We advise clients and assist them in preparing/reviewing documentation regarding residential and commercial real estate transactions, such as mortgage loans, purchases, sales, short sales. Additionally, we advise and represent clients before state and federal agencies such as United States Department of Housing and Urban Development and the California Department of Real Estate.
Our service areas also cover the following:
- Administrative Law defense including licensing accusation brought by licensing agencies such as CalBRE, CFL, RMLA and Nevada MLD
- White Collar Crime defense
- Business litigation
FURTHER CLARIFICATION ON THE CONSUMER FINANCIAL PROTECTION BUREAU IMPLEMENTATION OF THE DODD FRANK ACT
CURRENT REGULATION Z requires mortgage broker companies that receive compensation from the consumer to pay the loan officers hourly or salaried BUT NOT ON COMMISSION. Thus, mortgage broker companies may not pay a commission to their employee mortgage brokers.
THE NEW RULE EFFECTIVE JANUARY 10, 2014 revises Regulation Z to permit commissions to be paid to loan originators on borrower paid compensation. However, you must wait until January 10, 2014 BEFORE you pay commissions on borrower paid compensation.
All of the provisions implemented by the new rule (12 CFR Part 1026) apply to closed-end consumer credit transactions secured by a dwelling. HOWEVER, the restrictions on mandatory arbitration clauses and financing of credit insurance premiums also apply to an open-end home equity line of credit (i.e., credit subject to § 1026.40) when secured by the consumer’s principal dwelling. None of the provisions apply to a loan that is secured by a consumer’s interest in a timeshare plan.
EFFECTIVE JANUARY 10, 2014 the DEFINITION OF A “LOAN ORIGINATOR” IS EXPANDED TO INCLUDE A PERSON WHO, IN EXPECTATION of direct or indirect compensation or other monetary gain or for direct or indirect compensation or other monetary gain, PERFORMS ANY OF THE FOLLOWING ACTIVITIES:takes an application; offers, arranges, assists a consumer in obtaining or applying to obtain, negotiates, or otherwise obtains or makes an extension of consumer credit for another person; or through advertising or other means of communication represents to the public that such person can or will perform any of these activities.
The Rule expressly includes in the definition of a loan originator any person referring a consumer to any person who participates in the origination process as a loan originator. Referring includes any oral or written action directed to a consumer that can affirmatively influence the consumer to select a particular loan originator or creditor to obtain an extension of credit when the consumer will pay for such credit.
The exception is for persons who provide loan originator or creditor contact information to a consumer in response to the consumer’s request (as opposed to providing customer information to a loan originator or creditor). This definition is not only for purposes of determining who is subject to the restrictions on compensation, but also for the qualification requirements.
The Rule exempts certain employees: employees of a manufactured home retailer; a servicer or servicer’s employees, agents, and contractors who offer or negotiate terms for purposes of renegotiating, modifying, replacing, or subordinating principal of existing mortgages where consumers are behind in their payments, in default, or have a reasonable likelihood of defaulting or falling behind (as long as the transaction does not rise to the level of a refinance or obligates a different consumer on the existing debt); individuals that perform only real estate brokerage activities and are licensed or registered in accordance with applicable State law, UNLESS such person is compensated by a creditor or loan originator or by any agent of such creditor or loan originator for a particular consumer credit transaction. The definition of loan originator also does not include bona fide third-party advisors such as accountants, attorneys, registered financial advisors, housing counselors, or others who do not receive compensation for engaging in loan origination activities.
The Rule exempts a person who does not take a consumer credit application or offer or negotiate credit terms available from a creditor, but who performs purely administrative or clerical tasks on behalf of a person who does engage in such activities. However, managers, administrative and clerical staff, and similar individuals who are employed by (or a contractor or an agent of) a creditor or loan originator organization and take an application, offer, arrange, assist a consumer in obtaining or applying to obtain, negotiate, or otherwise obtain or make a particular extension of credit for another person are loan originators. The Rule includes examples of activities that, in the absence of any other activities, will not render a manager, administrative or clerical staff member, or similar employee a loan originator for these purposes, including persons who:
- At the request of the consumer provide an application form to the consumer;
- Accept a completed application form from the consumer;
- Deliver an application to a loan originator or creditor without assisting the consumer in completing the application, processing or analyzing the information, or discussing specific credit terms or products available from a creditor with the consumer;
- Provide general explanations, information, or descriptions in response to consumer questions;
- As employees of a creditor or loan originator, provide loan originator or creditor contact information in response to the consumer’s request, provided that the employee does not discuss particular credit terms available from a creditor and does not refer the consumer, based on the employee’s assessment of the consumer’s financial characteristics, to a particular loan originator or creditor seeking to originate particular credit transactions to consumers with those financial characteristics;
- Describe other product-related services;
- Explain or describe the steps that a consumer would need to take to obtain an offer of credit, including providing general guidance on qualifications or criteria that would need to be met that is not specific to that consumer’s circumstances.
Pursuant to the Dodd-Frank Act, seller financers are exempt from the definition of loan originator if:
- The person provides seller financing for the sale of three (3) or fewer properties in any 12-month period to purchasers of such properties, each of which is owned by the person and serves as security for the financing.
- The person has not constructed, or acted as a contractor for the construction of, a residence on the property in the ordinary course of business of the person.
- The person provides seller financing that meets the following requirements:
- The financing is fully amortizing.
- The financing is one that the person determines in good faith the consumer has a reasonable ability to repay.
- The financing has a fixed rate or an adjustable rate that is adjustable after five (5) or more years, subject to reasonable annual and lifetime limitations on interest rate increases.
- A separate seller financing exception is also included for a natural person, estate, or trust that provides seller financing for the sale of only one (1) property in any 12-month period to purchasers of such property, which is owned by the natural person, estate, or trust and serves as security for the financing.
HOWEVER, SOME OF THESE EXEMPTIONS FROM DODD-FRANK COULD VIOLATE CALIFORNIA DEPARTMENT OF REAL ESTATE LAWS AND REGULATIONS SO CHECK WITH LEGAL COUNSEL FIRST IF YOU INTEND TO USE ANY OF THESE EXEMPTIONS
The New Rule:
- Allows mortgage brokerage companies receiving compensation from consumers to pay their employees commissions, as long as the commissions are not based on the terms of the loans that they originate;
- Permits loan originators to reduce their compensation to bear the cost of unforeseen pricing increases in a very narrow set of circumstances;
- Establishes steps to determine when a factor is a proxy for loan terms; and
- Permits compensation to loan originators that is based on profits within specified parameters. (compliments and thanks to Weiner, Brodsky)
This is not all. It is a brief summary of a much large document. You should check with your attorney for the remainder of the rules that go into effect on January 10, 2014 or if you would like a seminar on the subject have your local association contact me.
DOCUMENTS CFPB REQUIRES TO BE SIGNED WITH NAME OF COMPANY, NMLS AND LOAN OFFICER NAME AND NMLS
The credit application, the promissory note and deed of trust at a minimum.
More rules to follow.
Mortgage Debt Relief Act of 2007 To Be Extended To 2015?
In March 2012 H.R. 4202, 4250, 4290, 4336, S. 2250, 3224 were introduced in Congress to extend the Mortgage Debt Relief Act through the end of 2015.
Watch the bills for further action to see if anyone is extending the time and is signed by the President. With xix bills pending I would say there is a good chance the Debt Relief Act will be extended to help the consumer with debt relief in the foreclosure of short sale of the principal residence.
HUD investigates mortgage loan fraud very industriously. The HUD Office of Inspector General in conjunction with the FBI completed criminal investigations in Southern California.
1. AUDIT TRIGGERS
CREDIT WATCH: A mortgagee and its branch office(s) are tracked through Neighborhood Watch. Those that have a high percentage of defaults and claims on insured mortgages are (in this attorney’s opinion) scheduled for an audit by HUD and/or have their approval automatically terminated depending on the percentage of HUD loans in default and claims. The notice may be given without action by the Mortgagee Review Board. Currently checks on the past 24 months that are 90 or more days delinquent and claims paid in the same period of time.
TERMINATION: If the termination is automatic based upon the percentage of loans in default, there is a very strong probability you will be audited by HUD and they will look for fraud in the organization.
2. HOW TO PREPARE FOR A HUD AUDIT REVIEW
COMMON VIOLATIONS FOUND BY HUD
Review your Quality Control Plan (QCP). It is generally not in compliance with HUD.
Loan documents in the Origination File are not complete.
Verification of down payment was not done or gift funds not in compliance with HUD rules.
Unallowable fees charged to the borrower.
Mortgagee fails to comply with Home Mortgage Disclosure Act (HMDA). You must comply even if it s a negative HMDA.
Borrower documents in file signed in blank.
Sharing office space with another business without adequate separation or identification.
Failure to establish borrower’s relationship with Non-occupying Co-borrower.
These are just some of the violations that can cause you to indemnify loans or pay HUD penalties. Are you in compliance.
3. RESPONSE TO HUD’S FINDING LETTER
A. FORMAT OF RESPONSE
B. WHAT DO YOU DO IF HUD THREATENS TO TERMINATE YOUR APPROVAL?
C. HUD AVAILABLE PENALTIES FOR FAILURE TO COMPLY
Letter of reprimand
Withdrawal of approval
Settlement agreement with mortgagee
Cease and desist order
Debarment of individuals as well as withdrawal of approval
Civil money penalties up to $5,000 per violation to a maximum of $1 million per year in addition to suspension, withdrawal of approval
Individual liability without the corporate veil to protect you pursuant to a 24 CFR §30.36
Is this a lot of trouble? You bet it is. Does it increase the overhead? You bet it does. Do you want to continue doing FHA loans? Only you can answer that. The quality control and potential liability to HUD certainly adds to the overhead. If you are doing less than 20 loans a month you may want to rethink your position.
Good luck and may you have a lot of success with all the new products that are put on the market each year
Herman Thordsen, Esq.
If you would like us to conduct a pre-audit before HUD does in order to reduce your exposure to monetary penalties, buyback of loans, withdrawal of approval or criminal charges, please contact:
Herman Thordsen, Esq.
Law Offices of Herman Thordsen
6 Hutton Centre Drive
Santa Ana, CA 92707-8767
(714) 662-4990 or (310) 277-4254
If you are in Central, Northern California or out of state please call toll free: (888) 667-8529
THE INFORMATION HEREIN IS NOT LEGAL ADVICE. AN ATTORNEY SHOULD BE CONSULTED IF YOU DESIRE LEGAL ADVICE.