are the additional disclosure requirements for originating a reverse mortgage loan?

Regulation Z, the implementing regulation of the Truth in Lending Act (TILA), sets forth the disclosures that are required for reverse mortgage loan transactions. Indeed, Regulation Z requires additional disclosures reflective of the model form provided in its Appendix K, paragraph (d).

These additional disclosure requirements are:

  1. A disclosure that the applicant is not obligated to complete the reverse mortgage transaction, even if the applicant received specific reverse mortgage disclosures, and even if the applicant has signed an application for a reverse mortgage loan.
  2. A Good Faith Estimate that provides the total cost of the credit extended, and expressed as a table of “total annual loan cost rates.” [see Regulation Z, Appendix K]
  3. An itemization containing the loan terms, charges, age of the youngest borrower, and the appraised value of the property.
  4. An explanation of the table of the “total annual loan cost rates” that are provided in the model form found in Regulation Z. [see Regulation Z, Appendix K, paragraph (d)]

Written by Jonathan Foxx, President and Managing Director of Lenders Compliance Group and a Principal Advisor to AGMB’s Mortgage Compliance Practice


The borrower is not available to attend the closing. Besides state law, what are other requirements to consider if the borrower wants to use a Power of Attorney to permit an agent to sign the closing documents?

Recently, Fannie Mae announced changes to its Sellers Guide regarding the use of a Power of Attorney (POA). These new requirements are only applicable to loans sold to Fannie Mae, however it’s advisable to keep these rules in mind on all loans because many investors will adopt Fannie Mae’s rules as overlays on all transactions. In addition, the lender and title company must approve both the use of a POA and the actual POA to be used in the transaction. The most noteworthy changes enacted by Fannie Mae are as follows:

  1. The name on the POA must match the name on the loan documents; it must reference the address of the subject property, it must be dated so it’s effective when the agent signs the document and it must be notarized. In addition, if the agent named in the POA executes the original 1003, the borrower must be actively serving in the US armed forced outside the US or the POA must expressly state an intention to secure a loan on a specific property.
  2. Except as otherwise required by applicable law or unless the agent is the borrower’s relative, the following individuals may not sign the note or mortgage as an agent of the borrower pursuant to a POA: the lender, loan originator, title insurance company, or financially interested real estate agent. Additionally prohibited from acting as an agent are any of these entities’ employees, employers, relatives, or affiliates.
  3. Except as required by applicable law, a POA may not be utilized to sign a note or mortgage if: i) no other borrower executes the note or mortgage in person in front of a notary public (this restriction does not apply if the designated agent is either the borrower’s attorney or relative); or (ii) it’s a cash-out transaction.

It is suggested that all lenders develop a policy regarding the use of POAs which incorporates agency guidelines, investor overlays, applicable law and its own Best Practices considerations.

The Consumer Financial Protection Bureau recently issued guidebooks to help the public better handle the responsibilities of acting as a financial caregiver. These guidebooks are posted to its website. One of these guidebooks addresses the use of a POA and a lender may find it advantageous to review this booklet when formulating its policy. Mortgage brokers also need to be aware of the policies of each of the lenders to which they place loans.

Most importantly, all parties to the loan transaction must make sure they are aware of the use of a POA as early as possible so its use does not suspend or abort a loan transaction.

Written by Michael Barone, Partner-in-Charge of Mortgage Compliance Practice at AGMB and Director of Legal and Regulatory Compliance at Lenders Compliance Group


If the origination fee is a percent of the loan amount, and the loan amount INCREASES due to a higher appraised value than originally used on the GFE, is the origination fee charged at settlement allowed to increase under the COC, with proper re-disclosure?

Bottom Line Up Front: “Yes, but only if issuance of a revised GFE is permissible under 24 CFR § 3500.7(f). In particular, if the loan amount changes and all or a portion of Block 1 is calculated as a percentage of the loan amount, then that portion in Block 1 may be recalculated.” (HUD RESPA FAQs, April 2, 2010)

In the answer quoted above, HUD was responding to the following: “If all or a portion of the charge in Block 1 is calculated as a percentage of the loan amount, and the loan amount changes, can the loan originator issue a revised GFE with an updated charge in Block 1?”

Your question differs from the question HUD answered in one significant way. Your question premises the increased origination fee on the increased loan amount, and the increased loan amount on the increased appraisal value. HUD points out that “yes”, the origination fee may increase if charged as a percentage of the increased loan amount, and if permissible under RESPA. It does not address your implied, underlying question of whether the higher appraised value may be the causal justification for higher origination fees.

The analysis is important because the loan originator bears the burden of demonstrating compliance when a GFE is revised for purported “Changed Circumstances”, and documentation of that reason must be maintained with the loan records for examination by your regulator. Revisions to the GFE charges are allowed if permissible under 24 CFR § 3500.7(f), (which points to 24 CFR (§3500.2(b); §3500.7(f)(1) and (f)(2)), in other words, “Changed Circumstances”. Your increased origination fee is not permissible if based merely on “a higher appraised value than originally used on the GFE”.

A higher appraisal value may be an alluring opportunity to increase the loan amount as a proxy in justification of higher origination fees. It is well established that a consumer is not obliged to increase the requested loan amount on the basis of improved valuation of over GFE. In fact, the consumer could choose to reduce the requested loan amount. As long as the loan amount remains unchanged, or lowered, there would be no permissible reason to increase origination charges. A loan originator engages in the prohibited conduct of steering if he or she persuades a consumer to obtain a higher loan amount for the purpose of generating higher origination fees.

Increased appraisal valuations may justify compliant GFE revisions, including consumer requested increase in the loan amount, resulting in organic, permissible increase in origination charges. Another permissible change occurs when a higher appraised value decreases the LTV and eliminates the need for previously estimated PMI charges. Conversely, a lower appraised value could increase settlement charges and trigger PMI costs. It is important to have thoroughly documented information supporting any “Changed Circumstances”, and the verifiable and compliant reasons for such change. Under RESPA a loan originator must provide the revised GFE within three business days of the borrower’s requested change.

Written by Wendy Bernard, Director of Legal and Regulatory Compliance at Lenders Compliance Group


We have an advertisement on our website and we also send out an email advertisement that is the same as the website advertisement. Are these considered a single advertisement? If so, what are the obligations for each advertisement?

Multiple advertisements in any media, such as web page advertisements on a website corresponding to a newsletter blast or in a catalog, are considered a single advertisement if the following criteria apply: (1) a trigger term is used; (2) such term requires a table or schedule in order to provide information regarding a finance charge associated with the trigger term, or any other term is used that appears in the opening disclosures; (3) the advertisement clearly and conspicuously sets forth or is required to set forth the foregoing table or schedule; and (4) these advertisements are required to refer and/or provide access to such table or schedule.

Put otherwise, single advertisement guidelines apply for any advertisement where a statement of finance charge is required for a trigger term, or disclosure is required in opening disclosures for any other term, where the trigger term or other term appear in a catalog or advertisement, thereby requiring clear and conspicuous reference to the page or location where the mandated table or schedule begins. [12 CFR § 226.16(c)(1), 2010]

For instance, in any advertisement where a trigger term necessitates a statement of finance charge – indeed, any other term that appears in opening disclosures pursuant to Regulation Z § 226.6 – the advertisement must clearly refer to the page, web page, or any media location where a table or schedule is found and begins.

Therefore, in each online, website advertisement and its corresponding newsletter advertisement, a hyperlink to the table or schedule containing required additional information should be provided for a trigger term requiring a statement of finance charge and/or any other term that appears in opening disclosures. [12 CFR Supplement I to Part 226 – Official Staff Commentary 12 CFR § 226.16(c)(1)-2, 2010]

Written by Jonathan Foxx, President and Managing Director of Lenders Compliance Group and a Principal Advisor to AGMB’s Mortgage Compliance Practice


It is my understanding that unless there is a “changed circumstance”, a Good Faith Estimate (GFE) is binding on the lender. What constitutes a “changed circumstance” such that a revised GFE may be re-disclosed, and what is the time frame for re-disclosing?

As a general rule, the GFE is binding on the lender until its expiration. The exception to this rule is if there is a “changed circumstance”.

A “changed circumstance” includes:

  • Acts of God, War, Disaster or other emergencies.
  • New information obtained that was not relied upon when the initial GFE was provided.
  • Identification of inaccurate information provided by the Borrower used to prepare the GFE.
  • Borrower requested changes in loan terms.
  • Other changes particular to the Borrower or transaction, including without limitation, boundary disputes, need for flood insurance, or environmental problems.

Additionally, a GFE must be redisclosed if the rate is locked after the initial GFE was provided. [12 CFR §1024.2(b)(1), §1024.7(f)]

None of the information collected by the loan originator prior to issuing the GFE may later become the basis for a “changed circumstance” upon which a loan originator may redisclose the GFE unless the loan originator can demonstrate that there was a change in the particular information or that it was inaccurate, or that the loan originator did not rely on that particular information in issuing the GFE.

The loan originator is presumed to have relied on the Borrower’s name, the Borrower’s monthly income, the property address, an estimate of the value of the property, the mortgage loan amount sought, and any information contained in any credit report obtained by the loan originator prior to providing the GFE.

Examples of situations where the reissuance of a GFE is warranted include, without limitation, the following:

  • Rate lock expiration or Borrower requests a rate lock extension at a cost to Borrower.
  • Loan amount changes due to Borrower request, change to payoff amount, change to obligations.
  • Borrower requests an escrow waiver or decides to no longer waive escrow.
  • Borrower estimated property value not supported by appraisal.
  • Credit quality change due to new information received such as FICO score, DTI, undisclosed debts, judgments, income change.
  • Occupancy change (i.e., property initially thought to be a primary residence becomes investment property).
      Some situations must be evaluated on a case-by-case basis to determine if a changed circumstance occurred. Such situations include, without limitation:
  • Borrower not proceeding quickly to closing.
  • Parties added or removed from title.
  • Signing documents using a power of attorney.
  • Vendor for a settlement service goes out of business.
  • Property type changes (i.e., single family residence is actually multi-family).
  • GSE, FHA, mortgage insurance program changes.

Situations which do not qualify as a changed circumstance include, without limitation, the following:

  • Lender does not accept broker issued GFE.
  • Market fluctuations on a locked loan.
  • Borrower’s name.
  • Information in a credit report generated before the issuance of the GFE.
  • Any change which is known or should have been known by the loan originator at the time the initial GFE was issued.

If a changed circumstance exists, a revised GFE must be provided to the Borrower within 3 business days of receipt of information sufficient to establish a changed circumstance.

It is important to bear in mind that information related to a changed circumstance may come from a party other than a borrower (i.e., an appraisal with a value other than expected which increases or decreases the loan amount).

The revised GFE can only reflect the changes which increased as a direct result of the changed circumstance. The changed circumstance should be documented and all documentation and information must be maintained for at least 3 years.

The above discussion reflects regulations in effect as of this date. The reader should bear in mind that the Consumer Financial Protection Bureau has proposed a rule integrating mortgage disclosures under the Real Estate Settlement Procedures Act (Regulation X) and the Truth-in-Lending Act (Regulation Z) which will alter the definition of “changed circumstance”. The proposed rule can be found at https://federalregister.gov/a/2012-17663.


I am the Anti-Money Laundering Program officer. I want to know three things: what are the required sections of the program, how to determine the core procedures that need to be in the program, and what are my responsibilities as the AML officer?

There are four elements to the Anti-Money Laundering Program (“AML”) required by the Financial Crimes Enforcement Network (“FinCEN”).

These are:

  • Policy and Procedures
  • AML Compliance Officer
  • Training
  • Independent Testing

In order to determine the core procedures that an organization requires, it is necessary to assess its size, complexity, and risk profile, with respect to exposure to money laundering activity and terrorist financing schemes. Generally, the policy statement should contain actionable and measurable implementations in accordance with the Bank Secrecy Act (“BSA”). For instance, if the residential mortgage lender or originator obtains its loan applications not only through a retail channel but also through a wholesale or correspondent channel, or any other channel, its agents, brokers, or any similarly situated entity, must be included in the operational structure of its AML compliance requirements. Methodologies for reviewing all internal and agent relationships for compliance with the AML guidelines are part of the AML program.

The AML officer’s responsibilities are considerable. The primary responsibility is to oversee the implementation of the AML program. To accomplish this, the AML officer monitors compliance with AML guidelines in all loan origination channels as well as internally among employees, promptly updating and ratifying the program, when required, implementing training initiatives, and ensuring that independent testing is effectuated. Additionally, the AML officer’s oversight includes taking actions to assure that Safe Harbor guidelines are always followed.

Written by Jonathan Foxx, President and Managing Director of Lenders Compliance Group and a Principal Advisor to AGMB’s Mortgage Compliance Practice


Our investor has told us that we need to monitor our quality control vendor. Exactly how do we do this?

Your investor is correct. It is very important to monitor your quality control provider to ensure that the firm is performing the audit work in accordance with your Quality Control Plan (“Plan”) and pursuant to industry requirements. Even though it is acceptable to outsource the quality control function, as the lender you are ultimately responsible for the administration and performance of your quality control program. The following are our suggestions to properly monitor your quality control vendor.

At least annually, review your Quality Control Plan with your quality control provider to ensure that the Plan is up to date with respect to any changes in investor and regulatory requirements, and also to verify that the quality control provider is aware of the changes and has incorporated them in its audit procedures.

Closely review the quality control audit reports you receive each month from your quality control provider and do not hesitate to question the findings and conclusions. As part of your required process to determine the cause of the findings and to take appropriate action to prevent the re-occurrence of the errors, you will be able to verify the correctness of the findings as reported by your provider. If you have documentation that disputes the findings, discuss these matters with your provider, and if they made a mistake require them to issue a revised report.

Periodically request, from your quality control provider, copies of the audit work papers, checklists, and all supporting documentation for a sample of loans that have been audited. It is not necessary or practicable to re-audit the files; instead, check to make sure that all questions or audit steps on the checklists have been answered and satisfactorily completed. Also review the documentation to ensure that there is adequate proof that the auditor did, in fact, satisfactorily re-verify the credit documents supporting employment, income, assets and gifts, and so forth, used by the underwriters.

Some lenders will rely on their Internal Audit Departments or independent, outside auditors to perform this task as part of their annual audit of internal control systems, of which Quality Control is a major secondary internal control point.

Other lenders will perform this task monthly or quarterly rather than waiting until the end of the year audits. In fact, Fannie Mae, in their recent Selling Guide Announcement SEL-2013-05, stated that “the lender must perform a monthly review of a minimum of 10% of the loans reviewed by the vendor to validate the accuracy and completeness of the vendor’s work. The 10% sample must include loans for which the vendor identified defects and for which no defects were identified. This review must be performed by the lender itself, and may not be contracted out.” This Announcement was issued on July 30, 2013 and can be implemented immediately, but must be implemented by January 1, 2014. The new 10% requirement might seem extreme; however, it is an excellent way to monitor your quality control vendor to ensure that it is providing you with top quality service at all times.

Written by by Bruce Culp, Director of Quality Control and Loan Analytics at Lenders Compliance Group


I would like to know how to define an “applicant” and an “application” under the Equal Credit Opportunities Act (“ECOA”). Also, what is a “completed application,” according to the ECOA?

The Equal Credit Opportunities Act and its implementing regulation, Regulation B, set forth guidelines for entities that extend credit with respect to preventing discrimination on the basis of sex, marital status, race, color, religion, national origin, age, applicant’s income derived from a public assistance program, and any right the applicant may have pursuant to the Consumer Credit Protection Act. [15 USC § 1691(a), Title 15, Ch 41, Sub IV]

Although it is believed that this ECOA requirement only pertains to the lender, as creditor, this notion is erroneous. Regulation B holds that a mortgage broker is considered a creditor, too, since the term “creditor” also “includes a person who, in the ordinary course of business, regularly refers applicants or prospective applicants to creditors, or selects or offers to select creditors to whom requests for credit may be made.” [12 CFR 202.2(l), Title 12, Ch II, Sub A, Part 202]

Under ECOA, an “applicant” is any person (i.e., natural person, corporation, government agency, trust, estate, partnership, cooperative, association) “who requests or who has received an extension of credit from a creditor, and includes any person, who is or may become contractually liable regarding an extension of credit.” [12 CFR 202.2(e), Title 12, Ch II, Sub A, Part 202]

The definition of an “application,” for the purposes of the ECOA, is “an oral or written request for an extension of credit that is made in accordance with procedures used by a creditor for the type of credit requested.” (My emphasis.)

The term “application” does not include the use of an account or line of credit to obtain an amount of credit that is within a previously established credit limit.

A “completed application” means an application in connection with which a creditor has received all the information that the creditor regularly obtains and considers in evaluating applications for the amount and type of credit requested. This includes, but is not limited to, “credit reports, any additional information requested from the applicant, and any approvals or reports by governmental agencies or other persons that are necessary to guarantee, insure, or provide security for the credit or collateral.” (My emphasis.) [12 CFR 202.2(f), Title 12, Ch II, Sub A, Part 202]

Written by Jonathan Foxx, President and Managing Director of Lenders Compliance Group and a Principal Advisor to AGMB’s Mortgage Compliance Practice


What are the penalties for violating the Truth in Lending Act (TILA)?

While there are criminal provisions that set forth penalties for willful violations of TILA, such as a fine of up to $5000, one year in prison, or both [15 USC § 1611(3), 2006], most violations are associated with civil monetary penalties. Creditor liability is extensive in TILA, covers a wide range of potential violations, and may include any actual damage sustained by a person as a result of the creditor’s failure to comply with this statute.

Covered transactions include home equity plans, open-end transactions, closed-end transactions secured by real property or dwelling, consumer leases, HOEPA transactions, appraiser independence, and UDAAP.

The following is the range of civil monetary penalties [15 USC § 1640(a), 2006]:

  • In the case of an individual action: twice the amount of any finance charge in connection with the transaction.
  • In the case of an individual action relating to certain consumer leases: 25% of the total amount of monthly payments under the lease, minimum $200, and maximum $2,000.
  • In the case of an individual action relating to an open-end consumer credit plan that is not secured by real property or a dwelling: twice the amount of any finance charge in connection with the transaction, minimum $500, and maximum $5,000 – which could be even higher where a violation is evinced by an established pattern or practice of such failures.
  • In the case of an individual action relating to a closed-end transaction secured by real property or a dwelling: either minimum $400, and maximum $4,000, or, in the case of a class action, such amount as the court may allow, no minimum per each member of the class, and the total recovery in any class action (or series of class actions) arising out of the same failure to comply by the same creditor may not be more than the lesser of $1,000,000 or 1% of the net worth of the creditor.
  • In the case of a failure to comply with many TILA requirements set forth in certain sections of Regulation Z: an amount equal to the sum of all finance charges and fees paid by the consumer, unless the creditor demonstrates that the failure to comply is not material.

Any of the foregoing, where rescission applies, in a prevailing action the costs of the action itself is included, together with a reasonable attorney’s fee (viz., determined by the court); and, in the case of a failure to comply, an amount equal to the sum of all finance charges and fees paid by the consumer, unless the creditor demonstrates that the failure to comply is not material.

In determining the amount of award in any class action, the following relevant factors, among other things, are considered by the court: the amount of any actual damages awarded, the frequency and persistence of failures of compliance by the creditor, the resources of the creditor, the number of persons adversely affected, and the extent to which the creditor’s failure of compliance was intentional.

Regarding appraiser independence, certain violations lead to civil monetary penalties of up to $10,000 per day for each day a first violation continues, and $20,000 for all subsequent violations. [Pub. L. 111-203, 7/21/10, Sub F, 1472 § 129E(k)]

With respect to UDAAP, the Federal Trade Commission sets forth rules concerning unfair or deceptive acts or practices [15 USC § 57a, Section 18, FTC Act]. Violations of UDAAP are treated through various sections of TILA.[PUB. L. 111–8, 3/11/09, Omnibus Appropriations Act, Division D, Title VI, § 626(b)(D)] Under the FTC Act, civil monetary penalty for each UDAAP violation may reach to $16,000. [15 USC § 45(m), 2006; 16 CFR §§ 1.98(d) and (e), 2010 (Title 16, Ch. I, Sub A, Part 1, Sub L § 1.98]

Civil monetary penalties for violations of HOEPA are substantial. The authority to promulgate HOEPA rules [TILA § 129(1)(2)] is the same authority pertaining to loan originator compensation and higher-priced mortgage loans. In the case of HOEPA violations, penalties are equal to the sum of all finance charges and fees paid by the consumer, permitting only for an exception where the creditor demonstrates that the compliance failure is not material. [15 USC § 1640(a), 2006]

Written by Jonathan Foxx, President and Managing Director of Lenders Compliance Group and a Principal Advisor to AGMB’s Mortgage Compliance Practice


Does the MLO Compensation Rule specifically prohibit a lender from taking deductions from an MLO’s compensation to recoup undisclosed or uncollected loan fees, such as where the loan officer forgets to disclose or add mortgage insurance, transfer taxes or other fees applicable to the transaction?

The MLO Compensation requirements under the Truth in Lending Act (“the Rule”) do not specifically prohibit a creditor from taking deductions to recoup undisclosed or uncollected fees. However, such deductions, if taken, must comply with the Rule and other applicable laws.

In its Official Commentary to the Final Rule, the CFPB responded to an industry question, which asked whether an MLO’s compensation may be reduced to bear the cost of a pricing concession, where the MLO assures the consumer that the interest rate is being locked but fails to actually lock the loan.

The CFPB responded, “This scenario is already covered by [the Rule] which allows reductions in MLO compensation to bear the cost of pricing concessions where there has been an unforeseen increase in a settlement cost above that estimated…or omitted” on the GFE.

While the CFPB’s response appears to treat the MLO’s conduct as an “unforeseen” event, repeated reductions for the “same categories of closing costs” could establish a pattern in violation of the Rule. The lender must retain appropriate records for proof of compliance in reductions.

Another industry question asked whether a Lender could penalize the MLO for failure to comply with a creditor’s policies and procedures in the absence of a demonstrable loss to the creditor. In this scenario, there are no increases, changes or pricing concessions.

The CFPB responded, “Unless the proxy analysis under [the Rule] applies, a reduction in MLO compensation as a penalty for the MLO’s failure to follow the creditor’s policies and procedures where there is no demonstrable loss to the creditor is outside the scope of § 1026.36(d)(1)(i) and thus need not be addressed by comment.” In other words, even where a reduction is not specifically prohibited or authorized by the Rule, such reduction cannot be based on the “terms and conditions” of the loan.

Further, the CFPB commented, “Allowing reductions in MLO compensation to cover reduced, waived, or uncollected third-party fees may not result in any discernible benefit to consumers, and in any event the reduction, waiver, or collection of third-party fees is better addressed separately by the MLO and creditor outside the context of the transaction.”

As a final point to consider, state law may prohibit employer “self-help” cost recoupment measures and may specifically prohibit deductions not otherwise authorized by law or agreement. Wages and commissions may also be subject to varying protections under federal and state labor laws.

Source: 12 CFR Part 1026: MLO Compensation Requirements under the Truth in Lending Act; (Regulation Z); AGENCY: Bureau of Consumer Financial Protection.

Written by Wendy Bernard, Director of Legal and Regulatory Compliance at Lenders Compliance Group


We are a broker that frequently takes applications for home equity lines of credit (HELOC) for a lender. Do we have a duty to make disclosures to the applicant?

Your duty as a broker to make disclosures with respect to a HELOC depends on whether the lender has provided you with both the application and the disclosures. To the extent the lender has not provided the disclosures to you, as a third party broker, you have no obligation to disclose. However, if the lender provided you with both the applications and disclosures, you do have a duty to disclose. In each instance, you have a duty to provide the consumer with the home equity brochure entitled, “What You Should Know About Home Equity Lines of Credit” or a similar brochure.

Pursuant to the Real Estate Settlement Procedures Act (RESPA), with respect to a home equity plan covered under Regulation Z, “a lender or mortgage broker that provides the borrower with the disclosures required by 12 CFR 1026.40 of Regulation Z at the time the borrower applies for such loan shall be deemed to satisfy the requirements of this section”. [12 CFR 1024.7(h)]

Section 40(c) of Regulation Z addresses the duties of third parties to disclose. “Persons other than the creditor who provide applications to consumers for home equity plans must provide the brochure required under paragraph (e) of this section at the time an application is provided. If such persons have the disclosures required under paragraph (d) of this section for a creditor’s home equity plan, they also shall provide the disclosures at such time.”

The Official Interpretation to Section40(c) makes it clear that a third party has no duty to obtain disclosures about a creditor’s home equity plan or to create a set of disclosures based upon what the third party knows about the creditor’s plan. However, if the creditor provides the third party with disclosures along with the creditor’s application form, the third party must provide those disclosures to the consumer together with the application. If the third party received the application via telephone, the third party may mail the disclosures and brochure within three business days of receipt of the application. [12 CFR 1026.40(c)]

Written by Joyce Pollison, Director of Legal and Regulatory Compliance at Lenders Compliance Group


What is the salient prohibition pertaining to loan originator compensation?

Regulation Z, the implementing regulation of the Truth in Lending Act (TILA), prohibits a creditor or any other person from paying, directly or indirectly, compensation to a mortgage broker or any other loan originator that is based on a mortgage transaction’s terms or conditions – the only exception being the correlation of compensation to the amount of credit extended.

A loan originator’s compensation can neither be increased nor decreased based on the loan terms or conditions.

Once the creditor offers to extend a loan with specified terms and conditions (i.e., rate and points), the amount of the originator’s compensation for that transaction may not change, based on either an increase or a decrease in the loan cost or any other change in the loan terms. For instance, if a consumer requests a lower interest and the creditor accepts that rate, the creditor is not permitted to reduce the amount it pays to the loan originator based on that change in loan terms. Similarly, any reduction in origination points paid by the consumer must be a cost borne by the creditor.

The amount of credit extended is deemed not to be a transaction term or condition of the loan for purposes of the Regulation Z prohibition, provided that the compensation payments to loan originators are based on a fixed percentage of the amount of credit extended. Such compensation may be subject to a minimum or maximum dollar amount; however, the minimum or maximum amount may not vary with each credit transaction.

Creditors may use other compensation methods to provide adequate compensation for smaller loans, such as basing compensation on an hourly rate, or on the number of loans originated in a given time period.

[See 12 CFR 226, §§ 226.36(d)(1) and (d)(2)]

Written by Jonathan Foxx, President and Managing Director of Lenders Compliance Group and a Principal Advisor to AGMB’s Mortgage Compliance Practice


What is an Affiliated Business Arrangement under RESPA, and what is required when an originator and a settlement service provider have an affiliated business arrangement?

An Affiliated Business Arrangement is defined in Section 8 of the Real Estate Settlement Procedures Act (RESPA) and Section 3500.14 of Regulation X, its implementing regulation, as an arrangement in which:

  1. a person who is in a position to refer business incident to or a part of a real estate settlement service involving a federally related mortgage loan, or an associate of such person has either an affiliate relationship with or a direct or beneficial ownership interest of more than one percent in a provider of the settlement service; and
  2. either of such persons directly or indirectly refers such business to that provider or affirmatively influences the selection of that provider.

The term “associate” includes the following: spouse, parents, or child of the referrer; a corporation/business entity that controls, or is under common control with, the referrer; an employer, officer, director, or partner of the referrer; and anyone who has an agreement, the purpose of which is to enable a financial benefit to occur as a result of the referral of settlement services.

A referral to an affiliated business is permissible if all of the following requirements are satisfied:

  1. The consumer is provided at or prior to the time each referral is made with an Affiliated Business Arrangement Disclosure which describes the relationship (explaining the ownership and financial interest) between the provider and the loan originator, and giving an estimated charge or range of charges made by such service provider;
  2. The consumer is not required to use the referred service provider (with certain exceptions such as the lender’s attorney, credit reporting agency and appraiser); and
  3. There is no consideration or item of value received from the arrangement other than reasonable payments for goods, facilities or services actually furnished and revenues derived from a party having an ownership interest in the provider.

A sample Affiliated Business Arrangement Disclosure can be found in Appendix D of Regulation X.

Written by Michael Barone, the Managing Partner of AGMB’s Mortgage Compliance Practice and also a Director of Legal and Regulatory Compliance at Lenders Compliance Group


In issuing a “Notice of Incompleteness” under the Equal Credit Opportunity Act, what is a “reasonable time frame” to give the applicant for completion of the application?

We are a lender with a current policy of allowing an applicant an additional 30 days beyond the initial 30-day ECOA requirement to complete an “incomplete application”. In accordance with policy, if the application is not completed within this 30-day period, the loan needs to be moved to withdrawn by the applicant or is deemed a cold lead.

However, we are finding that this policy requires many files to be disposed of well before the applicant has either finished shopping lenders or chosen a house to buy.

Is it possible for us to change the 30-day period for the applicant to complete the application to 60 days?

In issuing a Notice of Incompleteness, the creditor must provide a “reasonable period of time” for the applicant to complete the application. [12 CFR § 1002.9(c)]

Unfortunately, Regulation B does not prescribe what constitutes a “reasonable period of time” nor is there any guidance on this issue. Under the ECOA, a completed application is one in which 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” and presumably, would include information relating to the collateral.

Thus, if the lender is finding that many applicants need additional time to choose a home to buy, an extension of the time period from 30 to 60 days seems reasonable and appears to be justified under the regulations.

By contrast, since an applicant is under an obligation to exercise due diligence in obtaining the information, if the real force behind extending the time period for completion of the application is to allow the applicant time to finish shopping the loan, the lender would not be justified in extending the time period. [12 CFR §1002.2(f)]

Written by Joyce Pollison, Director of Legal and Regulatory Compliance at Lenders Compliance Group


Does my Loan Processor need an NMLS Number and State License?

Under the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act), a person must be licensed before engaging in the business of a mortgage loan originator.

The Dodd-Frank Act defines a Mortgage Loan Originator (MLO) as “an individual who (1) takes a residential mortgage loan application and (2) offers or negotiates terms of a residential mortgage loan for compensation or gain.”

Ordinarily, a processor is exempted from the definition of MLO and licensing under the SAFE Act, if the processor performs “administrative or clerical tasks” only, and is an “employee” subject to the supervision and control of a licensed mortgage broker, correspondent lender or lender.

Other processor functions include, but may not be limited to, “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.”

A processor is prohibited from performing loan origination activity, such as assisting a mortgage applicant in completing the application, except that the processor may clarify where required information must be entered on the 1003. The processor may not discuss rates or programs, analyze credit, advise or recommend loan programs or products, or other credit options that may be available to the mortgage applicant.

When a mortgage company requires or negligently causes a processor to work outside the scope of “purely clerical” responsibilities, it runs the risk of substantial non-compliance under the SAFE Act, risking significant administrative fines.

If a mortgage company elects to use an independent processor (1099 contractor), the company should request and verify that the contract processor has met his or her obligations for registration and licensing in the NMLS Registry.

While certain states have nuanced requirements, the SAFE Act requires independent underwriters and processors to be duly licensed, unless such individuals are employed by an independent processor and/or underwriting company that has met its specific licensing requirement under State Law.

Finally, the Consumer Financial Protection Bureau has issued reminders to mortgage entities (brokers, correspondents, lenders) to establish procedures designed to ensure that any third party with which the institution has arrangements related to mortgage loan origination has policies and procedures that comply with the SAFE Act and its regulatory implementation.

Written by Wendy Bernard, Director of Legal and Regulatory Compliance at Lenders Compliance Group


We are in the beginning stages of seeking approval to be a FNMA Seller/Servicer, and we have questions concerning Fannie Mae’s “defect rate” requirement. What is a defect rate, and how is it calculated?

Fannie defines a defect rate as “the number of loans expressed as a percentage, reflecting the total with defects discovered in the loan review process divided by the total loans reviewed”. Furthermore, a loan defect is defined as a “specific characteristic of a loan that does not meet the credit, documentation, eligibility or pricing requirements of those that purchase or invest in the loan; a loan may contain a defect(s) but still be considered to be investment quality”. [FNMA Single Family/2011 Selling Guide, Subpart D1-1-01]

It is the lender’s responsibility to determine the definition of a defect (or defects) and the related target rate(s) or goal(s) that best fit within its overall culture of originating quality loans and acceptable risk tolerance. There are several approaches that can be adopted; however, the two that I recommend are the following:

  • One approach is to define a defect as a quality control finding, determined by your Post-Closing Quality Control Audit Program, which should include auditing for types of findings or errors, including compliance issues.
  • Another approach would be to define a defect as the most severe quality control finding, determined by your Post-Closing Quality Control Audit Program. For example, in our (LCG’s) Quality Control Audit Program, findings are segregated into categories based upon the severity of the findings. These categories range from minor to critical, with critical defined as the highest level, specifically including findings of a material nature relative to creditworthiness, collateral security, insurability, and marketability.

Once the definition(s) of a defect is determined, the lender can set the defect rate target(s) or goal(s) it wants to establish for the organization, by reviewing the historical trends of the defects.

All lenders and brokers, and not just those seeking Fannie Mae Seller/Servicer approval, should utilize this strategy to ensure that their production operation is committed to originating quality loans and adherence to investor and regulatory requirements.

An excellent resource for implementing this strategy is Fannie’s publication, “Beyond the Guide.”

Written by Bruce Culp, Director of Loan Analytics and Quality Control at Lenders Compliance Group


As a lender, we require our brokers and TPOs to execute an Anti-Steering Disclosure certifying that the loan originator has presented loan options from at least three creditors with whom the LO does business in order to comply with the anti-steering provisions of Regulation Z. However, some of our originators only do business with us or one other lender and do not have the ability to present the consumer with options from three different lenders. Can those originators still make the required Anti-Steering Disclosure and qualify under the “safe harbor” provisions of Regulation Z?

Yes. Generally, to satisfy the safe harbor requirements, the loan originator must obtain loan options from “a significant number of creditors with which a loan originator regularly does business”. Three or more creditors constitute a “significant number of creditors”.

However, if an originator does not regularly do business with three creditors, obtaining loan options from the one or two creditors with which the originator regularly does business is acceptable, provided the loan options presented otherwise meet the criteria set forth in the regulation. There is no requirement that the originator establish a new business relationship just to meet the threshold of three.

An originator “regularly does business” with a creditor if:

  1. There is a written agreement between the originator and the creditor governing the originator’s submission of mortgage loan applications to the creditor;
  2. The creditor has extended credit secured by a dwelling to one or more consumers during the current or previous calendar month based on an application submitted by the loan originator; or
  3. The creditor has extended credit secured by a dwelling twenty-five or more times during the previous twelve calendar months beginning with the calendar month that precedes the month in which the loan originator accepted the consumer’s application.

Thus, in the scenario presented, even if you are the only lender with which the originator regularly does business, and the originator presents three loans available from you and no other options from any other creditor which otherwise meet the criteria set forth in the regulation, the originator qualifies for “safe harbor” protection under Regulation Z’s anti-steering provisions.

Written by Joyce Wilkins Pollison, Director of Legal and Regulatory Compliance at Lenders Compliance Group


We are reviewing our quality control procedures, and our question pertains to our sampling method. Is it adequate to make the 10% sample selection based on a purely random basis?

No. While simply selecting a random 10% sample of the loans originated each month might be adequate for very small lenders who only originate one type of loan and only have one production office, in general, quality control sampling needs to be more detailed in order to produce more meaningful and useful results from the quality control audit program.

It is important that the sample of loans selected for audit each month be statistically representative of the lender’s total book of business. This will enable a lender to be reasonably assured that a specific finding or error rate, found in the sample of loans audited, also exists at the same rate in the lender’s total population of loans originated.

For instance, our Post-Closing Quality Control Audit Program uses the Stratified Random Sample Method, whereby we first divide the total loan production for the month into groups. At a minimum, we “stratify” the loans by loan type (Conventional, FHA, VA, etc.) as well as by Loan Officer and/or Production Office. Additionally, based upon the nature of the lender’s business, we also sort the loans by Rate Type (Fixed or Adjustable).

Once the loans are stratified by groups, we then use the Systematic Random Sample Method to select a minimum of 10% of the loans from each group, by randomly selecting one of the first five loans from each group and then selecting every tenth loan thereafter.

We also use the Discretionary Sampling Method, where needed, and as directed by our clients. This selection method is in addition to the standard 10% sampling method (as described above). The method is used to focus on new types of mortgages and to evaluate the work of particular employees or branch offices.

Overall, we believe that these sampling methods and techniques provide the most meaningful and useful results for a viable mortgage quality control program.

Written by Bruce Culp, Director of Loan Analytics and Quality Control at Lenders Compliance Group


Where do I go to find out about resources for mortgage lenders and mortgage brokers to learn about state specific requirements, licensing, the correct way to file mortgage call reports, and information about the SAFE Act?

The best source that you should rely on heavily is the Resource Center of the Nationwide Mortgage Licensing System & Registry (NMLS).

Go to: http://mortgage.nationwidelicensingsystem.org/.

Although attending industry sponsored workshops and conferences is a good way to learn about the areas that you mentioned, the NMLS is by far the most instructive.

At the NMLS website, you will find a treasure trove of information, starting with News and Events that provides updated information on a variety of topical issues.

You will also find a section called Popular Links where you will see special links to:

  • Uniform State Test,
  • Mortgage Call Report,
  • State Agency Checklists, and
  • Study guides for the state specific tests.

Bookmark the NMLS website and get into the habit of visiting it on a regular basis. It is sure to become one of your favorites!

Written by Alan Cicchetti, Director of Agency Relations at Lenders Compliance Group