TREC 3 Hours CE. Financing the Buyer

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1 TREC 3 Hours CE Financing the Buyer

2 TREC 3 Hrs Financing the Buyer This course will introduce TREC Real Estate Licensees to the basic concepts involved in mortgage lending. Agents can use this understanding to provide better understanding of the process while assisting their clients. (NOTE: This course does not provide credit for Mortgage Originators) Introduction to our TREC CE 3 Hour Elective Course Welcome to the Alliance Academy MCE Course for TREC Real Estate Licensees. From this course, you will receive the 3 hours of TREC Elective CE Credit to renew your license. The topic is an easy overview of the mortgage process as it relates to your real estate transaction. It's an easy course that will give you some insight into how your buyers qualify for loans. Throughout the course, there may be pop quiz questions over text immediately preceding it to aid in comprehension. Your progress will be recorded throughout the course and you may resume where you left off in the event that you need to log out and continue later. Thank you for your business! Enjoy the course! Alliance Academy 3 P a g e C o p y r i g h t A l l i a n c e A c a d e m y

3 TREC CE Lesson 1: Job Descriptions & More In this Lesson, students will be introduced to basic mortgage finance concepts. Topic 1: Who are the players in the mortgage industry? One of the most confusing parts of the mortgage process can be figuring out all the different kinds of lenders that deal in home loans and refinancing. There are direct lenders, retail lenders, mortgage brokers, portfolio lenders, correspondent lenders, wholesale lenders and others. Many borrowers simply head right into the process and look for what appear to be reasonable terms without worrying about what kind of lender they're dealing with. But if you want to be sure of getting the best deal, or are looking for a jumbo loan or have other special circumstances to address, understanding the different types of lenders involved can be a big help. Explanations of some of the main types are provided below. These are not necessarily mutually exclusive - there is a fair amount of overlap among the various categories. For example, most portfolio lenders tend to be direct lenders as well. And many lenders are involved in more than one type of lending - such as a large bank that has both wholesale and retail lending operations. Mortgage Lenders vs. Mortgage Brokers A good place to start is with the difference between mortgage lenders and mortgage brokers. Mortgage lenders are exactly that, the lenders that actually make the loan and provide the money used to buy a home or refinance an existing mortgage. They have certain criteria you have to meet in terms of creditworthiness and financial resources in order to qualify for a loan, and set their mortgage interest rates and other loan terms accordingly. Mortgage brokers, on the other hand, don't actually make loans. What they do is work with multiple lenders to find the one that will offer you the best rate and terms. When you take out the loan, you're borrowing from the lender, not the broker, who simply acts as an agent. 4 P a g e C o p y r i g h t A l l i a n c e A c a d e m y

4 Often, these are wholesale lenders (see below) who discount the rates they offer through brokers compared to what you'd get if you approached them directly as a retail customer. However, the broker then tacks on his or her own fee, which may equal the discount - where the customer usually saves money is by getting the best deal relative to other lenders. Wholesale and Retail Lenders Wholesale lenders are banks or other institutions that do not deal directly with consumers, but offer their loans through third parties such as mortgage brokers, credit unions, other banks, etc. Often, these are large banks that also have retail operations that work with consumers directly. Many large banks, such as Bank of America and Wells Fargo, have both wholesale and retail operations. In this type of lending, the wholesale lender is the one that is actually making the loan and whose name typically appears on loan documents. The third party - bank, credit union, or mortgage broker- in most cases is simply acting as an agent in return for a fee. Retail lenders are exactly what they sound like, lenders who issue mortgages directly to individual consumers. They may either lend their own money or may act as an agent for Again, retail lending may simply be one function offered by a larger financial institution, which may also offer commercial, institutional and wholesale lending, as well as a range of other financial services. Warehouse Lenders Somewhat similar to wholesale lenders are warehouse lenders. The key difference here is that, instead of providing loans through intermediaries, they lend money to banks or other mortgage lenders with which to issue their own loans, on their own terms. The warehouse lender is repaid when the mortgage lender sells the loan to investors. Mortgage Banker The vast majority of U.S. mortgage lenders are mortgage bankers, who don't lend their own money, but borrow funds at short-term rates from warehouse lenders (see above) to cover the mortgages they issue. Once the mortgage is made, they sell it to investors and repay the short-term note. Those mortgages are usually sold through Fannie Mae and Freddie Mac, which allows those agencies to set the minimum underwriting standards for most 5 P a g e C o p y r i g h t A l l i a n c e A c a d e m y

5 mortgages issue in the United States. A Mortgage Banker (here forward referred to as Banker) is typically an employee and is not liable for their actions, but instead works under the umbrella license of their current institution. Typically, they have less experience in the field. They offer the "retail" prices and products of the lender's portfolio. The Banker typically offices at the bank, credit union or other lending institution and are employees who work to sell and process mortgages and other loans originated for their employer. They often have a wide variety of loans types to draw from, but all loans originate from one lending institution. The Banker takes the loan application and works to find a home loan that suits the borrower's needs. In Texas, the Mortgage Broker License Act (Chapter 156 of the Texas Finance Code) makes the following distinction: "Mortgage Banker" means a person who is: 1. Approved or authorized by the United States Department of Housing and Urban Development as a mortgagee with direct endorsement underwriting authority; 2. An approved seller or servicer of the Federal National Mortgage Association; (FNMA - Fannie Mae) 3. An approved seller or servicer of the Federal Home Loan Mortgage Association; (FHLMC - Freddie Mac) or 4. An approved issuer for the Governmental National Mortgage Association. (GNMA - Ginnie Mae) Portfolio Lenders Portfolio lenders, on the other hand, use their own money when making home loans, which they typically maintain on their own books, or "portfolio." Because they don't have to satisfy the demands of outside investors, they can set their own terms for the loans they issue. 6 P a g e C o p y r i g h t A l l i a n c e A c a d e m y

6 This makes portfolio lenders a good choice for "niche" borrowers who don't fit the typical lender profile - perhaps because they're seeking a jumbo loan, are considering a unique property, have flawed credit but strong finances, or may be looking at investment property. You may pay higher rates for this service, but not always - because portfolio lenders tend to be very careful who they lend to, their rates are sometimes quite low. Hard Money Lenders If you can't qualify through a portfolio lender, a hard money lender may be your option of last resort. Hard money lenders tend to be private individuals with money to lend, though they may be set up as business operations. Interest rates tend to be quite high - 12 percent is not uncommon - and down payments may be 30 percent and above. Hard money lenders are typically used for short-term loans that are expected to be repaid quickly, such as for investment property, rather than long-term amortizing loans for a home purchase. Direct Lenders Another term you may encounter is "direct lender." A direct lender simply means a lender that originates its own loans - either with its own funds or borrowed funds. It can therefore be either a mortgage banker or portfolio lender. It does not, therefore, act as an agent for a wholesale lender. Direct lenders are inevitably retail lenders as well, because they do not involve third parties or middlemen in making loans to consumers. Correspondent Lenders A final term you may hear is "correspondent lender." Whereas some types of lenders are distinguished by the process leading up to the loan, correspondent lenders are defined by what happens after the loan is issued. Correspondent lenders work with an investor, called a sponsor, who purchases any mortgages they make that meet certain criteria. Often, this is either Fannie Mae or Freddie Mac, in their roles as the major U.S. secondary lenders. Correspondent lenders earn their money by collecting a point or two when the mortgage is issued. Immediately selling the loan to a sponsor pretty much guarantees they'll make money, since the correspondent no longer carries the risk for a default. However, the sponsor may decline the loan if it turns out not to meet the sponsor's standards, in which case the correspondent must either find another investor or carry the loan itself. 7 P a g e C o p y r i g h t A l l i a n c e A c a d e m y

7 Again, these terms are not always exclusive, but instead generally describe types of mortgage functions that various lenders may perform, sometimes at the same time. But understanding what each of these does can be a great help in understanding how the mortgage process works and form a basis for evaluating mortgage offers. 8 P a g e C o p y r i g h t A l l i a n c e A c a d e m y

8 Topic 2: Overview of the SAFE Mortgage License Act Title V of P.L , the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 ( SAFE Act ), was passed on July 30, 2008 and went into effect on August 1, The new federal law gave states one year to pass legislation requiring the licensure of mortgage loan originators according to national standards and the participation of state agencies on the Nationwide Mortgage Licensing System and Registry (NMLS). This originally was under the oversight of HUD, but effective July 21, 2011, the enforcement was transferred to the Consumer Financial Protection Bureau (CFPB). The SAFE Act is designed to enhance consumer protection and reduce fraud through the setting of minimum standards for the licensing and registration of state-licensed mortgage loan originators. Under the SAFE Act, any individual who, for compensation or gain, takes a residential mortgage loan application or offers or negotiates terms of a residential mortgage loan application must be licensed or registered as a Mortgage Loan Originator. The SAFE Mortgage Licensing Act of 2008 does not provide any exceptions to licensing for individuals conducting above activities. That said, real estate brokerage activities are not covered. 1. Establishes a National Mortgage Licensing System and Registry (NMLS) - Sets forth objectives for a Nationwide Mortgage Licensing System and Registry (NMLSR) for the residential mortgage industry - The objective for the system is that residential mortgage originators would be required to act in the best interests of the consumer to the greatest extent possible - Allows for a system to facilitate the collection and distribution of consumer complaints to both state and federal regulators. 2. Establishes definitions for various terms - loan originator, - loan processor or underwriter, 9 P a g e C o p y r i g h t A l l i a n c e A c a d e m y

9 - nationwide mortgage licensing system and registry, - registered loan originator, - residential mortgage loan, - State, State-licensed loan originator, - Nationwide Mortgage Licensing System and Registry, - Registered Mortgage Loan Originator - and unique identifier. 10 P a g e C o p y r i g h t A l l i a n c e A c a d e m y

10 Topic 3: SAFE Act License or Registration Required? An individual may not engage in the business of a loan originator without obtaining and maintaining registration as a registered loan originator (for employees of insured depositories and their subsidiaries) or a license and registration as a State-licensed loan originator, and obtaining a unique identifier. There are also defined clarifications concerning loan processors, underwriters and independent contractors. Since it generally would not be possible for an individual to offer to or negotiate residential mortgage loan terms with a borrower without first receiving the request from the borrower (including a positive response to a solicitation of an offer) as well as the information typically contained in a borrower's application, the SAFE Act considers the definition of loan originator to encompass 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. The SAFE Act also describes activities in the residential mortgage process that are excluded from the definition of "loan originator." Activities that are excluded are those that pertain to administrative or clerical tasks; real estate brokerage activities by individuals licensed or registered by a state to undertake real estate brokerage activities unless a person is compensated by a loan originator, loan processing or underwriting undertaken under the direction and supervision of a state-licensed loan originator or registered loan originator; and those individuals solely involved in extensions of credit relating to timeshare plans. The SAFE 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)(B), entitled "Other Definitions Relating to Loan Originator" provides "For purposes of this subsection, an individual `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. The SAFE Act interprets "application" to include any request from a borrower, however communicated, for an offer (or in response to a solicitation of an offer) of residential mortgage loan terms, as well as the information from the borrower that is typically required in order to make such an offer. The SAFE Act interprets "taking" an application to mean 11 P a g e C o p y r i g h t A l l i a n c e A c a d e m y

11 receipt of an application for the purpose of deciding whether or not to extend the requested offer of a loan to the borrower, whether the application is received directly or indirectly from the borrower. Loan Officers, Mortgage Brokers, Mortgage Originators, Mortgage Specialists, Mortgage Gurus, Senior Mortgage Producer, etc. are all names that loan officers were able to use in the past. Now all loan officers are licensed or registered and MUST use the term Loan Originator or Residential Mortgage Loan Originator or RMLO in all marketing and correspondence. Even on their business cards! The term loan originator means an individual who (I) (II) takes a residential mortgage loan application; and offers or negotiates terms of a residential mortgage loan for compensation or gain; a. does not include any individual who is not otherwise described in clause b. and who performs purely administrative or clerical tasks on behalf of a person who is described in any such clause; c. does not include a person or entity that only performs real estate brokerage activities and is licensed or registered in accordance with applicable State law, unless the person or entity is compensated by a lender, a mortgage broker, or other loan originator or by any agent of such lender, mortgage broker, or other loan originator; and d. does not include a person or entity solely involved in extensions of credit relating to timeshare plans For purposes of the SAFE Act, a RMLO 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. 12 P a g e C o p y r i g h t A l l i a n c e A c a d e m y

12 Topic 4: Licensing versus Registration All residential mortgage loan originators must be either state-licensed or federally registered. All state licensed and federally registered mortgage loan originators must be registered with the Nationwide Mortgage Licensing System & Registry (NMLS) maintained by the Conference of State Bank Supervisors (CSBS) and the American Association of Residential Mortgage Regulators (AARMR). Registration for Mortgage Bankers A mortgage loan originator employed by a federally insured depository institution or any credit union or an owned and controlled subsidiary that is federally supervised must be registered. Each employee of a federally regulated institution who is a RMLO must submit to the Registry the following: identifying information, including name, home address, social security number, gender, date of birth, and principal business location; financial-services-related employment history for the prior 10 years; disclosure of specified criminal, civil, judicial, or state, federal, or foreign financial authority regulatory actions against the employee; and fingerprints, for purposes of a Federal Bureau of Investigation background check. The employee must attest to the correctness of the information submitted to the Registry; must authorize the Registry and the institution to obtain information related to any administrative, civil, or criminal action to which the employee is a party; and must authorize the Registry to make certain information available to the public. The federal registration system under the SAFE Act does not impose any licensing or continuing education requirements. Mortgage Company Licenses for Brokers All other mortgage loan originators, without exception, must be state licensed. Unlike under the federal registration system, the SAFE Act requires state-licensed RMLOs to pass a written qualified test, to complete pre-licensure education courses, and to take annual continuing education courses. 13 P a g e C o p y r i g h t A l l i a n c e A c a d e m y

13 The SAFE Act also requires all RMLOs to submit fingerprints to the Nationwide Mortgage Licensing System (NMLS) for submission to the FBI for a criminal background check; and state-licensed RMLOs to provide authorization for NMLS to obtain an independent credit report. RMLO Licensing Requirements: Provide fingerprints for an FBI criminal history background check Provide authorization for NMLS to obtain a credit report Input and maintain their personal Mortgage Loan Originator record in NMLS as their license in each state in which they wish to conduct loan origination activity Pass a national mortgage test Take 20 hours of pre-licensure education courses approved by NMLS. The education must include: o 3 hours of federal law and regulations o 3 hours of ethics, which must include fraud, consumer protection, and fair lending o 2 hours of standards on non-traditional mortgage lending Some states, have additional state-specific education requirements. In Texas, you must take an additional 3 hours of Texas education. RMLO Licensing Standards: All state-licensed Mortgage Loan Originators must meet the following standards: Never had a loan originator license revoked; and Has had no felonies in the past seven years; and Never had a felony involving fraud, dishonesty, breach of trust or money laundering; and Demonstrates financial responsibility and general fitness; and Scores 75% or better on a national test created by NMLS. The test will include: o Ethics o Federal law and regulation o State law and regulation o Federal and state law and regulation pertaining to fraud, consumer protection, nontraditional mortgages, and fair lending; and Takes eight hours of continuing education annually. The education must include: 14 P a g e C o p y r i g h t A l l i a n c e A c a d e m y

14 o 3 hours of federal law and regulations o 3 hours of ethics, which must include fraud, consumer protection, and fair lending o 2 hours of standards on non-traditional mortgage lending; and Some states have additional state-specific continuing education requirements. Maintain licensure through NMLS 15 P a g e C o p y r i g h t A l l i a n c e A c a d e m y

15 Topic 5: SAFE Act License NOT Required Admins A license is not required for admin or clerical work. The term administrative or clerical tasks means the receipt, collection, and distribution of information common for the processing or underwriting of a loan in the mortgage industry and communication with a consumer to obtain information necessary for the processing or underwriting of a residential mortgage loan. Real Estate Agents The Act also defines real estate brokerage activity as any activity that involves offering or providing real estate brokerage services to the public, including (i) (ii) (iii) (iv) (v) acting as a real estate agent or real estate broker for a buyer, seller, lessor, or lessee of real property; bringing together parties interested in the sale, purchase, lease, rental, or exchange of real property; negotiating, on behalf of any party, any portion of a contract relating to the sale, purchase, lease, rental, or exchange of real property (other than in connection with providing financing with respect to any such transaction); engaging in any activity for which a person engaged in the activity is required to be registered or licensed as a real estate agent or real estate broker under any applicable law; and offering to engage in any activity, or act in any capacity, described in clause (i), (ii), (iii), or (iv). De Minimis Exception The SAFE Act regulation provides an exception to the MLO registration requirements for any employee of a covered financial institution who has never been registered or licensed through the Registry as an MLO if during the past 12 months the employee acted as an MLO for five or fewer residential mortgage loans. When an institution relies on the de minimis exception in lieu of registration, the MLO employee must register prior to originating the sixth residential mortgage loan within 12 months. Covered financial institutions are prohibited from engaging in any acts or practices to evade the registration requirement. 16 P a g e C o p y r i g h t A l l i a n c e A c a d e m y

16 Attorney MIGHT have an exception Additionally, the definition generally would not apply to, for example, a licensed attorney who negotiates terms of a residential mortgage loan with a prospective lender on behalf of a client as an ancillary matter to the attorney's representation of the client, unless the attorney is compensated by a lender, mortgage broker, or other mortgage loan originator or by an agent of such lender, mortgage broker, or other loan originator. In such cases, the duties of loyalty, competence, and diligence owed by the attorney to his or her client are significant. The SAFE Act's requirements for registration and licensing does not apply in this context, which is distinguished from the commercial context contemplated in the SAFE Act. Other Exceptions Notwithstanding the broad definition of "loan originator" in the SAFE Act, there are some limited contexts where offering or negotiating residential mortgage loan terms would not make an individual a loan originator. The provision in the definition that loan originators are individuals who take an "application" implies a formality and commercial context that is wholly absent where an individual offers or negotiates terms of a residential mortgage loan with or on behalf of a member of his or her immediate family. The commercial context implied by the taking of an "application" is also absent where an individual seller provides financing to a buyer pursuant to the sale of the seller's own residence. 17 P a g e C o p y r i g h t A l l i a n c e A c a d e m y

17 Topic 6: SAFE Act affects Loan Processors and Underwriters Some loan processors or underwriters may need to be licensed. If they do not get the license, the RMLO they are working for would be found with Unlicensed Activity. If the loan processor or underwriter is a W-2 employee of a mortgage company they do not need to be licensed because they are considered by the Texas Savings & Mortgage Lending Department to be under the direction and supervision of a state licensed residential loan originator or registered loan originator. If the loan processor or underwriter is not a W-2 employee of a mortgage company the Department considers them to be an independent contractor and they do need a license because they, by definition, do not perform their duties at the direction of and under the supervision of a state licensed residential loan originator or registered loan originator. The Department offers an Independent Contractor Loan Processor/Underwriter License. The license would allow people to perform loan processing and underwriting functions, but would not allow to perform in the capacity of a residential mortgage loan originator. Alternately, they may license as a residential mortgage loan originator. The license would need to be sponsored by your affiliated mortgage company. With the residential mortgage loan originator license, they would be able to perform loan processing and underwriting functions and perform in the capacity of a residential mortgage loan originator. In general, the term loan processor or underwriter means an individual who performs clerical or support duties at the direction of and subject to the supervision and instruction of: (i) (ii) a State-licensed loan originator; or (ii) a registered loan originator. The Texas SAFE Act also requires individuals who provide clerical or support duties as independent contractor loan processors or underwriters to be licensed. A loan processor or underwriter, who works for a Mortgage Banker or Mortgage Company does not have to be licensed, but an independent contractor does. (1) SUPERVISED LOAN PROCESSORS AND UNDERWRITERS. A loan processor or underwriter who does not represent to the public, through advertising or other means of communicating or providing information (including the use of business cards, stationery, brochures, signs, 18 P a g e C o p y r i g h t A l l i a n c e A c a d e m y

18 rate lists, or other promotional items), that such individual can or will perform any of the activities of a loan originator shall not be required to be a State-licensed loan originator. (2) INDEPENDENT CONTRACTORS. An independent contractor may not engage in residential mortgage loan origination activities as a loan processor or underwriter unless such independent contractor is a State-licensed loan originator. 19 P a g e C o p y r i g h t A l l i a n c e A c a d e m y

19 Topic 7: What s the difference between a Mortgage Broker or Mortgage Banker? As we discussed earlier, all residential mortgage loan originators must be either statelicensed or federally registered. A mortgage loan originator employed by a federally insured depository institution or any credit union or an owned and controlled subsidiary that is federally supervised must be registered. All other mortgage loan originators, without exception, must be state licensed. All state licensed and federally registered mortgage loan originators must be registered with the Nationwide Mortgage Licensing. What is a Mortgage Broker? (SAFE Act Mortgage Company ) A Mortgage Company (sometimes referred to as a Mortgage Broker) is a company, licensed with the state and is liable for the actions of all staff for fraud for the life of a loan. A Mortgage Company may also choose to sponsor Residential Mortgage Loan Originators (previously referred to as loan officers ) and will hold liability for the actions of those sponsored individuals. Mortgage Brokers exclusively use the money of others to fund their loans. Brokers are neither bankers nor lenders, but an independent contractor that is able to offer a broad range of "wholesale" products and pricing of other financial institutions. Mortgage Brokers are paid a fee to bring together lenders and borrowers. They usually work with dozens or even hundreds of lenders, not as employees, but as freelance agents. Many of the mortgages companies that advertise online are mortgage brokers. Think of Brokers as "scouts." They find and evaluate home buyers, analyzing each person's credit situation to determine which lender is the best fit for that person's needs. The broker submits the home buyer's application to one or more lenders in order to sell it, and works with the chosen lender until the loan closes. A good mortgage broker can find a lender for just about any type of credit. They review the borrower s personal financial information and look over an array of lenders and try to match them with one who will give them the best rate and terms. The advantage is choice because the broker will have lots of lenders to match the borrower with; the disadvantage is that once the match is made, the broker not making the lending decision. That said, the broker will be in communication with and your buyer in addition to remaining in constant contact with the person who is underwriting and funding your buyer s loan. Why use a Mortgage Broker? 20 P a g e C o p y r i g h t A l l i a n c e A c a d e m y

20 Disparaged by some as the bogeymen of the housing crash, mortgage brokers have taken a beating over the last few years. Yet mortgage brokers are still a worthwhile option for borrowers, who now have some protection from the shady practices of the past. New federal regulations forbid brokers to pocket premiums from lenders in return for steering customers into higher-priced, high-risk loans. And under the SAFE Mortgage Licensing Act of 2008, brokers have to pass state licensing exams in order to prove they know the rules of the financing game. Because brokers are not tied to any one lender, they have the ability to shop around on behalf of their clients. A Broker may find a lender in another part of the country. A Bank might not have a local office where employees can help borrowers in a hands-on face to face setting. A borrower might still save time and irritation by having an experienced broker shop around for the best mortgage deal. Borrowers who might not be shoo-ins for a loan, perhaps because of lagging credit or other circumstances, might find that a broker with lots of lending contacts will have a good sense of what the financing possibilities are, if any. Brokers handle the paperwork and interactions with lenders. And they may be able to head off problems. The broker understands the guidelines of the lender, and has the chance to look at your information before it is sent to the lender. If brokers offer clients variety, mortgage lenders have the advantage of control. Because the bank is the one lending the money, the bank makes the decisions. That can make a big difference in situations when you need a small exception, or a subjective decision is needed. The banks (lenders) have used Brokers to effectively outsource the job of finding and qualifying borrowers, and also to outsource some of the liabilities for fraud and foreclosure onto the originators through legal agreements. This expansive mortgage broker network allows loan wholesalers of all sizes to immediately gain a national presence without incurring the great expense of national advertising and maintenance of branch offices. It would be impossible for every lender to have an office in every city to gain that kind of exposure in the marketplace. What is a Mortgage Banker? 21 P a g e C o p y r i g h t A l l i a n c e A c a d e m y

21 A company, individual or institution that originates mortgages. Mortgage bankers use their own funds, or funds borrowed from a warehouse lender, to fund mortgages. After a mortgage is originated, a mortgage banker might retain the mortgage in portfolio, or they might sell the mortgage to an investor. A mortgage banker's primary business is to earn the fees associated with loan origination. Most mortgage bankers do not retain the mortgage in portfolio. Additionally, after a mortgage is originated, a mortgage banker might service the mortgage, or they might sell the servicing rights to another financial institution. Larger mortgage bankers service mortgages, while smaller mortgage bankers tend to sell the servicing rights. Servicing basically means to collect the monthly payments and maintain escrow accounts for taxes and insurance. The distinguishing feature between a mortgage banker and a mortgage broker is that mortgage bankers close mortgages in their own names, using their own funds, while mortgage brokers facilitate originations for other financial institutions. Mortgage brokers do not close mortgages in their own names. Why use a Mortgage Banker? Using a local Banker can sometimes be a plus. Their staff generally understands the specifics of local properties, but a distant lender who does not will delay closing until questions are answered. They may not understand the intricacies of heating systems used in specific areas, private septic systems, and or not immediately understand common classifications and terms used by local appraisers. However, Mortgage Brokers can often find a lender who will make loans that a bank refuses such as loans with problem credit. Loans for unique or commercial properties might be easier to secure through a Mortgage Broker. A banker can say, I m going to fund this loan, while a broker might get jammed up. Mistakes might also be resolved more quickly.borrowers who have a long-term relationship with a bank for other services might be offered favorable terms on a home loan. And they might find that some mortgage products, like jumbo loans, are available only through a bank. Topic 8: What is the role of Loan Originators? 22 P a g e C o p y r i g h t A l l i a n c e A c a d e m y

22 Residential Mortgage Loan Originators Residential Mortgage Loan Originators (RMLO) find new clients, counsel borrowers on how to choose the best mortgage and fill out loan applications. They typically make their money through commissions on the loans. RMLOs can also be mortgage brokers or bankers. In the past, Residential Mortgage Loan Originators are sometimes called loan officers, mortgage consultants, home loan consultants, and mortgage planners. ALL states now have some type of licensing or registration process for mortgage brokers. The mortgage brokerage industry is regulated by 10 federal laws, 5 federal enforcement agencies, and 49 state laws or licensing boards. Additionally, brokers typically have some type of quality control (QC) requirements and should adhere to a strict code of ethics. The loan originator plays a vital role in the loan origination process and often makes the crucial decision over whether to approve the application and begin financing. This is a highly responsible position in that the originator is tasked with doing the research about all applicants and protecting the lender from making bad investments in borrowers not likely to repay the loan. Mortgage loan originators must take the time to review all delinquencies or defaults and determine whether these mistakes are going to affect the lending decision. Typical Tasks of Mortgage Originator As the name suggests, mortgage loan originators help to create original mortgage transactions between lending institutions and potential borrowers. Each potential borrower presents a risk to the lender in terms of the likelihood that the borrower will repay the debt. The mortgage loan originator, also known as a mortgage broker or mortgage banker, is responsible for reviewing the entire financial background of the borrowers to determine whether they make good candidates to borrow money. This involves running a credit report, determining the applicant's debt-to-income ratio, communicating with the lending institution as to the borrower's creditworthiness and determining an appropriate interest rate and loan terms. This position encompasses the roles of loan broker and underwriter and encapsulates these duties into one job description. The nature and scope of a Broker's activities vary and depend on the depth of their service 23 P a g e C o p y r i g h t A l l i a n c e A c a d e m y

23 and abilities. During the process of loan origination, the Broker gathers and processes paperwork associated with mortgaging real estate. Typically, the following tasks are undertaken by a Mortgage Originator: Marketing to attract clients Explaining the legal disclosures to the borrowers including the Loan Estimate Gathering all needed documents (pay stubs, bank statements, etc.) Assessment of the borrower's circumstances. May include credit report and affordability Assessing the market to find a mortgage product that fits the customer's needs Selecting the rate, program, and lender for the loan Lock the rate and monitor that lock Possibly submitting the loan through AUS Submitting all material to the processor Begin the conversation log to maintain compliance Stay in communication with the processor Assisting the processor with the loan approval process as needed Communicate with borrowers/real estate agents to keep them informed and up-todate Work with processor to complete and sign the closing fees request form (fee sheet) Work with processor to review the Closing Disclosure prior to closing for accuracy We highly recommend that the originator should ATTEND ALL CLOSINGS 24 P a g e C o p y r i g h t A l l i a n c e A c a d e m y

24 Topic 10: Am I exempt? and other Texas SML Licensing FAQ s Licensing FAQ Q: I am a real estate sales person. Am I exempt from the SAFE Act? A: NO. Real estate brokers and sales persons are NOT EXEMPT from the Act. If you are originating first lien mortgage loans, you must apply for and establish that you meet all of the multiple criteria for a RMLO license. Q: What if there is no structure on the property but the intent is for a house to be built? A: The Texas SAFE Act defines residential real estate as real property located in this state on which a dwelling is constructed or intended to be constructed. So, even if there is no dwelling on the property at the time the mortgage loan is originated, if the intent is for there to be a dwelling, the residential mortgage loan originator must be licensed. Q: Does a company that makes a construction loan to a builder for a spec home need to be licensed? What about a construction loan made to an individual to build their own residence? A: The Texas SAFE Act defines a residential mortgage loan as a loan primarily for personal, family, or household use. The loan made to the builder is for business purposes, not for personal, family, or household use, and no license would be required. The loan made to the individual to build their own residence would be considered for personal, family, or household use, and a license would be required. Q: I am a hard-money lender and all of the loans I make are to investors for the purchase and rehab of single family residences. After the rehab is completed, the investors typically either sell the property or hold on to the property as a rental. Do I need a residential mortgage loan originator license? A: Not in this specific scenario. Loans made to purchase and rehab properties with the intent to resell and loans to acquire rental properties are for business purposes, not personal, family or household use, and are not subject to licensure under the Texas SAFE Act. If you make any loans to any individual to purchase their own residence, the loan would be considered for personal, family, or household use and a license would be required. 25 P a g e C o p y r i g h t A l l i a n c e A c a d e m y

25 Q: I'm a private lender and I occasionally lend to an individual who will use the funds to purchase a primary residence. All contacts and communications with the applicant are conducted by a licensed residential mortgage loan originator. The licensed originator takes the loan application, provides all disclosures to the applicant and negotiates the loan terms with the applicant. Am I, as the lender, required to be licensed in this scenario? A: As long as you do not engage in taking the loan application from the consumer or negotiating loan terms with the consumer then you do not need to be licensed under the Texas SAFE Act. Q: Can you provide any guidance regarding the Texas SAFE Act exemption for licensed attorneys? A: The Texas SAFE Act provides an exemption for licensed attorneys under very narrowly defined circumstances. A licensed attorney may negotiate the terms of a residential mortgage loan on behalf of a client as an ancillary matter to the attorney's representation of the client without being licensed as a residential mortgage loan originator. Some examples where the department may consider the loan negotiations as an ancillary matter include: The attorney currently represents the client in a divorce The attorney is currently representing the client in a bankruptcy The attorney represents a lender in a foreclosure proceeding An attorney is representing a client in the settlement of an estate An attorney is engaged by a lender primarily for collection purposes The exemption for attorneys does not apply in scenarios where the attorney both takes a residential mortgage loan application and offers or negotiates the terms of a residential mortgage loan. If an attorney takes an application and offers or negotiates terms, he/she must be licensed as a residential mortgage loan originator for even one transaction. Owner Financing FAQ Q: If an owner financing seller has an exemption from the Texas SAFE Act, does it automatically mean that they are exempt from other state and federal laws and regulations? 26 P a g e C o p y r i g h t A l l i a n c e A c a d e m y

26 A: No, if an owner-financing seller qualifies for a licensing exemption from the Texas SAFE Act, it does not automatically exempt them from compliance with other applicable state and federal laws and regulations. Q: Is SMLD's interpretation of the five-transaction exemption under Section (a- 1)(7) of the Finance Code is subject to aggregation for entities that share a 25% ownership. This interpretation results in a single five-transaction exemption for the combined entity group, rather than five exempt transactions per entity? A: Yes, the Department s position is that the exemption is subject to aggregation for entities that share a 25% ownership which results in a single 5 transaction exemption for the combined entity group rather than five exempt transactions per entity. The 25% threshold is based on federal depository guidance used by the FDIC to establish non-rebuttable presumption of control. Q: An entity seller can only act through individual representatives. Assuming that an entity owner-financing seller otherwise qualifies for an exemption under Section (a)(3), does that exemption allow an officer or employee of that entity to act on the entity's behalf in taking an application and negotiating the terms of the ownerfinancing loan without being licensed? A: Yes, assuming that the entity qualifies for the exemption. Q: May realtors/sales people hand out pre-printed seller financing terms without being licensed as a RMLO? A: Yes, assuming that they do not discuss any of the information on the pre-printed sheet and refer the purchaser to a licensed RMLO for questions. Q: May an individual or entity owner finance more than 5 properties within a 12 month period without being licensed if they use a licensed RMLO to facilitate the transaction? A: Yes, assuming that they only act as the lender in the transaction and do not take an application or negotiate rate and terms with potential borrowers. 27 P a g e C o p y r i g h t A l l i a n c e A c a d e m y

27 Topic 11: Key Terms to Remember Mortgage Lenders vs. Mortgage Brokers Wholesale and Retail Lenders Warehouse Lenders Mortgage Banker Portfolio Lenders Hard Money Lenders Direct Lenders Correspondent Lenders SAFE Act CFPB NMLS RMLO Federal Registry for Bankers Mortgage Company License for Brokers Independent Contractors vs Employees 28 P a g e C o p y r i g h t A l l i a n c e A c a d e m y

28 You are done reading the material for this lesson. Now it s time to complete the homework quiz. You will follow this process to take the quiz at the end of every lesson on our website. Step 1: Go back to the website and login with your User ID and password. Step 2: Click Continue next to the course that you were working on. (example pictured below) Step 3: Click on the Continue button to go back to the last page you were on.

29 Step 4: Click the green Next arrow at the bottom of the page to go forward to the Quiz. Step 5: Complete the Quiz (Knowledge Assessment). You can retake a quiz as many times as you need. After you pass, you will see this screen and you ll need to click on the button to Continue to the Next Lesson