News and Commentary from Washington DC

Are Pre-Qualifications Masquerading as Pre-Approvals Illegal? WA DFI, PA DOBS Say "Yes"

2026-02-05T09:00:00.000-05:00

DFI Says "Yes" - it's a "Misleading and Deceptive Act." CFPB calls it "deceptive."

Update 10/2025 - PA Fines Broker $127,500 for Pre-Approvals

"I issued a pre-approval for a buyer and the lender wouldn't do the loan, so they had to pull the contract."
"I've been told a pre-qualification is worthless."
"If I have DU approval and docs, I can do a pre-approval."

As refinance volume dwindles and the spring housing market goes into full overdrive, these good questions increase. This is a minefield for brokers. It comes down to literal definitions. And, where it previously was an ethical issue, states now will cite brokers for pre-approvals that were not backed by a lender's approval.

From the WA DFI

From PA DOBS

A Pre-approved mortgage means approved before the property, NOT approved before underwriting. If a loan is ready to close, subject to an appraisal, that is a pre-approval. As you know, AUS approval doesn't mean the deal is ready to close. Approved means you, as a banker, are prepared to lend the money. Everything else is a pre-qualification.

Consequences of Fictitious Approvals

Some regulators will cite you - as a broker with no warehouse line or funds to make a loan - for approving a loan. You can also be sued by a seller or buyer for misrepresentation if the loan is delayed due to approval issues. In this market, where people submit contracts without a financing contingency, this becomes even more worrisome.

Specifically, buyers expose themselves to legal action if they cannot perform under a contract. Though brokers are not parties to the contract, if their representations cause the action, then they become culpable.

Do the work up-front and get the loan approved by the lender (TBD) before you send the borrower out shopping. If your lender doesn't approve loans without an appraisal (TBD), find another lender who does pre-approvals.

There IS Value in Pre-Qualification

Incorrect use of the term "pre-approved" connotes approved, subject to underwriting approval, which is contradictory. Pre-approval actually means "approved, subject to an acceptable property." (AKA TBD approval) The real estate industry has driven this confusion by recognizing that a pre-approval is better than a pre-qualification to satisfy a seller deciding between two offers; choose one with or without approval. Agents demanding instant pre-approvals have pushed originators to call a pre-qualification a pre-approval. Without underwriting, however, this is a fabrication.

A pre-qualification can include: "We have reviewed the documents and have received an automated underwriting approval; however, the loan request is still subject to lender approval." We suggest this because even with automated underwriting, without a review of the underlying documents, changes can invalidate automated underwriting approval. For instance, if the originator uses a salary for the income when the wages are actually variable, automated underwriting results will change accordingly.

Does this mean pre-qualifications are useless? NO! Prequalifications are very valuable, but they represent an earlier stage in the process, the first step. The pre-qualification process allows the originator to address a customer's realistic expectations for affordability. Once you address any customer issues, you can request pre-approval and submit an application for approval through a lender's underwriter. Once approved, you can send the borrower into contract negotiations with financing contingencies waived.

Furthermore, brokers should maintain loans not submitted to lenders in their "prospect" pipeline as pre-qualifications to avoid triggering reporting requirements and excess regulatory responsibilities. The fact that an applicant has triggered the requirement for a Loan Estimate does not automatically mean the loan is an "application." It can still be a pre-qualification.

Ethical or Illegal?

While this is primarily an ethical issue, not a legal one, the CFPB is focusing more on "deceptive acts and practices" and saying a loan is approved when it is not falls into this category. It does not rise to a civil legal matter until someone cannot deliver on a "pre-approval" and the loan does not close. Then the consumer, and anyone else who relied on the misrepresentation, can take action under breach of contract, fraud, etc., because they have a cause of action. Some states (such as Virginia and Washington) have mandated that the term "pre-approval" be accompanied by an actual loan offer. What that means is subject to interpretation. It is often difficult to prove misrepresentation when there is no harm - e.g. the customer doesn't take action.

Ethically, calling a loan approved when it is not ready to close - or the conditions precedent to closing have not been stipulated in a way that could be met by a reasonable person - is a misrepresentation and a deceptive act.

TBD - Property to Be Determined

The term TBD is the industry jargon for approved, subject to property. That is a correct term.

There is no distinction between which origination channel - e.g., retail lender or broker - that makes calling a pre-qualification a pre-approval right. It's a misrepresentation if the loan isn't ready to close as described. However, a lender who can make loans from its own proceeds certainly can "chance it" based on internal criteria knowing that a loan is "approvable" if AU is correctly applied. A broker cannot "make" a loan - they are brokers. A broker's approval "subject to" is the lender's institutional letter of approval, not the broker's. Technically and logically, a broker could expose him or herself to liability when acting as a lender when, in fact, a broker - e.g., "making loans." A case in Iowa brought this to a head when a broker failed to deliver a loan after issuing a pre-approval.

Unfreezing U.S. Housing Finance: How Two Simple Product Fixes at Fannie and Freddie Could Unlock Affordability

2025-11-15T08:33:00.003-05:00

For nearly a century, the U.S. mortgage system has excelled at one thing: mass‑producing a single, homogeneous product—the fully amortizing, fixed‑rate mortgage underwritten to a wage‑earner’s debt‑to‑income (DTI) ratio. That “post‑Depression” design stabilized a shaky market and became the world’s benchmark. But today’s households and neighborhoods don’t look like they did in 1938. We live with roommates, rent out accessory units, work from home, and stitch incomes from multiple sources. When the financing toolkit refuses to see those realities, it doesn’t just miss nuance—it warps incentives, funnels capital into narrow property types, and suppresses affordability.

The good news: we don’t have to force price controls or wait years for new supply. In a moment of regulatory openness, Fannie Mae and its younger cousin, Freddie Mac, can make targeted adjustments to their product menus that widen the doorway to ownership and increase rental supply—without compromising safety and soundness.

Where today’s rules block affordability

1) The system discounts household cash flow from boarders/roommates and ADUs

GSE rules do allow limited credit for boarder or accessory dwelling unit (ADU) income—but almost entirely by adding a slice of that income to the borrower’s denominator (qualifying income), rather than offsetting the numerator (the monthly payment). For example, Fannie Mae’s HomeReady® policy permits boarder income to contribute up to 30% of total qualifying income (with documentation), and ADU rent is recognized with a vacancy haircut, typically 75% of lease in illustrative scenarios. Both are added to income and then tested against a DTI cap, rather than netting them against the mortgage payment. Fannie Mae+2Fannie Mae+2

Freddie Mac likewise allows ADU income on a 1‑unit primary residence under defined conditions, again as qualifying income subject to Guide requirements—not as a direct payment offset. Freddie Mac+1

Why does this matter mechanically? Adding income is the weakest way to recognize rent, as it scales with the DTI cap. Suppose a borrower earns $6,000/month, carries $300/month in other debt, and considers taking in a boarder paying $800/month.

Current “income‑add” method (assume a 40% total DTI cap): capacity increases by 0.40 × $800 = $320.
“Payment‑offset” method with a prudent haircut (use 75% of rent, consistent with how the GSEs treat ADU rent in examples): capacity increases by $600.

That’s ~1.9× more effective at a 40% DTI—and 1.5× to 2.3× more effective across common DTI caps (50% down to 33%). In plain terms: the same boarder can safely support a meaningfully larger mortgage when their rent reduces the payment instead of being dribbled into income. (The 75% haircut mirrors how GSEs already account for vacancy/loss on ADU rents today.) Fannie Mae

Reducing net mortgage payment is vastly more effective for affordability

DTI Cap	Baseline (No Boarder)	With Boarder – Income‑Add	With Boarder – Payment‑Offset	Increase vs Baseline – Income‑Add	Increase vs Baseline – Payment‑Offset	Offset vs Income‑Add – Effectiveness
33%	$1,680	$1,944	$2,280	$264	$600	2.27×
38%	$1,980	$2,284	$2,580	$304	$600	1.97×
40%	$2,100	$2,420	$2,700	$320	$600	1.88×
45%	$2,400	$2,760	$3,000	$360	$600	1.67×
50%	$2,700	$3,100	$3,300	$400	$600	1.50×

Impact on affordability - Maximum Housing Prices increases dramatically

DTI Cap	No Boarder	With Boarder – Income‑Add	With Boarder – Payment‑Offset	Extra Loan from Boarder – Income‑Add	Extra Loan from Boarder – Payment‑Offset	Effectiveness (Offset ÷ Income‑Add)
33%	$272,853	$315,729	$370,300	$42,877	$97,447	2.27×
38%	$321,576	$370,950	$419,024	$49,373	$97,447	1.97×
40%	$341,066	$393,038	$438,513	$51,972	$97,447	1.88×
45%	$389,789	$448,258	$487,237	$58,468	$97,447	1.67×
50%	$438,513	$503,478	$535,960	$64,965	$97,447	1.50×

This is exactly how banks underwrite commercial and small‑income property: cash‑flow first. We already trust property‑level cash flows in DSCR underwriting for investments; we simply refuse to apply the same logic for owner‑occupied homes with modest, verifiable rent streams.

2) Property‑type rules nudge capital away from mixed‑use neighborhoods

Fannie’s mixed‑use eligibility keeps properties primarily residential, requires the borrower to be the owner‑operator of any business use, and values the property on its residential characteristics—effectively sidelining the commercial value that gives many “shopkeeper” buildings their economic logic. For condos and co‑ops, project rules generally cap non‑residential space at 35%. These constraints make above‑store apartments, live‑work buildings, and main‑street assets harder to finance in the single‑family channel, even when that is the natural housing near jobs and services. Selling Guide+2Selling Guide+2

The result: households often must finance a home and a nearby workspace separately (if at all). That fragments neighborhoods, lengthens commutes, and undercuts small‑business viability—the opposite of affordability.

Two product fixes that would move the needle fast

A) Net eligible rent against the payment (a “Residential Cash‑Flow” adjustment)

What to change: When a borrower can document stable boarder/roommate or ADU income under existing verification standards, allow that income—after standard haircuts (e.g., 25% for vacancy/loss)—to offset the monthly PITI before testing DTI.

Why it’s safe:

The haircut already embeds a cushion (the same logic GSEs use for ADU rent in examples). Fannie Mae
Require 12 months of history (or DU/LP‑approved alternatives such as verified recurring deposits), a simple lease, and market‑rent support (Form 1007 for rooms/ADUs as applicable). Selling Guide
Cap the net‑rent offset to a prudent share of PITI (e.g., ≤60%) and require two months’ “vacancy reserves” when relying on offsets above a threshold.

What it unlocks:

Using the $6,000 income / $800 boarder example: with today’s income‑add method, a borrower at a 40% cap qualifies for roughly $2,420 of PITI; netting rent would support about $2,700—a meaningful boost in competitive markets.
Multiply that across millions of roommates and ADUs, and you expand ownership and add immediate rental capacity (the boarder’s room). No subsidies required.

B) A true “Shopkeeper” or “Mixed‑Use Lite” mortgage

What to change: Offer a standard single‑family execution for one‑ to two‑unit properties with a modest ground‑floor commercial space (or live‑work layout), without forcing the borrower to be the business operator or stripping out commercial value in the appraisal. Keep existing zoning‑compliance and habitability tests; set clear commercial‑area and use thresholds; let the business rent offset payment under the same cash‑flow rules.

Why it’s safe:

Fannie already purchases mixed‑use that is primarily residential, with legal use and careful appraisal; condos and co‑ops already manage the share of commercial space at the project level. Adjusting eligibility and valuation to recognize modest commercial value—rather than pretend it doesn’t exist—aligns risk with reality. Selling Guide+2Selling Guide+2
Freddie’s ADU and property‑eligibility framework shows how accessory income and use can be governed within the single‑family guide. A parallel “Mixed‑Use Lite” construct is administratively feasible. Freddie Mac+1

What it unlocks:

Shopkeepers, restaurateurs, and repair tradespeople can live near work, eliminating a second lease and transportation costs.
Neighborhoods gain housing above storefronts—the most walkable, employment‑adjacent stock we can add without new land.

Implementation playbook (no statute needed)

Underwriting guides & AUS updates
- Add a “Net Eligible Rent” field in DU/LP that subtracts from PITI before DTI is calculated (with haircuts and caps).
- Maintain today’s boarder/ADU documentation standards (e.g., 9–12 months history for boarders; market‑rent support; primary‑residence restrictions; DU/LP documentation). Fannie Mae+1
Data & model governance
- Begin with pilot pools (e.g., up to a defined UPB) to measure default/loss differences versus matched controls.
- Track payment‑shock, vacancy incidence, and prepay behavior for loans using payment offsets.
Risk rails
- Haircut rents (e.g., 25%) and cap offsets as a share of PITI.
- Require two months of vacancy reserves for high‑offset cases.
- Apply modest loan‑level price adjustments (LLPAs) until performance data accumulate.
Property eligibility tweaks
- Define “Mixed‑Use Lite”: e.g., max commercial area 20%–25% of gross building area; clearly permissible uses; residential safety/egress intact.
- Remove the owner‑operator requirement for the commercial space on one‑ to two‑unit properties when third‑party tenant leases and market‑rent support are provided; continue to require legal use/zoning. (Fannie’s current rule requires owner‑operator and “primarily residential” treatment; the tweak would let neighborhoods function as communities, not silos.) Selling Guide
Appraisal modernization
- Permit dual‑track valuation (residential comp set + light‑commercial rent/value addendum) so the actual blended use is reflected—something the mixed‑use appraisal guidance already gestures toward but doesn’t fully enable. Selling Guide

Answering the usual objections

“This just hides risk.” It doesn’t. Offsetting with a haircut is more conservative than pretending the rent doesn’t reduce the bill. It aligns with how GSEs already model ADU rent in examples (75% of lease) and with how income property is underwritten broadly. Fannie Mae
“Fraud and roommate churn will spike.” That’s what documentation and reserves are for. The boarder policy already requires history and shared‑residency documentation. Extending those same standards to a payment‑offset approach, adding verified deposits/receipts and a small vacancy reserve, manages churn risk. Fannie Mae
“Mixed‑use belongs in multifamily or commercial.” Not when we’re talking about one‑ and two‑unit shopkeeper buildings—ubiquitous in older urban grids. The GSEs already touch mixed‑use; aligning eligibility and valuation with real cash flows simply stops penalizing neighborhoods that co‑locate homes and jobs. Selling Guide+1

Why this beats heavy‑handed market interventions

Forcing nominal price cuts or waiting on large‑scale greenfield supply pushes the problem down the road. The two changes above:

Increase demand‑side capacity where the household already has a paying roommate or ADU.
Increase supply—immediately—by validating rooms/ADUs and shopkeeper apartments as part of the housing stock.
Reduce commute costs and labor frictions by letting people live near their storefronts and workshops.

And because these are product changes, not subsidies, they scale through the secondary market with standard risk management and capital treatment.

A system built for the 1930s can be modernized in 2025

We don’t need to abandon the 30‑year fixed mortgage. We need to stop underwriting 21st‑century households as if every home is a suburban box occupied by a single wage earner. Let’s do what the GSEs already know how to do in other corners of their guides:

Underwrite cash flow where it’s durable and verifiable.
Acknowledge mixed use where it’s legal and market‑accepted.

Fannie Mae and Freddie Mac can catalyze affordability right now by (1) netting prudent, documented rent against the payment and (2) offering a standardized “Mixed‑Use Lite / Shopkeeper” mortgage. Those two simple changes would widen access to ownership, expand rental options, and rebuild communities as places where living and working belong together.

Key sources: Fannie Mae’s Selling Guide and HomeReady materials on boarder and ADU income; Fannie Mae’s mixed‑use and project‑level rules; Freddie Mac’s ADU guidance and fact sheet. Freddie Mac+7Fannie Mae+7Selling Guide+7

Appendix: What the current rules say (select highlights)

Boarder/roommate income: Fannie Mae (HomeReady) allows it to contribute up to 30% of qualifying income with documentation (e.g., 9 of the past 12 months and proof of shared residency). Fannie Mae
ADU rental income: Fannie Mae explicitly allows ADU income on a 1‑unit primary with conditions, and illustrative scenarios apply a 25% vacancy haircut (75% of lease). Selling Guide+1
Freddie Mac ADUs: Freddie permits ADU income to qualify on a 1‑unit primary residence subject to Guide 5306; see Freddie’s ADU fact sheet. Freddie Mac+1
Mixed‑use eligibility: Fannie Mae requires mixed‑use properties to be primarily residential, with the borrower as owner‑operator of the business use, and appraisals to value the residential characteristics. Selling Guide+1
Commercial share limits (condos/co‑ops): Projects are generally limited to ≤35% commercial/mixed‑use space. Selling Guide

These are solid, safety‑oriented rules. The proposal here keeps the guardrails—while finally aligning underwriting with how Americans actually live, earn, and house each other.

Hiring, Onboarding - How to for the Mortgage Business - Step-by-Step using MortgageManuals

2025-10-20T12:16:00.001-04:00

Hiring & Onboarding Workflow

Scope: This reflects the hiring and onboarding procedures as contained in your manuals and forms. All placeholders from the earlier draft have been replaced with the correct taxonomy and form IDs from your FORMS list.

A. Common Hiring & Onboarding Flow (All Roles)

Day 0 (Pre‑Offer)

Requisition approved and job description finalized
• Manual location: 7‑25 Employment and Compensation Practice
• Forms/tools: FORM 7‑26‑1 OPS COMP New Hire Checklist.docx (initiated for requisition)
Candidate screening, interviews & reference checks
• Manual location: 7‑25 Employment and Compensation Practices; 7‑26 Checking Background – Credit, Background and Housing Agencies
• Forms/tools: FORM 2‑72‑1 New Hire Reference Check.docx

We have updated the background check process to emphasise the MLO NMLS FBI Criminal Background Checks DO NOT supplant regular employment background checks for things like driver's licenses, cybersecurity, civil legal actions, previous employment and GSE checks. Also, ALL employees should have background checks, not just MLOs. See Chart 2-72-1 Background Check Matrix

Day 1 (Conditional Offer)

3. Offer letter issued
• Manual location: 7‑25 Employment and Compensation Practices
• Forms/tools: FORM 7‑26‑1 OPS COMP New Hire Checklist.docx (section for Offer of Employment)

Background checks completed (credit, criminal, housing agencies as role‑specific)
• Manual location: 7‑26 Background Checks
• Forms/tools: FORM 2‑72‑1 New Hire Reference Check.docx (supplemented by vendor background reports)

Day 1‑3 (Pre‑Start Provisioning)
5. IT account provisioning & device assignment (least privilege, MFA, encryption)
• Manual location: 2‑90‑23 Controlled Access by Job Duty; 2‑90‑24 Password Security; 2‑90‑25 IT Device Security
• Forms/tools: FORM 2‑90‑21 IT Security Inventory.xlsx; FORM 2‑94‑1 Remote Work Setup and Annual Review Checklist.xlsx (for remote staff)

Training assignment (initial role‑based training)
• Manual location: 2‑72 Mandatory Non‑NMLS Annual Training (new hire training rubric); 7‑45 Employee Training Calendar
• Forms/tools: FORM 2‑72 Mandatory Non‑NMLS Annual Training Rubric.xlsx; TRAIN 1‑70 BSA, AML and SAR Employee Training 2023.ppt

Day 1 (Start Date)
7. New‑hire orientation; policy acknowledgements (Code of Conduct, IT, AML/Red Flags)
• Manual location: 7‑A Employee Handbook (General Employment Policy, Conduct, Drug‑Free Workplace, Harassment); 2‑93 Red Flag Plan
• Forms/tools: FORM 1‑70 AML Red Flags Checklist.docx; Policy acknowledgement section of FORM 7‑26‑1 OPS COMP New Hire Checklist.docx

System access validated by manager
• Manual location: 2‑90‑23 Controlled Access by Job Duty
• Forms/tools: FORM 2‑90‑21 IT Security Inventory.xlsx

Day 1‑30 (Post‑Start)
9. Complete required initial trainings (AML, OFAC, Red Flags, Fair Lending, Privacy, InfoSec)
• Manual location: 2‑72 Training Policy; 7‑45 Training Calendar
• Forms/tools: FORM 2‑72 Mandatory Non‑NMLS Annual Training Rubric.xlsx; FORM 1‑70‑1 AML‑BSA Self Audit Checklist.xlsx (QC validation)

IT security validation: encryption, patching, AV, MFA enforced
• Manual location: 2‑90‑24 Password Security; 2‑90‑25 IT Device Security; 2‑90‑26 Patch Management
• Forms/tools: FORM 2‑90‑21 IT Security Inventory.xlsx
30‑day performance & compliance review
• Manual location: 7‑30 Performance Reviews; 7‑02.3 Performance Reviews
• Forms/tools: FORM 7‑26‑1 OPS COMP New Hire Checklist.docx (completion sign‑off); Performance Appraisal.pdf

B. Role‑Specific Add‑Ons

Mortgage Loan Originators (MLOs)

SAFE Act license/registration & NMLS sponsorship verified
• Manual location: 2‑71 Compensation & SAFE Act Compliance
• Forms/tools: FORM 2‑71‑2 LO Comp Plan Commissions Individual.docx; FORM 3‑39 Loan Originator Employment Agreement.doc
NMLS ID disclosure in advertising & signatures
• Manual location: 2‑30 Consumer Advertising; 2‑71 SAFE Act Advertising IDs
• Forms/tools: FORM 3‑21 ORIG COMPL Advertising and Website Review Checklist.xlsx

Processors

LOS/PII access controls
• Manual location: 4‑0 Processing Module; 2‑90‑23 Controlled Access
• Forms/tools: FORM 4‑01 PROC Loan File Set Up Checklist.xlsx

Underwriters

Appraiser Independence compliance
• Manual location: 2‑73 Appraiser Independence; 5‑0 Underwriting
• Forms/tools: FORM 2‑73‑4 Reconsideration of Appraised Value.pdf

Closers/Funders

Wire/escrow verification & closing QC
• Manual location: 6‑0 Closing Module; 2‑90‑22 Physical Office Security (escrow document controls
• Forms/tools: FORM 6‑2 CLOS QC Pre‑Closing Document Prep Funding Review.docx; FORM 6‑5 CLOS PROC Closing Notification Tickler.doc

Operations/Admin

Records retention & access
• Manual location: 2‑90‑50 Document Retention & Destruction; 7‑0 Operations
• Forms/tools: FORM 2‑90 Document Retention Reference.gdoc; FORM 7‑10 Employee Roster.xls

C. Timelines Summary

Pre‑offer: requisition, references, background checks (7‑25, 7‑26, FORM 2‑72‑1).
Pre‑start: IT provisioning (2‑90‑23/24/25, FORM 2‑90‑21); training assignment (2‑72, FORM 2‑72 rubric).
Start Day: orientation & policy acknowledgements (7‑A, FORM 7‑26‑1).
Within 30 days: required trainings complete (2‑72, 7‑45, FORM 2‑72 rubric); 30‑day review (7‑30, FORM Performance Appraisal).

D. Hiring & Onboarding Rubric (Manual Citations & Forms)

Role	Procedure Step	Manual Location	Form(s)	Notes
All	Requisition & job description	7‑25 Employment & Compensation	FORM 7‑26‑1 OPS COMP New Hire Checklist	Covers posting/approval
All	Background/reference checks	7‑26 Background Checks	FORM 2‑72‑1 New Hire Reference Check	Includes credit & housing
All	Offer letter	7‑25	FORM 7‑26‑1 OPS COMP New Hire Checklist	Offer embedded in checklist
All	IT provisioning	2‑90‑23/24/25	FORM 2‑90‑21 IT Security Inventory; FORM 2‑94‑1 Remote Work Setup Checklist	Device & access setup
All	Training assignment	2‑72; 7‑45	FORM 2‑72 Training Rubric	Role‑based, includes AML/OFAC
All	Policy acknowledgements	7‑A; 2‑93 Red Flags	FORM 1‑70 AML Red Flags Checklist; FORM 7‑26‑1 New Hire Checklist	Includes handbook policies
All	Performance/60‑day review	7‑30; 7‑02.3 Handbook	Performance Appraisal.pdf	60‑day review built into handbook
MLO	SAFE Act licensing	2‑71	FORM 2‑71‑2 LO Comp Plan; FORM 3‑39 Employment Agreement	Must be complete before origination
MLO	NMLS ID in ads	2‑30; 2‑71	FORM 3‑21 Ad & Website Review Checklist
Processor	File/LOS PII access	4‑0; 2‑90‑23	FORM 4‑01 Loan File Setup Checklist	Secure handling
Underwriter	Appraiser Independence	2‑73; 5‑0	FORM 2‑73‑4 Reconsideration of Appraised Value
Closer	Wire/escrow verification	6‑0; 2‑90‑22	FORM 6‑2 Pre‑Closing Checklist; FORM 6‑5 Notification Tickler
Ops/Admin	Records retention	2‑90‑50; 7‑0	FORM 2‑90 Document Retention Ref.; FORM 7‑10 Employee Roster

E. Forms Index (Corrected for Hiring/Onboarding)

FORM 7‑26‑1 OPS COMP New Hire Checklist.docx → Section 7‑26 (Background & Hiring)
FORM 2‑72‑1 New Hire Reference Check.docx → Section 7‑26 (used with Training)
FORM 7‑10 Employee Roster.xls → Section 7‑28/7‑29 Personnel Records
FORM 2‑90‑21 IT Security Inventory.xlsx → Section 2‑90‑25 Device Security
FORM 2‑94‑1 Remote Work Setup Checklist.xlsx → Section 2‑94 Remote Access
FORM 2‑71‑2 LO Comp Plan docs → Section 2‑71 SAFE Act/Compensation
FORM 3‑39 Loan Originator Employment Agreement.doc → Section 2‑71 SAFE Act/MLO
FORM 3‑21 ORIG COMPL Advertising & Website Review Checklist.xlsx → Section 2‑30 Advertising
FORM 2‑73‑4 Reconsideration of Appraised Value.docx → Section 2‑73 Appraiser Independence
FORM 6‑2 CLOS QC Pre‑Closing Checklist.docx → Section 6‑0 Closing
FORM 6‑5 CLOS PROC Closing Notification Tickler.doc → Section 6‑0 Closing

Mortgages on Mars

2025-08-29T15:12:00.002-04:00

When humans settle on Mars, the real estate and mortgage industry will emerge, albeit with some significant differences compared to Earth. Here’s how it might look:

Land Ownership

No Deeds Under Current Law: Under the 1967 Outer Space Treaty, no nation (and by extension, no company or person) can “own” land on Mars. So early settlers couldn’t technically buy and sell parcels the way we do on Earth.
Workaround Models: Ownership might be framed as long-term leases, licenses, or “use rights” issued by a governing Mars Authority or corporate colony operator.
Corporate Real Estate: In practice, companies that build habitats may “rent” living space like apartment landlords, bundling utilities, oxygen, and life-support.

Types of Properties

Habitats: Pressurized living pods, underground lava tube communities, or domed cities. Location will matter (sunlight, radiation protection, proximity to resources like ice).
Greenhouses & Industrial Modules: Valuable commercial “properties” because whoever controls food, oxygen, and water recycling has leverage.
Prestige Real Estate: Picture luxury domes with Earth views through digital windows, “oceanfront” simulations, or private rovers and tunnels.

Mortgages & Financing

Collateral Problem: On Earth, lenders can repossess property. On Mars, if someone defaults, what do you do — kick them out of the oxygen dome? Risky!
Corporate-Sponsored Housing: More likely than traditional mortgages. Employers may house colonists as part of work contracts, similar to mining towns.
Insurance-Linked Loans: If mortgages exist, they’ll be tied to risk pools (life support, radiation protection). A “Martian Mortgage” may look like a bundled financing + insurance + survival plan.

Regulation & Compliance

Martian Housing Authority: A local governing body would emerge to assign rights, enforce building codes (airlocks that must work), and set safety standards.
Earth-Based Oversight: Until Mars is self-governing, real estate deals may be regulated by Earth governments, corporations, or international consortia.
Disputes: Imagine foreclosure court on Mars — but the nearest judge is a 20-minute light-speed delay away.

Market Dynamics

Scarcity Premium: At first, housing will be ultra-limited, so prices (or lease rates) skyrocket.
Speculation Bubbles: Earth investors will still try to sell “Martian plots” (like they already do online), but only those tied to actual habitats will matter.
Secondary Market: Once settlements stabilize, sub-leasing, space-sharing (like Airbnb for pods), and even vacation homes for Earth tourists could develop.

Mortgage Broker Role

Less “Rate Shopping,” More “Survival Packages”: Brokers may help colonists choose between bundled housing + food + oxygen packages from different providers.
Risk Underwriting: Instead of FICO scores, lenders will assess mission role, skillset (engineers > influencers), and life expectancy in Mars conditions.
Expat Financing: Earth-based lenders could offer loans payable in Earth currency, backed by colonist labor contracts rather than Martian collateral.

Enterprise-Wide Risk Assessments for Small Mortgage Companies

2025-08-29T10:43:00.004-04:00

Small mortgage companies face the same regulatory expectations as larger institutions when it comes to identifying and managing risk. Even with one or two branches and fewer than fifty employees, regulators expect management to conduct an enterprise-wide risk assessment (EWRA) that evaluates exposures across operations, compliance, cybersecurity, and customer interactions. The EWRA provides a structured approach to documenting where risks exist, how they are controlled, and how frequently those controls are reviewed.

Risk Assessment Framework

The EWRA matrix organizes risks into categories, assigns an initial rating, lists the existing mitigation measures, records the residual rating, identifies the responsible party, and determines the review frequency.

We provide a tool to conduct your Risk Assessment internally. The idea is a four-step process: 1.) Identify Risk 2.) Risk Level (low, medium, or high) 3.) Where and how the risk is mitigated (e.g. policies/audits) and 4.) Post-mitigation risk.

Advertising – Online or remote application gateways
- Initial Risk: Medium
- Mitigation: Advertising compliance checklist; social media policy review
- Residual Risk: Low
- Responsibility: Compliance Officer
- Review: 12 months
Advertising – Non-compliant advertising or social media use
- Initial Risk: Medium
- Mitigation: Advertising audit and officer oversight
- Residual Risk: Low
- Responsibility: Marketing Manager, reviewed by Compliance Officer
- Review: 12 months
Compliance – Failure to comply with published regulations
- Initial Risk: High
- Mitigation: Regulatory Compliance Management System, documented policies and procedures
- Residual Risk: Low
- Responsibility: Compliance Officer / Management
- Review: 12 months
Cyber-Security – Customer data exposure
- Initial Risk: High
- Mitigation: Red Flags Identity Theft program, written safeguarding policies, IT security plan
- Residual Risk: Medium
- Responsibility: IT Administrator or designated third-party vendor, overseen by Management
- Review: 12 months
Fair Lending – Credit decisioning risk
- Initial Risk: Medium
- Mitigation: Fair Lending Plan with monitoring and comparative file review
- Residual Risk: Low
- Responsibility: Underwriting Manager / Compliance Officer
- Review: Annual

Responsibility for the EWRA

Responsibility for the risk assessment rests with management. In small companies without a board of directors, the owner, managing broker, or designated compliance officer typically prepares the matrix and maintains the record. Regulators expect management to review and approve the EWRA annually and when major changes occur, such as opening a branch or introducing a new loan product. Companies may hire a third party to conduct or validate the assessment, but if they follow the structured process outlined in Form 1-80, they can complete the EWRA internally without outside assistance.

Application for Small Companies

A small mortgage company must demonstrate that it applies this framework proportionately to its size.

Policies such as the QC Plan, Compliance Manual, and IT Security Plan serve as the mitigation layer.
Risk ownership is documented directly in the matrix to show who is accountable for each item.
The EWRA is updated when products, vendors, or branch operations change.
Documentation is reviewed during examinations to confirm the company has a process to identify and mitigate risks.

States That Require Enterprise-Wide Risk Assessments

Several states have explicit or implied EWRA requirements tied to licensing examinations. Current examples include:

Texas – Department of Savings and Mortgage Lending (SML) requires annual EWRA documentation.
Washington – Department of Financial Institutions (DFI) cites EWRA in examinations.
South Carolina – Department of Consumer Affairs requires an IT-security-focused EWRA.
New York – Department of Financial Services (DFS) requires risk assessments as part of cybersecurity compliance.
Connecticut – Banking Department requests EWRA in mortgage company exams.
California – Department of Financial Protection and Innovation (DFPI) includes EWRA in compliance review requests.
Florida, Virginia, and Maryland – examiners frequently request EWRA documentation, even if it is not formally codified.

Next Steps - Conduct one NOW!

An EWRA is a core element of compliance for small mortgage companies. By documenting risks, mitigation, responsibilities, and review cycles in a structured matrix, the company demonstrates control of exposures across advertising, compliance, cybersecurity, and fair lending. Regulators expect to see this process in place, regardless of company size.

HMDA, ECOA and What's an Application?... again

2025-05-09T12:58:00.001-04:00

Regulators do not understand Pre-Qualifications

Implications for NMLS Call Reporting and HMDA Reporting

Recent discussions make it apparent that regulators do not understand the concept of pre-qualification versus qualification or pre-approval. This is critical given the impending 2018 data recording season, when, with substantially lower reporting thresholds, even the smallest company becomes a potential HMDA reporter with its incumbent responsibilities and tasks.

Make sure you are armed with the facts when confronting a regulator who insists you are under-reporting your call volume or HMDA data.

What is Pre-Qualification?

"Pre"-Qualifying is a prior-to-application discussion of eligibility and rates, applied against published standard qualifying guidelines; ratios, down payment, loan type, and maybe even credit score. This analysis should result in a number; the maximum loan amount a customer could afford. It's not an application and the result states "THIS IS NOT AN UNDERWRITING DECISION", something that you must feature prominently on any correspondence. This is so consumers don't represent or think that they have been approved when they haven't.

If you Add a Property Address to a Pre-Qualification, the regulator will expect a Loan Estimate

Why Do Regulators Think Pre-Qualifications are Applications?

Buried in Reg B (ECOA/Fair Lending) commentary is a statement that has now become the lynchpin for the argument that pre-qualifications are applications. This opinion holds that pre-qualifications if failed, must be disposed of via Adverse Action and consequently are subject to activity reporting.

Comment for 1002.2(f)-3 When An Inquiry Or Prequalification Request Becomes An Application.
3. When an inquiry or prequalification request becomes an application. A creditor is encouraged to provide consumers with information about loan terms. However, if in giving information to the consumer the creditor also evaluates information about the consumer, decides to decline the request, and communicates this to the consumer, the creditor has treated the inquiry or prequalification request as an application and must then comply with the notification requirements under § 1002.9. Whether the inquiry or prequalification request becomes an application depends on how the creditor responds to the consumer, not on what the consumer says or asks. (See comment 9-5 for further discussion of prequalification requests; see comment 2(f)-5 for a discussion of preapproval requests.)

This comment illustrates the conundrum because, in this case, the consumer doesn't have to ask (apply) for credit but rather simply be ineligible for financing (according to the comment); the discussion must be treated as an application and denied. It also belies the intent of the pre-qualification which is, by its very nature, a positive discussion of what is possible. Even if the current scenario yields a $500 loan, it's positive, not negative. You CAN offer someone a loan if the income increases by a prospective amount, decrease debts by some prospective amount, save some prospective amount of money, and then identify what the pre-qualification yields. This is the purpose of the pre-qualification discussion - educating the consumer about how he or she should proceed if trying to obtain financing in the future.

This also shows the other flaw in the logic of considering a failed pre-qualification a reportable event; what's the number? It's ZERO! Where do you report that?

A "Failed Pre-Qualification" Doesn't Actually Exist

If we agree with the regulator that declining to issue a pre-qualification is a declined loan, you should consider this instance a "Failed Pre-Qualification." A "Failed Pre-Qualification" doesn't mean you issued a pre-qual that didn't meet the customer's expectations - such as one where the customer was looking at a 500,000 house but could only afford 125,000 - but merely should reflect the result of the qualification calculation, subject to underwriting. So if they can afford a $500 loan, you should issue a pre-qual for $500 and call it a day - no reporting required. In theory, you should never have a failed pre-qualification under this structure.

Your pre-qualification process must show you are determining a maximum loan amount, not meeting a specific loan request criteria. Once you begin trying to meet a specific criteria, it's no longer a pre-qualification , but a qualification.

Regulators are Correct About Pre-Approvals and Qualifying

Logically, the regulatory interpretation of pre-qualification activity WOULD be true if we called the process "qualification," eliminating the "pre-," instead. In a qualification exercise you start with a specific number - a desired property or particular loan amount - and work through the prospect's financial profile to determine whether the customer is eligible for that particular number. Results of this process identify, in binary form - YES/NO - whether the prospect can afford or is eligible for that number. In this case, if the borrower has too many debts, or has insufficient income or cash, or because of the limited profile, the credit score is insufficient for this particular instance, you now have a number that you are not eligible for. Either change the number (counter offer) or decline to proceed (adverse action).

Similarly, a Pre-Approval is a loan commitment resulting from a customer's application for a specific amount of financing prior to property selection. A customer submits an application and all supporting documentation which the lender completely processes in the absence of a property - no sales contract and subject to appraisal, title and property conditions. All decisioning rules apply. If the amount the borrower requests cannot be approved, then the underwriter may counter-offer for different terms, which the customer may accept. If not accepted, the loan must be declined and notices provided. Disclosures, except those which apply to a property, must also be provided.

You Can't Fight City Hall

Sadly, to this date, logic doesn't necessarily dissuade regulators from attempting to corral these innocuous discussions into a regulated process. According to several state regulators and the NMLS, while you don't count pre-qualifications in your call report, you must report declined pre-qualifications.

The golden rule applies. No amount of good reasoning will persuade a regulator, who has made a public determination about a policy, to admit that he or she is incorrect. So if you are in a state where the industry has allowed the regulator to control the definitions of what construes a credit inquiry, then you have to build policies around it, to ensure you comply.

Building a Compliant Pre-Qualification Process

Since this ECOA interpretation can open your business to regulatory scrutiny, you should build a process that inoculates you against under-reporting or fair lending findings. Simply, you could issue a pre-qualification certificate or letter for every single discussion, even if the result included a prospective versus current solution.

Generate and retain a copy of all pre-qualification letters/certificates from every discussion.

Create a standard pre-qualification letter or certificate

There may be multiple formats

as is or
prospective

If you do not issue a pre-qualification (a failed pre-qualification) you should issue an adverse notice stating "we don't offer any program matching your requirements."

A defined pre-qualification identifies a potential maximum, but does not state any basis for a declination.

The Anti-Kickback Rule - Payment or Receipt of Non-Approved Fees

2025-01-27T11:32:00.001-05:00

Background

With the recent spate of enforcement actions surrounding kickbacks, take the time to re-visit your explicit policies and procedures surrounding the anti-kickback rules.

12/23/2024 - CFPB Sues Real Estate Firm for Referral Fees

4/30/2015 - Updated filing shows actual money penalties by participants
1/22/2015 - Baltimore CFPB Action
St. Louis CFPB Action
Kentucky CFPB Action
Baltimore Referral Fee Lawsuit

Kickbacks are a problem because they tend to inflate the cost of a transaction.

Kickbacks tend to inflate the cost to the consumer due to the fact that someone else has to get paid for the referral.

Prohibited - Kickbacks and Referral Fees

Section 8(a) of RESPA prohibits anyone from giving or receiving a fee, kickback, or “anything of value” pursuant to an “agreement or understanding” for the referral of business related to the purchase or financing process. The purpose of the prohibition is to protect consumers from the payment of fees when no additional work is actually performed. Kickbacks tend to increase the cost of the transaction, since the borrower will have to be charged more in order to cover the cost of the referral fee.

All personnel should avoid even the appearance of accepting or paying for non-approved services.

An “Agreement or Understanding” does not have to be a formal agreement, but can be a verbal agreement or even an agreement established through a practice, pattern, or course of conduct.

Prohibited Payment – “Anything of Value”

Payments include, but are not limited to

A “Thing of Value”
Money
Discounts
Commissions
Salaries
Stock
Opportunities to participate in a money-making program
Special or unusual banking terms
Tickets to theater or sporting events
Services of all types at special rates
Trips and payments of another’s expenses

Prohibited - Fee Splitting

Fee splitting is when a service provider inflates charges and splits the excess funds with another service provider in exchange for the referral of business. This is tantamount to a kickback and is a prohibited practice. Service providers may attempt to circumvent this prohibition by establishing joint ventures or entering into business arrangements that allow referrals between organizations and conceal the fee splitting arrangement.

Permitted – Approved Affiliated and Controlled Business Arrangements

In some cases, there can be fee splitting or referral fees paid under what is known as an “affiliated business arrangement”. An affiliated business arrangement is where a person who refers settlement services has an “affiliate relationship” or “an ownership interest of more than one percent in a provider of settlement services.”

The payment of reasonable fees is acceptable as long as the relationship is disclosed to the borrower and the referrer actually performs a service – or somehow adds value. The referral service provider may NOT be a REQUIRED provider of services, such as an appraiser or credit bureau that the lender must select. An affiliate relationship structured simply to legitimize the payment of a fee is referred to as a “sham”. Affiliates must be a “Bona Fide Provider of Services” to receive a referral fee legally.

Approval Required - Desk Rental Arrangements

Because of the level of oversight, and the potential for the payment of desk rental to masquerade as payment for a referral, all Desk Rental Arrangements must be approved in advance. Provide the following:

· Copy of the lease/rental agreement

· Document market value of desk rental services through Craig’s list, square footage analysis or other verifiable source

Approval Required – Joint Marketing Arrangements

Similar to a Desk Rental, partnering with referral sources to advertise or market must also be evaluated for potential conflicts and approved by management. Particularly when this relates to commercial communication, the material must also be reviewed against the Provide:

· Any advertising agreement

· Copy of publication or proposed media

Approval Required - Marketing Vendors

Payments to marketing vendors, such as lead generation companies, may create problems if we base the payments on anything but the lead itself. If there is a payment conditioned upon a certain criteria or threshold, such as confirmed application, underwriting approval or closing, the arrangement may be considered illegal. For approval provide:

Marketing Agreement
Fee Schedule for Leads

In addition, the agreement and vendor must be approved to ensure the vendor complies with Fair Lending, Information Security, Customer Privacy and other consumer-facing regulation.

Approval Required - Payments to Counseling Agencies

Payment for services to a non-profit agencies for counseling services performed are permitted. Provide:

memorandum of understanding between the lender and the non-profit agency
establish how payments to vendor are not based on referrals .

Required Disclosures

· Affiliated Business Arrangement Disclosure (AfBA) – if Applicable

· Required Provider Disclosure – From LOS

· Approved Settlement Services Provider List

Operating Areas Affected

· Origination - Production

· Compliance

Penalties for Non-Compliance

Penalties for violations of the anti-kickback provision include fines of up to $10,000 and up to one year in prison.

Unethical or Illegal? Dual Agency/Dual Capacity, Double Compensation in Loan Origination

2025-01-07T07:37:00.001-05:00

Updated 1/6/2025

It seems obvious, but the fact that an originator might represent someone else's interests in a transaction creates an inherent conflict of interest. The real estate agent works for the seller, and the loan officer owes his fiduciary responsibility to the borrower. Conflict occurs when the loan originator can receive compensation elsewhere in a transaction besides the mortgage, such as:

real estate commission
insurance sale
title/closing/escrow transaction
appraisal/valuation
financial services
accounting

The question at issue: whether it's merely unethical to "double-dip" or illegal and prohibited? The answer lies in the location of the property. If your state prohibits dual agency or has rules against dual compensation, then it's illegal.

Since acting as a real estate agent (where you represent the seller) and a loan officer (where you represent the buyer) is a conflict, you should not allow both. However, it may be acceptable for you to have a business where you actively sell real estate as a licensed real estate agent and separately originate loans as a licensed mortgage loan originator. There is no conflict if you recuse yourself from participating in the transaction.

Loan Originator Compensation Rules

In a conundrum for "true" buyer brokerage (where the buyer pays the agent's commission), dual agency cannot exist due to the requirement that the borrower cannot pay the loan originator anything outside of the commission on the loan. If you recuses yourself from the fee, it appears this would be acceptable.

Is it acceptable to Have a Real Estate License?

Mortgage originators with a real estate license sometimes find it easier to generate business because their experience in real estate adds professional credibility to real estate agent referral sources. However, this does not mean the mortgage company or bank finds this acceptable. The POTENTIAL for conflict creates enough possible risk to lead the mortgage company to create a hiring policy that prohibits this arrangement unless the license is affirmatively inactive.

This stems from the fact many secondary market contracts and loan purchase eligibility warranties often cite the requirement for no conflict of interest in the loans sold or purchased. The mere existence of a conflict can require a lender to repurchase a loan, regardless of whether there was a negative outcome.

FHA Allows it - USDA Does NOT

Recently, FHA clarified that it WOULD allow non-credit (not underwriters, valuations, quality control, etc.) related parties to act as both agents and loan originators. However, on 3/31/23, USDA clarified this was a conflict of interest and specifically DISALLOWED this.

Dual agency in Real Estate Transactions Prohibited

Eight states have made dual agency in real estate illegal: Alaska, Colorado (although dual capacity for LO is allowed), Florida, Kansas (allowed for broker), Maryland (Prohibited from receiving finder's fee -aka broker fee), Texas (Dual Capacity For LO allowed), Wyoming, and Vermont. Dual Agency refers to the real estate agent representing both the seller AND the buyer. This is one indicator that, regardless of role, a loan originator who is also a real estate agent could run afoul of this. Some states allow what is known as "Dual Capacity."

Real Estate Rules Where Undisclosed Dual Capacity is a Violation

Massachusetts, Massachusetts, also does not allow acting as a real estate attorney and a broker on the same transaction.

States that may specifically disallow Dual Capacity

North Dakota	Not Allowed	Examiner - Ownership okay, but cannot be agent and MLO on same transaction
Illinois	Not Allowed (must be separate)	https://idfpr.illinois.gov/faq/bre/mlofaq.html#faq-5caniholdamlolicenseandrealestatesalespersonlicensesimultaneously-faq
Louisiana	Not Allowed	La. Rev. Stat. §6:1090(I)
Utah	Not Allowed	Prohibited per 61-2c-301 (1)(i)
RI	Not Allowed	Commentor

Maryland - No "double dipping"

States that do not specifically disallow Real Estate Agents and Originators to Receive Commissions on Both Transactions - known as "Dual Capacity."

Arizona (Mortgage Broker License)

California (DRE Licensed)

Colorado - With Proper Disclosure

Connecticut

District of Columbia - With Proper Disclosure

Kansas - If properly disclosed

Michigan (MI DFI) - Must use AfBA disclosure

Nebraska

Nevada

New York

North Carolina (maybe) - Strong advisory against it because of possible RESPA/TILA violations

Ohio - with proper disclosure as of 6/24

Texas - With proper disclosure

Virginia

Washington - Required Language in Disclosure

We will add it to this list, or you can send your citations as we collect more information.

Regulatory Guidance - Appraiser Independence Rule (AIR) Violation Minefield

The most frequently overlooked problem with this arrangement is the possible influence of the appraiser. The real estate agent (particularly the listing agent) meets the appraiser at the inspection of the property and has a vested interest in obtaining the highest possible value to support the sales price. The company could be liable for undue appraiser influence if the agent is also a loan originator. The lending company can put guardrails in place, but there is no such fail-safe for real estate agents.

Affiliated Business Arrangement Disclosure

Many states have their own language for Dual Authority, but RESPA rules require that the relationship be disclosed using the Affiliated Business Arrangement Disclosure (AfBA). Further, there should be a prominent disclosure that the customer receives services and pays fees to the same individuals for multiple services.

This is also true if the agency owns a part of the lender, or any related settlement service.

Unless it's Specifically Codified - Best Practices Dictate "Don't Do It."

Sources

“Required Disclosures by State - American Mortgage Network.” American Mortgage Network - Funding The American Dream, 22 Nov. 2022, https://www.amnetmtg.com/required-disclosures-by-state.

Should You Reprocess Your Mortgage Loan File Before Submitting It to a Regulator for Review?

2024-08-28T11:22:00.003-04:00

When it comes to regulatory reviews, presenting a meticulously organized and thoroughly vetted mortgage loan file is crucial. You might wonder if reprocessing your loan file before submission is worthwhile. The short answer is yes, especially if you are not already post-closing and organizing loans when they close. In this case, reprocessing your mortgage loan file could be the difference between a smooth review and a costly, time-consuming ordeal.

Why Reprocess? It’s All About Precision

Loan files are complex, containing numerous documents, verifications, and disclosures that must be accurate and complete. Even with the best intentions and processes, items can be missed. The reality is that we often discover missing or incorrect items when we take the time to reprocess files. These oversights might seem minor but can lead to significant issues during a regulatory review.

By reprocessing your loan file, you ensure that every document is where it should be, every calculation is correct, and every compliance box is checked. The attached FORM 1-4 QC PROC Closed File Pre-Audit Compliance Checklist is an excellent example of a comprehensive tool to guide this reprocessing. This checklist covers everything from verifying borrower information to ensuring all regulatory disclosures are accounted for. You might use the state required version of the file, such as that provided by North Carolina or Texas, for your review (even though the FORM 1-4 does contain all these items.)

The Benefits of Reprocessing

Reducing Findings and Penalties: Regulators are thorough, and they will catch mistakes. By reprocessing your file, you can correct errors before they become findings in an audit. This proactive step can save you from fines, penalties, or even more severe regulatory actions.
Cost Savings: When a file is well-organized and accurate, it takes less time for the examiner to review it. This not only makes the review process faster but can also reduce the overall cost of the examination. A clean file means fewer questions, less back-and-forth, and ultimately, less time spent by the examiner—time that you won’t be billed for.
Building Confidence: Presenting a thoroughly reprocessed file with a detailed checklist like the Post-Closing Audit Preparation/Regulatory Compliance Checklist gives the examiner confidence in your compliance processes. While it’s unlikely that an examiner will completely forego reviewing your files based on this alone, a well-organized submission can lead to a more favorable outcome, potentially reducing the depth of the review.
Streamlined Communication: A file that has been reprocessed is easier to navigate, not just for the examiner, but for anyone in your organization who might need to answer questions or provide additional documentation. Having a checklist attached that shows exactly what has been reviewed and included in the file simplifies communication and ensures everyone is on the same page.

What Happens If You Don’t Reprocess?

If you decide to submit your file without reprocessing, you’re taking a risk. Missing or incorrect items can lead to findings that will need to be corrected under the pressure of a regulatory deadline. This can be more stressful and costly than simply reprocessing the file upfront. Moreover, repeated findings can damage your company’s reputation with regulators and may lead to increased scrutiny in the future.

A Checklist to Guide Your Reprocessing

Consider using a tool like the FORM 1-4 QC PROC Closed File Pre-Audit Compliance Checklist as part of your reprocessing efforts. This checklist is comprehensive, covering all the necessary components of a loan file, including:

Borrower and Loan Information: Ensuring all borrower details, loan amounts, and terms are correctly documented.
Fee/Cost Reconciliation: Verifying that all fees are correctly calculated and documented, with copies of relevant checks and invoices attached.
Record Retention: Confirming that all required documents are included and appropriately filed, from the initial loan application to the final promissory note.
Post-Closing Audit: Preparing for a regulatory review by double-checking that all compliance requirements are met and that the file is ready for submission.

Conclusion

In conclusion, reprocessing your mortgage loan file before submitting it to a regulator for review is not just advisable—it’s essential. By taking the time to review and organize your file, using a comprehensive checklist, you can significantly reduce the likelihood of costly errors, streamline the review process, and potentially save your company both time and money. So, next time you’re preparing a file for submission, take that extra step to reprocess—it’s well worth the effort.

What items MUST a Broker retain independently in each loan file

2024-08-08T09:50:00.001-04:00

Don't let your wholesaler tell you they've got everything you need. They don't. Important lessons in regulatory audits and examinations.

"If you only do ONE THING - post close your loan files."

Brokers - ALWAYS Retain All Loan Documents

I cannot overstate the importance of meticulous record-keeping. Regulatory requirements and best practices require brokers to maintain comprehensive records of all loan transactions, including disclosure events and closing documents.

I hear people saying, "I don't see anything in the regulations that says I have to keep certain documents..." but your regulator will require copies of all documents on all the loans you handle. In this article, we provide an explanation of what documents regulators hold brokers accountable for.

I also hear people saying "My wholesaler will give me copies of everything if I ask for it. So I don't need to post-close my loan files..." While the wholesaler will retain copies, and may also provide a copy of a file a long time after loan closing, we see a lot of inconsistency in the condition of those document stacks from the lender. They can look like a jumble, which will require you to reprocess the file. Furthermore, what happens if the lender shuts down, gets merged or otherwise doesn't have the ability to provide what you need?

Record Retention Requirements

As a broker, your record retention involves both the disclosures you issue and those provided by the lender. While federal and state regulations may not explicitly mandate the retention of all documents from the lender, best practices and regulatory expectations strongly advise maintaining a complete set of records.

Also, your loans progress in stages and may not complete or get submitted to the lender. Our system suggests what you must retain at various stages of the process.

We provide a checklist of this here:

Key Practices and Checklists

Retain All Broker-Issued Disclosures:
- Initial Loan Application Form (1003): Ensure that the signed initial application is on file.
- Loan Estimate and Required Providers Disclosure: These should be issued within three days of application.
- Notice of Intent to Proceed: Must be signed by all borrowers.
- Changed Circumstances Re-issued: Include any tolerance adjustments.
- E-SIGN Acceptance/Agreement and Delivery Transcript: Keep records of acceptance and delivery audit trails.
- Signed Initial and Final Broker Fee Agreement: Must match the closing disclosure or settlement statement.
Obtain and Retain Lender-Issued Documents:
- Final Loan Application (1003) and Transmittal Summary (1008): Essential for compliance.
- Executed Closing Disclosure (CD): Include all attachments.
- Final Mortgage Loan Lock-in/Financing Agreement: Required at least five days prior to closing.
- Appraisal and Related Notices: Keep copies of the appraisal order, the appraisal itself, and the right to appraisal notice.
- Final Sales Contract and Earnest Money Deposit: Ensure these are part of your records.
- Loan Commitment/Approval Notification: Document the lender's commitment to the loan.
Comprehensive Documentation:
- Fee/Cost Reconciliation: Maintain copies of all application fees, appraisal fees, credit report fees, and other relevant costs.
- Affiliated Business Arrangement Disclosure: If applicable, retain this disclosure.
- Compliance Disclosures: Include ARM disclosures, CHARM Booklet Notice, Anti-Steering Notice, ECOA Rights, Fair Credit Reporting Act Notice, and others.
- State-Specific Disclosures: Ensure all state-required disclosures are documented and retained.

Why Complete Record Retention Matters

State regulators, such as those in Washington and Texas, expect brokers to maintain records similar to those required from lenders. During examinations, brokers are often asked to produce detailed records of all disclosure events, closing documents, and other pertinent paperwork.

Texas, North Carolina, and Maryland Loan File Checklists

Adhering to the checklists from different states can help ensure comprehensive compliance:

Texas Checklist: Includes initial and final disclosures, funding checks, appraisal reports, and title insurance.
North Carolina Loan File Checklist: Similar to the Texas checklist, emphasizing the importance of complete documentation.
Maryland Loan File Checklist: Focuses on detailed retention of all application and closing documents.

Updated Practices and Client Advice

In light of experiences and state examinations, brokers should update their practices to require copies of all signed disclosures and final closing packages from the lender. This proactive approach not only ensures compliance but also protects brokers in the event of an audit. You do not want to have to stop producing and getting new business to have to reprocess loan files to submit to a regulator.

Advice for Broker Clients: Always obtain a complete disclosure package from the lender, and ensure you send out the required broker disclosures independently. This comprehensive approach to record retention is crucial for compliance and to avoid citations for missing lender documents. If the lender does not cooperate, document your efforts to obtain the necessary records.

How to create a compliance library for your company

2024-04-10T10:13:00.001-04:00

Creating content takes weeks and months. That's why many people purchase off-the-shelf training subscriptions for compliance training. But in truth, much of this material is the same stuff that's been trotted out for years. Why not take the material directly from the source (e.g., government agency, regulator, or mortgage insurance company) and just document that our employees have taken it with a quiz?

This allows you to devote your training program development to those areas where there is a gap or where your specific situation needs more attention.

Step 1 - Assemble the Playlist

We did this here on YouTube. It's a great resource for compliance managers who need to have more than their line employee's training. Visit https://www.youtube.com/@Mortgagemanuals/videos

You can curate playlists with the content you want your employees to see.

Then it's just a matter of developing a quiz to ensure the students have gotten the message. You can create a quiz in Chat GPT, or use our models here:

https://www.mortgagemanuals.com/annual-aml-training.html

Gramm-Leach-Bliley FTC Safeguard Rules Updated 6/2023 - Regulators asking lots of questions

2023-11-02T14:50:00.011-04:00

Changes published in 2021 went into final effect in June 2023. Now, regulators are stepping up their review.

We've been seeing the impact of the updated CyberSecurity examinations prompted by the December 2021 FTC rule revisions. Regulators are dumping massive checklists into the exam load, and most companies don't have the bandwidth to address it. It's a hefty load, but it's worth going through to establish a baseline.

Click here for the updated rule

Click here for the CSBS Model Examination Form for non-banks

The word you will see the most in an examination citation is "implementation." This means that, no matter how good your model policy is, if you're not doing - or have evidence that you can do - the things the rule requires, you'll likely be cited.

Like every good compliance program, policies and procedures are simply part of a complete IT Security Plan. There are 4 pillars of every compliance program:

a compliance officer,
policies and procedures
training, and
testing/auditing.

Most of the policies we've seen are precisely that - policies. There is very little procedure. In other words, the model form says, "We will comply," but doesn't say, "This is how we comply." This is the most significant difference between our products and those written by lawyers or compliance experts.

Location of IT Security Questionnaire Items in 2-9 IT/CyberSecurity Plan

States Strictly Enforcing GLB Compliance

DC
Maryland
Massachusetts
Virginia
Texas
New York

Remember to add those non-policy items

List of hardware (investor)
List of software and cloud services
List of vendors (investors, office tech, processors, etc. )
Cyber Insurance Policy

Tools for Self-Training

MortgageManuals.com provides training for our customers' Non-NMLS employees.

Tools for Self-Audit

We provide the tools for a self-assessment, but if you want a third party risk assessment we do that here.

The problem with the flip flop - Anti- Steering and Loan Originator Comp

2023-05-17T11:57:00.006-04:00

Broker companies are creating compensation plans with flexibility for lowering the compensation of broker loan originators by switching from lender paid to borrower paid. It appears legal, by taking the Safe Harbor of "borrower's best interests" to allow pricing discretion and reduced commission to loan originators. However, this changing commission is based on loan terms (or proxy) because it results from the change of fees. Seen this way, the practice is prohibited under the anti-steering rules. Why? Because if you can reduce pricing by switching, you can achieve the inverse, too.

This is precisely what is happening today; loan originators go to the prospect with one price based on lender-paid fixed compensation plans. Then the prospect comes back with a competing offer and the loan originator now tries to beat it. Since it's impractical to change pricing under LO comp rules under lender paid on a case-by-case basis, they switch the pricing to borrower paid where there is flexibility to reduce the charges. Now, the compensation is in the hands of the broker-company, not the wholesale lender. This is done under the auspices of "borrower's best interests" Safe Harbor.

It should be clear that, unless you have a loan amount-based compensation plan, the temptation to flip a borrower from Borrower Paid to Lender Paid and INCREASE commission is inherent in the "flip to borrower paid" structure.

I think any regulator will see this as flying in the face of the LO Comp/Anti-steering rule because it gives the LO pricing power with discretion to decrease his or her commission. The argument goes; it benefits the borrower - which is a SAFE Harbor. The main flaw in this thinking is that it doesn't consider that the inverse is also true; a loan originator could switch from borrower paid to lender paid at a higher commission. In a word - steering.

Perhaps the fact that compensation is capped at a QM level of 2.75 points as a maximum commission provides a sense of no variable compensation.

I am not sure why this has escaped scrutiny for so long. We tell our customers that we recommend a flat commission rate based on loan amounts, not a percentage of the of the fee, to avoid the appearance of steering.

The problem for the industry is that the good actors who lead with their best price in compliance are having their production poached by participants who allow loan originators to adjust pricing to "get the deal." While that seems to benefit the customer by creating a competitive market, remember that the whole idea of the rule was to regulate this practice because the pricing was opaque to the consumer. The consumer has minimal knowledge of the market, rates, and pricing, while loan originators are very knowledgeable and are extremely motivated to increase their income.

A Look at AML Audits - Can you Audit Without a Risk Assessment?

2023-04-01T12:51:00.004-04:00

We deal with known risks by establishing a plan to mitigate them. In the case of AML plans for mortgage companies, we face the risk of allowing financial crimes to go undiscovered and enter the financial system through our business.

We create compliance plans as multi-tiered tools to deal with the risk. The tiers are the four (or five, depending on your business) pillars of an AML plan

the plan itself - which identifies the risks your business encounters and how you mitigate them
training - your employees learn how to identify and report red flags
compliance officer - the person who implements the procedures, files reports, and ensures the activity, such as training, audits, risk assessments, etc., takes place
an audit or exam - reviews your plan, determines if it is sufficient for the risks you face, and identifies if you are following it
ongoing review of accounts - if we are servicing, for instance

Static Plans DO NOT Address the Risks - Make Sure you know what they are

We conduct hundreds of AML audits, and the BIGGEST problem we see is that AML plans don't address the risks the business faces explicitly. Furthermore, the audits or tests we see focus on whether the AML plan contains arcane legal citations or reviews a sampling of closed loan files. This is not where the risk is.

In the mortgage business, we are experts in looking for fraud - documenting sources of funds and ferreting out suspicious income and transactions. This doesn't mean that fraud and suspicious activity doesn't make it through (CoreLogic reports 1 in 131, or 0.76% of loans, are fraudulent). Still, it does mean that the MAJORITY of incidences probably aren't in the files that make it through to closing. So it makes sense to focus our efforts on loans that don't go through a complete underwriting process.

None of the AML plans and audits we have reviewed focus on risk assessments. Hawaii is the only state we have encountered where they are requesting a specific AML risk assessment - (Bravo! Mahalo!). New York requires large-scale risk assessments of the entire operation, including AML.

This leads me to conclude that people don't know what a risk assessment is or even why you do one. The purpose of the Risk Assessment is to look at YOUR business for areas of risk. Only then can you create a strategy to mitigate money laundering activity?

How to Conduct a Risk Assessment?

Depending on the firm's scope, our risk assessments create a binary decision tree instead of a complex "relative risk rating" approach - e.g., low, medium, and high. We do it this way because the risk increases on an absolute basis. One red flag doesn't necessarily indicate fraud or money laundering activity; however, two levels of risk means that we should, at a minimum, document that we validated there were no red flags. We refer to this as "risk layering," where two or more inherent risks exist in a file.

Higher risk components - Company-wide

Geography
Business model -

delegated, non-delegated,
retail/wholesale, etc.

Origination strategy -

direct/indirect
relationship/transactional

Higher risk components - Loan Level

Loan Type

Gift Letter
ALT/Non-QM
Investment

Borrower Type

Self-employed
Real Estate
Medical
Cash Business

This allows us to have a methodical elevation of the review of the file.

We do this because things that don't matter to the underwriter from an approval perspective (the loan meets guidelines) often matter for detecting and reviewing red flags. In our business, we review files for these elements, and it always surprises us how often these are overlooked. Examples include:

Deposits not needed for down payment or closing costs - the underwriter isn't concerned about whether a borrower has a $100,000 CD in one bank if he has the $20,000 he needs for closing seasoned in another account. The money has been there forever, and the account doesn't move. But does it make sense that someone who makes $60,000 a year has $100,000 stashed in an account they don't touch? Especially when they have a lot of debt? No, it doesn't. That's a SAR.

Income and Expenses from a side business - the underwriter doesn't include the borrower's side business which involves cash in the computation. He or she has enough income to qualify for the loan. The side job (documented by frequent small dollar cash deposits) is a compensating factor, and the borrower didn't need to provide tax returns because she was on salary. That makes perfect sense, except that if there is more than $5,000 of this kind of activity in the loan file (e.g., 2 months' bank statements), then that triggers a SAR report for "smurfing."

Focus on engagements/applications/rate quotes/pre-quals which do not complete
The greatest risk lies in loans or prospects not reviewed by underwriting/credit.

HMDA Data Reporting Process Changes - LOWER THRESHOLDS

2023-02-28T13:23:00.049-05:00

Substantially lower reporting thresholds mean most LENDERS must report HMDA data - Implications for non-delegated correspondents

As you may be aware, a Federal District court ruling in September 2022 changed HMDA reporting thresholds. The previous lookback formula stated that if you made credit decisions on 100 mortgages in each of the previous 2 years, you were required to report in the current year. The ruling reduces the threshold for reporting based on the number of mortgages with credit decisions to 25 in each of the previous 2 years.

Implications for Non-Delegated Correspondents

It has come to our attention that equal numbers of wholesalers do NOT report HMDA data on correspondent loans as those who do. The HMDA rules stipulate as the credit decision maker must report (in other words, the underwriter/approver), but not all companies follow this edict. Some believe that if your name is on the note, you are the lender of record, and so reporting is your responsibility. YOU MUST CHECK with each wholesaler to find our what their procedures are. If they do not report for you, and you have over 25 loans closed, you must report HMDA data.

Retroactively Effective

Since the ruling reverses a previous regulation it now applies retroactively. If you were previously not a reporter because you made fewer than 100 loans in each of the previous 2 years, you most likely are now. If you’re a broker, you’re not making credit decisions, so this does not impact you, UNLESS you are denying loans. The CFPB has stated that it will not penalize those organizations which now must report due to the change who are now implementing the new reporting.

We have updated our HMDA Policy to reflect these changes. You may download it here:

Download Updated HMDA Policy

Insert it in your Section 2-42 of your 2-0 Compliance Module

Download Updated HMDA Policy

How much information can I share with a real estate agent?

2023-01-18T20:02:00.003-05:00

As we get into a more competitive real estate environment, where all-cash offers aren't the only way for a buyer to make an offer that might be accepted by a seller, these questions surface again. Specifically, how much about a customer can we share with a listing or selling agent?

Understanding Real Estate Agent's Role

First, understand that real estate agents, for the most part, have a fiduciary responsibility to the seller. While selling agents (who work with buyers) say they work for the buyer - and may even have the buyer brokerage disclosure or contract signed - the real estate agent is paid by the seller. So information about a customer's profile, the likelihood of getting financing, and other transactional information a loan originator may possess can be pretty valuable to a seller.

Loan originators often pass this information out to the agent who referred them to the transaction as a way of currying favor with the agent. You must carefully monitor and limit this data flow for many reasons. For example

While negotiating a contract, a seller wants to obtain the highest price and net proceeds. The buyer wants the opposite. If a loan originator offers a prequalification or pre-approval letter, the seller wants to know if the buyer can afford more. The loan originator capitulates and says, "well, he can afford another $200,000 in the loan amount," the seller may counter-offer a higher amount. The buyer, however, asked for prequalification for a certain amount, and the originator's disclosure took away the buyer's leverage.
While processing a transaction, the seller accepts backup contracts, perhaps more favorable than the current contract. With the information that financing is still pending or in question, the seller may act in ways that further diminish the buyer's ability to consummate the transaction to obtain a more favorable sale.
The loan is denied, and the seller wants to know "why?" The seller is trying to figure out if the borrower did something wrong - acted in bad faith, perpetrated fraud, or another scheme - that kept the property off the market during the financing contingency period. The seller wants to keep the buyer's deposit because they needed to actively pursue financing.

Pre-Qualification is NOT an Approval; it's an Opinion

A buyer asks for your opinion on how much he or she can afford by asking to be prequalified. You should address that pre-qualification letter, certificate, or other documents to the prospect, not the real estate agent. Then, if the real estate agent has questions about the customer's qualifications, such as where is the money for the down payment coming from, what their monthly debts are, how they receive their income, etc., the agent should address it to the prospect.

Prospects should be careful about what information they provide to a real estate agent because they risk exposing their Personally Identifiable Information or their Non-Public Information to identity thieves. Real estate firms generally are not regulated by entities that insist on secure data because most real estate-specific information is public knowledge.

On the other hand, the agent will likely communicate the information to the seller in support of an offer to purchase, so a prospect may feel compelled to share more information than prudent to advance their home purchase.

To avoid disclosing this information, a prospect should actually obtain the financing in question via a loan application, loan underwriting, and loan commitment, subject to a final property selection; a pre-approval. With this in hand, the customer does not have to provide additional documentation supporting an offer contingent on financing because the financing has already been obtained.

How Much Can You Share?

Technically, none. Your customer has a right to limit the information you share and under what circumstances the information is shared. To share any information a prospect gives you, you should review a copy of the sales contract (offer) to see if the customer has already authorized the lender to share information on loan status. Otherwise, you should obtain authorization to release information to the agent(s) or builders; Consent to deliver loan status updates, generally.

Loan Status vs. Personally Identifiable Information or Non-Public Information

Loan status simply details what is in and out on a loan file and provides dates when certain tasks have been performed on a transaction. This is a good example of how this information could be shared (Source: AZ Association of Realtors). There is no NPI or PII in any of this material.

When the loan originator provides Non-Public Information or Personal Financial Information, such as credit scores, payment history, or any other information gathered during transacting business or in conjunction with a loan application, this is a clear violation of the Gramm-Leach-Bliley Privacy Act. It MAY be permissible in a situation where there is an affiliated business and the sharing of information would be NECESSARY to conduct business.

So, NO. Don't Share Private Information

In other words, a customer may share their own information, but you, as a financial service provider, may not provide any non-public private information.

Planned Refinances - Compliance Minefield

2022-12-20T10:13:00.014-05:00

Buyer refi program: "If you use us for your purchase loan and you refinance within 3 years, we will credit back at the close of your refinance, appraisal fee, and certain other fees......"

Can this be done as a Broker, and if so, how is it disclosed?

These are popping up all over the place. Of course, you CAN do them (and lots of people do informally), but creating a program around this and advertising this runs afoul of the "planned refinance" rules of the agencies.

Pricing from the lenders is based on actuarial tables that include estimates of how long a loan will stay on the books. Further, many servicers offer a "loan modification" element to retain the servicing on a loan while moving the underlying loan from one security to another.

To understand why this is a big deal, the cash value of mortgage-backed securities for mortgage lenders is small and gets capitalized as an income stream. Even when retained as a swap or other secondary marketing asset or hedge, the secondary market for mortgage-backed securities' primary use for lenders is a tool to achieve equilibrium - you might make money in secondary in a falling rate environment, but you intend to break even or just not lose money. So a lender makes money by building a servicing platform and collecting monthly payments for a small spread. That small spread, multiplied by thousands of loans, creates a solid cash flow model. Planned refinances disrupt that model.

Further, creating an agreement to refinance out of a higher rate loan runs into the UDAAP higher cost loan rules and makes it look like a predatory lending strategy: Take this higher cost loan today, and we'll give you a lower cost loan in the future..." Regulators, particularly those interested in enforcing anti-predatory lending practices, have a keen interest in these types of arrangements when they surface. It's not the kind of attention most lenders want.

Finally, the practical considerations of a planned refinance agreement create a minefield of legal issues. How do you guarantee that you will be in a position to provide the cost credit? What provisions do you make if the company goes out of business or is shut down? How do you create an independent index that a reasonable consumer can follow to trigger the rate, and what if rates end up going lower than the refinance trigger?

There is nothing wrong with a loan officer creating a database of past customers and discussing a possible future refinance. "I'll call you when rates get to x.00%" And you could market that as a personal service: "The Rate Watch."

The Buzz on Cyber Security

2022-11-15T15:10:00.000-05:00

Federal Rules Expand the Scope of Your Customer's Data Protection

In case you were wondering about the onslaught of regulator or investor requests for cybersecurity plans, risk assessments, and MFA certifications, it all has to do with FTC regulations passed last year that go into effect December 9, 2022. The FTC has extended the deadline for compliance for 6 months, making the new deadline 6/9/2023.

eCFR :: 16 CFR Part 314 -- Standards for Safeguarding Customer Information

In a nutshell, our customers have all of the tools to meet these requirements in the 2-90 IT Security Plan. These include:

Employee Training
Risk Assessment
Third-Party Vendor Reviews
Data Breach Response and Remediation

Small companies - responsible individual

For small firms, you should assign a responsible individual who is knowledgeable about the technology aspects of your firm. They do not need to have a degree in cybersecurity. However, they should know all the firm's tech and communications infrastructure and have the capability to completely answer the cybersecurity questionnaire. If the individual is NOT able to answer the questionnaire, you MAY designate a third party, such as an IT consultant. We caution small companies against signing big contracts if the firm's technology consists mostly of leased cloud computing assets, such as LOS, document storage, and email. Even third-party apps, like online 1003s, should come with some tech support, and you can designate a 3rd party (even the vendor) specifically for those types of risks.

Don't "Build Castles" - Use the Tools you Have

We really try to avoid creating additional work in the form of a separate workflow for compliance-related matters. That's why you should use some of the resources you already have to meet some or all of the requirements.

Credit Bureau Audits - If you have the ability to pull credit reports yourself (instead of just through your investor/wholesaler directly) you likely have a credit bureau service provider. This firm is responsible for evaluating your firm (usually annually) and providing a risk assessment based on that evaluation. That should be a foundation. Review their report against the overall questionnaire to see how many items are covered.
- By the way, bureaus are conducting these audits furiously as a part of the new rule's implementation
State Certifications - keep a copy of any questionnaire you complete to assess your technology. THIS COUNTS AS AN AUDIT or RISK ASSESSMENT
When you sign up with a tech provider, get their SOC or ISO certification information. Use the vendor's reviews as your own.
When getting training, make sure you keep a copy
Read your policies and procedures - if they don't make sense, get a plain English translation!

Speaking of Plain English - here's our summary of the IT/Cyber Security Plan requirements that you can use as a checklist.

New York Cybersecurity Certification

The Section NYSDFS 500 updates that went around earlier this year include the updates from the FTC's rule. The changes do not represent a departure from current best practices but memorialize the requirements in the FTC's Safeguarding rule.

Remember that the certification only captures information on what you are doing. Policies and procedures should reflect this information; they don't replace your implementation.

You can request help completing your Cybersecurity Certification here

The Proliferation of 1099's, Flat Fee agreements - A Warning

2022-11-08T15:54:00.004-05:00

I've just survived a hurricane. In the resulting re-building process, I've learned one thing definitively; many people say that they can fix your problem - just give them a "deposit." In fact, that's a pretty good way to ensure you'll never hear from them again.

I see the same thing in the loan officer compensation wars currently evolving. No compliance officer or attorney worth his or her salt will authorize a non-compliant compensation plan because the risks so far outweigh any temporary benefits. However, as margins and business shrinks companies are adopting risky plans because they're likely to be out of business when the bill comes due. Unfortunately, this drives the entire market in the same direction.

When arranging compensation plans in a way that allows the company to capture a flat fee is fine. Charging a flat fee (subject to QM cost limits) to a customer is also fine. Charging a loan originator a monthly desk rental or other fee is also fine. However, netting costs from a loan officer's comp is a problem. You cannot withhold fees from an agreed-upon commission.

Independent contractors | Washington Department of Revenue

To be considered compliant with the "Anti-Steering Rules" you must set flat commission rates from your wholesalers across the board so the loan originator cannot increase his or her income by steering the customer to a particular product or lender.

A common trend today involves the adjustment or reduction of a loan originator's compensation because the customer changed to/from borrower-paid compensation. You should only do this in conjunction with a "best interests" scenario, not as a matter of course. We do not know that Federal regulators will accept this as a standard practice for reducing a customer's price.

Independent Contractors, Again

We get the question about whether a specific state will always accept loan originators paid via 1099. You must know that a state does not necessarily regulate this, though it may take a position. For example, Texas, North Carolina, and CA DFPI do mandate that loan originators must be employees, not contractors. States regulate licensing and business practices, so even though you may see a tacit acceptance of originators as 1099 contractors, this is an internal decision for each company.

To understand the consequences of 1099 contractors, understand that the IRS and the US Department of Labor define the issue of employee status. Can a loan originator really be a contractor if you control certain elements of their business? For instance, you really should require a loan originator to use your technology (laptops, phones, and networks) to avoid exposing your customers to cyber risks. If a contractor must use your equipment, are they really a contractor? In another instance of controlling the work environment, you must license a remote location or approve the use of remote access. Does this create an employee relationship? If you are offering employee benefits, such as health care, it's likely you are an employer.

For these reasons and others, any reputable compliance consultant or attorney who knows the rules will NOT recommend 1099 employment agreements. I KNOW THAT EVERYONE IS DOING IT.

Furthermore, regulators have paid surprisingly little attention to this matter. In the end, what may drive your decision relative to 1099 or W-2 is the possible re-classification of your company's contractors as employees in an audit. The penalties are enormous - unpaid taxes, plus a 100% penalty, plus interest.

You CAN withhold taxes and mark the employee's W-2 as "Statutory Employee" which will allow them to deduct their business expenses on Schedule C. Or have the employee get licensed as an LLC, or even as a Sole Prop, and pay the LLC directly.

Mortgage News Digest: Can I pay a Loan Originator by 1099?

There is a sample Loan Originator Agreement in the folder you got with your 2-0 Compliance Module. You can also copy it here:

Loan Originator Compensation Plan Template - Mortgage Manuals

QC Requirements for Non-Delegated Correspondents

2022-07-11T10:13:00.000-04:00

UWM, and many other wholesale lenders, comply with the Fannie Mae requirement that all third parties have a quality control plan that meets their guidelines. Among other things, this means that

you need to have periodic reviews, dependent on your volume, at least quarterly (See #1)
you report those results to management (See #1)
you certify that your plan meets all federal regulatory requirements (See #4)
your plan requires reviewers to have independence from the production process or that you use a 3rd party (See #3)
your scope includes the documents you are involved in producing (e.g.; origination, closing) (See #2)

This means that non-delegated correspondents who are table funders must thread the needle on quality control procedures to avoid expensive and redundant reviews. So we structure the non-delegated QC plan to ensure that you meet these requirements without assuming lender responsibilities.

Avoiding redundancy

We call it redundant because a requirement for a full forensic review of a loan file for a non-delegated correspondent means YOU review your LENDER'S work! The lender is already reviewing the documents that you provide. And the lender includes these loans in their own QC reviews. What is gained by conducting ANOTHER review? While there

While there is nothing wrong with another set of eyes looking for fraud in a loan file. The review is better spent reviewing critical items within your loan files - specifically compliance. Did you retain everything you needed?

Independence - Internal or Third-Party Quality Control Reviews

In our products, independence is created by the use of checklists. However, not every lender or regulator believes that you can create independence this way. If you have a very small company, it's unlikely that personnel tasked with reviews will not have involvement in the process they review. In that circumstance, you have to hire a 3rd party reviewer.

When hiring a 3rd party reviewer, remember that YOU define the scope of the review. Do not just request a quality control review. Create a specific scope of work. For non-delegated correspondents, those requirements generally fall within the scope of the regulatory compliance review we provide in Section 6 - Post-closing Financial, Compliance, and Document Retention Review.

These reviews cost between $100-$200 per loan, depending on the company and your volume. If you need a referral to a good provider for these needs, please let us know, and we can make a recommendation based on your profile.

Full Scope QC Reviews or Not?

If your near future plans include applying for Fannie Mae, Freddie Mac or HUD approval, you should consider upgrading your Quality Control Reviews to a "full-scope" investor/agency-level quality control review. These reviews give you insight into what the lenders are looking for, and the depth and scope of reviews at a more intense level. This review is a full forensic re-underwriting of the loan file, including re-ordering verifications, appraisals, credit, etc.

Then you can start self-reporting and compiling the monthly reports to document your preparedness for lender-level quality control reporting responsibilities.

Remote Workplace Setup and Supervision

2021-12-10T11:50:00.002-05:00

Remote work is here to stay

As much as we have addressed operations in remote work locations through technology, the simple process of setting someone up remotely means aggregating and amalgamating pieces from a number of different areas of operation - mostly IT security - into something comprehensive. We have amalgamated policies and procedures from across a mortgage operation into a unifying element, and have provided a checklist for setting up that remote worker as a tool.

Key Point - Documentation Transfer

Paper documentation and images, the mortgage industry's lifeblood, represents the single largest risk to customers and the company. Remote workplaces, being dispersed and interconnected with private residences, can be extremely insecure places to store documents. Knowing this, we structure the remote workplace as 100% paperless. Logically, arranging for the delivery of loan file exhibits in a secure manner without paper means a secure, 2-factor authentication upload. Remember - personal email is not secure.

Key Point - Internet of Things

In an office environment, wired network connections prevail and a smaller number of items get connected to a wireless network. In small-office, home, or remote environments, wireless devices abound. Inventory of these items and their connection to a shared internet connection where you or your employees securely connect can prevent a hacker's back door access by allowing IT departments to identify items that have been exploited. (Watch Mr. Robot to see how they get in.)

Key Point - Expectations for Work Schedule, Supervision and Duties

In a remote environment, employees can often experience "mission creep" where, because of a non-office setting, priorities, and distractions detract from the customer experience. For this reason, clear rules on work hours - logging in and out, accountability for email and phone responses, as well as consequences for time spent on personal items during work hours - get set forth at the outset.

For our customers, we have provided a sample "2-94 Remote Work Policy and Procedure" which you can use as a stand-alone to prove compliance with regulatory requirements, and insert into your 2-90 IT Security Module. This supports pandemic-related remote work, as part of a disaster recovery (see 2-97 Disaster Recovery/Business Continuity) and continuity program, and general network security plan (2-92 IT Security Plan).

Audit Season: Loan Officer Comp Plans vs Loan Officer Employment Agreements

2021-10-27T11:14:00.006-04:00

Questions Persist on the Meaning of "Employment Agreement" or "Compensation Plan"

With the onset of annual audit season, we have noticed a large increase in the number of requests we get for compensation plans and loan officer agreements. We need to set the record straight on some definitions so that you have clarity on what is required and what the regulator is requesting.

First, there are two different things at play.

The need to establish the arrangement between the loan originator and the company as to employment. This item is referred to as an employment agreement.
The need to establish the pay rate for the originator is referred to as a compensation plan
These two items are exclusive of each other, although an agreement may refer to a compensation plan.

Employment Agreements are NOT Compensation Plans

Employment agreements define job duties, the terms of employment, and how employment will terminate. In other words - this is your job; do these things and don't do other things. If you do things we say not to do, we can terminate you. This is how we'll wrap matters up if you separate from the company voluntarily or involuntarily.

One of the difficulties we face in providing compliance services is that we often get asked for advice. Largely, advice on compliance relates to understanding what regulatory rulemaking means. This is not interpretation or advice, it simply is a translation of the rules into a more easily understood or practical application. Employment agreements, on the other hand, are contracts. In order to draft a contract for a third party you need to be authorized to practice law: an attorney or lawyer. A compliance company should not provide this service. Instead, you should seek the advice of a competent advisor familiar with the employment laws of a state.

When we provide this free sample loan originator employment agreement, we are actually calling it a comp plan, because it forms part of the comp plan. You may copy the text and use it as a model for drafting an agreement yourself.

That said, we have some general, common-sense guidance for the creation of employment agreements:

1.) Separate compensation plans from the employment agreement by attaching the compensation plan as an exhibit which is SUBJECT TO CHANGE AT ANY TIME.

2.) An Employment Agreement states the general minimum job requirements of the position. You can augment that by having a very detailed job description such as that in our Loan Originator, Loan Processor, Loan Closer or Underwriting policies and procedures.

Compensation Plans are NOT Legal Agreements

A compensation plan simply states the rate of pay for various services. In the case of the current regulatory scheme, we have to be aware of anti-steering rules. A compliant compensation plan defines how compensation to loan originators happens in a way that does not violate the anti-steering rules.

Elements of a Compensation Plan

Loans Subject to the Rule
Definition of a Loan Originator
Exclusions from the LO Comp Rule
Dual Compensation, Upfront Points and Fees
Proxies for Loan Terms
Non-Loan-Term Items
Profits-Based Compensation
Pick-A-Pay Plans
Pooled Compensation
Compensation for LOs that Work as a Team
Pricing Concessions
Point Banks
Competition for LOs
SAFE Act Requirements
Anti-Steering Provisions/Safe Harbor
Record Retention
QMs and Double Counting
LO Qualifications
Written Policies and Procedures
Non-Cash Compensation Incentives
Splitting Comp Between LOs
Bonuses and Retirement Plans
Bonuses Based on Volume
Non-Producing Managers and Sales Executives

Our Compliance Module provides a policy and procedure that addresses all of these issues.

Dear Old 1003, I'm sorry. I didn't know how good you were...

2021-05-03T10:09:00.002-04:00

We have updated our Quality Control Data Validation checklist to conform to the organization of the redesigned URLA, which was required for use after 4/1/2021.

Best Practice - Send for Signature, Not in Blank

The new Uniform Residential Loan Application (1003) form is required for SUBMISSION to Fannie Mae. It is NOT useful as a form to be sent to an applicant to collect information. In fact, there are areas in the form which explicitly state "TO BE COMPLETED BY LENDER" which belies the actual intent of the form.

Send this document to your customer for completion at your own peril. The reality is you will NOT send a blank application to the borrower to fill out. Instead, you should capture the information in your LOS, and send the completed form to the borrower for signature. If you want to put data collection responsibilities on the borrower, use the pre-application kit process.

PROBLEM 1 - Too Complex, Too Long

That is the biggest problem with this product - asking a (single) applicant to parse THIRTEEN pages of application forms correctly, in most mortgage industry participants' experience - means it won't be returned. If it is, it will not be correct.

Recommended Procedure - Only Sign in Final Form

For those of you who grew up with the old HUD-2900, you will remember that the HUD Application was only signed once the underwriter had approved the loan. This is the same approach.

1.) Collect application data using LOS or Pre-Application Kit

2.) Enter information into LOS

3.) Generate form for signature

We are NOT advocates of having loan originators or consumers completing this form directly as it is extremely inefficient and fraught with problems, particularly since the representations and warrants on the application form are SO STRINGENT that sending out an application, other than the final verified application, is risky. Our recommended approach is to utilize the LOS screens to complete the form, and have the printed form reviewed by a senior processor or underwriter prior to release.

The URLA is not necessary to begin an "application" as defined under other regulations

ECOA, TRID, and other regulations that are triggered by an "application" are not referring to this specific form. The regulations DO NOT require the use of the new URLA 1003 form to establish an application, so you can use any method you like to assemble the information (including obtaining a credit authorization). In fact, for AUS Data Submission, (DU/LP/Catalyst-TOTAL/GUS) the system is not calling for the form, simply the underlying data. Once the application is complete and ready for underwriting submission, you can send the compiled application.

Our recommended process

1.) For customer facing data collection, use a pre-application kit or web form, with EDI to the LOS

2.) Download a re-configured data integrity review checklist aligned with the new 1003 here

Pre-Application Kit Sample

URLA Review Checklist Sample

Comment - Why all the fuss for a few small changes? Only several new fields added.

Once you dive down into the changes, you can see how minute they are. The new form doesn't add significantly to the collection of data and could have been added to the old form.

For instance, the addition of a cell phone capture. Honestly, the cell phone could replace the Home Phone, which no one uses anymore. And since each co-borrower now has his or her own application, this actually represents the unique identifier of the loan.

A litany of pre-filled choices... and then, still, "other"... drives me nuts. Simplification or obfuscation.

Here is the updated URLA Policy and Procedure - depending on which module you review it goes in the following sections:

3-0 Origination - 3-51-5 Complete Application Process

4-0 Processing - 4-61-2 Using the Application as a Data Validation Tool

The Practical Guide to Loan Processing - Chapter 6 - Underwriting Submission

The Loan Officer's Practical Guide to Residential Finance - Chapter 7 - The Application Process

UWM Renewals - Reviewers Asking Lenders to Locate Items in QC Plans

2021-03-25T16:16:00.005-04:00

We have seen an uptick of inquiries from our customers who engage with several national wholesalers. At the root of the inquiry is the reviewer asking the customer to locate items in the QC Plan. To forestall this we wanted to show you what a standard response looks like.

More than this, though, is an understanding of the terms. Our plans are all delivered in Word format. This means you can easily search them for a particular phrase. The problem is that the reviewers aren't using standard QC nomenclature. Key phrases include:

Independence - does the plan show that reviewers are not involved in underwriting or production?
Completion - are loans reviewed within 90 days of closing?
Selection - does the plan require a 10% sampling
Schedule - does the plan require reporting results to management within 90 days
Scope - does the plan review all origination documents, underwriting, and closing documents?

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They want to know who your QC person is and provide a resume. If you are using a 3rd party, you need to show that in the plan. The Plan itself shows independence here:

On the matter of timing the plan is clear:

Reporting results to management:

Sample size is addressed here:

Scope is addressed here:

Of course, if you ever have a problem with any of our products, we welcome the opportunity to fix it and make it right. We want you out there doing business, not worrying about whether your policies and procedures are updated!

#QCPlans #LenderAnnualReview #Compliance Audit

The New QM - Ability to Repay Requires understanding HPML Requirements

2021-02-25T10:19:00.000-05:00

QM - What Changed?

Abandon Appendix Q
Rate Threshold Determination for QM Status: 2.25%
Seasoned QM for performing loans > 36 months
4 month either/or GSE status patch - use either old or new guidelines

What didn't change

Compensation limits
Loan type constraints
Transaction exemptions
Qualifying rate

At the core of the Qualified Mortgage (QM) rules is the issue of the borrower's ability to repay. One of the most significant effects of the Trump Administration's housing policy efforts was shepherding the GSEs (Fannie Mae and Freddie Mac) out of the business of providing government guarantees. The vast majority of QMs were made by virtue of an automatic waiver of QM rules for loans guaranteed by the government like Fannie and Freddie, but also FHA, VA, USDA.

The deregulators conceived of a much simpler test for a qualified mortgage. Instead of a 43% DTI measurement, along with a myriad of guidelines for what could be used, they chose an agnostic indicator for QM status: the rate. If it's less than 2.25% over the Average Prime Offered Rate (APOR), it qualifies for presumption of rebuttable status. And it's so simple...

Sadly, nothing's that simple. It was a quick fix and the rate trigger crossed over some other regulations which add a layer of complexity, most notably the HPML Rules.

Can't read the spreadsheet - link here

Qualified Mortgage Guidelines 3/1/2021

Current APOR see FFIEC (Based on Loan Type)
Rate Spread Calculator
General Qualified Mortgage - With HPML Kicker (below) - < than	2.25%
Calculate Based on			Exempt :HELOC Reverse, Bridge, Construction, Land
Fully Indexed Rate (Balloons use balloon term, not payment)			Exempt :HELOC Reverse, Bridge, Construction, Land
ARMs Less than 5 Years use Worst case- highest possible rate			Prohibited Neg Am or I/O or terms >30 years
Points and Fees Limits: See HPML			Prohibited Neg Am or I/O or terms >30 years
HPML General Thresholds
1st mortgage	1.50%
Non Agency (Jumbo)	2.50%
2nd	3.50%
HPML and Low Balance QM Thresholds
HMPL Appraisal Exemption	$27,300	Appraisal Exemption Rule Link
Required on HPML 1.) Escrow 2.) 2 appraisals for flips (lender must pay)
Points, Fees and Rate Thresholds	Loan Amount >	Max Fee		QM Threshold	Mobile Home	2nd Lien
	$110,260	3.00%		2.25	2.25
	$66,156	$3,308	5.00%	3.5	6.5	3.5
	$22,052	5.00%		6.5	6.5
	$13,783	$1,103	8.00%		6.5
	0				6.5	6.5
HOEPA	$22,052	$1,103	8%
Required ATR Standard Guidelines - Must consider
1. Income - current or reasonably expected income or assets .	Can consider seasonal or bonus income, rental income, commissions, interest payments, dividends, retirement benefits, trust income, public assistance payments, alimony, child support, and other sources of income. can also consider future income if verified it is using reasonably reliable third-party records. Further, can use assets like a savings account, amounts vested in a retirement account, stocks, bonds, certificates of deposit, and amounts available to the consumer from a trust fund.
2. Current employment status - if used	including full-time, part-time, seasonal, irregular, military, and self-employment.
3. monthly mortgage payment	calculate monthly mortgage payment using the introductory or fully indexed interest rate, whichever is higher, and monthly, fully amortizing payments
4. Payments on 2nd and other loans on home
5. Taxes and Insurance	property taxes, fees and special assessments, condo, coop, HOA, ground rent or lease, homeowners, flood and mortgage insurance premiums
6. Current debts, alimony, and child-support obligations.	include student loans, auto loans, revolving debt, and existing mortgages not being paid off at or before consummation. Can exclude an obligation is likely to be paid off soon
7. Debt-to-income (DTI) ratio or residual income.	The monthly DTI ratio or residual income must be calculated using the total of all of the mortgage and non-mortgage obligations listed above, compared to total monthly income.
8. "Consider" but non-prescribe particular credit history.	Credit history might include information about number and age of credit lines, payment history, judgments, collections, bankruptcies, and nontraditional credit references, such as rental payment history or utility payments.

Secondary marketing should have these changes well in hand, as there are different thresholds depending on whether the product offered is an ARM or Fixed rate.

We have also updated free sample Ability to Repay policy