Question

Answer

Could you provide clarification on what titles are allowed for Licensed Residential Mortgage Loan Originators? Can such titles as “Advisor,” “Specialist,” “Consultant,” “Loan Officer,” be used in representing themselves on marketing collateral and websites? It seems there are many titles being used in the industry even though the license is under the title Residential Mortgage Loan Originator.

The SAFE Act (“Act”) defines “loan originator” as “an individual who (I) takes a residential mortgage loan application; and (II) offers or negotiates terms of a residential mortgage loan for compensation or gain.” [Section 1503(3)(A)(i)]Acronyms used for this definition are “MLO” and “RMLO.”

The Act also provides a section, entitled “Other Definitions Relating to Loan Originator,” which further elaborates that the RMLO is an individual who “assists a consumer in obtaining or applying to obtain a residential mortgage loan” by, among other things, advising on loan terms (including rates, fees, other costs), preparing loan packages, or collecting information on behalf of the consumer with regard to a residential mortgage loan. [Section 1503(3)(B)]The definition of “loan originator” encompasses any individual who, for compensation or gain, offers or negotiates pursuant to a request from and based on the information provided by the borrower. Such an individual would be included in the definition of “loan originator,” regardless of whether the individual takes the request from the borrower for an offer (or positive response to an offer) of residential mortgage loan terms directly or indirectly from the borrower.

Ultimately, in order to determine the accuracy and acceptability of a title, the title itself really is not as important as the actual activity conducted by an individual, with respect to the definition in the Act of a “loan originator.”

Other titles suggested, such as “Advisor,” “Specialist,” and even “Consultant” are freighted with inferences that may impact the use of these titles in the context of the Act’s specificity. It is obviously the case that the Act has clearly defined the title “loan originator” and, to that extent, using this term or a modest variation of this term, such as “loan officer,” would be most conducive to clarity.

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 TILA provides the finance charge tolerances on all residential mortgage loans. Recently, however, we originated a foreclosure refinance loan that was kicked back to us by our investor for a tolerance violation. What caused this violation?

The investor no doubt saw the disclosed finance charge as a tolerance violation with respect to a consumer’s right to rescind. With respect to the rescission right, Regulation Z (the implementing regulation of the Truth in Lending Act, or “TILA”), mandates a higher tolerance for certain loans and a lower tolerance in foreclosure situations, such as in the case of a foreclosure refinance.

For purposes of the right of rescission of certain residential mortgage loans, the disclosed finance charge is accurate if:

  1. It is understated by no more than 1/2 of 1 percent of the face amount of the note or $100, whichever is greater. In other words, the finance charge is less than the finance charge required by Regulation Z by no more than one-half of 1% of face amount of the note or $100, whichever is greater; or,
  2. It is greater than the amount required to be disclosed; that is, the disclosed finance charge exceeds the finance charge required by Regulation Z. [12 CFR § 226.23(g)(1)]

However, there is a lower tolerance in foreclosure situations, where (a) there is a new creditor, (b) the loan is not a HOEPA loan, and (c) there is no new advance or a consolidation of existing loans.

Given the foregoing caveat, for purposes of the right of rescission in a foreclosure situation, the disclosed finance charge is accurate if:

  1. It is understated by no more than 1 percent of the face amount of the note or $100, whichever is greater. In other words, the finance charge is less than the finance charge required by Regulation Z by no more than 1% of the face amount of the note or $100, which is greater; or,
  2. It is greater than the amount required to be disclosed; that is, the finance charge exceeds the finance charge required by Regulation Z. [12 CFR § 226.23(g)(2)]

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


We are a builder that owns a mortgage company and a title company. Recently, we were told that we are exempt from the RESPA section 8 requirements. I do not want to violate RESPA and I would like a better understanding. Are relationships such as ours subject to being an affiliated business arrangement?

Actually, the relationship you describe is a classic case of an affiliated business arrangement, known by its most common acronym “ABA”. If you do not conform to the applicable RESPA guidelines for ABAs, your firm would be in violation of section 8. There are exemptions, but your ownership of a mortgage company and a title company does mandate compliance with the ABA requirements.

Specifically, there are three conditions for satisfying an exemption, if and only if certain requirements are implemented.

I will summarize these three conditions, cautioning you to consult with a regulatory compliance professional for guidance in satisfying all the requirements of these conditions. The following three conditions pertain to exemptions, such that, if implemented, the relationship between the parties to an ABA would not be viewed as violating RESPA:

  1. Disclosure. The person making each referral has provided to each person whose business is referred a written disclosure, in the format of the Affiliated Business Arrangement Disclosure Statement, which outlines the nature of the relationship (i.e., explaining the ownership and financial interest) between the provider of settlement services (or business incident thereto) and the person making the referral and of an estimated charge or range of charges generally made by such provider. The disclosures must be provided on a separate piece of paper no later than the time of each referral or, if the lender requires use of a particular provider, the time of the loan application.
  2. Choice of Provider. No person making a referral has required any person to use any particular provider of settlement services (or business incident thereto), except if such person is a lender, for requiring a buyer, borrower or seller to pay for the services of an attorney, credit reporting agency, or real estate appraiser chosen by the lender to represent the lender’s interest in a real estate transaction, or except if such person is an attorney or law firm for arranging for issuance of a title insurance policy for a client, directly as agent or through a separate corporate title insurance agency that may be operated as an adjunct to the law practice of the attorney or law firm, as part of representation of that client in a real estate transaction.
  3. Thing of Value. The only thing of value that is received from the arrangement – other than payments specifically exempted in RESPA and Regulation X – is a return on an ownership interest or franchise relationship. [24 CFR § 3500.15(b)]

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


We were recently cited by our regulator for violations of CAN-SPAM. Specifically, the header of our email was considered to be misleading. How do we determine when a header is violating the CAN-SPAM requirements?

CAN-SPAM is the acronym for Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003. The Act governs the use of commercial email as a marketing tool as well as other activities relating to commercial email that is deemed to be abusive.

It is unlawful to initiate a transmission to a protected computer of a commercial electronic mail message, or a transactional or relationship message, that contains, or is accompanied by, header information that is materially false or materially misleading.

Generally, a “protected computer” is a computer used in interstate or foreign commerce or communication, including a computer located outside the United States that is used in a manner that affects interstate or foreign commerce or communication of the United States. [LVRC Holdings LLC v. Brekka, 581 F.3d 1127, 1131 (9th Cir. Nev. 2009)] Gradually this definition has been expanded to include all networked computers, inside the U.S. or outside. [Shurgard Storage Centers, Inc. v. Safeguard Self Storage, Inc., 119 FSupp2d 1121 (WD Wash 2000)] Briefly put, computers on the Internet are “protected computers.” [US v. Fowler, Case No. 8:10-cr-65-T-24 AEP (MDFL Oct. 25, 2010)]Header information is considered materially misleading if the header:

  1. Is technically accurate but includes an originating electronic mail address, domain name, or Internet Protocol address the access to which for purposes of initiating the message was obtained by means of false or fraudulent pretenses or representations; and,
  2. Fails to identify accurately a protected computer used to initiate the message because the person initiating the message knowingly uses another protected computer to relay or retransmit the message for purposes of disguising its origin. [15 USC § 7704(a)(1)(A), (C)]

Furthermore, CAN-SPAM prohibits initiating a transmission of a commercial electronic mail message to a protected computer if there is actual knowledge, or knowledge fairly implied on the basis of objective circumstances, that a subject heading of the message would be likely to mislead a recipient, acting reasonably under the circumstances, about a material fact regarding the contents or subject matter of the message. [15 USC § 7704(a)(2)]By Jonathan Foxx, President and Managing Director of Lenders Compliance Group and a Principal Advisor to AGMB’s Mortgage Compliance Practice


We have developed Net Defect Rate Targets, but we do not see the need to set targets for Gross Defect Rates. Is this acceptable?

No, it is not acceptable for several reasons. First of all, Fannie Mae requires lenders to set targets for both Gross and Net Defect Rates and then to track their performance with respect to meeting these target levels each month through their Post-Closing Quality Control Program.

More importantly, lenders need to track and monitor their Gross Defect Rates, because this percentage measures the efficiency or inefficiency of their loan origination process. In other words, how good of a job are they doing at originating, underwriting and closing mortgage loans? With today’s mortgage origination environment and ever shrinking profit margins, it is imperative that lenders have an efficient and cost effective process of producing viable mortgage loans.

Gross Defect Rates are an excellent way of measuring and monitoring, over time, how good the production operation is performing, as this metric indicates the condition of the loan file documentation as received by the lender’s quality control department, directly from the production operation.

Net Defect Rates, on the other hand, indicate the condition of the loan file documentation of the sample of loans after findings or errors have been fixed, remedied or explained away. Keep in mind that defect rates are calculated from the errors or findings found in the sample of loans, not the lender’s total book of business for the audit period.

If a lender has a high Gross Defect Rate but a low Net Defect Rate, that indicates it is good at fixing findings in the loans being sampled, but it is failing to realize that a high Gross Defect Rate in the sample indicates a high error rate in the total loans originated – assuming that the sampling method resulted in the sample being statistically representative of the total population. High error rates in a lender’s total book of business is costly and could increase the probability that loans will be originated that end up as ineligible for sale to investors.

Many lenders will concentrate on their Net Defect Rates in order to get an excellent Final Quality Control Audit Report to show their senior management, board of directors, and investors; but, these lenders are missing an important element of quality control, which is evaluating the cost effectiveness of their production operation.

I urge you to set targets and track your Gross Defect Rates, in addition to your Net Defect Rates.

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


We are a lender that made a USDA Rural Development loan to a borrower. We provided the borrower with a Truth-in-Lending Act (TILA) disclosure statement that disclosed the RD guarantee fee.

However, we failed to include the RD guarantee fee as a prepaid finance charge in annual percentage rate (APR) calculation. This failure to include resulted in an understated annual percentage rate (APR) in excess of 0.125% of the disclosed APR. We closed on the loan less than 60 days ago and borrower has not yet made any payments with respect to the loan.

What can we do to rectify the situation?

Under the provisions of the TILA, there will be no civil or regulatory liability if, within 60 days of discovering the error, the lender notifies the consumer of the error and “makes adjustments necessary to assure that the person will not be required to pay an amount in excess of the charge disclosed or the dollar equivalent of the annual percentage rate actually disclosed, whichever is lower”.[15 U.S.C. § 1640(b)]Thus, the consumer is to pay no more than the lesser of the finance charge actually disclosed (which would require the reimbursement of the undisclosed guarantee fee) or the dollar equivalent of the APR actually disclosed. In the scenario outlined above, you must notify the borrower and reimburse the borrower for the RD guarantee fee.

By Joyce Pollison, Director of Legal & Regulatory at Compliance Lenders Compliance Group


Our Company offers loans requiring mortgage insurance (MI) but collect the MI premiums with the monthly mortgage payment, with no upfront MI premiums collected at closing.

May we collect a cushion to avoid an escrow shortage at the end of the year?

Bottom Line Up Front: You would not collect a “cushion” at closing but you may collect an “escrow deposit” to ensure that the consumer’s mortgage insurance premiums are paid in a timely manner, ahead of due dates as applicable, to avoid penalty or harm to the consumer, and to avoid a potential escrow shortage.

A “cushion” or “reserve” should not be confused with the “escrow deposit” collected at closing. Even though these terms are often used and understood interchangeably, Regulation X, the implementing regulation of the Real Estate Settlement Procedures Act (“RESPA”), provides that that in addition to the escrow deposit, the servicer may charge the borrower a cushion that shall be no greater than one-sixth of the estimated total annual payments from the escrow account (i.e., two monthly payments cushion as a maximum allowable reserve). Regulation X defines cushion or reserve as “funds that a servicer may require a borrower to pay into an escrow account to cover unanticipated disbursements or disbursements made before the borrower’s payments are available in the account”.

If the escrow deposit is accurately calculated and collected at closing, the borrower’s payments will be available in his or her escrow account to cover the premiums when due. Mortgage premiums disbursed on a consistent monthly schedule (as described in the question) cannot be considered “unanticipated” and, therefore, would never be a need to collect a “cushion” to cover unknown disbursements as allowed with other categories of escrow payments under Regulation X.

The prepaid escrow MI deposit would be included on the HUD as with other prepaid escrow items. For example, the mortgage insurance escrow deposit required would be entered on Line 1003 of the HUD to reflect the corresponding amount disclosed on line 9 of the GFE.

The escrow deposit amount should be the least amount possible to ensure that payments can be made when due, and at the same time achieving a target balance of zero dollars remaining at the end of projected escrow year. Of note, the escrow year is defined under Regulation X as twelve consecutive months, not necessarily twelve calendar months. If the escrow deposit is accurate at closing, there should be no need to collect a “cushion” for monthly mortgage insurance premiums.

When MI is collected upfront at closing, the premium is typically added to the total cash settlement and financed into the mortgage. In your scenario, the insurance premium is not a settlement cost to be paid at closing. HUD Line 902 would indicate “zero” as would the disclosed amount of line 3 of the GFE. The consumer should understand the difference between MI escrow deposits and upfront MI premiums.

Final Note Except for the advance escrow deposit allowable at closing, no pre-accrual deposits can be collected during the servicing life of the loan. Servicers may resolve escrow shortages under annual escrow analysis adjustments. When complying with Regulation X’s escrow requirements, remember that each of the follow require distinct compliance procedures:

  • Initial Escrow Account Analysis [12 CFR 1024.17(c)(2) and (3) and 12 CFR 1024.17(k)]
  • Annual Escrow Account Statement requirements [12 CFR 1024.17(i)]
  • Shortages, Surpluses, and Deficiency requirements [12 CFR 1024.17(f)]

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


I own a small mortgage brokerage and have an Anti-Money Laundering Program in place pursuant to the Bank Secrecy Act (“BSA”) and FinCEN guidelines. We have an AML officer. In addition, in August of 2012, my employees and I completed a training webinar on AML.

Is there anything more I am required to do to be compliant with the Anti-Money Laundering (“AML”) rules?

Yes. We previously answered the question (see our FAQ of October 10, 2013), yet, based upon what we are seeing, many non-banks and mortgage brokers and are still confused with the BSA requirements.

As of August 13, 2012, non-banks and mortgage brokers (regardless of size) have been required to comply with the anti-money laundering and suspicious activity reporting requirements of the BSA. Having a policy in place and completing the initial training are just two of these requirements.

The following are additional requirements under the BSA:

  1. All entities are required to perform an annual risk assessment (or sooner if circumstances dictate). The risk assessment should determine factors such as the AML vulnerabilities of the non-bank’s or broker’s products and services, the AML risks associated with the geographies in which it operates, and the AML risks of the customers with which it deals.[31 CFR 1029.210(b)(1)]
  2. All employees of the non-bank and mortgage broker are required to receive training in AML compliance immediately upon commencement of their employment and annually thereafter. Evidence of such training and the training materials must be maintained by the entity and ready to be produced upon request.[31 CFR 1029.210(b)(3)]
  3. All non-banks and mortgage brokers must perform an independent test (i.e., audit) of their AML program by an outside, independent, qualified third-party or internally by a qualified member of the staff who is completely independent from an entity’s AML compliance team. This test must be performed within 12-18 months of the August of 2012 implementation date and every 12-18 months thereafter.[31 CFR 1029.210(b)(4)]

Please note that the foregoing is not intended to be a list of all of the requirements under the BSA.

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 non-bank residential mortgage lender and originator, I know that our company is now required to file SARs with FinCEN, but are we also subject to the information sharing and disclosure provisions of Sections 314(a) and (b) of the USA PATRIOT Act?

Yes as to both 314(a) and (b).

The plain language of the regulation (31 CFR §1029.500) states that “[l]oan or finance companies are subject to the special information sharing procedures to deter money laundering and terrorist activity requirements set forth and cross referenced in [subpart E of part 1029],” which, in turn, makes reference to the general regulations implementing 314(a) and (b) contained in 31 CFR §1010, subpart E. Accordingly, RMLOs are specifically subject to the information sharing provisions of 314(a) and (b).

However, as a practical matter, unless a financial institution receives a 314(a) request from FinCEN requiring it to search for and disclose records, they have no obligation under the 314(a) rule. And, although not required to do so, RMLOs can participate in protected information sharing under 314(b) by completing and submitting the electronic information form on the FinCEN site and selecting “Other” for the “Primary Federal Regulator” field.

Written by Brennan T. Holland, Director of Legal and Regulatory Compliance at Lenders Compliance Group


We continually hear about the importance of the “Settlement Service Provider” in originating residential mortgage loans. But it seems sometimes that almost everybody involved in a loan transaction is such a company. Is there a list that we can go by to determine who is and who is not a Settlement Service Provider?

There are seven elements that the Interagency Guidelines outline for implementation by financial institutions and creditors. These elements are incorporated in the Identity Theft Prevention Program, including a Supplement thereto that sets forth certain Red Flags (a list that is not meant to be exhaustive).

[12 CFR pt. 334: Appendix J (FDIC); 16 CFR pt. 681: Appendix A (FTC); 12 CFR pt. 222: Appendix J (FRB); 12 CFR pt. 41: Appendix J (OCC); 12 CFR pt. 717: Appendix J (NCUA). See also Identity Theft Red Flags and Address Discrepancies under the Fair and Accurate Credit Transactions Act of 2003, Final Rule: Federal Register: November 9, 2007, 72/217, Rules and Regulations: 63717-63775]These elements are:

  1. Identity Theft Prevention Program,
  2. Identify relevant Red Flags,
  3. Detect Red Flags,
  4. Prevent and mitigate identity theft,
  5. Update the Program,
  6. Administer the Program, and
  7. Legal requirements.

Regarding the Red Flags, these are categorized into five groups, as follows:

  1. Alerts, notifications, and warnings from a consumer reporting agency.
  2. Suspicious documents.
  3. Suspicious personal, identifying information.
  4. Unusual use of, or suspicious activity related to, the covered account(s).
  5. Notice from customers, victims of identity theft, law enforcement authorities or other persons regarding possible identity theft in connection with covered accounts held by the financial institution or creditor.
[12 CFR pt. 334: Appendix J, Supplement A (FDIC); 16 CFR pt. 681: Appendix A, Supplement A (FTC); 12 CFR pt. 222: Appendix J, Supplement A (FRB); 12 CFR pt. 41: Appendix J, Supplement A (OCC); 12 CFR pt. 717: Appendix J, Supplement A (NCUA)]By Jonathan Foxx, President and Managing Director of Lenders Compliance Group and a Principal Advisor to AGMB’s Mortgage Compliance Practice


The company that generates my loan documents includes a form which requires the closing agent to obtain two forms of ID from the borrower. Does the Patriot Act require us to obtain and verify a borrower’s identity at closing with at least two forms of identification?

No. There is no set number of forms of ID required by the USA Patriot Act. Section 326 of the USA Patriot Act requires financial institutions to implement a Customer Identification Program (“CIP”) that is appropriate for the size and location of the financial institution. This regulation requires the CIP to be in writing, incorporated into the institution’s Identity Theft Prevention and Red Flags program, and approved by the Board of Directors, a committee of the Board of Directors, or Senior Management.

A financial institution must implement reasonable procedures for verifying the identity of any person who applies for a residential or commercial mortgage loan. These procedures may vary based upon the circumstances of each situation and whether any “Red Flags” are present based on the information obtained by the financial institution regarding the consumer.

It should be noted that the Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Financial Crimes Enforcement Network, National Credit Union Administration, Office of the Comptroller of the Currency, Office of Thrift Supervision, and the United States Department of the Treasury have recommended that “given the availability of counterfeit and fraudulently obtained documents, a bank is encouraged to obtain more than a single document to ensure that it has a reasonable belief that it knows the customer’s true identity”. [Interagency Interpretive Guidance on Customer Identification Program Requirements, April 28, 2005.]This Guidance can be located by clicking on the link below:
http://www.fincen.gov/statutes_regs/guidance/html/faqsfinalciprule.html

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


We continually hear about the importance of the “Settlement Service Provider” in originating residential mortgage loans. But it seems sometimes that almost everybody involved in a loan transaction is such a company. Is there a list that we can go by to determine who is and who is not a Settlement Service Provider?

There is a list of sorts, in RESPA, but it is not meant to be exhaustive. RESPA provides quite a broad definition of a settlement service, starting with the meaning of a “Settlement Service.” That is, whoever provides a settlement service is obviously a settlement service provider. With regards to your language of “loan transaction,” in context, this is a process, called a “settlement,” or a “closing,” or “escrow,” that has procedures for executing legally binding documents relating to a lien on a property that is subject to a federally related mortgage loan.

Any provider of a settlement service is, mutatis mutandis, a settlement service provider. The following list is a guide, certainly not meant to be exclusive, that forms a basis for RESPA’s broad way of defining a settlement service. [24 CFR § 3500.2(b)]

  1. Origination of a federally related mortgage loan (including, but not limited to, the taking of loan applications, loan processing, and the underwriting and funding of such loans);
  2. Rendering of services by a mortgage broker (including counseling, taking of applications, obtaining verifications and appraisals, and other loan processing and origination services, and communicating with the borrower and lender);
  3. Provision of any services related to the origination, processing or funding of a federally related mortgage loan;
  4. Provision of title services, including title searches, title examinations, abstract preparation, insurability determinations, and the issuance of title commitments and title insurance policies;
  5. Rendering of services by an attorney;
  6. Preparation of documents, including notarization, delivery, and recordation;
  7. Rendering of credit reports and appraisals;
  8. Rendering of inspections, including inspections required by applicable law or any inspections required by the sales contract or mortgage documents prior to transfer of title;
  9. Conducting of settlement by a settlement agent and any related services;
  10. Provision of services involving mortgage insurance;
  11. Provision of services involving hazard, flood, or other casualty insurance or homeowner’s warranties;
  12. Provision of services involving mortgage life, disability, or similar insurance designed to pay a mortgage loan upon disability or death of a borrower, but only if such insurance is required by the lender as a condition of the loan;
  13. Provision of services involving real property taxes or any other assessments or charges on the real property;
  14. Rendering of services by a real estate agent or real estate broker; and
  15. Provision of any other services for which a settlement service provider requires a borrower or seller to pay.

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


We are a lender with a question regarding seller concessions at closing and the inclusion of seller paid fees on the final Truth-in-Lending and Itemization of Amount Financed. Perhaps the best way to ask the question is by example.

A loan closed with $2,400.00 in seller concessions. At the time we closed the loan, in our LOS system, we marked the following fees as paid by seller: $900.00 origination fee, $800.00 lender attorney fee, $700.00 abstract fee. By marking these fees as paid by seller, the LOS system does not include those fees in the final Truth-in-Lending or Itemization of Amount Financed.

Should those fees have been included on the final TIL and Itemization of Amount Financed?

The $700.00 abstract fee is not a finance charge and should not be included on the final TIL or Itemization of Amount Financed. [12 CFR 1026.4(c)(7)] With respect to the $900.00 origination fee and the $800.00 lender attorney fee, unless the lender has a written agreement with the seller obligating the seller to pay the fees on behalf of borrower, the origination and bank attorney fees should have been included on the final TIL and Itemization of Amount Financed.

Under Regulation Z, seller’s points are excluded from the finance charge. Seller’s points include any charges imposed by the creditor upon the non-creditor seller of property for providing credit to the buyer or for providing credit on certain terms.

With respect to other seller paid amounts paid at or before consummation or settlement on behalf of the borrower by a non-creditor seller,

“The creditor should treat the payment made by the seller as seller’s points and exclude it from the finance charge if, based on the seller’s payment, the consumer is not legally bound to the creditor for the charge.” [Supplement I to Part 1026 – Official Interpretation at Section 1026.4, paragraph 4(c)(5)(emphasis added)]So, only if the consumer is “not legally bound to the creditor for the charge”, can the amounts paid by seller be excluded.

In many instances, the seller concession is provided for in the purchase agreement. However, this is an agreement between the seller and buyer/borrower, not the seller and creditor. It does not obligate the seller to the creditor nor does it absolve the buyer/borrower of his obligation to pay the charge to the creditor. As stated above, in order for the fees to be excluded from the finance charge, there would have to be a written agreement between the seller and creditor obligating the seller to pay the charges and confirming that, based upon the seller’s payment, the borrower is not legally bound to the creditor for the charge.

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


Can an MLO be paid different compensation for “Self Sourced” referrals (i.e., originated loans that the MLO obtained through his or her own relationships) and “Company Sourced” referrals (i.e., originated loans from a source in which the Company or an employee of the Company other than the MLO has a relationship, such as loans sourced through lead agreements, market servicing agreements or joint marketing agreements)?

While there is no direct answer to this question set forth in any of the relevant regulations, an examination of Regulation Z, as well as “unofficial” CFPB guidance, indicates that the answer is Yes.

As we are all well aware by now, Regulation Z as codified by the Dodd-Frank Act prohibits loan origination compensation based on transaction terms, such as interest rate, or a proxy for transaction terms. [Section 1026.36(d)]A transaction term is any right or obligation of the parties to a credit transaction, except for the amount of credit extended. [Section 1026.36(d)(1)(ii)] Therefore, the referral source is not a transaction term.

A factor (which is not itself a transaction term) is a proxy for a transaction term if it meets two conditions:

  1. The factor consistently varies with a transaction term or terms over a significant number of transactions; and,
  2. The loan originator has the ability, directly or indirectly, to add, drop, or change the factor when originating the transaction.

Applying this definition to the issue presented reveals that the referral source is not a proxy for a transaction term, because the second condition is not satisfied. A loan originator does not have the ability to influence a referral source.

Noteworthy, this same question was posed to a CFPB presenter at the MBA’s 2014 Legal Issues & Regulatory Compliance Conference in San Diego. The CFPB representative concluded that MLOs could be paid differently based upon referral source, yet as we have seen all too often when it comes to the guidance of the CFPB, the Bureau’s presenter stated that his opinion was to be considered “unofficial” and not to be construed as official CFPB guidance.

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


I heard that there are some impending changes concerning FHA loans involving prepayment penalties and Adjustable Rate Mortgages. Would you please clarify?

On August 26, 2014, FHA announced changes under 24 CFR 203 involving (1) the elimination of “post-payment” interest aka “prepayment penalties” on FHA-insured loans, and (2) notice requirements concerning interest rate changes on FHA-insured Adjustable Rate Mortgages (ARM).

The announcements are summarized as follows:

Effective with loans that close on or after January 21, 2015, lenders will be prohibited from collecting post-payment interest on all FHA-insured Single Family mortgage products. Lenders will be required to accept a borrower’s prepayment “at any time and in any amount” without charge to the borrower for the prepayment. Lenders will also be prohibited from requiring 30 days advance notice of any prepayment by the borrower and must calculate prepayment interest solely on the unpaid principal balance as of the date the borrower prepays the loan.

Currently, under FHA’s monthly interest accrual amortization method, FHA-approved lenders may generally charge interest through the end of the month in which the mortgage is prepaid, although other provisions and restrictions may apply. The new requirements also include provisions that impact FHA-insured loans that close before January 21, 2015. For example, lenders are required to notify borrowers of the privilege “to prepay the mortgage in whole or in part at any time and in any amount” without being charged to do so.

Effective for FHA-insured Adjustable Rate Mortgages (ARMs) that close on or after January 10, 2015, lenders must notify borrowers of impending monthly payment adjustments no later than 60 days before the scheduled change in monthly payments, but no earlier than 120 days before the scheduled monthly payment adjustments. In addition, monthly payments must be adjusted based on the corresponding index value at the earliest 45 days prior to the scheduled change – the look back period.

FHA currently requires a 30-day look back period for monthly payment adjustments and a 25 day-advance notice to the consumer regarding the impending change in monthly payments. This expanded notification and look back requirement is expected to provide greater protections to the consumer who will have additional time to respond to impending monthly payment adjustments on ARM loans.

[Federal Register, 79/165, 8-26-14; 24 CFR Part 203, FHA: Handling Prepayments: Eliminating Post-Payment Interest Charges, Final Rule; FHA: Adjustable Rate Mortgage Notification Requirements and Look-Back Period for FHA-Insured Single Family Mortgages]By Wendy Bernard, Director of Legal and Regulatory Compliance at Lenders Compliance Group


We are a mortgage broker. Recently, we submitted an application to two separate lenders. One of the lenders originated the loan, but the other one did not send out the notice of action taken to our borrower. Isn’t the other lender required to send that notice?

When an application is made on behalf of an applicant to more than one creditor, such as when a mortgage broker submits an application to more than one creditor, if the applicant expressly accepts or uses credit offered by one of the creditors, notification of action taken by any of the other creditors is not required.

If no credit is offered or if the applicant does not expressly accept or use any credit offered, each creditor taking adverse action must comply with the ECOA notification requirements, directly or through a third party, such as a mortgage broker.

Any notice given by a third party must disclose the identity of each creditor on whose behalf the notice is given. [12 CFR § 202.9(g)]By Jonathan Foxx, President and Managing Director of Lenders Compliance Group and a Principal Advisor to AGMB’s Mortgage Compliance Practice


We have loan officers that speak to consumers by phone or face-to-face and are constantly being asked the interest rate by these consumers. But we do not know if they are supposed to be quoting just the interest rate or also the Annual Percentage Rate (APR). Should we provide the interest rate in terms of the APR?

If a creditor responds orally to a consumer’s inquiry about the cost of credit, such as by phone or face-to-face, only the APR may be stated, with the exception that the creditor may, but is not required to, state the simple annual rate or periodic rate if the rate is applied to an unpaid balance.

However, if the APR cannot be determined in advance, the APR for a sample transaction must be stated, and other cost information for the consumer’s specific transaction may be given.[12 CFR § 226.26(b)]By Jonathan Foxx, President and Managing Director of Lenders Compliance Group and a Principal Advisor to AGMB’s Mortgage Compliance Practice


Our company (“Company B”) offered a loan officer a position in our company. He had worked for a competitor (“Company A”). The loan officer has loans in his pipeline at this former employer and wants to bring them to our company. While he is licensed in the states where the loans in the pipeline were originated, it takes several days to transfer the loan officer’s status in the NMLSR to a new sponsored entity. During this time that the transfer of sponsorship is pending, how would you suggest we handle the pipeline loans?

There are many issues to consider in this scenario.

Make sure the affected borrowers are notified and have consented to the proposed “transfer” of their loan files – prior to the pipeline being moved. Failure to do so would be a violation of many regulations. A record of an affirmative withdrawal from Company A to Company B should be established in order to protect the company as well as the loan officer.

In this situation, the loans in the pipeline would technically be treated as “withdrawn” from Company A and would need to be set up as new applications by Company B. This would require the GFE, TIL and all other required disclosures to be issued within three business days. No personal information may be transferred from Company A to Company B without the borrower’s written consent; to do so would violate federal and state privacy laws.

Another area of consideration is the stage of processing of the individual applications in the pipeline. Regulators would not look favorably on any situations where the consumer was negatively impacted by delays in closing or any other issues resulting from the “transfer” (i.e., the borrower having to re-lock at a higher rate or having to pay duplicate fees). Consumer complaints arising out of this situation could result in restitution, civil monetary penalties, and formal state banking department administrative orders, depending on the extent of consumer harm.

Lastly, Company B must make sure that the loan officer does not engage in unlicensed activity before being sponsored by Company B. Any activity that meets the definition of Mortgage Loan Originator by the incoming loan officer, prior to sponsorship, would be deemed “unlicensed activity.”

While these issues exist today, in order to provide uninterrupted service to the consumer, regulators and industry are working together to come up with solutions that would allow expeditiously transferring loan officers’ NMLSR licensing credentials.

At this year’s recently held conference of the American Association of Residential Mortgage Regulators, the NMLS Ombudsman, Robert Niemi, Deputy Superintendent for Consumer Finance, Ohio Division of Financial Institutions, posted an agenda that had some related topics, including the process for approving sponsorships of loan officers, uniform testing standards for all loan officers (including depository registrants), aligning HMDA and the Mortgage Call Report (MCR) Data Requests, and a variety of sponsorship Best Practices.

These Best Practices include timing of approving sponsorship of a loan officer who is in transition between employers on the same day, the effect on the license between sponsorships, and the concept that the loan officer could be kept in an active status so that consumers may continue to be served – provided that there are no pending material issues with the license.

By Alan Cicchetti, Director of Agency Relations at Lenders Compliance Group


Upon reviewing and updating our Post-Closing Quality Control Plan, we noticed that it says we must obtain Residential Mortgage Credit Reports (RMCRs) when auditing our files. Is this correct or can we use Tri-merge Credit Reports?

Yes, you may obtain Tri-merge Credit Reports instead of RMCRs as part of your Post-Closing Quality Control Program. The following are the requirements per HUD, Freddie Mac, Fannie Mae and VA.

HUD

A new credit report must be obtained for each borrower whose loan is included in a Quality Control review; unless the loan was a streamline refinance or was processed using a FHA approved automated underwriting system exempted from this requirement. A credit report obtained for a Quality Control review may be a Residential Mortgage Credit Report, a three repository merged in-file report or, when appropriate, a business credit report. [HUD Manual 4060.1 Mortgage Approval Handbook, Section 7-6, E1. (08-06)]Freddie Mac

For Loan Prospector Mortgages, the Seller is not required to obtain a new credit report. For one out of every ten Non-Loan Prospector Mortgages selected for post closing quality control reviews, the Seller must obtain either a new Residential Mortgage Credit Report or a three-repository merged in-file credit report. For the remaining Non-Loan Prospector Mortgages in the Seller’s post closing quality control sample, the Seller must obtain new in-file credit reports containing information from one or more of the national repositories. [Freddie Mac Single Family Seller/Servicer Guide, Section 48.5, (c) (05/15/12)]Fannie Mae

For all loans selected via the random selection process (and for loans selected through the discretionary selection process, as applicable), the post-closing QC review must include reverification of the borrower’s credit history. If a borrower’s credit was evaluated by using a traditional credit report, the lender must reverify the borrower’s credit history by obtaining a new tri-merge credit report. [Fannie Mae Single Family, 2013 Selling Guide/Part D, Ensuring Quality Control, Section D1-3-02 (07/30/2013)]VA

Reordering of a new credit from another credit source. Report may be a RMCR or an in-file report which merges the records of the three national repositories of credit files, commonly know as a 3-file merge. [VA Lender Handbook, Chapter 1, 15-1Review of Loans (09/15/2014)]By Bruce Culp, Director of  Quality Control and  Loan Analytics at Lenders Compliance Group


Are we required to keep hard copies of records? Specifically, how long do we need to retain records relating to Regulation Z (TILA) compliance and periodic statements?

Generally, evidence of compliance does not need to be kept in hard copy. It is permissible to retain documents in any method that faithfully reproduces the documents, such as microfilm, microfiche, or computer programs (i.e., PDFs). Some lenders keep the entire loan transaction file indefinitely in electronic media; however, the creditor’s primary obligation is to keep sufficient records to reconstruct the compliance documents and disclosures.

For instance, a creditor is not required to retain each open-end periodic statement for a home equity plan, as long as specific information associated with each statement can be accessed. [12 CFR Supplement I, Part 226, Official Staff Commentary § 226.25(a)-2]With the exception of advertising, Regulation Z sets forth a record retention period of two years after the date disclosures are required to be made or action is required to be taken. But an agency involved in supervising and enforcing TILA compliance, such as the CFPB, has the authority to extend the record retention period for longer than the statutorily mandated timeframe. [12 CFR § 226.25(a)]By Jonathan Foxx, President and Managing Director of Lenders Compliance Group and a Principal Advisor to AGMB’s Mortgage Compliance Practice


Can a lender refuse to close a loan on the basis that an applicant is pregnant or on maternity leave?

Bottom Line Up Front: No, not if the applicant qualifies for the loan and demonstrates the ability to repay. Lenders who refuse to consider income or employment just because a woman is pregnant or on maternity leave may be in violation of the Fair Housing Act’s prohibitions against discrimination on the basis of gender and familial status, and the Equal Credit Opportunity Act (ECOA) prohibitions against discrimination on the basis of gender.

A mortgage veteran with over 35 years in the industry informed me that she was once required to confirm whether women were on birth control as a prerequisite to applying for a mortgage – she called it the “pill disclosure”. Thankfully, those days are over and fair lending laws are increasingly addressing the remaining vestiges.

In its Single Family Selling Guide, published on January 24, 2014, Fannie Mae clarified that maternity leave is defined as “temporary leave” analogous to short-term medical disability, parental leave, or other temporary leave types that are acceptable by law or the borrower’s employer. Generally, lenders should be aware that:

  • It is a Fair Lending violation to assume that a woman will not return to work after child-birth.
    Under Fannie Mae guidelines, the applicant on maternity leave must provide written notice of her intent to return to work, and the employer, or a third party representative may verify the return date and whether the borrower has the right to return to work after the temporary leave period is over. Confirmation requires no particular formality and does not need to comply with Fannie Mae’s “Age of Allowable Credit Documents” policy – in other words, lenders should not impose expiration date standards applicable to other credit documents.
  • Temporary Leave means “employed”.
    Once the lender confirms that the borrower is on “temporary leave” the lender must consider the borrower as “employed”. The lender is prohibited from requiring a qualified applicant who is pregnant or on maternity leave to return to work, and thereafter earn a specified number of paychecks before her loan may be approved or closed. If the borrower will return to work by the date the first mortgage payment is due, the lender can consider the borrower’s regular employment income for qualification purposes.

“If the borrower will not return to work as of the first mortgage payment date, the lender must use the lesser of the borrower’s temporary leave income (if any) or regular employment income. If the borrower’s temporary leave income is less than her regular employment income, the lender may supplement the temporary leave income with available liquid financial reserves.”[Fannie Mae Seller Guide, B3-3.1-09, 5/27/14]

  • Lenders must establish underwriting policies that similarly consider employment and income for pregnant women and women on maternity leave, as it does other mortgage applicants.
    Temporary leave income that falls below the borrower’s regular income may be supplemented by the borrower’s available liquid financial reserves, subject to Fannie Mae’s underwriting guidelines. If the lender is aware that a borrower will be on maternity leave at the time of closing, and if the loan cannot be approved without the income of the borrower who will be on maternity leave, the lender must confirm employment and qualify income under standard eligibility requirements.

Lenders should understand Fair Lending risks and take the necessary steps to ensure compliance.

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


We are a mortgage broker which owns a subsidiary that is a licensed real estate education provider, which I will refer to as “Real Estate Academy”. Real Estate Academy will be holding a continuing education class for which it charges $25 per person. A local title company has offered to sponsor the class and pay the $25 fee for each person in attendance. Is this arrangement permissible?

Whether the foregoing arrangement is a violation of the Real Estate Settlement Procedures Act (RESPA) depends on whether the real estate agents or other attendees are receiving continuing education credits for their attendance. If no credits are received, there is no RESPA violation. By contrast, if credits are received, RESPA has been violated.

As a general rule, RESPA and its implementing regulation, Regulation X, prohibit a person from giving or accepting “any fee, kickback or other thing of value” for the referral of any business that is incident to or part of a settlement service involving a federally related mortgage loan. [12 CFR 1024.14(b)] The term “thing of value” is construed quite broadly and includes “payment of another person’s expenses”. [12 CFR 1024.14(d)] Certainly, the payment by the title company of a realtor’s continuing education expenses falls within the definition of “thing of value”, and is in violation of the general rule.

However, there is an exception to the general rule which would permit the title company to sponsor the class, provided no continuing education credits or other “thing of value” is given to the realtors. RESPA permits “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”. [12 CFR 1024.14(g)(vi)] This exception underscores that an arrangement that results in continuing education credits being given to the realtors is not permissible because the title company is defraying expenses the agents would otherwise incur, for instance, continuing education expenses.

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


We are a mortgage lender and have an Identity Theft Prevention Program, but we are still not sure what is considered a “covered account”, or an “account”, or a “Red Flag”, or even a “customer”. What are the definitions for these terms?

Required by the Federal Trade Commission, the Identity Theft Prevention Program must be implemented by “financial institutions” and “creditors”. The foregoing two categories of subject entities have been defined very broadly, so as to reach to all residential mortgage lenders and originators. Essentially, a financial institution or creditor that offers or maintains one or more covered accounts must develop and implement a written Identity Theft Prevention Program, the purpose of which is to detect, prevent, and mitigate identity theft in connection with the opening of a covered account or any existing covered account.

A “covered account” consists of two classes:

  1. An account that a financial institution or creditor offers or maintains, primarily for personal, family, or household purposes, that involves or is designed to permit multiple payments or transactions, such as a credit card account, mortgage loan, automobile loan, margin account, cell phone account, utility account, checking account, or savings account; and,
  2. Any other account that the financial institution or creditor offers or maintains for which there is a reasonably foreseeable risk to customers or to the safety and soundness of the financial institution or creditor from identity theft, including financial, operational, compliance, reputation, or litigation risks. [16 CFR § 681.1(b)(3) (2010)]

An “account” is a continuing relationship established by a person with a financial institution or creditor to obtain a product or service for personal, family, household or business purposes. For instance, an account would include an extension of credit, such as for the purchase of property or services involving a deferred payment. [16 CFR § 681.1(b)(1) (2010)]A “Red Flag” is a pattern, practice, or specific activity that indicates the possible existence of identity theft. [16 CFR § 681.1(b)(9) (2010)]A “customer” is a person who has a covered account with a financial institution or creditor. [16 CFR § 681.1(b)(6) (2010)]Written by Jonathan Foxx, President and Managing Director of Lenders Compliance Group and a Principal Advisor to AGMB’s Mortgage Compliance Practice


We are concerned about loss mitigation procedures by third parties. Does the Fair Debt Collection Practices Act (FDCPA) apply to such loss mitigation efforts?

An entity engaged in loss mitigation on behalf of a creditor is subject to the requirements set forth in the FDCPA, unless otherwise specifically excluded.

Consider the types of activities that form the features of debt collection, such as structuring payment plans, receiving payments from a consumer, and forwarding consumer payments to the creditor. In effect, these activities are covered by the FDCPA. Therefore, an entity whose activities include loss mitigation would come within the FDCPA’s regulatory guidelines. The precise regulation states that an entity, in its normal course of business, would be covered by the FDCPA if it “regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.” [15 USC § 1692a(6) (2006)]An interesting feature of the third-party settlement service is that the act of receiving the consumer’s payment would be dispositive, with respect to including or excluding the entity from the FDCPA’s mandates. If a third-party entity does not receive payments from the consumer in the course of its loss mitigation procedures, the entity would be excluded. Furthermore, the FDCPA excludes nonprofit third-party settlement, debt management, and debt collection services if they actually do receive payments from the consumer. The FDCPA expressly excludes “any nonprofit organization which, at the request of consumers, performs bona fide consumer credit counseling and assists consumers in the liquidation of their debts by receiving payments from such consumers and distributing such amounts to creditors.” [15 USC § 1692a(6)(E) (2006)]Written by Jonathan Foxx, President and Managing Director of Lenders Compliance Group and a Principal Advisor to AGMB’s Mortgage Compliance Practice


What documentation is required after the appraisal is completed and the subject property is located in a disaster area?

With Hurricane season and wild fires in full swing, the question is common to all agency types of loans: FHA, VA, Conventional, and USDA. Such natural disasters include, but are not limited to, hurricanes, mud slides, rising waters/flooding, wild fires, tornadoes, et cetera.

When the property is located in an area where a natural disaster has struck, a lender must certify to its investor and/or Agency that the property was not damaged, and the value is supported; or, if repairs are required to be made, that the lender is notified prior to the loan closing or, in some cases, prior to purchase in the secondary market.

In the scenario where an appraisal was completed “As Is,” “Subject to Completion of Repairs,” or “Subject to Completion per the Plans and Specifications’” prior to the disaster event, the lender must provide evidence the subject property did not sustain any damage or value deterioration due to the disaster event affecting the area in which the property is located. The most accepted form to be used is either the 1004D or 442 Appraisal Update and/or Completion for FNMA and FHLMC or the 92051 Compliance Inspection Report for FHA and VA loans. This evidence must be provided by a licensed appraiser, but not limited to the appraiser who prepared the original appraisal.

In the scenario where the appraisal was completed after the declared disaster event, the appraiser must provide a statement in the report to the effect that the subject property was not affected by the noted disaster event and the value of the original appraisal is supported.

If a lender is unclear or unsure if the subject property has been involved in a disaster event that warrants a recertification of value, it should consult the investor or Agency website for alerts, as well as the Federal Emergency Management Agency (FEMA) website, where all declared disaster areas by state and county are listed. The FEMA website for disaster area listings is: http://www.fema.gov/disasters.

Written by Brandy George, Director of Underwriting Operations at Lenders Compliance Group


I have recently become aware that a HMDA-LAR we previously filed for 2013 contained systemic errors. Am I required to correct and resubmit the HMDA-LAR?

It depends on the number of errors contained in the previously filed HMDA-LAR. The CFPB has set forth specific HMDA Resubmission Guidelines in its Examination Procedures of October 2013.

You can find a complete copy of these guidelines at
http://files.consumerfinance.gov/f/201310_cfpb_hmda_resubmission-guidelines_fair-lending.pdf.

Institutions reporting fewer than 100,000 loans or applications on their HMDA-LAR are required to correct and resubmit HMDA data when 10% or more of the HMDA-LAR entries are inaccurate. Institutions reporting 100,000 or more loans or applications on their HMDA-LAR are required to correct and resubmit HMDA data when 4% or more of the HMDA-LAR entries are inaccurate.

This begs the question of how an institution would know what percentage of its entries are inaccurate unless it scrubbed 100% of the loan files and compared the data to the HMDA-LAR entries! For this reason the CFPB suggests an institution review a sample size, on a consistent basis, to ensure that systemic problems are detected and addressed.

The CFPB Examination Procedures indicate that the Bureau’s examiners will randomly select up to seventy-nine loans to review for institutions with 100,000 or fewer loans or applications on their HMDA-LAR. If the loans are reviewed and eight are identified as HMDA-LAR entries with errors, the CFPB will require a complete resubmission of the HMDA-LAR following a scrub of 100% loan files referenced on the HMDA-LAR.

It is suggested that institutions do whatever is necessary to ensure the accuracy of their HMDA-LAR, as the CFPB has imposed civil monetary penalties upon institutions for failing to have accurate HMDA data; such fines ranging from $1,500 to $425,000.

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


In the case of preapprovals, we are unsure about whether we should include them in the code for preapprovals in the HMDA-LAR. The HMDA guides only refer to a Preapproval Program. If we offer preapprovals, are we involved in a Preapproval Program?

Among other reporting requirements, an application type and action taken on a request for a preapproval under a preapproval program would need to be reported on the HMDA-LAR. There are three elements of a covered preapproval program that lead to the requirement for such reporting.

The essential components of a preapproval program are:

  1. The lender conducts a comprehensive analysis of the applicant’s credit-worthiness (i.e., including such verification of income, resources, and other matters as is typically done by the lender as part of its normal credit evaluation program);
  2. A written commitment to the applicant is issued and valid for a stated period of time for a up to a specified amount(i.e., purchase money mortgage to purchase a home); and,
  3. The written commitment is not subject to conditions other than:
    1. Conditions that require the identification of a suitable property;
    2. Conditions that require that no material change has occurred in the applicant’s financial condition or credit-worthiness prior to closing; and,
    3. Limited conditions that are not related to the financial condition or credit-worthiness of the applicant that the lender ordinarily attaches to a traditional home mortgage application (i.e., cleared termite inspection, acceptable title insurance binder).

It is valid to include as a condition that an applicant must provide a settlement statement showing adequate proceeds from the sale of the current home, where such proceeds are to be used from the sale of the current home to purchase the new home subject to the preapproval.[12 CFR § 203.2(b)(2); 12 CFR, Part 2, Supplement I § 203.2(b)-3]Written by Jonathan Foxx, President and Managing Director of Lenders Compliance Group and a Principal Advisor to AGMB’s Mortgage Compliance Practice


Last month I read about an Internet anomaly called the “Heartbleed.SSL bug.”

When I discussed this issue with our IT support staff, we were assured that the necessary precautions had been taken in-house to protect our financial applications and our network.

However, they mentioned that we should take precautions outside of their purview and change our passwords on all our private email accounts, services and various websites that are popular today.

Is this really necessary?

Yes!

Heartbleed is a serious bug discovered across the Internet that has existed for almost two years. This flaw, found in the way secure SSL sites communicate, allows the possibility for hackers to capture passwords and even create fake sites that appear like the real ones. SSL stands for Secure Sockets Layer, and is a protocol for managing the security of a transmission on the Internet.

Many major sites such as Facebook, Google, Gmail, Yahoo, Twitter, Apple, GoDaddy, Netflix, YouTube and Dropbox have been affected. Most of them have since patched the flaw but your passwords need to now be changed in case they were stolen prior to the fix.

A comprehensive list of the affected sites and their reactions has been compiled and can be found at this link:

http://mashable.com/2014/04/09/heartbleed-bug-websites-affected/

This is not a virus that is spreading. There is no protection to install for your computer.

The only way to be safe is to change your passwords to any online site – and I mean all your passwords!

To increase your security even more, and prevent something like this from happening in the future, we encourage you to use a process called “two-step verification” whenever possible. Known as “Two-Step Authentication,” the protocol is used on many major sites, such as Gmail, LastPass, Yahoo! Mail, Facebook, Twitter, Dropbox, Evernote, and LinkedIn. An example of Two-Step Authorization, such as the one deployed at Gmail, utilizes a password and then a second code you enter. In turn, this prompts a text message code to be sent to your cell phone, and you respond to the logon prompt with the code that was just sent to you.

Remember that your personal computer is the gateway to information that someone else may want.

Written by Kevin Origoni, Director/IT and Internet Security at Lenders Compliance Group


Our AML program has been implemented from the effective compliance date. It contains all the required elements, including the training component. Recently, a trainer told us that there is a difference between AML compliance and OFAC compliance. This stirred up quite a debate. What is the difference between AML and OFAC compliance?

AML (Anti-Money Laundering) means precisely what its name implies: the program relating to AML is meant to identify and prevent money laundering and, by extension, abuses of our financial system by terrorists, criminals, and others involved in suspicious financial activities. The implementation of AML guidelines stems from the Bank Secrecy Act (BSA), the foundational Act of the federal anti-money laundering statutory framework. Failure to comply with BSA requirements can lead to civil monetary penalties and even criminal liability. [FFIEC Exam Manual; 18 USC §§ 981, 982, 1956, 1957, 2339A, 2339B, 2339C (2006)]As a result of the 2001 terrorist attacks, the Congress passed the “Uniting and Strengthening America by Providing the Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001,” better known as the “Patriot Act.” The Patriot act amended BSA, with respect to the statutes administered by the Office of Foreign Assets Control (OFAC) and various federal statutes. The Patriot Act also added some provisions, such as Section 314, which itself facilitates the sharing of information between the government and the financial industry and within the financial industry. [USA Patriot Act, Pub. L. No. 107-56 § 352(c), 115 Stat. 272 (and codified at USC § 5318]The fact that OFAC is an office in the Treasury Department suggests its dominant role: the administration and enforcing of economic trade sanctions and national security mandates including, but not limited to, financial transactions. To date, OFAC actually acts under emergency powers, plus it is given specific authorities through legislation. Its powers include the imposition of controls on transactions and freezing assets subject to US jurisdiction. Examples are restrictions on commerce with foreign countries, targeting and averting terrorist financial activity, preventing international narcotics traffic, monitoring persons attempting to develop weapons of mass destruction, and other perceived threats to the United States.

OFAC maintains a list of targets, called the “Specially Designated Nationals” list, or “SDN.” The list contains the names of persons, entities, and countries that are subject to restrictions or prohibited from transacting any business in the United States. As is the case with AML, violations resulting from a failure to comply with OFAC’s restrictions may result in substantial civil monetary penalties and fines.

Unlike AML, OFAC does not require an entity to maintain an OFAC compliance program. Nevertheless, beware! If a violation of law occurs, the implementation of an OFAC compliance program is considered a valid mitigating factor in determining the type and amount of a penalty, if any.

Both the AML and the OFAC compliance requirements should be taken together as functionally necessary in order to protect the financial institution, maintain its safety and soundness, comply with the law, and enhance the protection of the United States. [31 USC § 5312 (2006)] It is in the interests of financial institutions to view AML and OFAC compliance as conjoining. Where possible, AML and OFAC compliance should be placed with the compliance department for oversight.

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


We are a mortgage lender establishing an Employee Incentive Compensation Plan for all employees, including our loan officers, based upon the tenure of each employee with the Company. Following a six month probation period, each employee earns one share for each full month of employment with the Company. The Incentive Compensation Pool from which each employee shall be paid equals 8 percent of the Company’s annual net income from profits. The value of each share (“Share Value”) will be equal to the Incentive Compensation Pool divided by the total number of employee shares earned by all eligible employees. On an annual basis, each employee will be paid an amount equal to the total number of shares earned by the employees multiplied by the Share Value. Is this Employee Incentive Compensation Plan acceptable under the Loan Originator Compensation Rule?

With respect to Loan Officers, the Employee Incentive Compensation Plan has the potential to violate the “10 percent limit” rule. As discussed below, the Plan should include a limitation on the amount of Incentive Compensation that may be paid to an LO who consummates more than 10 transactions in the calendar year to 10 percent of the LO’s total compensation corresponding to the calendar year for which the compensation under the Plan is paid.

The Incentive Compensation Pool is based upon net profit earned by the company in a given year. As a general rule, an LO cannot receive compensation that is determined with reference to profits. There are some exceptions to this general rule, such as the “10 percent limit”. As the incentive compensation is being paid out of a bonus pool established with reference to the company’s mortgage related business profits it is subject to the additional rules regarding non-deferred profits based compensation. [12 CFR §1026.36(d); Official Interpretation Comment 36(d)(1)-1 and 36(d)(1)-3.ii]Compensation may be paid to a LO under a non-deferred profits based compensation plan provided one of the following circumstances is met.

  1. Compensation paid, in the aggregate, does not exceed 10 percent of the LO’s total compensation corresponding to the time period for which the compensation under the non-deferred profits based compensation plan is paid (the “10 percent limit”); or
  2. The individual was an LO for 10 or fewer transactions consummated during the 12 month period preceding the date of the compensation determination.

[12 CFR §1026.36(d)(1)(iv)]With respect to (1) above, total compensation includes all of the LO’s wages and tips reportable for Medicare purposes. It can also include all contributions the company paid to the LO’s accounts in designated tax advantaged plans that are defined contribution plans. [12 CFR §1026.36(a)(3)]Additionally, the cash value of any awards of merchandise, services, trips, etc., should be included. [12 CFR §1026.36(a)(3)] You determine whether the compensation complies with the 10 percent limit by measuring the ratio of compensation subject to the 10 percent limit and the total compensation earned during the relevant time period for which you paid compensation under the plan. [Official Interpretation Comment 36(d)(1)-3.v.D.]Consider the following example. Let’s assume Joe is an LO. Under the Plan, he is eligible to receive incentive compensation in the amount of $18,000.00. According to the parameters set forth in the Plan, the bonus pool is based on net profits for the preceding year. Let’s further assume that Joe earned $160,000, received $10,000 in contribution to a tax advantage defined contribution plan, and received the $18,000.00 incentive compensation which totals $188,000.00 for the calendar year. As the incentive compensation does not exceed 10 percent of total compensation, it is permissible.

However, let’s assume Joe only earned $90,000, including the incentive compensation. Payment of the $18,000.00 incentive compensation would violate the 10 percent limit, as such constitutes over 20 percent of total compensation received by Joe. Of course, if Joe originates 10 or fewer loans during the preceding calendar year, the payment would be permissible under exception (1) above.

The Incentive Compensation Plan should limit the amount of Incentive Compensation that may be paid to an LO who consummates more than 10 transactions in the calendar year to 10 percent of the LO’s total compensation corresponding to the calendar year for which the compensation under the Plan is paid.

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


I have heard that there are additional requirements imposed on a lender when it utilizes pre-screened credit data for marketing or advertising. Is this true?

Yes.

Prescreening is a process by which a consumer reporting agency (viz., a credit bureau) compiles a list of consumers meeting specific credit-granting criteria provided by an institution. The list is provided to the institution for use in soliciting specific consumers for credit products.

The use of prescreened data is beneficial to an institution because it allows the institution to qualify consumers for an offer and ensure that only qualified consumers receive the offer. By way of example, a financial institution could get a list of consumers (a) with a credit score over 700; (b) not down 30 in the last 12 months; and (c) in a specific zip code. A list of consumers fulfilling these three criteria could not be assembled from publicly available information. While these criteria can serve as a powerful marketing tool, if an institution uses prescreened data it must make a “firm offer of credit” to all consumers whose names appear on the prescreened list. Furthermore, if the consumer accepts the offer of credit, the institution cannot, with limited exceptions, withdraw or deny the credit, even when based on new information concerning the consumer.

The guidelines set forth in the Fair Credit Reporting Act (“FCRA”) which is now enforced by the CFPB speak to the requirements to be followed when an institution utilizes prescreened data. The FCRA permits the use of prescreened data for marketing purposes if the institution makes a “firm offer of credit” to each consumer whose name appears on the prescreened list. Specifically, Section 604(3)(A) of the FCRA permits an institution to obtain prescreened data if it intends to use the information in connection with a credit transaction involving the extension of credit to the consumer. Therefore, an institution cannot use prescreened data to send promotional materials.

The requirement to offer a consumer whose name appears on the prescreened list a “firm offer of credit” should not be taken lightly. If your institution utilizes prescreened data, you must understand all of the requirements of a “firm offer of credit”. These requirements include, but are not limited to, offering a short form and long form opt-out notice on the offer, setting forth all collateral requirements on the offer and establishing and documenting all credit requirements before the offer is made to the consumer.

In addition, these requirements are imposed upon an institution that is using credit data, whether obtained directly from the credit bureau or through a third party lead provider.

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


I am interested in compliance services for a small broker shop. What do I need to finish the CFPB requirements and how long will it take to complete?

I am a one-person broker shop and want to make sure that I have what is necessary to comply with all rules issued by CFPB. What do I need?

I am a four MLO company that will not likely exceed fifteen originators. I would like to have ongoing communications available to me with regard to questions that occur during our business routine to help us stay compliant. What do you recommend?

Can you review what we currently have in place and tell me if everything required is in place?

The questions posed are actual questions from independent mortgage professionals trying to determine the requirement for brokers in this complex CFPB environment. The good news is that they are asking questions that reflect their concern over understanding what the actual requirements are.

Many brokers have decided to do nothing and take the chance that they will not be the target of any regulatory examinations or inquiries. They have totally disregarded the relatively new CFPB mandates except for the requirements that are being imposed on them by their lenders.

So what are the CFPB and State regulatory requirements?

As a former banking department regulator, I have stayed in touch with many of my colleagues presently with state banking departments and the CFPB. They all take a similar position as to what is required. The primary requirement is to develop and implement a Compliance Management System (CMS). In fact, the states are working hand in glove with the CFPB and will be coordinating their efforts to adhere to a single examination protocol. In a recent email from one of our clients, we read about a first day letter from one of the state examiners stating that part of the exam scope would include providing evidence of a CMS.

A CMS is a system that creates a culture of compliance within your company. It consists of policies and procedures, training and testing. You may say that you have all of your policies and procedures or that you do not need the consumer complaints policy and procedures because you do not receive any complaints.

The point here is that the days of dusting off a notebook full of policies and procedures and handing it to the examiner are over. There needs to be a process in place that causes you to treat policies and procedures as living documents in a continuous state of improvement and change. Examiners will question your mortgage loan originators as part of the examination process to determine if they are aware of the specific policies and procedures that are in place. Therefore, it is much more than a policy notebook. It requires training, some of which is mandatory, and periodic testing to ensure that your employees understand the policies and are adhering to them.

Compliance is also more expensive now. You need to have the mindset that you should be willing to spend on risk management services as you would on your electricity bill. And, the fact that you are a one-person shop does not relieve you of adhering to the above stated requirements. It’s like being a little bit pregnant!

So maybe you should run out and purchase a set of policies and procedures and get started. There is really no need to do this either. The CFPB recognizes the fact that independent mortgage professionals may not have the financial resources to meet all of the requirements up front. The key here is to be able to demonstrate that you are making a good faith effort to comply.

There are roughly twenty five policies and procedures that cover the various subject matters but there are ten or twelve policies and procedures that are deemed to be essential. One way of easing the financial burden and at the same time create a culture of compliance is to select one essential policy per month to fully implement. After six months, you will be half way home and well on your way of building a CMS. There is little value in purchasing all of your policies at once since you will not have the time to fully implement them.

One of the other keys to success is to associate with a group of independent subject matter experts, such as we provide in Brokers Compliance Group, so that you have a resource for all of the questions that come up in the normal course of doing business.

You can begin to build your program now or you can wait and catch up later. Remember that compliance or lack of compliance leaves a trail. The choice is yours!

Written by Alan Cicchetti, Director/Agency Relations, and Executive Director at Brokers Compliance Group


There has been a lot of litigation and concerns involving referral fees. One of the areas of confusion relates to what is the so-called “agreement” or “understanding” involving a referral of business. So, what do these terms mean?

RESPA defines a “referral” to a settlement service provider in two ways:

  1. A referral includes any oral or written action directed to a person which has the effect of affirmatively influencing the selection by any person of a provider of a settlement service or business incident to or part of a settlement service when such person will pay for such settlement service or business incident thereto or pay a charge attributable in whole or in part to such settlement service or business.
  2. A referral also occurs whenever a person paying for a settlement service or business incident thereto is required to use a particular provider of a settlement service or business incident thereto. (Emphasis added.) [24 CFR 3500.14(f)]

The required use concept is significant. This doctrine holds that “required use” means “a situation in which a person must use a particular provider of a settlement service in order to have access to some distinct service or property, and the person will pay for the settlement service of the particular provider or will pay a charge attributable, in whole or in part, to the settlement service.” [24 CFR 3500.2]However, the offering of a package (or combination of settlement services) or the offering of discounts or rebates to consumers for the purchase of multiple settlement services does not constitute a required use. Any package or discount must be optional to the purchaser. The discount must be a true discount below the prices that are otherwise generally available, and must not be made up by higher costs elsewhere in the settlement process.

An “agreement” or “understanding” in this context means “the referral of business incident to or part of a settlement service,” and it need not be written or verbalized, but may be established by a practice, pattern or course of conduct. When a “thing of value” (i.e., any payment, advance, funds, loan, service, or other consideration) is received repeatedly and is connected in any way with the volume or value of the business referred, the receipt of the thing of value is evidence that it is made pursuant to an agreement or understanding for the referral of business. [24 CFR 3500.14(e)]Written by Jonathan Foxx, President and Managing Director of Lenders Compliance Group and a Principal Advisor to AGMB’s Mortgage Compliance Practice


We are an FHA-approved lender with several branch officers. At one of our branches, a loan officer has an assistant, who is not licensed, but helps him close loans. The Loan Officer pays his assistant directly from his own compensation. Is this arrangement permissible?

The arrangement described above is not permissible. A Loan Officer may not pay his assistant out of his own compensation; rather, the lender must bear this expense.

HUD requires that a lender originating or servicing an FHA insured loan pay all of its own operating expenses. This requirement applies to the operating expenses of both the main and branch offices. “Operating expenses” is defined to include, without limitation, “equipment, furniture, office rent, overhead, employee compensation, and similar expenses”. (Emphasis added.) [HUD Handbook 4060.1 Rev-2, para. 2-8]HUD further underscores this requirement by stating:

“A FHA approved mortgagee must pay all of its operating expenses including the compensation of all employees of its main and branch offices. Other operating expense that must be paid by the FHA approved mortgagee include, but are not limited to, equipment, furniture, office rent, utilities and other similar expenses incurred in operating a mortgage lending business. A branch compensation plan that includes the payment of operating expenses by the branch manager, any other employee or by a third party is a prohibited arrangement.” (Emphasis added.) [HUD Handbook 4060.1 Rev-2, para. 2-14B]Additionally, HUD requires the lender to have control over and responsibly supervise its branch employees. [HUD Handbook 4060.1 REV-2, para. 2-9] In the scenario described above, the assistant is not an employee of the lender, but rather an employee of the Loan Officer. As such, the lender cannot control or supervise the assistant’s activities, which is a violation of HUD requirements.

In light of the foregoing, a Loan Officer employed by an FHA lender may not employ and directly compensate his own assistant. The assistant must be employed and compensated by the lender. However, the lender may be able to restructure the Loan Officer’s compensation arrangement so that ultimately she or he bears the cost of the assistant.

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


The User Guide to our Loan Origination System states that it provides all the “material disclosures” for the right of rescission in home equity plans, but it does not outline what disclosures are supposed to be given to the borrower. What are the right of rescission disclosure requirements for home equity plans?

There are five “material disclosure” right of rescission requirements for home equity plans. If these are provided to the consumer as part of the account opening disclosure requirements, the lender has satisfied the regulatory compliance mandates.

For purposes of the right of rescission in home equity plans, the following disclosures are considered “material disclosure” requirements:

  1. The method of determining the finance charge and balance upon which the finance charge will be imposed.
  2. Annual Percentage Rate (APR).
  3. The amount or method of determining the amount of any membership or participation fee that may be imposed as part of the plan.
  4. The length of the draw period and repayment period.
  5. For both the draw period and repayment period, an explanation of how the minimum periodic payment will be determined and the timing of the payments, including the required disclosures if paying the minimum payment may or will result in a balloon payment.

[12 CFR § 226.15(a)(3), Footnote 36]Written by Jonathan Foxx, President and Managing Director of Lenders Compliance Group and a Principal Advisor to AGMB’s Mortgage Compliance Practice


Are there limits to how many times a loan originator may submit or resubmit a loan through Fannie Mae’s Desktop Underwriter?

There are several automated underwriting engines, usually embedded within the Loan Origination System (LOS), that analyze the collateral, income, assets and credit obligations referred to as “Automated Underwriting Findings” or simply “AUS findings.” Fannie Mae’s engine is entitled “Desktop Underwriter” (DU), Freddie Mac’s is named “Loan Prospector” (LP), and the USDA’s “Guaranteed Underwriting System” is called “GUS.”

As a general rule, FHA, VA and Agency guidelines do not specifically reflect the maximum number of submissions and resubmissions a lender may make before or after the loan closes (i.e., AUS findings are frequently re-run after the loan funds in order to make corrections). Often, the AUS findings will be run more than one time – and in some case multiple times – as information changes once the verification process begins. One reason to resubmit is due to the fact that loan terms may change or the borrower’s income and assets may increase or decrease.

As a Best Practice rule, loan officers and processors should place notes in the LOS to support each resubmission. Multiple resubmissions might be considered a Red Flag. A Red Flag may be caused by a lender trying to manipulate the transaction data into returning an Approve/Eligible result.

The more accurate notes that are maintained on the actions, decisions, and milestones in the processing of DU files, the stronger the position in defense of the foregoing resubmissions.

Written by Brandy George, Director of Underwriting Operations at Lenders Compliance Group


What is a “Pre-existing Business Relationship” and its effect on affiliate marketing?

At its core, the pre-existing business relationship is a relationship between a “person” or “persons” (i.e., residential mortgage lender and originators) and consumers, based on these three rudimentary criteria:

  1. A financial contract between the person and the consumer that is in force on the date a solicitation covered by the affiliate marketing provisions is sent to the consumer;
  2. The consumer’s purchase, sale, or lease of the person’s goods or services, or a financial transaction (including holding an active account or a policy in force or having another continuing relationship) between the person and the consumer during the eighteen-month period immediately preceding the date a solicitation covered by the affiliate marketing provisions is sent to the consumer; or
  3. An inquiry or application by the consumer regarding a product or service offered by the person during the three-month period immediately preceding the date a solicitation covered by the affiliate marketing provisions is sent to the consumer.

There are essentially two scenarios that come under scrutiny: (1) where there is a pre-existing business relationship, and (2) where there is no pre-existing business relationship. [16 CFR § 680.3(j)(i)-(iii); 16 CFR § 680.3(j)(2)-(3)]A pre-existing business relationship is where a consumer:

  • Has an existing loan account with a creditor – the creditor has a pre-existing business relationship with the consumer and can use eligibility information it receives from its affiliates to make solicitations to the consumer about its products or services. (A solicitation is the intent to encourage the consumer to purchase or obtain products or services.)
  • Obtained a mortgage from a mortgage lender, but refinanced the mortgage loan with a different lender when the mortgage loan came due – the first mortgage lender has a pre-existing business relationship with the consumer and can use eligibility information it receives from its affiliates to make solicitations to the consumer about its products or services for 18 months after the date the outstanding balance of the loan is paid and the loan is closed.
  • Obtains a mortgage, the mortgage lender has a pre-existing business relationship with the consumer.
    • If the mortgage lender sells the consumer’s entire loan to an investor, the mortgage lender has a pre-existing business relationship with the consumer and can use eligibility information it receives from its affiliates to make solicitations to the consumer about its products or services for 18 months after the date it sells the loan, and the investor has a pre-existing business relationship with the consumer upon purchasing the loan.
    • If the mortgage lender sells a fractional interest in the consumer’s loan to an investor but also retains an ownership interest in the loan, the mortgage lender continues to have a pre-existing business relationship with the consumer, but the investor does not have a pre-existing business relationship with the consumer.
    • If the mortgage lender retains ownership of the loan, but sells ownership of the servicing rights to the consumer’s loan, the mortgage lender continues to have a pre-existing business relationship with the consumer. (The purchaser of the servicing rights also has a pre-existing business relationship with the consumer as of the date it purchases ownership of the servicing rights, but only if it collects payments from or otherwise deals directly with the consumer on a continuing basis.)
  • Applies to a creditor for a product or service that it offers, but does not obtain a product or service from or enter into a financial contract or transaction with the creditor – the creditor has a pre-existing business relationship with the consumer and can therefore use eligibility information it receives from an affiliate to make solicitations to the consumer about its products or services for three months after the date of the application.
  • Makes a telephone inquiry to a creditor about its products or services and provides contact information to the creditor, but does not obtain a product or service from or enter into a financial contract or transaction with the creditor – the creditor has a pre-existing business relationship with the consumer and can therefore use eligibility information it receives from an affiliate to make solicitations to the consumer about its products or services for three months after the date of the inquiry.
  • Makes an inquiry to a creditor by e-mail about its products or services, but does not obtain a product or service from or enter into a financial contract or transaction with the creditor – the creditor has a pre-existing business relationship with the consumer and can therefore use eligibility information it receives from an affiliate to make solicitations to the consumer about its products or services for three months after the date of the inquiry.
  • Has an existing relationship with a creditor that is part of a group of affiliated companies, makes a telephone call to the centralized call center for the group of affiliated companies to inquire about products or services offered by the insurance affiliate, and provides contact information to the call center, the call constituting an inquiry to the insurance affiliate that offers those products or services – the insurance affiliate has a pre-existing business relationship with the consumer and can therefore use eligibility information it receives from its affiliated creditor to make solicitations to the consumer about its products or services for three months after the date of the inquiry.

A pre-existing business relationship does not occur where a consumer:

  • Makes a telephone call to a centralized call center for a group of affiliated companies to inquire about the consumer’s existing account with a creditor – the call does not constitute an inquiry to any affiliate other than the creditor that holds the consumer’s account and does not establish a pre-existing business relationship between the consumer and any affiliate of the account-holding creditor.
  • Has a loan account with a creditor, makes a telephone call to an affiliate of the creditor to ask about the affiliate’s retail locations and hours, but does not make an inquiry about the affiliate’s products or services – the call does not constitute an inquiry and does not establish a pre-existing business relationship between the consumer and the affiliate. (Also, the affiliate’s capture of the consumer’s telephone number does not constitute an inquiry and does not establish a pre-existing business relationship between the consumer and the affiliate.)
  • Makes a telephone call to a creditor in response to an advertisement that offers a free promotional item to consumers who call a toll-free number, but the advertisement does not indicate that creditor’s products or services will be marketed to consumers who call in response – the call does not create a pre-existing business relationship between the consumer and the creditor because the consumer has not made an inquiry about a product or service offered by the creditor, but has merely responded to an offer for a free promotional item.

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


I know that a “business day” is a day when the lender’s offices are open to loan applicants. However, we are always debating here when the “business day” definition should be applied. So, when does the “business day” apply?

Let’s be sure about our definition of “business day.” The term generally refers to a day on which a lender’s offices are open to the public for carrying on substantially all of its business operations. [12 CFR § 226.2(a)(6)] However, for purposes of rescission and most residential loan product originations, the term means all calendar days except Sundays and the legal public holidays, such as New Year’s Day, the Birthday of Martin Luther King, Jr., Washington’s Birthday, Memorial Day, Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving Day, and Christmas Day. New Year’s Day, Independence Day, Veterans Day, and Christmas Day, fall on specific dates; when their dates fall on a Saturday, federal offices observe them on the preceding Friday, which means that the preceding Friday is a “business day” and the Saturday is not a “business day.” [Official Staff Commentary § 226.2(a)(6)-2]Generally, there are four cases in which the foregoing definition of “business days” applies. Caution should be exercised here, because there are some nuances to the applicable regulations.

The following constitute the four prevalent instances where “business days” apply:

  1. The three business day rescission period, for loans subject to rescission.
  2. Closed-end, dwelling-secured loan transactions:
    1. Seven business days “waiting period” implemented when initial disclosures are provided and the consummation date.
    2. Three business day “waiting period” between when corrected disclosures are received by the consumer and the consummation date.
    3. Three business day period after which a consumer is deemed to have received the initial disclosures that were mailed (for purposes of imposing fees) and corrected disclosures that were mailed.
  3. Under HOEPA, the three business day “waiting period” between when the special HOEPA disclosures are received by the consumer and the consummation date.
  4. In reverse mortgage transactions, the three business day “waiting period” between when reverse mortgage loan disclosures are received by the consumer and either when the consummation date for a closed-end credit transaction may occur or when the first transaction may occur under an open-end credit transaction.

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


We are a lender transferring servicing to a subservicer (the “Subservicer”). We send out our servicing transfer notice (“good-bye letter”) to our borrowers at least 15 days prior to the transfer. Among other items, the good-bye letter includes the new subservicer information and the effective date of transfer. The Subservicer advises that if a borrower chooses to mail his payment in early to the Subservicer, the Subservicer cannot process the payments or setup the loan until the date of the official date of transfer. The Subservicer also advises that their servicing transfer notice or “hello” letter cannot be sent out until the effective date of transfer or a few days later. This leaves our borrowers in a quandary as to what to do. What do you recommend?

The Subservicer is correct in that they cannot process a payment prior to the effective date of the transfer, as the servicing transfer has not occurred. However, as detailed below, the balance of the concerns raised by you are valid as the practices result in the disruption of service to consumers, which the CFPB emphasizes must be avoided. There is nothing in the statute which prohibits a transferor from sending out a “hello” letter prior to the effective date; RESPA only mandates that the notice be sent out not more than 15 days after the effective date of the transfer. RESPA permits the transferor and transferee to issue a joint notice, which must be sent out at least 15 days prior to the effective date of the transfer. This may be an option to be considered. Additionally, the servicing rules require that payments be promptly credited. [12 CFR 1024.33]In February 2013, the CFPB issued a bulletin advising mortgage companies about the risks to consumers during the servicing transfer process. The CFPB reminded mortgage companies of their legal obligations with respect to protecting consumers during loan servicing transfer process. Among the complaints giving rise to the CFPB’s heightened scrutiny is service interruption when the loans are transferred during the loss mitigation process. In light of the number of homeowners that have been negatively impacted by servicing transfers, the CFPB is making servicing transfer related problems a focus of its supervisory activities.

The CFPB will assess the servicers’ policies, procedures, systems, and controls which address the risks to consumers in connection with servicing transfer. Among the areas highlighted by the CFPB as particular areas of concern are the following:

  1. The transferor servicer’s plans in preparation for transfer, with an emphasis on the transfer of information to the transferee so as not to disrupt servicing to consumers.
  2. The transferee’s plans for handling the files transferred to it, with an emphasis on the data transfer and the transferee’s verification of the accuracy of the information.
  3. The transferor and transferee’s processes and procedures for dealing with loans in the process of loss mitigation so as avoid the negative effects servicing transfers often have on consumers in the midst of the process.

With respect to servicers handling significant servicing transfers, in “appropriate cases”, the CFPB will require servicers to prepare and submit written plans to the CFPB detailing how they will manage the consumer risks associated with the transfers. [CFPB Bulletin 2013-01]Written by Joyce Pollison, Director of Legal and Regulatory Compliance at Lenders Compliance Group


Our company recently commenced requiring prefunding quality control audits which requires substantial manpower. I have heard conflicting views on whether prefunding quality control audits are required by Fannie Mae and/or HUD. Can you clarify the prefunding requirement for me?

HUD does not specifically require that prefunding audits be performed on FHA loans but it strongly suggests that prefunding reviews should be done. HUD’s Handbook 4060.1 Rev-2 Section 7-5-B says, “mortgagees may want to sample cases prior to closing to evaluate the quality of processing and underwriting. Using such reviews, mortgagees may detect problems prior to closing while problems can still be corrected.”

As we all know, Fannie Mae requires prefunding reviews and they list the specific elements or audit steps that should be conducted. (And so does Freddie Mac)

Even if your firm does not sell directly to Fannie Mae, it is still required to perform prefunding audits because its investors sell to Fannie Mae and the investors want their lenders to follow Fannie Mae guidelines. This is mandated because all the investors want the loans to be considered secondary marketable. Please check with your investors to confirm this requirement.

Lenders should perform prefunding audits, not just because it is a regulatory requirement, but because it is Best Practice. All lenders must have a strong system of internal controls to protect themselves. In any internal control system, there are primary control points and secondary control points. Primary control points are designed to prevent the problems or, in other words, find the problems before they occur. Prefunding Quality Control is an important primary control point. Secondary control points are designed to find the problems after they have occurred. Post-Closing Quality Control is a secondary control point. Any internal control system for any company in any industry should have a combination of primary and secondary controls.

Our quality control division has audited many Early Payment Default (EPD) loans through the years, and approximately one out of every 25 EPD loans audited, resulted in a finding that a borrower lost his or her job one to two weeks prior to loan closing. And of course the borrower failed to mention this to the lender, and therefore at closing, when the borrower signed the Final Application, s/he committed fraud – because by signing the Final Application the borrower is affirming that the information to originate the loan was true and correct. Approximately, 75% of the time these files did not have any evidence that a verbal verification of employment (VOE) was conducted a few days prior to closing. Had a verbal VOE been done, these EPDs would have been prevented.

Prefunding audits are important. If your firm is having trouble performing prefunding audits due to manpower, I would suggest that they consider outsourcing this task to us, Lenders Compliance Group.

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


May I deliver an appraisal and other valuations to the applicant(s) via email, thereby reducing the waiting period required prior to closing?

In order to provide an answer to this question, many issues need to be discussed.

By now, everyone in the mortgage industry should be aware of the new ECOA Valuations Rule which applies to all applications received on or after January 18, 2014. The ECOA Valuations Rule states as follows:

§1002.14: Rules on providing appraisal reports

(a) Providing appraisals and other valuations.

(1) In general. A creditor shall provide an applicant a copy of all appraisals and other written valuations developed in connection with an application for credit that is to be secured by a first lien on a dwelling. A creditor shall provide a copy of each such appraisal or other written valuation promptly upon completion, or three business days prior to consummation of the transaction (for closed-end credit) or account opening (for open-end credit), whichever is earlier. An applicant may waive the timing requirement in this paragraph (a)(1) and agree to receive any copy at or before consummation or account opening, except where otherwise prohibited by law. Any such waiver must be obtained at least three business days prior to consummation or account opening, unless the waiver pertains solely to the applicant’s receipt of a copy of an appraisal or other written valuation that contains only clerical changes from a previous version of the appraisal or other written valuation provided to the applicant three or more business days prior to consummation or account opening. If the applicant provides a waiver and the transaction is not consummated or the account is not opened, the creditor must provide these copies no later than 30 days after the creditor determines consummation will not occur or the account will not be opened.

If the appraisal is mailed to the consumer, you need to add additional time onto the three business days referenced in the statute. Conservatively, the appraisal should be placed in the mail for delivery six days prior to consummation.

What if the appraisal is delivered electronically? May a lender use the delivery and read receipt to confirm receipt as the start of the three business day requirement? The short answer is Yes, but there are other considerations.

§1002.14 (a) (5) states:
Copies in electronic form. The copies required by §1002.14(a)(1) may be provided to the applicant in electronic form, subject to compliance with the consumer consent and other applicable provisions of the Electronic Signatures in Global and National Commerce Act (E-Sign Act) (15 U.S.C. 7001 et seq.).

The E-Sign Act requires the applicant(s) to consent to the use of electronic signatures and records to satisfy any statute or regulation. Prior to obtaining their consent, a financial institution must inform the applicant(s) of (a) an option to have the record made available on paper; (b) the right to withdraw consent; (c) the procedures the applicant must use to withdraw consent; (d) the procedures the applicant must follow to request a paper copy of the record and whether a fee will be charged for the copy; and (e) the hardware and software requirements for access to and retention of electronic records.

While this seems simple enough, let’s not forget two of the general themes set forth by the CFPB: (1) emails from financial institutions containing non-public personal information (“NPI”) should be encrypted; and (2) financial institutions should adopt an information security program which protects non-public personal information.

Thus, the ECOA Valuations Rule and E-Sign Act allow for the delivery of an appraisal via email, but the email should be encrypted as there is non-public personal information contained in an appraisal.

One would think that if a financial institution has a methodology for sending secure disclosures that are full of NPI, than the same delivery method would work for delivering a copy of the appraisal.

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


Recently, our firm came under a “phishing attack.” Our IT people fixed the problem, but we really don’t know what happens in a phishing attack. Can you explain it in layman’s terms? Also, How can we prevent this kind of cyber attack?

Phishing is the act of attempting to acquire information such as usernames, passwords, and credit card details (and sometimes, indirectly, money) by masquerading as a trustworthy entity in an electronic communication. Today’s spear-phishing attacks are highly targeted, technically sophisticated, and represent a real threat to data security.

Attackers can leverage information gleaned from social media to tailor messaging to individual targets, and can convincingly imitate legitimate senders. A successful attack compromises the target’s device with malware and can be used by a criminal to gain access to the entire network – often with serious financial repercussions for the business.

It’s apparent that residential mortgage lenders and originators have non-public personal information at their fingertips and it would be disastrous to have that information in the wrong hands.

How can you prevent phishing attacks on your computer?

You can start by avoiding and not opening emails that contain subject lines that read:

  1. Invitation to connect on LinkedIn
  2. Mail delivery failed: returning message to sender
  3. Dear (insert bank name here) Customer
  4. Important Communication
  5. Undelivered Mail Returned to Sender

In sophisticated and large infrastructure environments, there is technology like firewalls and web-blockers in place that can prevent certain emails from filtering through to you, the user. Certainly, your organization should implement an Information Security Plan. This is an extensive document that ensures regulatory compliance and practical, preventive steps to warding off a cyber attack.

However, in smaller, less-sophisticated environments, or even at your home network, you should be cognizant that your personal computer is the gateway to information that someone else may want. It’s imperative that you keep your PC’s anti-virus updated, and avoid suspicious emails that invite you to click on a hyperlink.

Written by Kevin Origoni, Director/IT and Internet Security at Lenders Compliance Group


We need to know the difference between business purpose and consumer purpose loans. How do we distinguish between them and can you give us a few examples? Also, is a non-owner occupied rental property or an owner-occupied rental property considered business purpose?

There are at least five primary factors that must be considered in order to determine business purpose from consumer purpose. In general, these are:

  1. The relationship of the borrower’s primary occupation to the acquisition. The more closely related, the more likely it is to be business purpose.
  2. The degree to which the borrower will personally manage the acquisition. The more personal involvement there is, the more likely it is to be business purpose.
  3. The ratio of income from the acquisition to the total income of the borrower. The higher the ratio, the more likely it is to be business purpose.
  4. The size of the transaction. The larger the transaction, the more likely it is to be business purpose.
  5. The borrower’s statement of purpose for the loan.

Admittedly, the foregoing criteria may seem somewhat subjective. Nevertheless, these are the five factors that should be applied in the loan origination process. (12 CFR Supplement I to Part 226, Official Staff Commentary 226.3(a)-3.i)

For examples of each, guidance is provided in Regulation Z, as follows:

Examples of business purpose include:

  1. A loan to expand a business, even if it is secured by the borrower’s residence or personal property.
  2. A loan to improve a principal residence by putting in a business office.
  3. A business account used occasionally for consumer purposes.

Examples of consumer purpose include:

  1. Credit extensions by a company to its employees or agents if the loans are used for personal purposes.
  2. A loan secured by a mechanic’s tools to pay a child’s tuition.
  3. A personal account used occasionally for business purposes.
    (12 CFR Supplement I to Part 226, Official Staff Commentary 226.3(a)-3.i-ii)

To your question about non-owner occupied rental property, credit extended to acquire, improve or maintain rental property (regardless of the number of units) that is not owner-occupied is deemed to be business purpose. If the owner expects to occupy the property for more than 14 days during the coming year, the property cannot be considered non-owner occupied. (12 CFR Supplement I to Part 226, Official Staff Commentary 226.3(a)-4)

There are two rules involved in determining business purpose of owner-occupied rental property. Rule 1: If credit is extended to acquire rental property that is or will be owner-occupied within the coming year, the rental property is deemed to be business purpose if it contains more than 2 housing units. Rule 2: If credit is extended to improve or maintain rental property that is or will be owner-occupied within the coming year, the rental property is deemed to be business purpose if it contains more than 4 housing units. Neither of these rules means that an extension of credit for property containing fewer than the requisite number of units is necessarily consumer purpose. In such cases, the determination of whether it is business purpose or consumer purpose should be made by considering the five factors listed above. (12 CFR Supplement I to Part 226, Official Staff Commentary 226.3(a)-5.i-ii)

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


We are a lender that initially attempts to e-mail disclosures to our loan applicants. Our e-delivery system requires the applicant to consent to e-delivery before the disclosures can be opened. If the applicant responds “yes”, the disclosures are opened. If there are co-applicants and we receive consent to e-delivery from one applicant, but not the second, is that sufficient for compliance with disclosure requirements under the Real Estate Settlement Procedures Act (“RESPA”) and the Truth in Lending Act (“TILA”)?

With respect to TILA disclosures, generally, when there are multiple applicants, the disclosures may be made to any applicant “who is primarily liable on the obligation”. [12 CFR 1026.17(d)] However, when there is a right to rescind (such as a refinance), the disclosures “shall be made to each consumer who has the right to rescind”. [12 CFR 1026.17(d)] So, if the transaction is a refinance, all applicants must consent to the e-delivery in order for the lender to be in compliance.

With respect to RESPA disclosures, the answer is not as clear cut. Regulation X, the implementing regulation of RESPA, simply states that “the lender must provide the applicant with a GFE”. [12 CFR 1024.7(a)] The term “applicant” is not defined. Thus, the conservative approach is to give the GFE to each applicant, which under your delivery system, will require each applicant to consent to e-delivery before opening the documents.

Additionally, although not part of your initial questions, note that with respect to notifications under ECOA and Regulation B, in the case of multiple applicants, notifications only need to be given to one applicant, but “must be given to the primary applicant where one is readily apparent”. [12 CFR 1002.9(f)]

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


Are the homeownership counseling list requirements set forth in the High-Cost Mortgage and Homeownership Counseling Amendments to the Truth in Lending Act and RESPA (“HOEPA Final Rule) only applicable to high-cost loans?

No. As of January 10, 2014 all lenders are required to provide consumers who apply for a federally-related mortgage with a list of HUD-approved housing counseling agencies. This list must be in writing. The CFPB has provided two ways for a lender to fulfill its obligations as set forth in the HOEPA Final Rule.

  1. A lender may obtain the lists of HUD-approved housing counseling agencies through the CFPB’s website; or
  2. A lender may generate the lists of the HUD-approved housing counseling agencies by independently using the same HUD data that the CFPB uses on HUD-approved counseling agencies in accordance with the CFPB’s list instructions. The CFPB published the list instructions and clarified how lenders can provide their own lists on November 8, 2014.

In addition, in Bulletin 2013-13 (the “Bulletin”) the CFPB acknowledged that the second option referenced above will require lenders to “undertake significant development of their compliance systems” to ensure that lists of the HUD-approved housing counseling agencies are compliant. The CFPB also advised that lenders will not be able to provide approved agency lists under the second option for up to six month’s following the January 10, 2014 effective date.

As such, the Bulletin provides that lenders may direct borrowers to the CFPB’s housing counseling website to obtain a list of housing counselors. The CFPB suggests the following text to be provided by lenders.  If followed, the CFPB suggests that the goals of the regulation would be achieved and would not raise supervisory or enforcement concerns.

“Housing counseling agencies approved by the U.S. Department of Housing and Urban Development (HUD) can offer independent advice about whether a particular set of mortgage loan terms is a good fit based on your objectives and circumstances, often at little or no cost.

If you are interested in contacting a HUD-approved housing counseling agency in your area, you can visit the Consumer Financial Protection Bureau’s (CFPB) website, www.consumerfinance.gov/find-a-housing-counselor  and enter your zip code.

You can also access HUD’s housing counseling agency website via www.consumerfinance.gov/mortgagehelp.

For additional assistance with locating a housing counseling agency, call the CFPB at 1-855-411-CFPB (2372).”

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


What is the timeframe requirement with regard to post-closing quality control audits? In short, when must they be completed?

HUD and VA require that FHA and VA loans be reviewed within 90 days of closing. For example, loans originated in October 2013 must be audited by January 29, 2014.

Freddie Mac says the “the results of quality control reviews must be reported in writing to the Sellers’ senior management within 90 days of selection of the mortgage files for review”. (Freddie Mac Single Family Seller/ Servicer Guide, Section 48.10) For example, the results of the audit of loans originated in October 2013 must be reported to senior management by the end of January 2014.

Fannie Mae, with their release of SEL-2013-05 on July 30, 2013, requires that the entire post closing quality process be completed within 120 days from the month of loan closing, with the following breakdown: Loans must be selected for audit within 30 days, the quality control review and rebuttal must be completed within 60 days, and the results of the audits must be reported to senior management within 30 days. For example, for loans originated in the month of October 2013, the file selection must be made by the end of November 2013, the quality control audit and rebuttal must be completed by the end of January 2014, and the reporting of the results to senior management must be completed by the end of February 2014.

At Lenders Compliance Group, we provide our clients with a Preliminary Quality Control Audit Report in no later than 50 days from the date we received the selected files and then we release the Final Quality Control Audit Report in no later than 60 days from the date we received the selected loan files. This ensures that our clients are always in compliance with respect to the quality control time frame requirements.

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


Does the final RESPA/TILA integration rule (the “Rule”) under Regulation Z (TILA) released by the CFPB on November 20, 2013 change the current fee tolerances under Regulation X (RESPA)?

Yes. Initially, the Rule does not refer to “tolerance” but the concept remains intact. In addition, the Rule refers to the document which will be provided to the borrower within three days of application as a “Loan Estimate” and not a GFE.

The most substantial change in this regard is that the Rule expands upon those fees where no increase is permitted (the “zero tolerance” bucket) to include the following: (a) all charges paid to an affiliate of the lender or broker; (b) all charges for required services where the lender does not permit the borrower to choose the service provider (i.e., appraisal, credit report); and (c) “lender credits”. Transfer taxes and charges paid to the lender or broker for their own services remain as fees where no increase is permitted.

Currently, RESPA permits lenders to modify zero tolerance charges on the GFE and to provide a revised GFE if there is a “changed circumstance”. The Rule also sets forth precise situations where zero tolerance fees may be modified, but these situations do not mirror “changed circumstances” as currently defined in RESPA. Under the Rule charges may be increased if (a) the borrower requests a change that affects fees previously disclosed [Part 1026.19(e)(3)(iv)(C)]; (b) the Loan Estimate expires, in that no intent to proceed is indicated by the borrower within 10 days of the lender providing the Loan Estimate [Part 1026.19(e)(3)(iv)(E)]; (c) the interest rate is locked [Part 1026.19(e)(3)(iv)(D)]; or (d) there is a “changed circumstance” affecting a settlement charge. “Changed Circumstance” means:

  1. An extraordinary event beyond the control of any interested party or other unexpected event specific to the consumer or transaction;
  2. Information specific to the consumer or transaction that the creditor relied upon when providing the Loan Estimate and that was inaccurate or changed after the disclosures were provided; or
  3. New information specific to the consumer or transaction that the creditor did not rely on when providing the original Loan Estimate. [Part 1026.19(e)(3)(iv)(A)]

As required today, only those charges which increase as a direct result of the reason for the change can be increased in the revised Loan Estimate.

Now that the countdown to QM has passed, we have a new countdown to August 1, 2015 (the effective date of the Rule).

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


Under the new appraisal rules, when must the appraisal be provided to the residential mortgage loan applicant? Also, must all versions of the appraisal be provided or just the last or “final” version?

With respect to loan applications received on or after January 18, 2014, under the ECOA Valuation Rule, a creditor must provide an applicant with a copy of the appraisal and other written valuations “upon completion, or three business days prior to consummation of the transaction, whichever is earlier”. [12 CFR 1002.14(a)] “Completion” of an appraisal or written valuation occurs when the creditor receives the last version of the appraisal or when it is apparent that there will only be one version of the appraisal.

The creditor does not need to give the applicant copies of all versions of the appraisal or written valuation; only a copy of the latest version must be provided. However, if the applicant is given a copy of an appraisal or written valuation which is then revised, a copy of the updated version must be sent to the applicant. [Supplement 1 to Part 1002 – Official Interpretations, Comment 14(a)(1)] The appraisal or written valuation must automatically be provided, regardless if credit is extended, denied, incomplete or withdrawn.

Note that in order to avoid a last minute delay of closing, if there is a clerical error in the appraisal or valuation already provided to the applicant, the creditor can have the applicant waive the right to receive the revision three business days prior to consummation of the transaction. Such waiver may be oral or written. However, in order to use this exemption, all of the following criteria must be met:

  1. The revision must be solely to correct clerical errors in the appraisal;
  2. The revisions must have no impact on the estimated value;
  3. The revisions must have no impact on the calculation or methodology used to derive the estimate;
  4. The applicant must receive the revised appraisal or valuation at or prior to the closing;
  5. The applicant must have already received the appraisal or valuation being corrected either promptly upon completion or three business days prior to consummation of the transaction.[12 CFR 1002.14(a)(1)]

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


I know that the Dodd-Frank Act changed the rule for the types of loans that were considered HOEPA and Section 32 transactions. What loan types are now included or excluded in these transactions?

Mortgages covered by the Home Ownership and Equity Protection Act (“HOEPA”) amendments have been referred to as “HOEPA loans,” “Section 32 loans,” or “high-cost mortgages.” The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) refers to these loans as “high-cost mortgages.”

The Final Rule, issued January 10, 2013 – which is set to take effect on January 10, 2014 – implements Dodd-Frank’s amendments that expanded the universe of loans potentially covered by HOEPA. Under the Final Rule, most types of mortgage loans secured by a consumer’s principal dwelling, including purchase-money mortgages, refinances, closed-end home-equity loans, and open-end credit plans (i.e., home equity lines of credit or “HELOCs”) are potentially subject to HOEPA coverage.

The Final Rule retains the exemption from HOEPA coverage for reverse mortgages. Also, mortgages secured by vacation or second homes are not covered.

In addition, the Final Rule adds exemptions from HOEPA coverage for three types of loans that the Consumer Financial Protection Bureau believes do not present the same risk of abuse as other mortgage loans: (1) loans to finance the initial construction of a dwelling, (2) loans originated and financed by Housing Finance Agencies (HFA), and (3) loans originated through the United States Department of Agriculture’s (USDA) Rural Housing Service Section 502 Direct Loan Program.

Thus, the following are included:

  • Purchase-money mortgages
  • Refinances
  • Closed-end home equity loans
  • Open-end credit plans (i.e., HELOCs)

And, the following are excluded:

  • Reverse mortgages
  • Mortgages secured by vacation or second homes
  • Construction loans
    NOTE: The exemption for construction loans applies only to loans that finance the initial construction of a new dwelling. It does not extend to loans that finance home improvements or home remodels. Where a construction-to-permanent loan consists of two separate transactions, the construction loan transaction is exempt, but the permanent financing transaction is not exempt. For a construction-to-permanent loan originated as a single transaction, coverage must be determined in accordance with appendix D to Regulation Z. [§ 1026.32, Comment 32(b)-1 and Appendix D]
  • Loans originated and directly financed by a Housing Finance Agency (HFA) [as defined in 24 CFR 266.5]
  • Loans originated under the U.S. Department of Agriculture’s (USDA’s) Rural Development Section 502 Direct Loan Program
    NOTE: The exclusions for HFA and USDA loans apply only to loans that these organizations directly finance, not loans they guarantee or insure.

These new HOEPA requirements apply to applications received on or after January 10, 2014.

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