Chapter 1. NON-TRADITIONAL MORTGAGES Section 1

Transcription

1 Chapter 1 NON-TRADITIONAL MORTGAGES Section 1 NEGATIVE AMORTIZATION Introduction Ask twenty experienced Mortgage Loan Originators a question about Negative Amortization, and you will get twenty different answers. Therefore, for this introduction we will go to the famous or infamous Consumer Financial Protection Bureau to see what they say. Question to CFPB on their website: What is negative amortization? Answer: Amortization means paying off a loan with regular payments, so that the amount you owe goes down with each payment. Negative amortization means that even when you pay, the amount you owe will still go up because you are not paying enough to cover the interest charged. Your lender may offer you the choice to make a minimum payment that doesn t cover the interest you owe. The unpaid interest gets added to the amount you borrowed, and the amount you owe increases. Usually, after a period of time, you will have to start making payments to cover principal and interest. These payments will be higher. A negative amortization loan can be risky, because you can end up owing more on your mortgage than your home is worth. That makes it difficult to sell your house because the sales price won t be enough to pay what you owe. This can put you at risk of foreclosure. 1

2 Certain loans have payment options that let you pay only a portion of the amount of interest you owe each month. If you only pay some of the interest, the amount that you do not pay will get added to your principal balance. You end up paying not only interest on the money you borrowed, but interest on the interest you are being charged for the money you borrowed. This dramatically increases the amount of debt you have and the cost of the loan. To keep your debt from growing, you need to pay down all of the interest and at least some of the principal you owe. Another question to CFPB: What is a qualified mortgage? Answer: A QM is a category of mortgage with certain more stable features that make it more likely that you will be able to afford the loan. There are certain types of loans with certain risky features that are not permitted, one being Negative Amortization. The Congress of the United States passed the Dodd-Frank and included that language. They decided that a loan with negative amortization is toxic. Many of the loans that were lost to foreclosure in the last decade had negative amortization as one of the features. Major culprits were Adjustable Rate Mortgages, No Document Loans, and Graduated Payment Loans. I find that many experienced, capable, knowledgeable, sophisticated, and honest Loan Originators have different opinions. This includes me. Negative amortization is not for most borrowers. Borrowers must know the risks of this type of mortgage. Bad things can happen. It is imperative that MLO's explain these loans thoroughly, then explain them again, and then have the client explain. Sometimes, they are fine. Years ago, there were more Neg. Amortization loans. What type of clients should consider them? 1. Someone who might not have much money at this time but is expecting more later. Med School Student. 2. Investor with courage. This will increase leverage and IF the property does well, the overall return is better. Some investors (this includes me) might like even more negative amortization, like no payments at all. That is mega Negative Amortization. Takes real courage. 2

3 3. Sometimes the lower payment will help make a good Performa Sheet to allow purchase of an investment property or to qualify a homebuyer. 4. Someone can make it through the early years, because their payments are lower. 5. Some sophisticated investors might believe that the market will be increasing, and in five years or so, he or she will refinance. 6. If someone is conservative, they will not like the idea of interest going up, or equity dropping as the payments do not cover the interest. I would have a policy of describing this feature of a loan and have the borrowers sign a written notice that they understand the risks. Not on a big form, just a small simple agreement, saying this loan has some interesting features that could prove to be toxic, and they understand the risks. Can you get a Negative Amortization loan today? Yes, but the interest rates might be higher and they would not be sold on the secondary market. The loans would be kept in the lender's portfolio. 12 CFR Subpart E

4 Section 2 15 YEAR LOANS Introduction The SAFE ACT stated that the only Traditional Mortgage was the 30-year fixed rate loan, fully amortized. Therefore, the 15 year fixed and other variances are Non-Traditional Loans. That is why they are listed in this chapter and designated Non-Traditional Loans. I always thought that NT loans would be Reverse Mortgages, Graduated Payment Loans, Adjustable Rate Loans, Interest Only Loans, Negative Amortization, Hard Money Loans, Prepayment Loans, and Balloon Payments, among others. After the chaos of the last decade many homeowners did consider and decide to obtain 15-year loans. Many of these were people who wanted to pay off their loans quickly and have a home free and clear with no loan payments. Other parties believe that paying off a home loan is heresy. But even some conservative people liked this idea when they saw friends, neighbors, relatives, family, and others lose their homes to foreclosure or short sale. Some years ago there was a Truth In Lending Form given out to applicants which explained the costs of the Loan. The form had four columns. The first column listed the APR (Annual Percentage Rate). This would normally be higher than the interest discussed because the costs prorated over the life of the loan. MLO's will all tell you that the clients would look at this figure, and they would say with emotion, "That is not the interest rate you quoted, what is going on here". The MLO would then explain that this was not the interest rate and further explain how it was calculated. The client would next look at column two and three. Not too much said about those two columns. Then, the clients read the fourth box, and all of them said something like, "Oh, my God", "What in the is this?", "You have got to be kidding", "No Way", etc. The box was the total of all payments and the principal was added to this amount. It was a rather large number. 4

5 This form was for a 30-year loan and the interest paid does add up. The MLO could recommend a 15-year loan. Now, the client might be satisfied with column four, but not so satisfied with the payments. When explaining the difference between a 30-year fixed and a 15-year fixed, an easy way to make a complete disclosure is to use the Loan Estimates. They will illustrate all the differences, such as lower interest rate on the 15-year, lower APR and a lower figure in the TIP line. Plus, much more principal paid off in the five-year period that is illustrated on the LE. The TIP is the total amount of interest that you will pay over the loan term expressed as a percentage of your loan amount. The old column four is not on the new LE. For the 15-year loan the TIP is % and on the 30-year loan it is %. Wonder how many borrowers understand that figure and whether the amount that is shown is good or bad. Estimates: $500,000 Loan, $750,000 Property Value It will also, in our example, illustrate that the payment goes from $2, for the 30-year loan to $3, for the 15-year loan. That is a figure that most borrowers thoroughly understand. They can use this form to compare other loan offers. One item that the LE has that the TILA Estimate did not is a space for the applicant to sign that they received the form and the date received. Another use of the form is to explain page three: Important Information. The other considerations such as appraisal (get one), assumption (no), insurance (your choice), late payment (15 days-5%), liability after foreclosure (many loans in California are non-recourse), refinance (may not be able to), and servicing (potential to transfer your loan). You should use these forms proudly. They were demanded by Congress, and the one form replaced two used previously. It did take them many years to develop them and then release them. 5

6 Loan Estimates 15-hr fixed 20-hr fixed 30-yr fixed Int Rate 4.125% 4.5% 4.625% APR 4.184% 4.547% 4.660% Est. Closing Costs $6,177 $7,028 $7,615 TIP % 52.21% % Principal & Interest $3, $3, $2, Time to Think 1.1 1) A mortgage category with more stable features with less chance of foreclosure. 2) What is TIP? 3) Who is the Director of CFPB? 6

7 Section 3 REVERSE MORTGAGE UPDATE Introduction This year NMLS sent a list of topics to providers that could be used to write an approved Continuing Education course. In some chapters there are topics that are required. In this Non-Traditional chapter one of the highly recommended topics is Reverse Mortgages. All of you should know the basics of Reverse Mortgage loans. 62 years of age Principal residence Single family or 2-4 units Condominiums and manufactured homes ok Pass a financial assessment Counseling required Many methods of payment Line of credit possible Must pay taxes and insurance Keep in good repair Non-recourse, non-borrower spouse can under certain conditions stay in property California has a strict Worksheet Guide, stressing who should finance a home with a reverse mortgage, not for everyone, etc. etc. No application until seven days after counseling. HUD made many changes during This section will cover some of the new changes for Reverse Mortgages. The changes are announced by Mortgagee Letters. This title is different because in California we have very few, almost no, Mortgagees. East Coast is Mortgagee (Lender) and Mortgagor (Borrower). California and most of the Left Coast States have Trustors (Borrowers), Trustees (Intermediary), and Beneficiaries (Lender). 7

8 Mortgagee Letter (Excerpt) Subject: Home Equity Conversion Mortgage (HECM) Claim Type 22 (CT-22) Assignment Requests Purpose: This Mortgagee Letter provides consolidated and updated guidance regarding the submission of HECM assignment requests to HUD. Basic Assignment Eligibility Criteria For Lender Assignment Eligibility Criteria For Cases that Do Not Involve a Non- Borrowing Spouse Assignment Eligibility Criteria For Cases that Involve a Non-Borrowing Spouse with an FHA Case Number Assigned on or After August 4, 2014 Assignment Eligibility Criteria For Cases that Involve a Non-Borrowing Spouse Under MOE Assignment Election Required Documentation General Required Documentation Compliance Package Required Documentation Collateral Package Required Documentation Servicing Package Required Documentation Assignment Package Preliminary Review by HUD Completing the Assignment Process Servicing Responsibilities for Pending HECM Assignments HUD Advances Information Collection Requirements Questions: Any questions regarding this Mortgagee Letter may be directed to HUD s National Servicing Center at (877) Mortgagee Letter dated January 18,

9 Mortgagee Letter (Excerpt) Subject: Implementation of HUD s January 2017 Home Equity Conversion Mortgage (HECM) Final Rule Purpose: On January 19, 2017, the Federal Housing Administration (FHA) published the Final Rule, Strengthening the Home Equity Conversion Mortgage (HECM) Program. The purpose of this Mortgagee Letter is to highlight requirements specifically related to servicing functions that were published in the Final Rule, and support Mortgagees in successfully implementing the Rule s servicing requirements which take effect for all case numbers assigned on or after September 19, The Final Rule is available online at Sale of Property Securing a Due and Payable HECM: When a HECM is Due and Payable, the Borrower, Eligible Non-Borrowing Spouse, Borrower s estate, or Borrower s heir(s), as applicable, may sell the property for a minimum of 95% of the appraised value. Cash for Keys Incentive and Relocation Incentive: HUD shall reimburse the Mortgagee up to $3,000 for its payment of a Cash for Keys or relocation incentive, where either of the following apply: The Mortgagee paid the incentive to a Borrower or other party with a legal right to dispose of the property The Mortgagee paid a financial incentive to a bona fide tenant who vacated the property prior to an eviction being initiated by the Mortgagee. Mortgagee Letter dated August 24, 2017 Mortgagee Letter (Excerpt) Subject: 2018 Nationwide Home Equity Conversion Mortgage (HECM) Limits Effective Date: The HECM maximum claim amount limits transmitted by this Mortgagee Letter are effective for case numbers assigned on or after January 1, Maximum Claim Amount Limits: For the period January 1, 2018 through December 31, 2018, the maximum claim amount limit for FHA-insured 9

10 HECMs will be $679,650 (150 percent of Federal Home Loan Mortgage Corporation s (Freddie Mac) national conforming limit of $453,100). This maximum claim amount limit of $679,650 is also applicable to Freddie Mac s special exception areas: Alaska, Hawaii, Guam, and the Virgin Islands. Questions: Please address any questions about the topics addressed in this Mortgagee Letter to the FHA Resource Center at (800) Persons with hearing or speech impairments may reach this number via TTY by calling the Federal Relay Service at (800) For additional information on this Mortgagee Letter, please visit Mortgagee Letter dated December 7, 2017 Mortgagee Letters 2017 This list shows the 18 letters written in The range of subjects is large. One interesting situation: Letter lowered the Annual Mortgage Insurance Premium (MIP) Rates on all Forward Loans. Before the effective date of letter it was suspended by letter so the rates remained as in Mortgagee Letters: Document Number Title Property Assessed Clean Energy (PACE) Nationwide Home Equity Conversion Mortgage (HECM) Limits Nationwide Forward Mortgage Limits Extension of Initial Disaster Foreclosure Moratorium for Properties in Specified Areas Impacted by Hurricanes Harvey, Irma, and Maria 10

11 Annual Revisions to Base City High Cost Percentage, High Cost Area and Per Unit Substantial Rehabilitation Threshold for 2017 Extension of Temporary Approval Provisions for the Federal Housing Administration (FHA) Condominium Project Approval Process Home Equity Conversion Mortgage (HECM) Program: Mortgage Insurance Premium Rates and Principal Limit Factors Implementation of HUD s January 2017 Home Equity Conversion Mortgage (HECM) Final Rule Additional Period of Eligibility for 203(h) Mortgage Insurance for Disaster Victims Implementation of the CNA e Tool -- Delayed Implementation Effective Date of Implementation of the Federal Housing Administration s Loan Review System, and Change in Effective Date for Timeframe for Conducting Pre-Endorsement Mortgage Reviews for Unconditional DE Authority Suspension of Mortgagee Letter Reduction of Federal Housing Administration (FHA) Annual Mortgage Insurance Premium (MIP) Rates Servicing of FHA-insured Mortgages on Properties Encumbered with a Property Assessed Clean Energy (PACE) Obligation Home Equity Conversion Mortgage (HECM) Claim Type 22 (CT-22) Assignment Requests 11

12 Section 232 Program Healthcare Portal Federal Housing Administration (FHA) Loan Review System - Implementation and Process Changes Annual Base City High Cost Percentage and High Cost Area Revisions for 2016 Reduction of Federal Housing Administration (FHA) Annual Mortgage Insurance Premium (MIP) Rates Time to Think 1.2 1) A Mortgagee Letter would be sent to. 2) The limit on Cash for Keys for HUD is. 3) FHA is under the control of. 12

13 Section 4 FHA MORTGAGE LIMITS AND UPDATES Introduction The Secure and Fair Enforcement Act of 2008 (Title V, Section ) defined a nontraditional mortgage as any mortgage other than a 30 year fixed, fully amortized. Every year the SAFE Act requires that you study these loans for two hours of the eight hours of Continuing Education required. One topic strongly recommended by the Nationwide Mortgage and Licensing System for this year's course is FHA Mortgage Limits and Updates. There have been changes again for First, Some History of the FHA In 1934 the National Housing Act created the Federal Housing Administration. This was during the early years of Franklin D. Roosevelt's first term of office along with other New Deal Acts. A FHA loan is a federal assistance mortgage loan in the United States that is insured by the Federal Housing Administration. The loan can only be made by Federally-qualified lenders. The loans are insured, they are not guaranteed. When the FHA was created, the housing industry was in the throes of the Great Depression. 1. Two million construction workers had lost their jobs along with workers from every category. 2. The Stock Market had crashed, not a correction, a violent crash. 3. Terms for homebuyers seeking mortgages were horrific. 4. Mortgage loans were made for 50% of value or less, not 95% or 100% of value. 5. Repayment schedules were for three to five years. 6. Most loans had balloon payments. 7. America was a nation of renters; 6 out of

14 The loans were typically made to lower income Americans. There was a large volume of foreclosures so the FHA program was started to allow lenders to consider lending again. The loans must meet certain requirements established by FHA to qualify for insurance. Canada has different requirements. Private Mortgage Insurance (PMI) which is payable to a lender has become popular over time. Without FHA loans there would be no avenue for homeownership for a large percentage of Americans. The FHA has made over 47.5 Million loans since FHA is under the control of the Department of Housing and Urban Development (HUD). HUD is headed by Ben Carson. HUD has some outstanding resources that MLO's should discuss with prospects. History of the Federal Housing Administration (FHA) Homeownership in California 1. Getting Started a) Housing counseling agencies: Free or low-cost counseling services for buying, renting, defaults, foreclosures, credit issues and reverse mortgages b) Predatory lending: Beware if you're buying or refinancing your home; don't become a victim of unfair lending practices c) Education: Learn about buying and maintaining your home 2. Buying a Home a) Assistance programs: Resources and programs to help you buy and maintain your home b) HUD homes for sale c) Homeownership vouchers: Some public housing agencies help you become a homeowner through the Housing Choice Voucher Homeownership Program 3. Owning and Maintaining Your Home a) Home repairs: Money for home improvements and repairs b) Avoid foreclosure: Don't lose your home c) Make your home more energy efficient 4. Other California Resources a) California Bureau of Real Estate: Regulatory agency for real estate brokers and appraisers 14

15 b) CalVet Home Loans c) Disaster relief and emergency assistance d) Health and environmental information: Safeguard your home and family e) Help with your utility bills f) Housing resources for seniors g) Legal assistance h) Rural housing programs i) State consumer protection: Consumer affairs and advisories j) Veterans Affairs (VA) properties for sale k) Downpayment assistance How Is FHA Funded? It operates entirely from self-generated income, the only government agency to do so therefore eliminating any cost to the U. S. of A. taxpayers. The income is derived from the mortgage insurance paid by homeowners. These loans are a great stimulate to the national economy in terms of community development. Money moves down to local areas in the form of jobs, supplies, tax dollars, schools, and many other forms. Where would the U.S. of A. be in times of crisis like the early 2000's without these loans? You may not like the rules and the PMI, but where would many MLO's and Americans be without FHA loans. In the 84 years since FHA was created much has changed. FHA has changed with the times. Americans are arguably the best housed people in the world. Want to Learn More? There is the helpful "Single Family Housing Policy Handbook, # published by the Federal Housing Administration. FHA considers this handbook to be: 1. Consolidated: Hundreds of handbooks, mortgage letters, housing notices and policy documents have been combined into this one source. No need to search through hundreds of stand-alone documents. 2. Consistent: There is a consistent format of Definition, Standards, and Documentation to support better understanding for mortgagees to 15

16 extend the already wide range of FHA products and programs to more and more eligible borrowers. 3. Comprehensive: While not yet complete, it is already a comprehensive source of single family policy. Information on approval, endorsements, quality control and service. There is one interesting segment of the Handbook. It involves an appraisal question. Appraisers and MLO's have disagreed many times on what is an appliance and when do they have to be operational. A Notice published on 9/30/16 answers this question. From reading the notice FHA defines an appliance as refrigerator, range/oven, dishwasher, disposal, microwave, washer and dryer. This leaves out spas, compactors, sound systems, intercoms, security equipment, etc. The appliance must be operational if it is to remain in the property after the sale and there must value attached to it. Not in the sale, does not have to be checked. No value, does not have to be checked. FHA Updates; Mortgagee Letters Mortgage Letters from HUD are extremely informative and valuable for MLO's. This is where many of the updates concerning FHA loans are published, both forward and reverse. There were three published on December 7th, The letters are listed by year and then the releases are listed numerically, such as and in 2017 there were 18. Highlights from Mortgagee Letter dated December Subject: 2018 Nationwide Forward Mortgage Limits and is effective January 1, The limits are based on the median house prices per the National Housing Act. 3. They are set by Metropolitan Statistical Area (MSA) and county and are published each calendar year. 4. Requests for local increases (appeals) can be made in accordance with HUD Handbook Requests must be received no later than 30 days after the published date. Too late for this year. 16

17 5. Limits for individual MSA s and counties are available at 6. Downloadable text files with complete listings of all county loan limits are available at 7. Low Cost Areas: The FHA national low cost area mortgage limits, which are set at 65 percent of the national conforming limit of $453,100 for a one-unit Property, are, by property unit number, as follows: One-unit: $294,515 Two-unit: $377,075 Three-unit: $455,800 Four-unit: $566, High Cost Areas: The FHA national high cost area mortgage limits, which are set at 150 percent of the national conforming limit of $453,100 for a one-unit Property, are, by property unit number, as follows: One-unit: $679,650 Two-unit: $870,225 Three-unit: $1,051,875 Four-unit: $1,307, Special Exceptions for Alaska, Hawaii, Guam, and the Virgin Islands Mortgage limits for the special exception areas of Alaska (AK), Hawaii (HI), Guam (GU) and the Virgin Islands (VI) are adjusted by FHA to account for higher costs of construction. These four special exception areas have a higher ceiling as follows: One-unit: $1,019,475 Two-unit: $1,305,325 Three-unit: $1,577,800 Fourunit: $1,960,750 Highlights from Mortgagee Letter dated December Subject: Property Assessed Clean Energy (PACE) Limits 2. Effective 30 days after the date of the ML or January 6, These policies apply to forward and reverse mortgages. 4. In ML , FHA established requirements regarding the eligibility for FHA-insured mortgages of properties encumbered with PACE obligations that permitted, under some circumstances, a continuing obligation for repayment of the PACE obligation even after foreclosure and acquisition by FHA. 5. FHA is concerned about the potential for increased losses to the Mutual Mortgage Insurance Fund due to the priority lien status given to such assessments in the case of default. 17

18 6. FHA is also concerned with the lack of consumer protections associated with the origination of the PACE assessment, which are far less comprehensive than that of traditional mortgage financing products. 7. Potential borrowers may face risk associated with the potential for property overvaluation due to the unknown or miscalculated effect of the PACE lien on the property value. 8. FHA is also aware of the need to provide guidance regarding the extinguishment of PACE obligations in association with forward mortgage refinances and HECMs. 9. The policies and procedures for the servicing of FHA-insured mortgages on properties encumbered with a PACE obligation as announced in ML are not impacted by this ML and remain in effect. 10. Outstanding PACE Obligations: Properties encumbered with PACE obligations will no longer be eligible for FHA-insured forward mortgages. 11. Refinances: Clarification is provided to identify PACE obligations as existing debt that may be paid off using a Rate and Term Refinance. Current policies allowing the use of a Cash-Out refinance to pay off PACE obligations remain unchanged. 12. HECMs: The existing prohibition of properties encumbered with PACE obligations remains unchanged for HECMs. Clarification is provided to identify PACE obligations as Mandatory Obligations that must be paid off at closing, and may be paid off using HECM proceeds. 13. HECM Program: Properties which will remain encumbered with a PACE obligation are not eligible for an FHA-insured HECM. The payoff of a PACE obligation is a Mandatory Obligation and it must be paid off at closing and may be paid off using HECM proceeds. 18

19 Stay Alert and Informed Anyone who works with FHA products or even gets asked questions about FHA products should stay informed about changes. You can subscribe to Mortgagee Letters, Handbooks, Policy Notices, Federal Register Notices, Training, and other products. It is free. To get started and evaluate what is available go to Some Interesting Phrases On the letters there are some phrases that should be studied. 1. Any request for a change to high-cost-loan limits must comply with the existing guidance in HUD Handbook Any changes in area loan limits because of valid appeals will be in effect retroactively for case numbers assigned on or after January 1, (Sounds like HUD works on New Year's Day). 3. This guidance will affect HUD's Single Family Housing Policy Handbook Access to the limits section gives links for downloadable text files. 5. Information about Paperwork Reduction Act. 6. There is a link to visit: and a phone number or CALLFHA 7. And there is another number for the Federal Relay Service at for hearing impaired 8. Another website mentioned: espanol.hud.gov Federal Housing Administration (FHA) Mortgagee Letters Time to Think 1.3 1) What is the number of the HUD Handbook? 2) What is the National Conforming Limit that was 2000's without these loans used for setting FHA Loan Limits? 3) Who was president when the Federal Housing Act was created? 19

20 Section 5 GUIDANCE ON NONTRADITIONAL MORTGAGE PRODUCT RISKS Introduction The Conference of State Bank Supervisors (CSBS) and the American Association of Residential Mortgage Regulators developed parallel programs to cover state-licensed mortgage entities. These entities were not subject to federal interagency guidance. The guidances were designed as a means of promotion of consistent regulations in the mortgage market. There were several categories which were deserving of increased scrutiny. There could be higher than normal risk for both lenders and borrowers and mortgagors and mortgagees and in California, trustors and beneficiaries. The practices are: 1. Collateral Dependent Loans; Lenders should avoid the use of terms and underwriting practices that may develop a need for the buyer to sell or refinance the property. Terms on these loans can be unfair and abusive. Lenders offering these loans to the unqualified could be subject to criticism, corrective action and lawsuits. 2. Risk Layering; When risky features are layered, risk can increase dramatically. This would be making an interest only loan, with a second, reduced documentation and so forth. If this is done, the provider better have some good mitigation factors. Higher Credit Scores Lower LTV Lower DTI Lots of Liquid Assets Mortgage Insurance Etc, etc, etc. There better be sound and conservative underwriting. Foreclosure risk does not scare all borrowers. 3. Reduced Documentation; Some providers use less verification such as unverified income. No-Docs lending leads to a plethora of No- 20

21 Payment loans. Lenders use assumptions where they should be using caution. Stated income equals lots of mitigating factors. The borrowers should have W-2s, pay stubs, tax returns, 1099 s and other required paperwork. Clear policy should govern these decisions. Yes, even Self-Employed Investors, MLOs and Real Estate Agents are subject to these factors. 4. Simultaneous Second-Lien Loans; These postings decrease equity and increase risk for both the lender and the borrower. If someone has no skin in the game, they can walk away. In California, so many loans are Non-Recourse that walking away may be a good business decision for a borrower. 5. Introductory Interest Rates; The government agencies should have called this practice what it is. Teaser Rates. Teaser rates lead to Payment Shock. Early recasting leads to delinquencies. These rates should be explained and then explained again and then for a third time have applicants explain them to you. 6. Lending to Subprime Borrowers; If lenders want to target subprime borrowers, it can lead to more defaulted loans. These risk-layered loans can become predatory or abusive. 7. Non-Owner Occupied Loans; These borrowers should qualify based on their ability to service the debt. Borrowers should have sufficient reserves and be able to sustain periods of rental vacancy. If a rental house is vacant, that is by definition a 100% vacancy rate. Have a rental house become vacant the first of November, and many times it takes lots of time to refill. Some Other Factors 1. Providers should develop solid written policies, performance measures and management reporting to increase early warnings. 2. Policies should address levels of acceptable risk tools for risk mitigation, and set growth and volume limits by loan type. 3. Providers of non-traditional loans should have monitoring systems and risk management practices. Third party and employee incentive programs to make more risk-laden loans should be evaluated. 4. Quality control, compliance, and audit procedures should focus on high risk loans. 5. Third-Party Originators; Providers need to have strong systems and controls and due diligence is a key word. Remedial action must be used when problems arise. 21

22 6. Secondary Market; This can be a real problem and a volume problem. Contingency Planning; Formal Strategies; Credit Losses; Reputation Risk. All concerns. Sometimes it might even be necessary to repurchase defaulted mortgages to maintain access to the market. Proposed Regulatory Prudential Standards for Non-Bank Mortgage Servicers Time to Think 1.4 1) List some Mitigating Factors. 2) Which would be considered a less risky loan, Collateral Dependent or Qualified Mortgage?. 3) Which two agencies developed the Guidance on Mortgage Risk? 22

23 Chapter 1 CASE STUDY ENFORCEMENT CASE BY CONSUMER FINANCIAL PROTECTION BUREAU Topic: Reverse Mortgage Advertising Date: December 7, 2016 Parties: American Advisors Group, Reverse Mortgage Solutions, and Aegean Financial Charges: Deceptive Advertising The three companies were cited for falsely claiming consumers could not lose their homes when obtaining a Reverse Mortgage. CFPB Director Richard Cordray said, "The companies tricked consumers into believing that they could not lose their homes. All mortgage brokers and lenders need to abide by federal advertising disclosure requirements in promoting their products." Other deceptive advertising included: Borrowers were told that they would not have to make any payments, and they had to maintain and pay property insurance, property taxes, association fees, and keep the home in good condition. The loan would eliminate all debt They must call by a certain deadline as the product would no longer be available Can't be forced to move The loan was from a government agency No charges for any refinances in the future And many other creative phrases. American Advisors Group from Orange, CA was fined $400,000.00, Reverse Mortgage Solutions from Houston was fined $325, and Aegean Financial was fined $65, All of the companies were told to cease deceptive advertising, implement systems to ensure this would be done, and pay the penalties. Three Companies Cited For False Claims 23

24 Chapter 1 CASE STUDY REVIEW Do you believe that the fines are adequate? Should there be an agency that evaluates advertising by loan originators? If you were the owner of any of these three companies, how would you react to this decision? What resources would you use to correct the problems in the companies? Have you seen other deceptive advertising by other loan originators and describe? 24

25 Chapter 1 REVIEW QUIZ 1. Name types of borrowers that might want a Neg Am loan. 2. The Dodd Frank Act said that Neg Am loans are 3. What does Fin-Cen stand for. 4. Which departments were merged to form the Department of Business Oversight?. 5. What is the booklet called that is given to applicants for a QM?. 6. What is the limit for higher cost loans in 2018? 7. In California Trust Deed Loans, the borrower is called the. 8. Who is the person considered the "founder" of the CFPB?. 9. Is a 40-year fixed rate loan considered a Traditional Loan? 10. Who is the head of HUD? 11. How many counties in CA? 12. What is a GPM and is it legal in CA? 25

26 Chapter 2 ETHICS Section 1 ANTI-MONEY LAUNDERING Introduction The need to convert "dirty" cash into clean money is the major factor in the success or failure of a criminal enterprise. In testimony on November 28, 2017 before a Senate Committee on the Judiciary, Ron Pol, a respected anti-money laundering researcher was quoted. "Anti-money laundering legislation is the least effective of any anti-crime measure, anywhere." It is estimated that money-laundering enforcement fails 99.9 percent of the time. Total failure is just a decimal point away. This is particularly true in the tax evasion area, so says Raymond Baker, financial crime expert. Foundation for Defense of Democracies Some Fines JP Morgan Chase a few years ago was fined $2 Billion, yes Billion. They allowed money laundering and alleged transactions. Many of the transactions were for Bernie Madoff. One of the statements at the trial was there should have been many Suspicious Activity Reports submitted to the proper authorities. Even the mighty fall. Also, HSBC violated the Bank Secrecy Act (BSA). They must have done it a few times because their fine was $1.92 Billion. 26

27 History of Anti-Money Laundering Laws Making dirty money clean. This process involves three steps: Placement, Layering and Integration. The money is introduced into the system, moved around through many schemes and many times through many countries. The money sponsors drug trade, terrorism, politics and business fraud. Recent TV shows and movies illustrate this laundering, think "Breaking Bad" and "Made in America" with Thomas Cruise. To combat these staggering conditions the US of A passed several laws starting in That is close to fifty years ago. The Laws that are enforced by the Financial Crimes Enforcement Network are: 1. Bank Secrecy Act Money Laundering Contro Act Anti-Drug Abuse Act Annunzio-Wylie Anti-Money Laundering Act Money Laundering Suppression Act Money Laundering and Financial Crimes Strategy Act Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (U.S. of A. PATRIOT ACT) Bank Secrecy Act This was the first and most important tool in the fight against ML. The requirements and goals of the Act as listed on the FIN-CEN Website. 1. Established requirements for recordkeeping and reporting by private individuals, banks and other financial institutions 2. Designed to help identify the source, volume, and movement of currency and other monetary instruments transported or transmitted into or out of the United States or deposited in financial institutions 3. Required banks to (1) report cash transactions over $10,000 using the Currency Transaction Report; (2) properly identify persons conducting transactions; and (3) maintain a paper trail by keeping appropriate records of financial transactions Financial Crimes Enforcement Network Bank Secrecy Act (BSA), 31 USC

28 USA Patriot Act Passage of this act came immediately after the 9-11 attacks. This has one of the longest titles of any law passed by Congress, but the key word is terrorism. It involves much more than just money laundering and has been controversial in many aspects. In debate about the bill it was stated that the FBI could get wiretaps to fight organized crime and drug dealers, but not to investigate terrorists. This bill allows law enforcement to use surveillance and roving wire taps against terror crimes. Delayed notification of search warrants can be used. Allows federal agents to get orders to obtain business records in national security cases. Other sections: Facilitated information sharing and cooperation among government agencies. Updated the law to reflect new technologies and new threats. Increased the penalties for terrorist crimes. The USA PATRIOT Act: Preserving Life and Liberty IRS Form 8300 Generally, any person in a trade or business who receives more than $10,000 in cash in a single transaction or in related transactions must file a Form Persons includes an individual, a company, a corporation, a partnership, an association, a trust, or an estate. If you are required to file Form 8300, you must do so by mail or electronically the 15th day after the date the cash transaction occurred. Companies need to furnish a written statement to each person whose name is required to be included in the Form 8300 by January 31 of the year following the transaction. This statement must include the name, address, contact person, and telephone number of the business filing Form 8300, the aggregate amount of reportable cash the business was required to report to the IRS from the person receiving the statement, and that the business provided this information to the IRS. 28

29 There are potential civil and criminal penalties for failure to file Form Form 8300 and Reporting Suspicious Activity Report Following is the report you must file when you notice anything suspicious in business transactions. The best method to learn the regulations is to study the form. Part V is the most critical. You are advised to write carefully and be complete. If you need more space, use a duplicate copy. Other information in the Instructions: Safe Harbor you are protected against Civil Liability Notification Prohibited Ongoing Violations: Immediate attention to be given, notify law enforcement, and file a timely report Insider abuse: Any amount Suspect identified: $5,000 Potential Suspect: $25,000 Violations of Bank Secrecy Act: $5,000 29

30 INSERT SUSPICIOUS ACTIVITY REPORT PDF HERE (2PGS ) 30

31 Suspicious Activity Report 12 CFR Suspicious Activity Report. 31

32 Time to Think 2.1 1) What does the abbreviation JOBS Act stand for?. 2) What is the full title of the Patriot Act?. 3) When was the BSA passed? 4) The Form 8300 is from which Agency?. 5) What is the amount required to file an insider abuse report? 32

33 Section 2 IDENTITY THEFT RULES Introduction Under the Fair and Accurate Credit Transactions Act ( FACTA ), Congress directed the Federal Trade Commission ( FTC ) and other financial agencies to develop regulations requiring creditors and financial institutions to address the risk of identity theft The result became the Red Flags Rules which requires all such entities that have covered accounts to develop and implement written identify theft prevention programs to help identify, detect, and respond to patterns, practices, or specific activities (known as red flags ) that could indicate identify theft. Who is Covered by the Rules? FACTA s definition of creditor includes any entity that regularly extends or renews credit (or arranges for others to do so) and includes all entities that regularly permit deferred payments for goods or services. The Rule also defines creditor as one who regularly grants loans, arranges for loans or extensions of credit or makes credit decisions. Red Flag Rules Examples include finance companies, mortgage brokers, and real estate agents who offer financing or help consumers get financing from others. Financial institutions are defined as a state or national bank, a state or federal savings and loan association, a mutual savings bank, a state or federal credit union, or any other person that, directly or indirectly, holds a transaction account belonging to a consumer. Here is a test to determine if your company must comply with the Red Flag Rules: The first question. Does your company or organization regularly: Defer payment for goods or services or bill customers? Grant or arrange credit? 33

34 Participate in the decision to extend, renew, or set the terms of credit? If you answer yes to any of those, move to: The second question. Does your company or organization regularly and in the ordinary course of business: Get or use consumer reports in connection with a credit transaction? Give information to credit reporting companies in connection with credit transaction? Advance funds to (or for) someone who must repay them, either with funds or pledged property (excluding incidental expenses in connection with the services you provide to them). If you answer yes to any of those, you re a creditor under the amended Rule. Depending on the size of your company and the level or possible rsik of identity theft, you may have a very simple program or a more comprehensive one. Identify Theft Prevention Programs are to be customized according to your company and the way you operate. 17 CFR Duties regarding the detection, prevention, and mitigation of identity theft. The Importance of Having Written Programs and Policies The importance of having your policies and procedures in writing cannot be stressed enough. Regardless of the size of your company, having clear and consistent policies and procedures is protection for your clients, you, and your employees and in some cases may be required by law. You may want to have separate manuals for company policy and various procedures depending on how your company is configured. Policies are usually the company rules for personnel and operations. Procedures manuals are usually a step-by-step instruction of operations. 34

35 Suggested Topics to be Included in Policy Manuals Personnel Policies Identify Theft Prevention Program Fraud Prevention Program Individual Procedure Manuals This course will be limited to Identify Theft and Fraud Prevention policies. However, you should consider putting all of your policies and programs into written form and periodically reviewing them for accuracy and timeliness. Time to Think 2.2 1) What is the correct name of the Act that requires Education for MLO's? 2) What is step one in your Identity Theft Protection Program?. 3) Suspicious patterns or practices are called? Elements of a Program to Detect and Prevent Identify Theft Four basic elements must be included in your Identify Theft Protection Program. First: Identify relevant red flags. Red flags are suspicious patterns or practices, or specific activities, which indicate the possibility of identity theft. Second: Detect the red flags. Third: Prevent and mitigate identify theft. Fourth: Update your program. 35

36 Step 1 Identifying Red Flags Identifying potential Red Flags is specific to each business type and further specific to your company. Potential Red Flags are different in the mortgage business than in the tax software business. Potential Red Flags differ between mortgage companies. Red Flags for a mortgage broker are different from those for a bank offering mortgages or a loan processor or an underwriter. Let s look at some areas where there is potential for fraud depending on how your company operates. Does your company: Accept referrals from mortgage brokers? Buy leads? Have an in-house escrow or outside escrow company? Use a document signing notary service? Allow the borrower to select vendors for appraisal, escrow, title, etc? Service the loan after closing? Share space with a Real Estate Brokerage company? Step 2 Detecting Red Flags Red Flags come in all sorts of ways, shapes and sizes. Some may seem minor, but further investigation could turn up serious fraud. Others might seem like big, neon, bright, flashing Red Flags and then turn out to have a perfectly reasonable explanation. Red Flags can be in written form, oral statements, or body language that seems to be suspicious. Trust your gut. If something doesn t feel right, doesn t pass the smell test, investigate. Things to look for include: 1. A fraud or active duty alert is included with a consumer report. 2. A consumer reporting agency provides a notice of credit freeze in response to a request for a consumer report. 3. A consumer reporting agency provides a notice of address discrepancy, as defined in 681.1(b) of this part. 4. A consumer report indicates a pattern of activity that is inconsistent with the history and usual pattern of activity of an applicant or customer. 36

37 Suspicious Documents 1. Documents provided for identification appear to have been altered or forged. 2. The photograph or physical description on the identification is not consistent with the appearance of the applicant or customer presenting the identification. 3. Other information on the identification is not consistent with information provided by the person opening a new covered account or customer presenting the identification. 4. Other information on the identification is not consistent with readily accessible information that is on file with the financial institution or creditor. 5. An application appears to have been altered or forged or gives the appearance of having been destroyed and reassembled. Suspicious Personal Identifying Information 1. Personal identifying information provided is inconsistent when compared against external information sources used by the financial institution or creditor. 2. Personal identifying information provided by the customer is not consistent with other personal identifying information provided by the customer. 3. Personal identifying information provided is of a type commonly associated with fraudulent activity as indicated by internal or thirdparty sources used by the financial institution or creditor. Step 3 - Prevent and Mitigate Identity Theft The old saying An ounce of prevention is worth a pound of cure is true when it comes to identity theft and the damage it can cause. While preventing identity theft altogether is the best plan, when that fails, your next option is to mitigate the damages to you, your company, and your client. 1. Have a system a. Checklists b. Verification: Verify everything upon which you rely to make the loan i. Appraisal review ii. Title issues 37

38 iii. That the person in front of you is actually the person on title c. Investigation i. Identify all red flags ii. Get to the bottom of all red flags (a) Does the borrower have two SS# s on their credit report? (b) Do you have a 500 FICO borrower that is on social security and owns a house free and clear? Or any borrower that owns a house free and clear? How did they get the cash to buy the house? (c) Does the broker tell you not to contact the borrower? (d) Does the broker tell you that you have to use his preferred title, escrow, or notary? Don t do it. d. Staff Training i. Don t open s that you weren t expecting e. Internal control processes i. Two people to sign checks & wires (a) Wire confirmation by limited persons (b) The person who cuts the checks for the bills should be different from the person opening the bills & requesting the funds. (c) Limit # of persons to authorize new vendor & investor accounts (d) Limit salesperson access to loan files (e) Protect customer lists (f) FBI suggests having a stand-alone computer (g) Periodic review & updating: There are people out there with nothing better to do than to think up new ways to defraud people (h) Do not let any employee who writes checks and makes deposits do the bank reconciliations. The facts of a particular case may warrant using one of these options, several of them, or another response altogether. Consider whether any aggravating factors raise the risk of identity theft. For example, a recent breach that resulted in unauthorized access to a customer s account records would call for a stepped-up response because the risk of identity theft rises, too. 38

39 The Guidelines in the Red Flags Rule Offers examples of some appropriate responses, including: Monitoring a covered account for evidence of identity theft Contacting the customer Changing passwords, security codes, or other ways to access a covered account Closing an existing account Reopening an account with a new account number Not opening a new account Not trying to collect on an account or not selling an account to a debt collector Notifying law enforcement Determining that no response is warranted under the particular circumstances Actions Taken When Identity Theft is Detected The Program s policies and procedures should provide for appropriate responses to the Red Flags the financial institution or creditor has detected that are commensurate with the degree of risk posed. Federal Trade Commission CFR Identity Theft Red Flags and Address Discrepancies Under the Fair and Accurate Credit Transactions Act of 2003; Final Rule Step 4 - Updating the Program Financial institutions and creditors should update the Program (including the Red Flags determined to be relevant) periodically, to reflect changes in risks to customers or to the safety and soundness of the financial institution or creditor from identity theft, based on factors such as: a) The experiences of the financial institution or creditor with identity theft; b) Changes in methods of identity theft; c) Changes in methods to detect, prevent, and mitigate identity theft; d) Changes in the types of accounts that the financial institution or creditor offers or maintains; and 39

40 e) Changes in the business arrangements of the financial institution or creditor, including mergers, acquisitions, alliances, joint ventures, and service provider arrangements. Oversight of the Program Oversight is of paramount importance. This oversight by the Board of Directors, a committee of the Board or a senior management employer should include: Assigning responsibility for implementation. Reviewing reports by staff regarding compliance with CFR Approving material changes. Administration In administering your program, monitor the activities of your service providers. If they re conducting activities covered by the Rule for example, opening or managing accounts, billing customers, providing customer service, or collecting debts they must apply the same standards you would if you were performing the tasks yourself. One way to make sure your service providers are taking reasonable steps is to add a provision to your contracts that they have procedures in place to detect red flags and either report them to you or respond appropriately to prevent or mitigate the crime. Other ways to monitor your service providers include giving them a copy of your program, reviewing the red flag policies, or requiring periodic reports about red flags they have detected and their response. Fighting Identity Theft with the Red Flags Rule: A How-To Guide for Business 40

41 Time to Think 2.3 1) What is the final step in the Red Flag's Program? 2) In Identifying Theft Protection, what does "An ounce of prevention is worth a pound of cure" mean?. 3) FACTA stands for. 41

42 Section 3 REGULATION N: MORTGAGE ACTS AND PRACTICES Introduction Deceptive advertising was and is a major problem in the lending industry. After the passage of the Dodd-Frank Act, the Consumer Financial Protection Bureau passed Regulation N to enforce the 2009 Omnibus Appropriation Act. For more information you can read the entire act at 12 Code of Federal Regulations There are seven parts to the Act Scope of the Regulations: The Act applies to anyone over whom the Federal Trade Commission has jurisdiction Definitions Prohibited Representations Waiver Not Permitted Recording Requirements Action by States Severability 12 CFR Part MORTGAGE ACTS AND PRACTICES - ADVERTISING (REGULATION N) The regulation is under the control of the Consumer Financial Protection Two of the most important sections for understanding this Code are the Definitions and the Prohibited Representations Definitions. For the purposes of this part: Commercial communication means any written or oral statement, illustration, or depiction, whether in English or any other language, that is designed to effect a sale or create interest in purchasing goods or services, whether it appears on or in a label, package, package insert, radio, 42

43 television, cable television, brochure, newspaper, magazine, pamphlet, leaflet, circular, mailer, book insert, free standing insert, letter, catalogue, poster, chart, billboard, public transit card, point of purchase display, film, slide, audio program transmitted over a telephone system, telemarketing script, on-hold script, upsell script, training materials provided to telemarketing firms, program-length commercial ( infomercial ), the internet, cellular network, or any other medium. Promotional materials and items and Web pages are included in the term commercial communication. Consumer means a natural person to whom a mortgage credit product is offered or extended. Credit means the right to defer payment of debt or to incur debt and defer its payment. Dwelling means a residential structure that contains one to four units, whether or not that structure is attached to real property. The term includes any of the following if used as a residence: an individual condominium unit, cooperative unit, mobile home, manufactured home, or trailer. Mortgage credit product means any form of credit that is secured by real property or a dwelling and that is offered or extended to a consumer primarily for personal, family, or household purposes. Person means any individual, group, unincorporated association, limited or general partnership, corporation, or other business entity. Term means any of the fees, costs, obligations, or characteristics of or associated with the product. It also includes any of the conditions on or related to the availability of the product Prohibited representations. It is a violation of this part for any person to make any material misrepresentation, expressly or by implication, in any commercial communication, regarding any term of any mortgage credit product, including but not limited to misrepresentations about: (a) The interest charged for the mortgage credit product. (b) The annual percentage rate, simple annual rate, periodic rate, or any other rate. 43

44 (c) The existence, nature, or amount of fees or costs to the consumer associated with the mortgage credit product. (d) The existence, cost, payment terms, or other terms associated with any additional product or feature that is or may be sold in conjunction with the mortgage credit product. (e) The terms, amounts, payments, or other requirements relating to taxes or insurance associated with the mortgage credit product. (f) Any prepayment penalty associated with the mortgage credit product. (g) The variability of interest, payments, or other terms of the mortgage credit product. (h) Any comparison between: (1) Any rate or payment that will be available for a period less than the full length of the mortgage credit product; and (2) Any actual or hypothetical rate or payment (i) The type of mortgage credit product. (j) The amount of the obligation, or the existence, nature, or amount of cash or credit available to the consumer in connection with the mortgage credit product. (k) The existence, number, amount, or timing of any minimum or required payments. (l) The potential for default under the mortgage credit product. (m) The effectiveness of the mortgage credit product in helping the consumer resolve difficulties in paying debts. (n) The association of the mortgage credit product or any provider of such product with any other person or program. (o) The source of any commercial communication. (p) The right of the consumer to reside in the dwelling that is the subject of the mortgage credit product, or the duration of such right. (q) The consumer's ability or likelihood to obtain any mortgage credit product or term. (r) The consumer's ability or likelihood to obtain a refinancing or modification of any mortgage credit product or term. (s) The availability, nature, or substance of counseling services or any other expert advice offered to the consumer regarding any mortgage credit product or term Waivers Consumer waivers of these rights are a violation. It is a violation of this part for any person to obtain, or attempt to obtain, a waiver from any 44

45 consumer of any protection provided by or any right of the consumer under this part Recordkeeping requirements. (a) Any person subject to this part shall keep, for a period of twenty-four months from the last date the person made or disseminated the applicable commercial communication regarding any term of any mortgage credit product, the following evidence of compliance with this part: (1) Copies of all materially different commercial communications as well as sales scripts, training materials, and marketing materials, regarding any term of any mortgage credit product, that the person made or disseminated during the relevant time period; (2) Documents describing or evidencing all mortgage credit products available to consumers during the time period in which the person made or disseminated each commercial communication regarding any term of any mortgage credit product; (3) Documents describing or evidencing all additional products or services (such as credit insurance or credit disability insurance) that are or may be offered or provided with the mortgage credit products available to consumers during the time period in which the person made or disseminated each commercial communication regarding any term of any mortgage credit product. (b) Any person subject to this part may keep the records required by paragraph (a) of this section in any legible form, and in the same manner, format, or place as they keep such records in the ordinary course of business. Failure to keep all records required under paragraph (a) of this section shall be a violation of this part. 45

46 Time to Think 2.4 1) What are dwellings according to Regulation N? 2) Regulation N is under the control of. 3) Copies of documents for commercial communications should be kept for. 46

47 Section 4 PRIVACY & PROTECTION National Do Not Call Registry History In 1991 Congress passed, and President George H. W. Bush #41 signed into law, the Telephone Consumer Protection Act ( TCPA ). It amended the Communications Act of The TCPA restricts telephone solicitations and the use of automated phone equipment such as auto dialers, prerecorded voice messages, text messages, and fax machines. When the TCPA was passed, Congress delegated the enforcement of the do not call rules to the Federal Communications Commission ( FCC ) and suggested that the FCC develop a single national database. Instead, the FCC required that each company maintain its own do not call database. Communications Act of U.S.C. 227(c)(3) Do Not Call Registry In 2003 the U.S. Federal Trade Commission ("FTC") opened the National Do Not Call Registry. Currently, as of 2017, the Registry has more than 221 million telephone numbers on it. The valuable web site of the Registry is with a Spanish version also available. Registration for the Do Not Call list began on June 27, 2003 and enforcement started on October 1, Beginning January 1, 2005 telemarketers covered by the registry have up to 31 days from the date a number is registered to cease calling that number. The Do Not Call Improvement Act of 2007, effective February 2008, changed the time that a number remained on the registry from five years to being on the registry permanently. 47

48 Also, included in the Do Not Call Improvement Act of 2007 is an increase to the frequency with which the FTC must purge numbers to several times a month. Rules Unless the recipient has given express prior consent the following rules must be complied with: Solicitors may not call residences before 8 am or after 9 pm (local time). Solicitors must maintain a company specific do not call list. Solicitors must honor the National Do Not Call Registry. Solicitors must give their name, the name of their company and a phone number and address where they may be contacted. Solicitors may not use an artificial voice or recording. Solicitors may not use automated telephone equipment to an emergency line, a cell phone or a service where the recipient is charged for the call. Solicitors may not make autodialed calls that engage two or more lines of a multi-line business. Solicitors may not send unsolicited advertising faxes. Willful violators may be sued for up to three times the damages, for example $40,654 per violation. Who is Covered? The Do Not Call Registry applies to any plan, program, or campaign to sell goods or services through interstate phone calls. This includes telemarketers who solicit consumers and sellers who provide or offer to provide goods or services to consumers in exchange for payment. Calls by political organizations, charities or telephone surveyors are not covered. The area codes in all 50 states are covered along with the District of Columbia, Puerto Rico, U.S. Virgin Islands, Guam, North Mariana Islands, American Samoa and toll free numbers. Not covered is a consumer with whom the telemarketer or seller has an established business relationship if there has been a purchase, delivery or 48

49 payment within the previous 18 months. Also, not covered is a consumer who has made an inquiry or submitted an application within the previous 3 months. The exception to these rules is if the consumer has asked the company not to call, regardless of the established business relationship. If a consumer has given a company written permission they may call, even if the consumer s number is on the registry. How Does the Registry Work? Beginning January 1, 2005 telemarketers have been required to search the registry at least once every 31 days and to purge the numbers of consumers who have registered. You may access the registry at In order to access the information your company will be required to register and may be required to pay a fee depending on the number of area codes requested. Fees are based on the number of area codes requested. Do Not Call Registry You can reduce the number of unwanted sales calls you get by signing up for the National Do Not Call Registry. It s free. Visit to register your number. Most legitimate companies don't call if your number is on the Registry. If a company is ignoring the Registry, there s a good chance that it s a scam. If you get these calls after 31 days or registration, hang up and file a complaint with the FTC. How do You Register? Add your phone number for free by visiting donotcall.gov, or calling from the phone you want to register (TTY: ). If you register online, you will receive a confirmation from donotcall.gov. You must click on the link in the within 72 hours to complete your registration. The Registry is a dual effort by the Federal Trade Commission and the California State Attorney General. 49

50 How long does it take? Your phone number should show up on the Registry the next day. Most sales calls will stop once your number has been on the Registry for 31 days. You can verify that your number is on the Registry by visiting donotcall.gov or calling If I register my number, will ALL unwanted calls stop? No. Cell Phones and the Do Not Call Registry Consumers may place their cell phone number on the National Do Not Call Registry to notify marketers that they don't want to get unsolicited telemarketing calls. The truth about cell phones and the Do Not Call Registry is: The government is not releasing cell phone numbers to telemarketers. There is no deadline for registering a cell phone number on the Do Not Call Registry. Federal Communications Commission (FCC) regulations prohibit telemarketers from using automated dialers to call cell phone numbers without prior consent. There is only one Do Not Call Registry, operated by the Federal Trade Commission (FTC), with information available at donotcall.gov. The Do Not Call Registry accepts registrations from both cell phones and land lines. If you have registered a mobile or other telephone number already, you don't need to re-register. Once registered, a telephone number stays on the Do Not Call Registry until the registration is canceled or service for the number is discontinued. 50

51 What can I do to stop unwanted calls? Make sure your number is on the Do Not Call Registry. Hang up on illegal sales calls. Investigate whether call blocking can help. 1. If you get repeated illegal calls from one particular number, contact your phone company. Ask to block that number, but first ask whether there s a fee for this service. 2. If you get unwanted calls from many different numbers, look into a call blocking solution. My number is on the Registry, so why am I still getting illegal calls? The reason is technology. What is the FTC doing to stop these calls? The FTC has sued hundreds of companies and individuals who were responsible for placing unwanted calls, and has obtained over a billion dollars in judgments against violators. The FTC is leading several initiatives to develop a technologybased solution. What are the penalties for breaking the law? Those who violate the National Do Not Call Registry or place an illegal robocall can be fined up to $40,654 per call. This is a change to reflect inflation-adjusted Civil Penalty maximums. Where can I file a complaint about an illegal sales call or a robocall? To repeat, visit donotcall.gov or call (TTY: ). Will I hear back from the FTC regarding my complaint? No. I gave you the phone number that called me illegally. Why isn t the FTC doing something? Current technology makes it easy for scammers to fake or spoof caller ID information, so the number you reported in your complaint probably isn t real Someone called and offered to put my name on the Registry. Should I let them? No. 51

52 Can I register all my family and friends? You should register only your own numbers. What happens if I register more than one number at a time online? You will get an for each number you register online. You must open each and click on the link within 72 hours to register those numbers. How can I register more than three phone numbers? Just do it again. Can I register my business phone number or a fax number? The National Do Not Call Registry is only for personal phone numbers. Business-to-business calls and faxes are not covered. Can I take my number off the Registry? Yes. You can delete your number by calling from the telephone number you want to delete. If I choose to register, how will the FTC use my information? They collect and store your phone number so telemarketers can remove your number from their call lists. If you contact us via the internet, we also collect your address to confirm your registration. We store your address in a secure manner, separate from your phone number, and do not share it with telemarketers. For more information about the privacy of your information, please see the FTC privacy policy. How long does my phone number stay registered? Telephone numbers on the Registry don t expire. I moved and got a new phone number. Do I need to register the new number? Yes. Do I need to take my old phone number off the list when I get a new number? No. What happens if my phone number is disconnected and then reconnected? If your number is disconnected and then reconnected, you 52

53 might need to re-register. You also might need to re-register if you change calling plans or change the billing name on your account. If my area code changes or splits, do I need to re-register? If the phone companies change your three-digit area code, you don t have to reregister. What s a Robocall? It is a recording. These calls for political candidates and charities are allowed. No for sales messages unless with written permission. Why so many? Again, technology. And they can fake Caller IDs. What should you do? Hang up. Consider blocking the number, but they change often. Call FTC. Which are allowed? Purely informational (ex., flight cancellations) But no promotions. Debt collection is okay. Banks, and charities are exempt if they make the calls themselves. Robokiller won the FTC contest on how to stop robocalls. Check it out at Consumer Information Do Not Call Registry IRS and Scam Phone Calls The IRS issues Tax Tips regularly and one area stressed is consumer warnings. Criminals want to steal your money and/or your identity. They use robocalls, phishing mail, callbacks, spoofing, etc. Tips Here are some of the scams and tips from the IRS 1. Scammers make unsolicited calls 2. Callers try to scare their victims. 3. Scams use caller ID spoofing. 4. Cons try new tricks all the time. 5. Scams cost victims over $23 million a year. 53

54 You and your clients should know what the IRS will not do: 1. Call you to demand immediate payment. 2. Demand that you pay taxes and not allow you to question or appeal the amount you owe. 3. Require that you pay your taxes a certain way. 4. Ask for your credit or debit card numbers. 5. Threaten to bring in the police. What you should do now: 1. Do not give out any information. Hang up immediately. 2. Contact Treasury Inspector General for Tax Administration (TIGTA) to report the call. Use their IRS Impersonation Scam Reporting webpage. You can also call This website has many valuable resources stressing elder justice. The mission is to combat elder abuse and financial exploitation, encourage reporting abuse and educate the public to make America safer for all. 3. Report it to the Federal Trade Commission. Use the FTC Complaint Assistant on FTC.gov. Please add "IRS Telephone Scam" in the notes. 4. Call the IRS at IRS workers can help you. IRS Special Edition Tax Tip , October 21, 2015 AARP Another phone scam is touching senior citizens as relayed by AARP. Someone will call an elder person and actually say, Hello Grandpa, this is Tommy, and I am so sorry but I need your help. The reason can be a drug arrest, money stolen on a trip, car accident, or others. An article How to Beat the Grandparent Scam (AARP Bulletin January/February 2017) discusses one case where the astute grandparent got a call from Kenny who was in Chicago. The grandparent asked why his voice was strange, and Kenny quickly noted that his nose had just been broken. The caller knew his grandparents phone number, his grandson s name, that his sister was in Chicago working. The caller was in a cab that was allegedly pulled over. Drugs were found in the trunk. Everyone was arrested, and the case was being sorted out. 54

55 $2000 was needed at once so they could be released. His lawyer was right there and could explain more. The callee became suspicious and asked What was your last address in LA? CLICK This can happen. It just happened to me. The call was from my grandson Grant. Of course, it did not sound like Grant. I said Great to talk to you, Grant. By the way, which college did you go to as a Freshman? CLICK Some Other Thoughts about Fraud 1. When talking to spammers, slow down. Take time to think. 2. Ask questions and more questions. 3. Don t be intimidated. These people can get rough and crude. 4. Register on the Do Not Call list. It is like a flu vaccine. Not perfect but can help in some cases. 5. Let calls go to message, 6. Get caller ID s and forward to the proper agency. 7. IRS states that you can block numbers, but they change so fast. 8. Set your phone so you do not leave caller ID s. 9. Consider putting a block on your credit with all three credit agencies so no one including you can put a lien on a property. 10. Read & stay alert and help any elders you know to be alert. 55

56 Time to Think 2.5 1) The first Telephone Consumer Protection Act was passed in. 2) What is the evening deadline for making telephone marketing calls? 3) What would the financial penalty for three violations of Do Not Call Regs? 4) A completed business transaction allows you to call for. 5) How long does a phone number stay registered? 6) Does registering with Do Not Call registry eliminate all phone calls? 56

57 Chapter 2 CASE STUDY ENFORCEMENT CASE BY THE FEDERAL TRADE COMMISSION Topic: Telemarketing Date: December 19, 2016 Party: Inbound Call Experts, Inc. Charges: Violations by the Company's Lead Generators The Defendant was accused of many violations: Misrepresenting material facts that they have identified problems on the consumer's computers Using false or misleading statements to induce persons to pay for goods or services Not disclosing truthfully, promptly and in a clear and conspicuous manner their identity, purpose of call is to sell services, and the nature of the services Violating the Telemarketing Sales Rule: 16 CFR Part 310 The court order stated that within 120 days the defendants must review what their lead generators are doing and if they do not become legal, they must be terminated immediately. They should review thoroughly any new lead generators. Also, records of these reviews must be maintained properly and for the correct time period. There were several money judgments to pay totaling around $17,900, The company at the time of the court decision was under the control of a Receiver and any money held by the receiver was to be used to help pay this amount. Charged by FTC in Tech Support Scheme 57

58 Chapter 2 CASE STUDY REVIEW Does your company monitor the operations of any affiliates or partnership? Do you observe any loan originators violating Do Not Call Rules? What can be done to eliminate some of the telemarketing regulations? What do you personally do when you get illegal calls? Should the Do Not Call regulations be extended to business phones? 58

59 Chapter 2 REVIEW QUIZ 1. When was the Dodd-Frank Act passed? 2. A Currency Transaction Form must be completed when a suspicious activity is observed involving how much money? 3. Copies of commercial communications must be kept months. 4. Your Identity Theft Protection plan should be in, 5. Telemarketers can start calling at which hours? 6. What is the official name of the Patriot Act? 7. When was the Patriot Act passed? 8. What was the first act passed considering AML? 59

60 9. What does OCC stand for? 10. Under HUD what is the dollar limits on Cash for Keys? 11. What is the name of the form to be used when you notice something suspicious? (Suspicious Activity Report) 12. What would be the total fine be for four violations of DNC? 60

61 Section 1 Chapter 3 FEDERAL LAW REAL ESTATE SETTLEMENT PROCEDURES ACT (RESPA) REGULATION X Introduction If there is one section that loan originators should study is Regulation X, the very important part of RESPA. A large majority of the sanctions for people in the industry involve this Regulation. It involves Kickbacks, Unearned Fees, Delivery of Disclosures, Good Faith Estimate, Exemptions, Foreclosure, Discount Points and so many other factors. A company should establish a good strong compliance program and educate their people. Then, steps should be taken to update the program and monitor the work of their staff. This regulation was passed by Congress in 1994 and was effective in 1995 (getting near 23 years of age). Lots of court cases and other actions to give even more guidance. Become an expert and perhaps save yourself and your staff money and your licenses. A Section 8 in the military is not good. That is a discharge for being mentally unfit to serve. A violation of Section 8 of RESPA is also not good. You do not want to be discharged from your loan origination career. RESPA - 12 U.S.C et seq. 61

62 Loans Covered By RESPA All federally related mortgage loans are covered by RESPA. Loans, including refinances that satisfy the following two criteria First, the loan is secured by a first or subordinate lien on residential real property, including those to be constructed. o A one-to-four family structure is located or a manufactured home loan using proceeds of the loan. Second: o Loans made by a lender, creditor, dealer o Loans made or insured by government agency o Loans made in connection with a housing or urban development program o Loans made and intended to be sold by the originating lender or creditor to FNMA, GNMA, etc. o Loans that are the subject of a home equity conversion mortgage or reverse mortgage FDIC Compliance Examination Manual Loans NOT Covered By RESPA Some of the exemptions are: 1) An extension of credit primarily for business, commercial or agricultural purposes. 2) Temporary financing, such as a construction loan. 3) Vacant land, with no plans to build within 2 years 4) An assumption where the lender does not have the right to approve a subsequent borrower on an existing federally related loan. 5) The conversion of a federally related mortgage loan to different terms that are consistent with provisions of the original mortgage as long as a new note is not required 6) A bona fide transfer of a loan obligation in the secondary market. 62

63 Time to Think 3.1 1) Loans on properties consisting of acres or more are exempt from RESPA. 2) Loans on vacant land with no plans to build for years or more are exempt from RESPA. 3) Name another loan not covered by RESPA: Prohibitions Against Kickbacks and Unearned Fees One of the first phrases that comes out of this Section is the phrase "thing of value". MLO's and staff must be aware that HUD interprets this phrase broadly. It does not have to be money, property or baseball tickets to you. In one case the originator received a donation to her favorite charity, nothing to her and any relative. But that is considered definitely a "thing of value". No person shall give, and no person shall accept any fee, kickback or thing of value pursuant to any agreement or understanding, oral or otherwise that business incident to or part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person. Section 8 of RESPA, 12 U.S.C. Section 2607(a) Any referral of a settlement service is not a compensable service, unless specifically set forth below. A company may not pay any other company or the employees of any other company for the referral of settlement services. No person shall give and no person shall accept any portion, split or percentage of any charge made or received for the rendering of a settlement service in connection with a transaction involving a 63

64 federally related mortgage loan other than for services actually performed. An agreement or understanding for the referral of business need not be written or verbalized if a pattern or practice of receiving a thing of value (includes money, gifts, etc.) exists, the receipt of the thing of value is considered to be evidence of an agreement for referral of business. 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 thereto. A referral also exists 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. Section 8 of RESPA permits: 1) A payment to an attorney for services actually rendered 2) A payment by a title company to its duly appointed agent for services actually performed in the issuance of a title policy 3) A payment by a lender to its duly appointed agent or contractor for services actually performed in the origination, processing or funding of a loan 4) A payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed 5) A payment pursuant to cooperative brokerage and referral arrangements or agreements between real estate agents and real estate brokers (This exemption only refers to real estate brokerage arrangements when all parties are acting in a real estate brokerage capacity, and has no applicability to any fee arrangements between real estate brokers and mortgage brokers or between mortgage brokers) 6) Normal promotional and educational activities that are not conditioned on the referral of business and that do not involve the defraying of expenses that otherwise would be incurred by 64

65 persons in a position to refer settlement services or business incident thereto 7) An employer s payment to its own employees for any referral activities If the Bureau investigates and finds that the payment of a thing of value bears no reasonable relationship to the market value of the thing of value, then the excess is not for services or goods actually performed or provided, and these facts may lead to an investigation. The fact that the transfer of the thing of value does not result in an increase in any charge made by the person giving the thing of value is irrelevant in determining whether the act is prohibited. When a person in a position to refer settlement service business receives a payment for providing additional settlement services as part of the transaction, such payment must be for services that are actual, necessary and distinct from the primary services provided by such person. Any documents provided pursuant to this section shall be retained for five years from the date of execution. 12 CFR (a) through (h) Other Prohibitions Section 6 Provides borrowers with consumer protections relating to the servicing of their loans. If a borrower sends a qualified written request to his loan servicer concerning the servicing of the loan, the servicer must provide a written acknowledgment within 20 business days of receipt of the request. Not later than 60 business days after receiving the request, the servicer must make any appropriate corrections to the borrower s account, and must provide a written clarification regarding any dispute. During this 60-day period, the servicer may not provide information to a 65

66 consumer reporting agency concerning any overdue payment related to such period or qualified written request. Section 8 RESPA prohibits a person from giving or accepting anything of value for referrals of settlement service business related to a federally related mortgage loan. It also prohibits a person from giving or accepting any part of a charge for services that are not performed. These are also known as kickbacks, fee-splitting and unearned fees. Section 8 Violations are subject to criminal and civil penalties. According to HUD, a person who violates Section 8 may be fined up to $10,000 and imprisoned up to one year. In a private law suit a person who violates Section 8 may be liable to the person charged for the settlement service an amount equal to three times the amount of the charge paid for the service. Section 9 RESPA prohibits home sellers from requiring home buyers to purchase their settlement services from a particular company either directly or indirectly, as a condition of sale. Buyers may sue a seller who violates this provision for an amount equal to three times all charges made for the title insurance. Section 10 RESPA limits the amount of money a lender may require the borrower to hold in an escrow account for payment of taxes, hazard insurance and other charges related to the property. RESPA does not require lenders to impose an escrow account on borrowers; however, certain government loan programs or lenders may require escrow accounts as a condition of the loan. RESPAnews.com Prohibited Practices 66

67 Some Limitations on RESPA REO s There are many, many limits on different actions by loan originators, staff, servicers, lenders, and others. For example, there are limits on members of the public purchasing HUD REO properties. There is no limit on the number an investor can buy, however, investors can only bid on properties during the Extended Listing Period. Also, there are many people who are not allowed to buy any REO's. HUD employees and family members. HUD REO Marketing and Management Contractors, and Listing Brokers and their agents/employees. Appraisers of HUD REO's Members of Congress or Delegates. Former Non-Occupant Borrowers of FHA Insured Programs where there was a default RESPA Limits on Escrow (Impound) Accounts The public is protected from gouging by lenders not following the RESPA rules on these accounts. And there have been many problems including servicing companies. Each of us could probably name some violators. Some of the rules: Cushion Limit: It is limited to one-sixth of the total of all escrow items, which would be two months of payments. Total Limit: Only require one-twelfth of amount necessary to pay all fees. Review Each Year: If overage more than $50.00, must be returned within thirty days. Lenders: May make an agreement to this account part of loan approval Problems: Make a written request with your questions. Lender must respond within 20 days and resolve within 60 days, or you can go to HUD RESPA Limits on Escrow Accounts 67

68 Other Limits On Fee Increases at Closing Incorrect Increases from Loan Estimate Balloon Payments Pre-payment Penalties Proper Rate Lock charges and Limits Incomplete Disclosures Predatory Lending Force-placed Insurance Appraisal Delivery And many, many more Settlement Services This term means, "any service provided in connection with a prospective or actual settlement, including, but not limited to, any one of more of the following: Origination of a federally related mortgage loan (taking of applications, processing, underwriting, and funding) Rending of a services by a mortgage broker (all of the above plus communicating with the parties of the loan) Provision of title services and other title work (even includes abstract preparation) Rendering of service by an attorney Preparation of documents, notary, delivery and recordation Rendering of credit reports and appraisals Inspections Settlement, Mortgage Insurance, Other Insurance, Homeowner's Warranties Services involving real property taxes and others Real broker and agent services and any other services. Settlement Services Law and Legal Definition 68

69 Time to Think 3.2 1) No person shall or a thing of value for referral of settlement services. 2) An agreement or understanding for the referral of business need not be or to be a violation. 3) The fact that the transfer of the thing of value does not result in an increase in any charge made by the person giving the thing of value is in determining whether the act is. Foreclosure Process Foreclosure procedures are different in every state. To advise clients learn the processes in every state you service. Foreclosure can be Judicial, Non-Judicial (Power of Sale/ Trustee Sale), and Strict Foreclosure. Strict Foreclosures are used on an extremely limited basis in the States where they are allowed. Simply, the lender files a lawsuit to get the property back. So, no need to elaborate on them. It is possible to use a Judicial Foreclosure in California. There are several reasons why it is hardly ever used on California properties, especially Residential Loans. A majority of California loans are Non-Recourse so there can be no judgment deficiency. A Judicial foreclosure takes many, many months to get to court and this means attorney fees and such. After the judgment, the homeowner has a one year right of redemption. On a Trustee Sale there is no court involved. The appointed Trustee files the proper documents within the proper time frames. Then an Auction is held. If there are bids over the announced Sale 69

70 Price, the homeowner or junior liens will get the extra money. In most cases during the chaos no bidders appeared and the property became Real Estate Owned by the lender. If the lender suffers a loss, they will go to HUD to get some money. hud.gov - Foreclosure Process Bona Fide Discount Points Discount points are finance charges, and are therefore included in the QM points and fees. However, the QM Rule does allow the following exclusions: Up to two bona discount points paid by the consumer in connection with the loan if the loan's interest rate, without any discount, does not exceed the APOR by more than 1% Upon to one bona fide discount if the loan's interest, without any discount, does not exceed the APOR by more than 2% Bona fide discount point means: An amount equal to 1 percent of the loan amount paid by the consumer that reduces the interest rate or time-price differential applicable to the transaction based on a calculation that is consistent with established industry practices for determining the amount of reduction in the interest rate. In simpler terms, a discount is considered "bona fide" if the discount fee paid by the borrower corresponds to a reduction in interest rate, but the ratio must conform to "well-established industry practices". What is "well established industry practices"? CFPB explains as follows: To satisfy this standard, a creditor may show that the reduction is reasonably consistent with established industry norms and practices for secondary mortgage market transactions. QM Points and Fees 70

71 Changes That Can Be Made To the Loan Estimate and Closing Disclosure The law sets out six events that justify a revised Loan Estimate for purposes of re-setting fees and performing one's good-faith analysis. Those six events include: 1. Changed circumstances that cause an increase to settlement charges 2. Changed circumstances that affect the consumer s eligibility for the loan or affect the value of the property securing the loan 3. Consumer-requested changes 4. Interest rate locks 5. Expiration of the original Loan Estimate 6. Construction loan settlement delays Changed Circumstances Affecting Settlement Charges Affecting Eligibility or the Value of Loan Security Consumer Requested Revisions Interest Rate Locks Loan Estimate Expiration Construction Loan Settlement Delay Loan Estimate Revision Timing The TRID rule requires that the revised Loan Estimate be provided within three business days of receiving information supporting the need to revise. Good Faith Estimate- Delivery Except as otherwise stated below the lender must provide the applicant with a Good Faith Estimate (GFE), not later than 3 business days after a lender receives an application or information sufficient to complete an application. In the case of dealer loans, the lender must either provide the GFE or ensure that the dealer does. The lender and mortgage broker must provide the GFE to the loan applicant by hand delivery, by placing it in the mail or if the applicant agrees, by fax, or other electronic means. 71

72 The lender and mortgage broker are not required to provide the GFE, within the 3 business day period, under the following circumstances: 1) The lender denies the application 2) The applicant withdraws the application 3) 12 CFR Section (a)(3) The lender and mortgage broker are not permitted to charge, as a condition for providing the GFE any fee for: 1) An appraisal 2) An inspection 3) Other similar settlement fee The lender and mortgage broker may charge a fee limited to the cost of a credit report. The lender and mortgage broker may not charge additional fees until after the applicant has received the GFE and indicated an intention to proceed with loan covered by that GFE. If the GFE is mailed to the applicant, the applicant is considered to have received it 3 calendar days after it is mailed, not including Sundays and legal holidays. The lender and mortgage broker may, at any time, collect from the loan applicant any information that it requires in addition to the required application information. However, the lender may not require, as a condition of providing the GFE, that the applicant supply documentation to verify the information on the application. Except as otherwise stated in this section, either the mortgage broker or the lender may provide the GFE. However, the lender is responsible for verifying that the GFE has been properly provided. If the lender determines that the GFE has been provided, then the lender is not required to provide an additional GFE. The estimate of charges on the GFE must be available for at least 10 business days from when the GFE is provided. 72

73 Exempted from this requirement is the interest rate, charges and terms dependent on the interest rate, which includes the charge or credit for the interest rate chosen, the adjusted origination charges, and the per diem interest. 12 CFR (a) through (c) Good Faith Estimate The Form The loan originator must prepare the GFE in accordance with the requirements using the instructions in Appendix C. The instructions allow for flexibility in the preparation and delivery in hard copy and electronic format. The actual charges at settlement may not exceed the amounts included in the GFE for: 1) The origination charges 2) While the borrower s interest rate is locked, the credit or charge for the interest rate chosen 3) While the borrower s interest rate is locked, the adjusted origination charge 4) Transfer taxes The sum of the charges at settlement for the following services may not be greater than 10 percent above the sum of the amounts included on the GFE: 1) Lender required settlement services, where the lender selects the third party settlement service provider 2) Lender required settlement services, title services and required title insurance, and owner s title insurance, when the borrower uses a settlement service provider identified by the loan originator 3) Government recording charges The amounts charged for all other settlement services included on the GFE may change at settlement. The loan originator is bound within the tolerances provided above to the settlement charges and terms listed on the GFE, unless a 73

74 revised GFE is provided prior to settlement consistent with this paragraph or unless the GFE expires. If a loan originator provides a revised GFE, the loan originator must document the reason that a revised GFE was provided. What could be a reason? Loan originators must retain documentation of any reason for providing a revised GFE for no less than 3 years after settlement. When a revised GFE may be provided: 1) If changed circumstances result in increased costs for any settlement services such that the charges at settlement would exceed the tolerances for those charges: The loan originator must provide the revised GFE within 3 business days of receiving information sufficient to establish changed circumstances. The revised GFE may increase charges for services listed on the GFE only to the extent that the changed circumstances actually resulted in higher charges. 2) If changed circumstances result in a change in the borrower s eligibility for the specific loan terms identified in the GFE: The loan originator must provide the revised GFE within 3 business days of receiving information sufficient to establish changed circumstances. The revised GFE may increase charges for services listed on the GFE only to the extent that the changed circumstances actually resulted in higher charges. 3) If a borrower requests changes to the loan identified in the GFE that change the settlement charges or terms of the loan: The loan originator must provide the revised GFE within 3 business days of the borrower s request. The revised GFE may increase charges for services listed on the GFE only to the extent that the borrower requested changes to the loan actually resulted in higher charges. 4) If a borrower does not express an intent to continue with an application within 10 days after the GFE is provided (unless that time is extended by the loan originator) the loan originator is no longer bound by the GFE 5) If the interest has not been locked, or a locked interest rate has expired, then the charge or credit for the interest rate chosen, 74

75 the adjusted origination charges, per diem interest, and the loan terms related to the interest rate may change. The loan originator must provide the revised GFE within 3 business days of the interest rate being locked (or in the case of an expired interest rate lock) relocked. All other charges and terms must remain the same. 6) In transactions involving new construction home purchases, where settlement is anticipated to occur more than 60 calendar days from the time a GFE is provided, the loan originator may provide the GFE to the borrower with a clear and conspicuous disclosure stating that at any time up until 60 calendar days prior to closing, the loan originator may issue a revised GFE. If no such separate disclosure is provided, the loan originator cannot issue a revised GFE. Nothing in this section shall be interpreted to require a loan originator to make a loan to a particular borrower. A loan originator is not required to provide a GFE if the loan originator does not have a loan for which the borrower is eligible. In the case of a federally related mortgage loan involving an open end line of credit covered under TILA, a lender or mortgage broker that provides the borrower with the disclosures required by TILA (Section ) at the time the borrower applies for such loan shall be deemed. A loan originator that violates the requirements of this section shall be deemed to have violated section 5 of RESPA. If any charges at settlement exceed the charges listed on the GFE by more than the permitted tolerances, the loan originator may cure the tolerances violation by reimbursing the borrower the amount by which the tolerance was exceeded, at settlement or within 30 calendar days after settlement. A borrower will be deemed to have received timely reimbursement if the loan originator delivers or places payment in the mail within 30 days after settlement. 12 CFR (d) through (i) 75

76 Time to Think 3.3 1) The sum of the charges at settlement may not be greater than above the sum of the amounts included on the GFE for lender required settlement services, where the lender selects the third party settlement service provider. 2) Loan originators must retain documentation of any reason for providing a revised GFE for no less than after settlement. 3) A revised GFE may be provided if the requests changes to the loan which result in changes to the settlement charges or loan terms. Information Booklet The lender shall provide a copy of the special information booklet to a person from whom the lender receives, or from whom the lender prepares, a written application for a federally related mortgage loan. When two or more persons apply together for a loan, the lender is in compliance if the lender provides a copy of the booklet to one of the persons applying. The lender shall place it in the mail no later than 3 business days after the application is received or prepared. The lender or mortgage broker does not have to comply under the following circumstances: 1) Refinancing transactions 76

77 2) Closed end loans when the lender takes a subordinate lien 3) Reverse mortgages 4) Any federally related mortgage loan whose purpose is not to purchase a 1-4 family residential property The booklet may be reproduced in any form provided no change is made except as stated below. Any color, size and quality of paper, type of print, and method of reproduction may be used so long as the booklet is clearly legible. The cover of the booklet may be in any form and may contain drawings, pictures, or artwork, provided that the words settlement costs are used in the title. The name, address, and phone numbers of the lender providing the booklet may appear on the cover. In the case of an open end credit plan providing the booklet When Your Home is On The Line: What You Should Know About Home Equity Lines of Credit is deemed to be in compliance. The booklet may be translated into languages other than English. 12 CFR (a) through (i) Open Ended Line of Credit Booklet Closed End ARM Booklet Settlement Statements HUD -1 or HUD-1A The settlement agent shall use the HUD-1 statement in every settlement involving a federally related mortgage loan in which there is a buyer and a seller. For transactions where there is a borrower and no seller (such as in refinancing), the HUD-1 may be used, using only the borrower s side of the statement or the HUD 1A may be used. The settlement statements must be used for all RESPA transactions unless exempted. Open end credit lines covered by Reg Z are exempted. The settlement statements shall be completed in accordance with the instructions found in Appendix A of section The loan 77

78 originator must transmit to the settlement agent all information necessary to complete the statement. The settlement statements shall state the actual charges paid by the seller and/or the borrower. The settlement agent shall separately itemize each third party charge paid by the borrower and seller. All origination services performed by or on behalf of the loan originator must be included in the loan originator s own charge. Administrative and processing services related to title services must be included in the title underwriter s or title agent s own charge. The amount stated on the statement for any itemized service cannot exceed the amount actually received by the settlement service provider for that itemized service, unless the charge is an average charge in accordance with the paragraph shown below. The average charge for a settlement service shall be no more than the average amount paid for a settlement service by one settlement service provider to another settlement service provider on behalf of borrowers and sellers for a particular class of transactions involving federally related mortgage loans. The total amounts paid by borrowers and sellers for a settlement service based on the use of an average charge may not exceed the total amounts paid to the providers of that service for the particular class of transactions. The settlement service provider shall define the particular class of transactions for purposes of calculating the average charge as all transactions involving federally related mortgage loans for: 78

79 A period of time as determined by the settlement service provider, but not less than 30 calendar days and not more than 6 months and; 1) A geographic area as determined by the settlement service provider 2) A type of loan as determined by the settlement service provider A settlement service provider may use an average charge in the same class of transactions for which the charge was calculated. If so, they must then use the same charge in every transaction within that class for which a GFE was provided. The use of an average charge is not permitted for any settlement service if the charge for the service is based on the loan amount or property value. The settlement service provider must retain all documentation used to calculate the average charge for a particular class of transactions for at least 3 years after in settlement for which that average charge was used. A violation of any of the requirements in this section will be deemed to be a violation of section 4 of RESPA. Any inadvertent or technical error in completing the statements shall not be deemed a violation of section 4 of RESPA if a revised settlement statement is provided in accordance with the requirements of this section within 30 days. 12 CFR (a) through (c) 79

80 Time to Think 3.4 1) The lender shall place a copy of the special information booklet it in the mail no later than days after the application is received or prepared. 2) The special information booklet be translated into other languages. 3) The settlement agent shall use the statement in every settlement involving a federally related mortgage loan in which there is a buyer and a seller. Settlement Statements Delivery, Inspection & Recordkeeping The settlement agent shall permit the borrower to inspect the settlement statement as completed by the agent, with the items known to the agent at the time of inspection, during the business day immediately preceding settlement. Items related only to the seller s transaction may be omitted. The settlement agent shall provide a completed settlement statement to the borrower, the seller, the lender and/or their agent. When the borrower s and seller s copies differ as permitted, both copies shall be provided to the lender. The settlement agent shall provide copies of the statements before settlement. The borrower may waive the right to delivery of the settlement statement no later than at settlement by executing a written waiver at or before settlement. In such cases the settlement shall be mailed as soon as practical after settlement 80

81 When the borrower or the borrower s agent does not attend the settlement or when the settlement agent does not conduct a meeting of the parties for that purpose, the transaction shall be exempt from the delivery and inspection requirements and the statement shall be mailed as soon as practical after settlement. The lender shall retain each completed settlement statement and related documents for five years after settlement unless the lender disposes of its interest in the mortgage and does not service the mortgage. In that case the lender shall provide its copy to the owner or servicer of the mortgage as part of transfer of the loan file. Such owner or servicer shall retain the statement for the remainder of the 5-year period. The Bureau shall have the right to inspect or require copies of records covered by this paragraph. The requirements for mailing documents required by this section are deemed satisfied by placing the document in the mail addressed to the addresses stated in the loan application or in other information submitted or obtained by the lender and/or settlement agent, unless they are expressly informed in writing of a change of address. The requirement is deemed satisfied whether or not the documents are received by the addressee. No fee may be charged for the preparation or delivery of the settlement statement, escrow account statements or statements required by TILA. 12 CFR (a) through

82 Section 2 TRUTH IN LENDING ACT (TILA) REGULATION Z Introduction The purpose of this regulation ( Reg Z ) is to promote the informed use of consumer credit by requiring disclosures about its terms and cost. The regulation also includes substantive protections. It gives consumers the right to cancel certain credit transactions that involve a lien on a consumer's principal dwelling, regulates certain credit card practices, and provides a means for fair and timely resolution of credit billing disputes. The regulation requires a maximum interest rate to be stated in variablerate contracts secured by the consumer's dwelling. It also imposes limitations on open end home-equity plans that are the consumer s principal dwelling and mortgages secured by the consumer s principal dwelling and where the costs and fees exceed a certain threshold. The regulation prohibits certain acts or practices in connection with credit secured by a dwelling, and credit secured by a consumer's principal dwelling. There are 7 Subparts to Reg Z, one subpart covers only Private Education Loans and another deals primarily with credit card and education loans. This course will cover only those subparts applicable to mortgage loans. Loans Covered by the Truth in Lending Act Regulation Z is likely the regulation with which you are most familiar and the one that most affects the way you do business. It is extensive and covers many aspects of both origination and servicing. While you may do strictly origination, it is important to know the regulations for servicing as well to better inform your clients of what is to come after the loan closes. 82

83 This regulation applies to each individual or business that offers or extends credit, (other than persons excluded from coverage of this part by other acts or public law) when four conditions are met: 1) The credit is offered or extended to consumers 2) The offering or extension of credit is done regularly 3) The credit is subject to a finance charge or is payable by a written agreement in more than four installments 4) The credit is primarily for personal, family, or household purposes These are some transactions which are not covered by Regulation Z: An extension of credit primarily for a business, commercial or agricultural purpose. An extension of credit to other than a natural person, including credit to government agencies or instrumentalities. 12 CFR (a) through (a) Permissible Fees and Finance Charges The finance charge is the cost of consumer credit as a dollar amount. It includes any charge payable directly or indirectly by the consumer and imposed directly or indirectly by the creditor as an incident to or a condition of the extension of credit. The finance charge includes fees and amount charged by someone other than the creditor (unless otherwise excluded under this section) if the creditor requires that the consumer use a third party as a condition of the loan, and any portion of a third party fee that is retained by the creditor. Fees charged by a third party that conducts the loan closing are finance charges if the creditor requires the service for which the consumer is charged, requires the imposition of the charge or retains a portion of the charge. Fees charged by a mortgage broker are finance charges even if the creditor does not require the consumer to use a mortgage broker and even if the creditor does not retain any portion of the charge. Some examples of finance charges: 1) Interest 83

84 2) Service fees 3) Points 4) Assumption fees 5) Finder s fees 6) Appraisal fees 7) Credit report fees 8) Insurance premiums protecting the lender against default 9) Charges to the creditor by another person for purchasing the loan 10) Life, accident, health or loss of income insurance premiums if tied to the loan 11) Insurance premiums for loss or damage to the property if tied to the loan Some examples of fees that are not considered finance charges: 1) Application fees 2) Unanticipated late payment fees 3) Seller s points Some examples of fees that are not considered finance charges if the loan is secured by real property and are bona fide and reasonable: 1) Title report and title insurance premiums 2) Document preparation 3) Notary fees 4) Credit report fees 5) Appraisal fees 6) Pest inspections 7) Flood-hazard determinations The following are some insurance products that are excluded from finance charges: 1) Premiums for credit life, accident, health or loss of income if the insurance is not required by the lender and this fact is disclosed in writing, if the premium for the initial term of insurance coverage is disclosed in writing, if the term of the insurance is less than the term of the loan, the term of the insurance shall be disclosed, and if the consumer signs or initials an affirmative written request for the insurance after receiving the disclosures. 2) Property insurance premiums against loss or damage to the property or against liability arising out of the ownership or use of the property, if 84

85 the insurer waives all right of subrogation against the consumer if the consumer has the right to choose the insurer and that fact is disclosed. Other items excluded from finance charges if they are itemized and disclosed: 1) Taxes and fees prescribed by law to public officials for determining the existence of or perfecting, releasing, or satisfying a security interest. 2) The premium for insurance in lieu of perfecting a security interest to the extent that the premium does not exceed the fees in the previous paragraph that otherwise would be payable. 3) Taxes levied on security instruments or on documents evidencing indebtedness if the payment of such taxes is a requirement for recording the instrument securing the evidence of indebtedness (recording fees). Tolerances for Finance Charges on Initial Disclosures In a transaction secured by real property or a dwelling, the disclosed finance charge and other disclosures affected by the disclosed finance charge, including the amount financed and the annual percentage rate shall be treated as accurate if the amount disclosed as the finance charge is understated by no more than $100 or is greater than the amount required to be disclosed. 12 CFR (a) through (f) 85

86 Time to Think 3.5 1) Regulation Z covers loans to for purposes. 2) Fees charged by a third party which are required by the creditor considered finance charges. 3) How many subparts to Reg Z? Right of Rescission Closed-End Credit In a credit transaction in which a security interest is or will be retained or acquired in a consumer s principal dwelling, each consumer whose ownership interest is or will be subject to the security interest shall have the right to rescind the transaction. For the purposes of this section, the addition to an existing obligation is a separate transaction, however the right to rescind only applies to the new transaction, not the existing obligation. The creditor is required to deliver the notice of right to rescind but need not deliver new material disclosures. Delivery of the notice shall begin the rescission period. To exercise the right to rescind, the consumer shall notify the creditor of the rescission by mail, telegram, or other means of written communication. Notice is considered given when mailed, or when filed for telegraphic transmission, or, if sent by other means, when delivered to the creditor's designated place of business. The consumer may exercise the right to rescind until midnight of the third business day following consummation, delivery of the notice required 86

87 under this section, or delivery of all material disclosures, whichever occurs last. If the required disclosures or notice are not delivered, the right to rescind expires 3 years after consummation, upon transfer of all of the consumer s interest in the property or upon sale of the property, whichever occurs first. In the case of certain administrative proceedings, the rescission period shall be extended. For purposes of the above paragraph, the term material disclosures means the required disclosures of the annual percentage rate, the finance charge, the amount financed, the total of payments, the payment schedule, and the disclosures and limitations referred to 12 CFR Sections (c) and (d) and (b)2. When more than one consumer in a transaction has the right to rescind, the exercise of the right by one consumer shall be effective as to all consumers. In any transaction or occurrence subject to rescission, a creditor shall deliver two copies of the notice of the right to rescind to each consumer entitled to rescind (one copy to each if the notice is delivered in electronic form in accordance with the consumer consent and other applicable provisions of the E-Sign Act). The notice shall identify the transaction or occurrence and clearly and conspicuously disclose the following: The retention or acquisition of a security interest in the consumer's principal dwelling. The consumer's right to rescind, as described above. How to exercise the right to rescind, with a form for that purpose, designating the address of the creditor's place of business. The effects of rescission, as described in paragraph (d) of this section. The date the rescission period expires. 87

88 To satisfy the disclosure requirements of the previous paragraph, the creditor shall provide the appropriate model form in as shown in Appendix H of Section 1026 or a substantially similar notice. Unless a consumer waives the right to rescind, no money shall be disbursed other than in escrow, no services shall be performed, and no materials delivered until after the rescission period has expired and the creditor is reasonably satisfied that the consumer has not rescinded. When a consumer rescinds a transaction, the security interest giving rise to the right of rescission becomes void, and the consumer shall not be liable for any amount, including any finance charge. Within 20 calendar days after receipt of a notice of rescission, the creditor shall return any money or property that has been given to anyone in connection with the transaction and shall take any action necessary to reflect the termination of the security interest. If the creditor has given the consumer any money or property, the consumer may retain possession until the creditor has complied with the requirements shown in the previous paragraph. At that time the consumer must return any property to the creditor at the consumer s residence or at the property. If it is money to be returned, the consumer must be at the creditor s place of business. If the creditor does not take possession of the money or property within 20 days, the consumer may keep it with no further obligation to the creditor. The consumer may modify or waive the right to rescind if the consumer determines that the extension of credit is needed to meet a bona fide personal financial emergency. To do so the consumer shall give the creditor a dated written statement that describes the emergency, specifically modifies or waives the right to rescind, and bears the signature of all of the consumers entitled to rescind. Printed forms for this purpose are prohibited. 88

89 The right to rescind does not apply to the following: 1) A residential mortgage transaction 2) A refinance by the same creditor of a loan secured by the consumer s principal dwelling, unless additional funds are loaned and in that case the right to rescind applies only to the additional amount loaned in excess of the principal balance. 3) A transaction where a State Agency is the creditor 4) A future advance or series of advances if the notice and required disclosures were given when the loan was originated. 5) Renewal of optional insurance that is not considered a refinance The finance charge and other disclosures affected by the finance charge, such as the amount financed and annual percentage rate, shall be considered accurate for the purposes of rescission if: 1) It is understated by no more than ½ of 1 percent of the face amount of the note or $100 whichever is greater; or 2) It is greater than the amount required to be disclosed In a refinancing of a residential mortgage transaction with a new creditor (other than a transaction covered by section ), if there is no new advance and no consolidation of existing loans, the finance charge and other disclosures affected by the finance charge, such as the amount financed and the annual percentage rate, shall be considered accurate for the purposes of rescission if: 1) It is understated by no more than 1 percent of the face amount of the note or $100, whichever is greater; or 2) It is greater than the amount required to be disclosed After the initiation of foreclosure on the consumer s principal dwelling that secures the credit obligation, the consumer shall have the right to rescind the transaction if a mortgage broker fee that should have been included in the finance charge was not included or if the creditor did not provide the properly completed appropriate model form in Appendix H of this section or a similar notice of rescission. After the initiation of foreclosure on the consumer s principal dwelling that secures the credit obligation, the finance charge and other disclosures affected by the finance charges, such as the amount financed and the annual percentage rate shall be considered accurate if the disclosed finance 89

90 charge is understated by no more than $35 or is greater than the amount required to be disclosed. 12 CFR (a) through (h) Advertisement Requirements If an advertisement for credit states specific credit terms, it shall state only those terms that actually are or will be arranged or offered by the creditor. Disclosures required under this section shall be made clearly and conspicuously. If an advertisement states a rate of finance charge, it shall state the rate as an annual percentage rate, using that term. If the annual percentage rate may be increased after consummation, the advertisement shall state that fact. If an advertisement is for credit secured by a dwelling, the advertisement shall not state any other rate, except that a simple annual rate or periodic rate that is applied to an unpaid balance may be stated in conjunction with, but not more conspicuously than the annual percentage rate. If an advertisement is for credit not secured by a dwelling, the advertisement shall not state any other rate, except that a simple annual rate that is applied to an unpaid balance may be stated in conjunction with, but not more conspicuously than, the annual percentage rate. If an advertisement contains the following terms: 1) Amount of percentage of any down payment 2) The number of payments or period of repayment 3) The amount of any payment 4) The amount of any finance charge Then the following terms must be stated 1) The amount or percentage of the down payment 2) The terms of repayment which reflect the prepayment obligations over the full term of the loan including any balloon payment 90

91 3) The annual percentage rate using that term and if the rate may be increased after consummation, that fact The requirements for all of this section ( (f)) apply to any advertisement for credit secured by a dwelling, other than television and radio advertisements, including promotional materials accompanying applications. If an advertisement for credit secured by a dwelling states a simple annual rate of interest and more than one simple annual rate of interest will apply over the term of the loan, the advertisement shall disclose in a clear and conspicuous manner: 1. Each simple annual rate of interest that will apply. In variable rate transactions, a rate determined by adding an index and margin shall be disclosed based on a reasonably current index and margin 2. The period of time during which each simple annual rate of interest will apply 3. The annual percentage rate for the loan. If such rate is variable, the annual percentage rate shall comply with the accuracy standards in sections (c) and For the purposes of this section the term clear and conspicuous means that the terms must be disclosed with equal prominence and in close proximity to any advertised rate that triggered the required disclosures. The required information on a variable rate loan may be disclosed with greater prominence than the other information. In addition, the above requirements, if an advertisement for credit secured by a dwelling, states the amount of any payment, the advertisement shall disclose in a clear and conspicuous manner: 1) The amount of each payment that will apply over the term of the loan, including any balloon payment. 2) If it is a variable rate loan, the payments advertised shall be determined by the application of the sum of a reasonably current index and margin 3) The period of time each payment will apply; and 4) In the case of a loan secured by a first lien on a dwelling, the fact that the payments do not include amounts for taxes and insurance, if applicable, and that the actual payment obligation will be greater 91

92 For the purposes of this section the term clear and conspicuous means that the terms listed must be disclosed with equal prominence and in close proximity to any advertised payment that triggered the required disclosures. The required information shall be disclosed with prominence and in close proximity to the advertised payment. The requirements in above two paragraphs do not apply to an envelope in which an application or solicitation is mailed, or to a banner advertisement or pop up advertisement linked to an application or solicitation provided electronically. An advertisement made through television or radio stating any of the terms requiring additional disclosures may comply either by: 1) Stating clearly and conspicuously each of the additional disclosures required; or 2) Stating clearly and conspicuously the information required and listing a toll free telephone number or any telephone number that allows a consumer to reverse the phone charges when calling for information, along with a reference that such number may be used by consumers to obtain additional information If an advertisement, (other than on television or radio), for a loan secured by a consumer s principal dwelling states that the loan may exceed the fair market value of the property securing the loan, then the advertisement must also state: 1) That the interest on the portion of credit that exceeds the fair market value is not tax deductible for Federal income tax purposes. 2) That the consumer should consult a tax adviser. 12 CFR (a) through (i) 92

93 Time to Think 3.6 1) Disclosures required in advertisements shall be made: and. 2) If an advertisement contains the amount of any finance charge then it must also contain:. 3) If an advertisement states that the loan may exceed the value of the dwelling, it must also state that a portion of the interest is not. Prohibited Acts The following acts or practices are prohibited in advertisements for credit secured by a dwelling: 1) Using the word fixed to refer to rates, payments or the loan in an advertisement for variable rate loans, or other loans where the payment will increase unless, (a) In the case of an advertisement that is solely for one or more variable rate loans, the phrase Adjustable Rate Mortgage, Variable Rate Mortgage or ARM appears in the advertisement before the first use of the word fixed and is at least as conspicuous as any use of the word fixed in the advertisement AND each use of the work fixed to refer to a rate or payment is accompanied by an equally prominent and closely proximate statement of the time period for which the rate or payment is fixed and the fact that the rate may vary or the payment may increase after that period. (b) In the case of an advertisement for both variable rate loans and non-variable rate loans, the phrase Adjustable Rate Mortgage, Variable Rate Mortgage or ARM appears with equal prominence as any use of the word fixed, Fixed Rate Mortgage or similar terms AND each use of the work fixed to refer to a rate, payment or loan either refers solely to the loans for 93

94 which rates are fixed and complies with this section, if applicable, or if it refers to a variable rate loan, is accompanied by an equally prominent and closely proximate statement of the time period for which the rate or payment is fixed and the fact that the rate may vary or the payment may increase after that period. 2) Making any comparison in an advertisement between actual or hypothetical credit payments or rates and any payment or simple annual rate that will be available under the advertised product for a period of less than the full term of the loan unless: (a) The advertisement includes a clear and conspicuous comparison to the information required to be disclosed; and (b) If the advertisement is for a variable rate loan and the advertised payment or simple annual rate is based on the index and margin that will be used to make subsequent rate or payment adjustments over the term of the loan, the advertisement includes an equally prominent statement in close proximity to the payment or rate that the payment or rate is subject to adjustment and the time period when the first adjustment will occur. 3) Making any statement in an advertisement that the product offered is a government loan program, government supported loan, or is otherwise endorsed or sponsored by any Federal, state, or local government entity, unless the advertisement is for an FHA loan, VA loan, or other similar loan program that is, in fact, endorsed or sponsored by a Federal, state or local government entity. 4) Using the name of the consumer s current lender in an advertisement that is not sent by or on behalf of the consumer s current lender unless the advertisement: (a) Discloses with equal prominence the name of the person or creditor making the advertisement, and (b) Includes a clear and conspicuous statement that the person making the advertisement is not associated with or acting on behalf of the consumer s current lender. 5) Making any misleading claim in an advertisement that the mortgage product offered will eliminate debt or result in a waiver or forgiveness of a consumer s existing loan terms with, or obligations to, another creditor. 6) Using the term counselor in an advertisement to refer to a for-profit mortgage broker or mortgage creditor, its employees, or persons 94

95 working for the broker or creditor that are involved in offering, originating, or selling mortgages. 7) Providing information about some trigger terms or required disclosures, such as an initial rate or payment, only in a foreign language in an advertisement, but providing information about other trigger terms or required disclosures, such as information about the fully-indexed rate or fully amortizing payment, only in English in the same advertisement. 12 CFR (a) through (i) Time to Think 3.7 1) In the case of an advertisement that is solely for one or more variable loans, the phrase Adjustable Rate Mortgage, Variable Rate Mortgage or ARM must appear in the advertisement before the first use of the word. 2) You may not use the name of the consumer s current lender in an advertisement that is not sent by or on behalf of the consumer s current lender unless the advertisement discloses with equal prominence:. 3) You may not use the term to refer to a for-profit mortgage broker or creditor. 95

96 Section 3 THE EQUAL CREDIT OPPORTUNITY ACT REGULATION B Purpose The purpose of the Equal Credit Opportunity Act (ECOA) is to promote the availability of credit to all creditworthy applicants without regard to race, color, religion, national origin, sex, marital status, or age (provided that the borrower has the legal capacity to contract); to the fact that all or part of the applicant s income derives from a public assistance program; or to the fact that the applicant has in good faith exercised any right under the Consumer Credit Protection Act. ECOA prohibits creditor practices that discriminate on the basis of any of these factors. ECOA also requires creditors to notify applicants of action taken on their applications; to report credit history in the names of both spouses on an account; to retain records of credit applications; to collect information about the applicant s race and other personal characteristics in applications for certain dwelling related loans; and to provide applications with copies of appraisal reports used in connection with credit transactions. 12 CFR (b) Some General Rules A creditor shall not discriminate against an applicant on a prohibited basis regarding any aspect of a credit transaction. A creditor shall not make any oral or written statement, in advertising or otherwise, to applicants or prospective applicants that would discourage on a prohibited basis a reasonable person from making or pursuing an application. A creditor shall take written applications for the dwelling related types of credit covered by section (a). 96

97 A creditor that provides in writing any disclosures or information required by ECOA must provide the disclosures in a clear and conspicuous manner and in a form the applicant may retain. The disclosures required by ECOA that are required to be given in writing may be provided to the applicant in electronic form, subject to the applicable provisions of the E-Sign Act. When the disclosures accompany an application which is accessed electronically, the disclosures may be provided in electronic form. Disclosures may be made in languages other than English, provided they are also available in English upon request. 12 CFR Requests for Information Except as provided in paragraphs (b) through (d) of this section, a creditor may request any information in connection with a credit transaction. This paragraph does not limit or abrogate any Federal or State Law regarding privacy, privileged information, credit reporting limitations, or similar restrictions on obtainable information. Notwithstanding paragraphs (b) through (d) of this section, a creditor shall request information for monitoring purpose as required in section for credit secured by the applicants dwelling. In addition, a creditor may obtain information required by a regulation, order or agreement issued by, or entered into with, a court or an enforcement agency to monitor or enforce compliance with the Act, this part or other Federal or state statutes or regulations. A creditor may obtain information that is otherwise restricted to determine eligibility for a special purpose credit program. 12 CFR

98 Evaluating Applications Except as otherwise provided in the Act and in this part, a creditor may consider any information obtained so long as the information is not used to discriminate against an applicant on a prohibited basis. Except as provided in the Act and in this part a creditor shall not take a prohibited basis into account in any system of evaluating the creditworthiness of applicants. Except as otherwise permitted, a creditor shall not take into account an applicant s age (provided that the applicant has the capacity to enter into a binding contract) or whether an applicant s income derives from any public assistance. Exceptions: 1) In an empirically derived, demonstrably and statistically sound, credit scoring system, creditors may use an applicant s age as a predictive value, provided that the age of an elderly person is not assigned a negative factor 2) In a judgement system of evaluating creditworthiness, a creditor may consider an applicant s age or whether an applicant s income derives from any public assistance program only for the purpose of determining a pertinent element of creditworthiness. 3) In any system of evaluating creditworthiness, a creditor may consider the age of an elderly applicant when such age is used to favor the elderly applicant in extending credit. In evaluating creditworthiness, a creditor shall not make assumptions or use aggregate statistics relating to the likelihood that any category of persons will bear or rear children or will for that reason receive diminished or interrupted income in the future. A creditor shall not take into account whether there is a telephone listing in the name of an applicant by consumer credit but may take into account whether there is a telephone in the applicant s residence. A creditor shall not discount or exclude from consideration the income of an applicant or the spouse of an applicant because of a prohibited basis or 98

99 because their income is derived from part time employment or is an annuity, pension, or other retirement benefit. A creditor may consider the amount and probable continuance of any income in evaluating an applicant s creditworthiness. When an applicant relies on alimony, child support, or separate maintenance payments in applying for credit, the creditor shall consider such payments as income to the extent that they are likely to be consistently made. To the extent that a creditor considers credit history in evaluating the creditworthiness of similarly qualified applicants for a similar type and amount of credit, in evaluating an applicant s creditworthiness a creditor shall consider: 1) The credit history, when available, the accounts designated as accounts that the applicant and the applicant s spouse are permitted to use or for which both are contractually liable 2) On the applicant s request, any information the applicant may present that tends to indicate that the credit history being considered by the creditor does not accurately reflect the applicant s creditworthiness 3) On the applicant s request, the credit history, when available, of any account reported in the name of the applicant s spouse or former spouse that the applicant can demonstrate accurately reflects the applicant s creditworthiness. A creditor may consider the applicant s immigration status or status as a permanent resident of the United States, and any additional information that may be necessary to ascertain the creditor s rights and remedies regarding repayment. Except as otherwise permitted or required by law, a creditor shall evaluate married and unmarried applicants by the same standards. And in evaluating joint applicants, a creditor shall not treat applicants differently based on the existence, absence, or likelihood of a married relationship between the parties. Except as otherwise permitted or required by law, a creditor shall not consider race, color, religion, national origin or sex (or an applicant s or 99

100 other person s decision not to provide the information) in any aspect of a credit transaction. A creditor s consideration or application of state property laws directly or indirectly affecting creditworthiness does not constitute unlawful discrimination for the purpose of the Act or this part. 12 CFR (a) through (c) Time to Think 3.8 1) The purpose of ECOA is to to all creditworthy applicants without regard to race, color, religion, national origin, sex, marital status, or age. 2) Disclosures may be made in languages other than English, provided they are also upon request. 3) A creditor consider the applicant s immigration status or status as a permanent resident of the United States. Extensions of Credit A creditor shall not refuse to grant an individual account to a creditworthy applicant on the basis of sex, marital status, or any other prohibited basis. A creditor shall not refuse to allow an applicant to open or maintain an account in a birth given first name and a surname that is the applicant s birth given surname, the spouse s surname, or a combined surname. In the absence of evidence of the applicant s inability or unwillingness to repay, a creditor shall not take any of the following actions regarding an applicant who is contractually liable on an existing open end account on 100

101 the basis of the applicant s reaching a certain age or retiring or on the basis of a change in the applicant s name or marital status: 1) Require a reapplication (see below for exception) 2) Change the terms of the account 3) Terminate the account A creditor may require a reapplication for an open end account on the basis of a change it the marital status or an applicant who is contractually liable if the credit granted was based in whole or in part on income of the applicant s spouse and if information available to the creditor indicates that the applicant s income may not support the amount of credit currently available. Except as provided in this paragraph, a creditor shall not require the signature of an applicant s spouse or other person, other than a join applicant, on any credit instrument if the applicant qualifies under the creditor s standards of creditworthiness for the amount and terms of the credit requested. A creditor shall not deem the submission of a joint financial statement or other evidence of jointly held assets as an application for joint credit. If an applicant requests secured credit, a creditor may require the signature of the applicant s spouse or other person on any instrument necessary or reasonably believed by the creditor to be necessary, under applicable state law to make the property be offered as security available to satisfy the debt in the event of default. 12 CFR (a) through (d) Notifications When notification is required, a creditor shall notify the applicant of action taken within: 1) 30 days after receiving a completed application concerning the creditor s approval of, counter offer to, or adverse action on the application 2) 30 days after taking adverse action on an incomplete application 3) 30 days after taking adverse action on an existing account 101

102 4) 90 days after notifying the applicant of a counter offer if the applicant does not expressly accept or use the credit offered A notification given to an applicant when adverse action is taken shall be in writing and shall contain a statement of the action taken, the name and address of the creditor, a statement of the provisions of section 701(a) of the Act, the name and address of the Federal agency that administers compliance with respect to the creditor and either: 1) A statement of specific reasons for the action taken; or 2) A disclosure of the applicant s right to a statement of specific reasons within 30 days, if the statement is requested within 60 days of the creditor s notification. The disclosure shall include the name, address, telephone number of the person or office from which the statement of reason can be obtained. If the creditor chooses to provide the reasons orally, the creditor shall also disclose the applicant s right to have them confirmed in writing within 30 days of receiving the applicant s written request for confirmation. To satisfy the disclosure requirements of this section, the creditor shall provide a notice that is substantially similar to the following: The Federal Equal Credit Opportunity Act prohibits creditors from discriminating against credit applicants on basis of race, color, religion, national origin, sex, marital status, age (provided the applicant has the capacity to enter into a binding contract); because all or part of the applicant s income derives from any public assistance program; or because the applicant has in good faith exercised any right under the Consumer Credit Protection Act. The statement of reasons for adverse action required must be specific and indicate the principal reason(s) for the adverse action. Statements that the adverse action was based on the creditor s internal standards or policies or that the applicant, joint applicant or similar party failed to achieve a qualifying score on the creditor s credit scoring system are insufficient. Within 30 days after receiving an application that is incomplete regarding matters that an applicant can complete, the creditor shall notify the applicant either: 1) Of action taken, in accordance with section (a) above 2) Of the incompleteness in accordance with the paragraph below 102

103 If additional information is needed from the applicant, the creditor shall send a written notice to the applicant specifying the information needed, designating a reasonable period of time for the applicant to provide the information and informing the applicant that failure to provide the information requested will result in no further consideration being given to the application. The creditor shall have no further obligation under this section if the applicant fails to respond within the designated time period. If the applicant supplies the requested information within the designated time period, the creditor shall take action on the application and notify the applicant. At its option, a creditor may inform the applicant orally of the need for additional information. If the application remains incomplete the creditor shall send the notice as required in section (c)(1) shown above. In the case of a creditor that did not receive more than 150 applications during the preceding calendar year, the requirements (including statements of specific reasons) are satisfied by oral notifications. When an applicant submits an application and the parties contemplate that the applicant will inquire about its status, if the creditor approves the application and the applicant has not inquired within 30 days after applying, the creditor may treat the application as withdrawn and need not comply with the notices described in this section. When an application involves more than one applicant, notification need only be given to one of them, but must be given to the primary applicant where one is readily apparent. When an application is made on behalf of an applicant to more than one creditor and 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. 103

104 If no credit is offered or if the applicant does not expressly accept or use the credit offered, each creditor taking adverse action must comply with this section, directly or through a third party. A notice given by a third party shall disclose the identity of each creditor on whose behalf the notice is given. 12 CFR (a) through (g) Changes to Closing Disclosure The first rule to remember is the TRID rules do not permit a revised Loan Estimate to be provided after the CD has been issued. Only a revised CD can be given at this time. The reason for the changes should be documented. It could be a changed circumstance, or a borrower requested change. A new 3-day waiting period is required if (l) the APR varies by more than 1/8 of one percentage point or (2) a prepayment is added or (3) the loan product has changed. If none of these conditions exist, the revised CD can be given at or before closing. If there are any changes, document, document, document and make sure the buyer is aware and understands the changes. Also, the regulations permit the borrower to inspect the revised CD, one business day before closing. The 2017 Rule provides that a post-consummation corrected Closing Disclosure is not required if he only changes that would be required to be disclosed are changes to per-diem interest and disclosures affected by perdiem interest. 104

105 Chapter 3 CASE STUDY ENFORCEMENT CASE BY CONSUMER FINANCE BUREAU Topic: Statute of limitations, mortgage insurance kickbacks, and is CFPB constitutional Date: Started January 29, 2014 and Nation's Second-highest Court's Ruling on 1/31/2018 Party: PHH Corporation, et al Charges: That PHH received kickbacks on Mortgage Insurance payments, and Countersuit that CFPB was unconstitutional First, CFPB started an administrative proceeding against PHH seeking a civil fine, a permanent injunction to prevent future violations, and victim restitution. The original fine was $6,000, Later, the fine was increased another $103,000, The charge was that PHH would refer clients to mortgage insurers and in exchange the insurers would purchase reinsurance from PHH's subsidiaries. These fees were considered kickbacks. These kickbacks went back more than 15 years. The result of these "fees" caused their borrowers to pay more money for loans. In October 2016 a panel of judges from the United States Court of Appeals for the District of Columbia Circuit made a ruling. The major part of the ruling was that since the CFPB Director could only be discharged by the President for "inefficiency, neglect of duty or malfeasance in office" the Bureau was unconstitutional since the President should have the right to remove the heads of agency at will. Therefore, the fine was not applicable. The CFPB appealed to the full Court of Appeals. On 1/31/2018 this group said that the Bureau was constitutional by a vote of 7-3. The $109,000, penalty was set aside, and the CFPB should revisit that case considering the recommendations from the Circuit Court. The main charge from PHH is that the Statute of Limitations should have been 105

106 considered for many of the violations were before later RESPA regulation changes. This case therefore has not gone away. The decision was being watched closely by lenders and regulators. The number of amicus briefs was staggering. It will be an interesting decision coming in the future. With the director at the beginning of this journey, Richard Cordray, starting a campaign to become the Governor of Ohio, no one knows what will happen. CFPB Takes Action Against PHH Corporation 106

107 Chapter 3 CASE STUDY REVIEW What is your opinion of the Consumer Finance Bureau operations to this point? Do you think that it will be dissolved in the future? Have you ever filed a Suspicious Activity Report after observing some illegal tactics by other companies? Do you have any "marketing agreements" with Real Estate Brokerages and how do you handle costs? Is the CFPB unconstitutional? 107

108 Chapter 3 REVIEW QUIZ 1. TILA regs are in the CFR Code, what does CFR stand for? 2. What is the meaning of Bona Fide? 3. What is the significance of Trigger Terms in lending? 4. RESPA is also known as Regulation. 5. The most common foreclosure in California is: 6. What is the booklet required on a closed-end ARM? 7. What is table signing? 8. The prohibition against kickbacks is in what section of RESPA? 9. Any documents discussing kickbacks shall be retained for years from date of execution? 10. What is the percentage of direct ownership a party has to have of another company to be considered an affiliate? 11. Regulation B discusses which Act? 108

109 12. Notification of an adverse action must be completed in how many days? 13. How long are documents to be retained for a correspondence related to complaints? 14. Regulation Z covers which Act? 15. Name a definite Finance Charge: 16. Can you accept a donation for your favorite charity for referrals? 17. Disclosures shall be considered accurate if no more than % or $? 18. Terms must be disclosed in and means? 19. Exemptions to RESPA include land that will not be built on for years. 20. NMLS stands for 109

110 Chapter 4 CALIFORNIA DBO AGENCY SPECIFIC EDUCATION Section 1 CALIFORNIA HOMEOWNER BILL OF RIGHTS History There were six bills passed in 2012 which would be effective on January 31, They were summarized as the Homeowner Bill of Rights. They were: AB 1950: Concerns problems on loan modification scams. AB 2314: Notification of lien releases to governmental agency. AB 2610: Involves Tenant notices. SB 1474: Allows the attorney general to convene a State-wide grand jury for cases that occur in more than one county. SB 900/AB 278: Impacted the non-judicial foreclosure process and loss mitigation statutes. Office of the Attorney General, California Homeowner Bill of Rights Effective Dates and Sunset Dates The bills were to be for the most part effective on January 1, The foreclosure crisis in California started long before 2012 so these bills were late to help thousands of homeowners who lost everything. Some of the provisions of the bills were to sunset on January 1, 2018 and others December 31, That means that some of them would only be effective five years unless there were changes. 110

111 If these laws sunset, the Federal Laws concerning foreclosure would be in effect. If a state law is more restrictive, it is meant to be followed in California. If there is no law concerning a case or it is less restrictive, then any Federal Law must be followed. Original Bill of Rights That Was Effective on January 1, 2013 Key provisions include: Restriction on dual track foreclosure: Mortgage servicers are restricted from advancing the foreclosure process if the homeowner is working on securing a loan modification. Guaranteed single point of contact: Homeowners are guaranteed a single point of contact as they navigate the system and try to keep their homes. Verification of documents: Lenders that record and file multiple unverified documents will be subject to a civil penalty of up to $7,500 per loan in an action brought by a civil prosecutor. Enforceability: Borrowers will have authority to seek redress of material violations of the new foreclosure process protections. (AB 278, SB900) Tenant rights: Purchasers of foreclosed homes are required to give tenants at least 90 days notice before starting eviction proceedings. (AB 2610) Tools to prosecute mortgage fraud: The statute of limitations to prosecute mortgage-related crimes is extended from one to three years, allowing the Attorney General s office to investigate and prosecute complex mortgage fraud crimes. In addition, the Attorney General s office can use a statewide grand jury to investigate and indict the perpetrators of financial crimes involving victims in multiple counties. (AB 1950, SB 1474) Tools to curb blight: Local governments and receivers have additional tools to fight blight caused by multiple vacant homes in their neighborhoods. (AB 2314) California Homeowner Bill of Rights 111

112 Section 2 Division 20 California Residential Mortgage Lending Act Financial Code [ ] Introduction This Act is extremely important in California Lending. It was passed in 1994 and was effective January 1, This Act is supervised, altered, and enforced by the Department of Business Oversight. Many times you will see the phrase, Department of Corporations. This was the Department that enforced this Act until July 1, 2013 when the DOC and the Department of Financial Institutions were combined by Governor Jerry Brown into the Department of Business Oversight. This was part of a reorganization plan to cut the costs of state government. The CRMLA is one of the groups that authorizes and regulates lending in California. The others are the California Finance Lenders Law under the DBO, the Bureau/Department of Real Estate, and the Federal Deposit Insurance Corporation. Who Does Not Have to Be State Licensed? Any bank, trust company, insurance company, or industrial loan company doing business under the authority of, or in accordance with, a license, certificate, or charter issued by the United States or any state, district, territory, or commonwealth of the United States that is authorized to transact business in this state. 2. A federally chartered savings and loan association, federal savings bank, or federal credit union that is authorized to transact business in this state. 112

113 3. A savings and loan association, savings bank, or credit union organized under the laws of this or any other state that is authorized to transact business in this state. 4. A person engaged solely in business, commercial, or agricultural mortgage lending. 5. A wholly owned service corporation of a savings and loan association or savings bank organized under the laws of this state or the wholly owned service corporation of a federally chartered savings and loan association or savings bank that is authorized to transact business in this state. 6. An agency or other instrumentality of the federal government, state government or municipal government. 7. An employee or employer pension plan making residential mortgage loans only to its participants, or a person making those loans only to its employees or the employees of a holding company, or an owner who controls that person, affiliate, or subsidiary of that person. 8. A person acting in a fiduciary capacity conferred by the authority of a court. 9. A real estate broker licensed under California law, when making, arranging, selling, or servicing a residential loan. 10. A California finance lender or broker licensed under Division 9 (commencing with Section 22000), when acting under the authority of that license. 11. A trustee under a deed of trust pursuant to the Civil Code, when collecting delinquent loan payments, interest, or other loan amounts, or performing other acts in a judicial or nonjudicial foreclosure proceeding. 12. A mortgage loan originator who has obtained a license under Chapter 3.5 (commencing with Section 50140), provided that the mortgage loan originator is employed by a residential mortgage lender or servicer. Financial Code - FIN Division 20. California Residential Mortgage Lending Act [50002] Civil Code - CIV Division 3. Obligations [ ] 113

114 Processors and Underwriters ) An individual who performs purely administrative or clerical tasks on behalf of a person meeting the definition of a mortgage loan originator, except as provided in subdivision (c) of Section ) An individual who solely renegotiates terms for existing mortgage loans held or serviced by his or her employer and who does not otherwise act as a mortgage loan originator. 3) An individual that is solely involved in extensions of credit relating to timeshare plans. 4) An individual licensed as a mortgage loan originator pursuant to Article 2.1 (commencing with Section ) of Chapter 3 of Part 1 of Division 4 of the Business and Professions Code and the SAFE Act (Real Estate Brokers). 5) An individual who is an employee of a federal, state, or local government agency or housing finance agency and who acts as a loan originator only pursuant to his or her official duties. 6) An employee of a bona fide nonprofit organization who exclusively originates residential mortgage loans for a bona fide nonprofit organization, and who acts as a mortgage loan originator only with respect to residential mortgage loans with terms that are favorable to the borrower. Financial Code - FIN Division 20. California Residential Mortgage Lending ACT General [ ] Loan Process or Servicer 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, rate lists, or other promotional items, that the individual can or will perform any of the activities of a loan originator shall not be required to be licensed as a mortgage loan originator. An independent contractor may not engage in the activities of a loan processor or underwriter for a residential mortgage loan unless the independent contractor loan processor or underwriter obtains and 114

115 maintains a residential mortgage lender or residential mortgage servicer license and a mortgage loan originator license under this division. Financial Code - FIN Division 20. California Residential Mortgage Lending ACT Licensing: Residential Mortgage Lender [ ] Requirements of a Mortgage Loan Originator or Servicer (a) A residential mortgage lender or servicer shall do all of the following: (1) Maintain staff adequate to meet the requirements of this division, as prescribed by rule or order of the commissioner. (2) Keep and maintain for 36 months from the date of final entry the business records and other information required by law or rules. (3) File with the commissioner any report required under law or by rule or order of the commissioner. (4) Disburse funds in accordance with its agreements and to make a good faith and reasonable effort to effect closing in a timely manner. (5) Account or deliver to a person any personal property such as money, funds, deposit, check, draft, mortgage, other document, or thing of value, that has come into its possession and is not its property, or that it is not in law or equity entitled to retain under the circumstances, at the time that has been agreed upon or is required by law, or, in the absence of a fixed time, upon demand of the person entitled to the accounting or delivery. (6) File with the commissioner an amendment to its application prior to any material change in the information contained in the application for licensure, including, without limitation, the plan of operation. The commissioner shall, within 20 business days of receiving a completed amendment to the application, or within a longer time if agreed to by the licensee, approve or disapprove the effectiveness of the proposed amendment. (7) Comply with the provisions of this division, and with any order or rule of the commissioner. (8) Submit to periodic examination by the commissioner as required by this division. 115

116 (9) Advise the commissioner by amendment to its application of any material judgment filed against, or bankruptcy petition filed by, the licensee within five days of the filing. (10) Notify the commissioner, in writing, prior to opening a branch office in this state or changing its business location or locations or its branch offices from which activities subject to this division are conducted. (11) Comply with all applicable state and federal tax return filing requirements. (12) Refrain from employing, or paying a commission or other fee to, a mortgage loan originator who is not licensed in this state, unless the individual is exempt from licensure. (13) Refrain from committing a crime against the laws of any state or the United States, involving moral turpitude, misrepresentation, fraudulent or dishonest dealing, or fraud, and disclose to the commissioner any final judgment entered against it in a civil action upon grounds or allegations of fraud, misrepresentation, or deceit. (14) Refrain from engaging in conduct that would be cause for denial of a license. (15) Remain solvent. (16) Proceed with due care and competence in performing any act for which it is required to hold a license under this division. (17) Comply with any other requirement established by rule of the commissioner. (b) The commissioner may require an applicant to submit a statement agreeing to comply with the requirements of this section. Financial Code - FIN Division 20. California Residential Mortgage Lending Act Licensing: Residential Mortgage Lender [ ] Education Required An applicant for a mortgage loan originator license shall complete at least 20 hours of education approved in accordance with subdivision (b). The education shall include at least the following: (1) Three hours of instruction on federal law and regulations. (2) Three hours of ethics, which shall include instruction on fraud, consumer protection, and fair lending issues. 116

117 (3) Two hours of training related to lending standards for the nontraditional mortgage product marketplace. (4) Two hours of training related to relevant California law and regulations. (5) Prelicensing education may be offered either in a classroom, online, or by any other means approved by the Nationwide Mortgage Licensing System and Registry. Financial Code - FIN Division 20. California Residential Mortgage Lending ACT Mortgage Loan Originators [ ] Testing (1) An applicant for a mortgage loan originator license shall pass a qualified written test developed or otherwise deemed acceptable by the Nationwide Mortgage Licensing System (2) An individual shall not be considered to have passed a qualified written test unless the individual achieves a test score of not less than 75 percent of correct answers to questions. (3) An individual who fails the qualified written test may retake the test up to three consecutive times, although at least 30 days shall pass between each retesting. (4) An applicant who fails three consecutive retests shall wait at least six months before retesting. (5) A licensed mortgage loan originator who fails to maintain a valid license for a period of five years or longer shall retake the test, not taking into account any time during which the individual is a registered mortgage loan originator. Financial Code - FIN Division 20. California Residential Mortgage Lending ACT Mortgage Loan Originators [ ] 117

118 Section 3 Division 9 - California Financing Law Financial Code Introduction The CFLL was passed in California in 1994 to be effective on July 1, It consolidated and replaced: 1. Personal Property Brokers Law 2. Consumer Finance Lenders Law 3. Commercial Finance Lenders Law These three laws were applicable to personal property brokers, consumer finance lenders and commercial finance lenders. The CFLL is based on these predecessor statutes, each with longer history and these predecessor statutes have been interpreted by cases, attorney general opinions and government agencies. Therefore, these items would still be applicable. Research: It Is Important to Protect Clients To investigate any Bill or Code Section you should go to leginfo.legislature.ca.gov. When you arrive at the site you will note many valuable tabs. Among them are: 1. Bill Information (Bill Search and Text Search) which is like a keyword search 2. Other Resources: This page includes website links to Senate, Assembly, Legislature Analysts, State Audits, Department of Finance, State Library, Research Bureau and the phone number to the California State Law Library ( ). 3. My Subscriptions and my Favorites In the upper right corner of the home page are links: 1. Skip to content 2. Home Page 3. Accessibility 4. FAQs 5. Feedback 118

119 6. Login 7. Quick Search Let me explain one caveat. You must be very careful in your reading. An example; Go to the Home Page. Click on the California Law Tab. It shows the Codes. Click on Financial Code. 23 Divisions of the Code will appear. You want #9, and there are 4 Chapters to the Division. (You could have arrived at this Code section by putting a keyword in the search by text field). There are two Code Sections in the Financial Code. They are listed here. Note any differences. Code Section #1 a. This division shall be liberally construed and applied to promote its underlying purposes and policies, which are: (1) To ensure an adequate supply of credit to borrowers in this state. (2) To simplify, clarify, and modernize the law governing loans made by finance lenders. (3) To foster competition among finance lenders. (4) To protect borrowers against unfair practices by some lenders, having due regard for the interests of legitimate and scrupulous lenders. (5) To permit and encourage the development of fair and economically sound lending practices. (6) To encourage and foster a sound economic climate in this state. b. Consumer loans, as defined in Sections and 22204, are subject to this chapter, Chapter 2 (commencing with Section 22200), Article 1 (commencing with Section 22700) of Chapter 4, and Article 2 (commencing with Section 22750) of Chapter 4. c. Commercial loans, as defined in Section 22502, are subject to this chapter, Chapter 3 (commencing with Section 22500), Article 1 (commencing with Section 22700) of Chapter 4, and Article 3 (commencing with Section 22780) of Chapter 4. d. This section shall remain in effect only until January 1, 2019, and as of that date is repealed. (Amended by Stats. 2017, Ch. 475, Sec. 5. (AB 1284) Effective October 4, Repealed as of January 1, 2019, by its own provisions. See later operative version added by Stats. 2017, Ch. 475.) 119

120 Code Section #2 a. This division shall be liberally construed and applied to promote its underlying purposes and policies, which are: (1) To ensure an adequate supply of credit to borrowers in this state. (2) To simplify, clarify, and modernize the law governing loans made by finance lenders. (3) To foster competition among finance lenders. (4) To protect borrowers against unfair practices by some lenders, having due regard for the interests of legitimate and scrupulous lenders. (5) To permit and encourage the development of fair and economically sound lending practices. (6) To encourage and foster a sound economic climate in this state. (7) To protect property owners from deceptive and misleading practices that threaten the efficacy and viability of property assessed clean energy financing programs. b. Consumer loans, as defined in Sections and 22204, are subject to this chapter, Chapter 2 (commencing with Section 22200), Article 1 (commencing with Section 22700) of Chapter 4, and Article 2 (commencing with Section 22750) of Chapter 4. c. Commercial loans, as defined in Section 22502, are subject to this chapter, Chapter 3 (commencing with Section 22500), Article 1 (commencing with Section 22700) of Chapter 4, and Article 3 (commencing with Section 22780) of Chapter 4. d. A program administrator, as defined in Section 22018, is subject to this chapter, Chapter 3.5 (commencing with Section 22680), and Article 1 (commencing with Section 22700) of Chapter 4. e. This section shall become operative on January 1, (Repealed (in Sec. 5) and added by Stats. 2017, Ch. 475, Sec. 6. (AB 1284) Effective October 4, Section operative January 1, 2019, by its own provisions.) CA Fin Code Questions: 1. Which one is in effect today? (#1) 2. Does it sunset and if so, on what date? (1/1/2019) 3. Which Assembly Bill originated this Code section? (AB1284) 120

121 4. Does #2 sunset? (not at this time) 5. Is there any difference between the 2 code sections? (Yes, #7 and d were added to the second one) It is extremely easy to read one of these bills and not note effective dates, etc. Also note the (a), (1) and sometimes there are citations (A). You be careful out there. Assembly Bill 1284 At you will find this Bill. If you check the text, you discover it was approved by the Governor, filed with the Secretary of State and made effective on October 4, However, there are many almost duplicate Code Sections that will be effective January 2019! All but one of the changes are to the California Finance Law, but there is one change to California Business and Professions Code Section That change discussed Pace Program Administration and PACE Solicitors. The CFLL changes emphasize their duties. The one important sentence is #7 in 22001; to protect property owners from deceptive and misleading practices that threaten the efficacy and viability of property assessed clean energy financing programs. A cursory review of the Code Sections that pertains to CFLL shows at least 40 of the changes were to add the phrases Program Administrator, Pace Program or Property Owners to the text. There is much more information available on leginfo.legislature.ca.gov about this and any other Bills that you discover in the future. If you every have any other questions, contact the Department of Business Oversight by phone at or or visit the website at or Ask.DBO@dbo.ca.gov. So much information for consumers and licensees. So much to learn, so little time. Department of Business Oversight: 121

122 Time to Think 4.1 1) In which Code is the CRMLA Act listed? 2) How much Net Worth must a DBO Broker prove? 3) In the 20 Hour Course how many hours must be devoted to California Law and Regulations? 4) How many times can an applicant fail before having to wait six months to test again?. 5) Can the commissioner of DBO be a licensed CRMLA person? 6) Who is the commissioner of DBO? 122

123 Chapter 4 CASE STUDY ENFORCEMENT CASE BY CALIFORNIA DEPARTMENT OF BUSINESS OVERSIGHT Topic: Non-issuance of a mortgage loan originator license Date: January 2, 2018 Party: Todd Joseph Krejci, an individual Failure To Meet: Demonstration of financial responsibility, character, and general fitness Todd Joseph Krejci applied for an MLO license and it was discovered during the application period that he: Was subject to a regulatory action by National Futures Association for misleading clients Was barred from the NFA for three years and has to pay a fine of $25, if he later applies Filed for bankruptcy in 2009, 2012, and 2013 Was the subject of a foreclosure proceeding The Commissioner found by reason of the foregoing that Krejci was involved in financial services-related conduct where he defrauded and misled clients for his own benefit. His regulatory action and financial history showed that he did not have the financial responsibility, character and general fitness as to command the confidence of the community and Jan Lynn Owen cannot determine that Krejci will be able to operate honestly, fairly and efficiently with the purposes of the CFLL and CRMLA. Therefore, no license to be issued under mandates from Financial Code Sections and The Commissioner prayed to the court that this determination be upheld. Statement of issues in support of non-issuance of MLO license 123

124 Chapter 4 CASE STUDY REVIEW Did the DBO take the proper action? Have you observed any other DBO or DRE actions on companies or individuals? Does having a foreclosure or bankruptcies eliminate an applicant for life? Has your operation been affected by DBO and BRE reorganizations? One State Agency has a new regulation pending that allows prior sanctions to be removed from the public records after ten years, your vote on this? 124

125 Chapter 4 REVIEW QUIZ 1. The amount of California Specific Continuing Education that is required for Bureau of Real Estate MLO's? 2. Who approves the tests for the MLO license? 3. Bankruptcy petitions must be reported to DBO in how many days? 4. Name a person or company making real estate loans in California that does not fall under DBO regulations. 5. Which Code lists DBO regulations? 6. The group other than CRMLA lenders that is authorized to make loans under DBO auspices? 125

126 FINAL PROJECT There are two methods to end a NMLS 8 Hour CE Course: Final Exam or Final Project. Our students when surveyed have preferred a Final Case Study Project. All students must participate in the project by reading the information, form answers/opinions, and then be prepared to discuss the questions. The NMLS allows only 20 minutes for this Study so you must read quickly and work quickly so that we can finish in the allotted time. Good luck. INTRODUCTION Clark Van Galder is an experienced mortgage loan originator working in Wisconsin. He has been promoted by his company to go to Bakersfield, California and assume management control of a large branch of a national company. The employees are licensed by the Department of Business Oversight. The branch has been in trouble with several regulatory audits and needs to make many corrections. Each problem will be highlighted, and you will be Mr. Van Galder with authority and responsibility to make severe changes. PROJECT ONE There have been many citations for lack of money laundering control. Borrowers have paid cash down payments of substantial amounts with no track record of the money. Also, applicants have shown low income on pay stubs and tax returns yet have large cash reserves. There have been cash transactions of over $10,000 in many instances with no action by the licensee. Not one Suspicious Activity Report has been filed in the last two years with this large staff. Q: What are the recommended procedures that you should consider? A:. 126

127 PROJECT TWO The Reverse Mortgage Department has not been writing many loans in the past six months. It is obvious that the licensees do not have a thorough understanding of the regulations. They ask you some questions on writing an advertisement to be used in a mailer. They want to use the following phrases: a) Get a Fixed Rate loan and get the entire benefit paid to you in the first year. b) If the borrowing spouse passes away, the non-borrowing spouse will continue to receive the monthly tenure payment. c) An equity line of credit will grow at the rate of the interest rate on the loan only.. d) If you buy a home with a RM, you can rent out your present home. e) You have no approval process of any kind. f) You cannot lose your home until you die or move out for twelve months. g) Your heirs can buy the home for 75% of the lower of the loan or home value. PROJECT THREE Q: One of the staff has a friend who wants to work for your company. She is a top producer with no sanctions on her record. Her total loan experience has been with a FDIC lender. What would she have to do to be a licensee with your company? A:. 127

128 PROJECT FOUR Q: The staff has a lack of understanding of finance charges. Complaints have been received from applicants and borrowers that they have been given incorrect information in their interviews. You decide to give them an exam on the topic to see what is their problem. When you find the areas that they do not understand, you will instruct them properly. When the topic is called, state whether the item is a finance charge or not. Assume that the loan is secured by real property and the fees are bona fide and reasonable. A:. PROJECT FIVE Q: Identity Theft: This is something that is not being considered important in the company. Borrowers have used suspicious documents. Documents are left in the open. Affiliates have no identity theft procedures. There are no policies on review of application. Company s are constantly being hacked. Money transfers have been diverted. Red Flags are never even discussed. You want to establish a program to help them better fight these problems for clients. What are some of the steps that you would demand be followed by the company? A:. 128

129 INSERT30-yr LOAN ESTIMATE PDFs HERE (9 PGS TOTAL 129

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133 INSERT IRS FORM 8300 pg 2 PDF HERE (5PGS ) IRS Form