Licensing, lending and losing. Your identity: mortgage banking regulatory and legislative trends at the state and local level covered a range of topics in 2006. Watch for possible state action on nontraditional mortgage products in 2007.
Licensing schemes more restrictive in 2006
Three states--Colorado, Florida and Iowa--have adopted especially significant licensing legislation this year. These states have made broad legislative changes encompassing a wide variety of licensing and regulatory issues.
So far in 2006, a number of other states also have made noteworthy legislative changes impacting mortgage bankers, including increasing licensing and registration fees; requiring applicants to submit to criminal background checks; clarifying statutory terms; increasing continuing education and financial requirements; increasing the authority of the industry regulator; adding new prohibited acts and practices; and increasing penalties for violations of these acts.
The most notable licensing change in the mortgage banking industry in 2006 is the passage of the Mortgage Broker Registration Act in Colorado. The signing of this act put Colorado on the map as the 50th jurisdiction to regulate mortgage brokers.
With the passage of the act, Alaska is now left as the only state that does not require mortgage brokers to comply with a licensing or registration requirement.
Pursuant to the Colorado legislation, a person may not broker a mortgage without registering with the Colorado Division of Real Estate. Mortgage broker registration applications are available on the Colorado Division of Real Estate's Web site, and may be submitted beginning Oct. 1. Mortgage brokers must be licensed by Jan. 1, 2007, to continue operating in the state.
In order to apply for registration, mortgage brokers must undergo criminal background checks. The Colorado Division of Real Estate recommends that brokers begin the criminal-background-check process as soon as possible, because the process could take up to three months.
Another significant piece of mortgage banking legislation was passed in Florida. Florida signed into law a bill substantially revising Chapter 494 of the Florida statutes, which regulates the mortgage banking industry. Under the amendments to Chapter 494, mortgage lenders and brokers are subject to increased licensing and application requirements, and increased restrictions and penalties for violations of the chapter.
The Florida Office of Financial Regulation (OFR) is authorized to obtain background information and fingerprints from control persons, members, partners or joint venturers of applicants who were not previously required to undergo review by the Florida OFR.
The bill also increases application fees, requires previously exempt entities to obtain licenses, and authorizes the Florida OFR's Financial Services Commission to prescribe rules for the destruction of records maintained by licensees. Education requirements are extensively discussed in the bill, which requires mortgage business schools (schools offering continuing education courses for the mortgage industry) to obtain permits, pay permit fees and comply with any rules and regulations adopted by the commission. Grounds for disciplinary action are expanded to include action against a licensee in the event that the licensee, or his or her associates, have been the subject of an administrative decision involving fraud, embezzlement, misrepresentation or deceit.
In addition to Colorado and Florida, Iowa also enacted extensive and significant mortgage banking legislation this year. Subordinate-lien mortgage lenders are especially impacted by this year's changes, as they will now be required to comply with the Mortgage Bankers and Brokers Act, which in the past only applied to first-mortgage lenders.
The Iowa legislation requires applicants for individual registrations to submit to national criminal-background checks, requires licensed mortgage bankers and brokers to maintain surety bonds for $50,000, and provides penalties for a licensee's failure to pay the costs of an examination or investigation.
Although new mortgage banking regulation tends to further restrict the mortgage banking industry, this year some states have actually added exemptions to their licensing and registration statutes.
Colorado now exempts from the supervised lender license requirement licensed "collection agencies" collecting supervised loans that are in default. Similarly, Indiana has enacted legislation allowing licensed collection agencies to conduct activities permissible by a supervised financial organization without obtaining a separate loan license.
Idaho has also exempted "supervised financial organizations" or persons holding certain licenses in other states from its consumer loan-licensing requirement. And Utah has added an exemption for certain loans related to the payment of tuition and other expenses related to higher education.
So far this year, a couple of states have enacted new legislation for the purpose of increasing revenue and/or to pay the administrative costs of regulation by increasing the fees associated with obtaining a license and also increasing fines for violations of mortgage banking laws. Connecticut has increased mortgage originator registration fees by passing a bill requiring a mortgage originator to pay a standard $100 registration fee, eliminating the previous pay option under which an originator who filed a renewal application early qualified for a fee reduction. In addition, Nebraska has raised the administrative fine cap for violations of the Mortgage Banker's Registration and Licensing Act.
While not making sweeping amendments, a number of states have made notable legislative changes affecting licensing. States have increased regulation in the mortgage banking industry by taking measures such as increasing financial requirements for licensure, requiring more extensive background checks for persons affiliated with regulated entities and increasing the administrative authority of state regulators.
Another recent development gaining momentum this year is the push toward a nationwide database in an effort to streamline the licensing process, spearheaded by the Conference of State Bank Supervisors (CSBS) and the American Association of Residential Mortgage Regulators (AARMR), both based in Washington, D.C. A number of state agencies have indicated that they will participate in the new systems, and some states, including Idaho and Iowa, have enacted legislation authorizing their state regulators to participate in the multistate automated licensing system and make changes to the state requirements to adapt to the new system.
Anti-predatory-lending legislation on the rise
As with licensing, the trend to highly regulate mortgage brokers and lending has continued with the passage of anti-predatory-lending statutes in both Rhode Island and Tennessee. These two states join approximately 30 other jurisdictions that currently maintain Home Ownership and Equity Protection Act-like (HOEPA-like) statutes and regulations.
On May 26, 2006, Tennessee Governor Phil Bredesen signed H.B. 3597/S.B. 3989, referred to as the Tennessee Home Loan Protection Act of 2006; and on July 11, 2006, Rhode Island Governor Donald Carcieri signed the Rhode Island Home Loan Protection Act, S.B. 2851, into law.
Similar to existing state predatory lending statutes and regulations, each of the bills defines high-cost home loan thresholds to determine whether a loan falls within the scope of the bill. Both bills include an annual percentage rate (APR) trigger--8 percent for first-lien loans in both Tennessee and Rhode Island, or more than 10 percent in Tennessee or 9 percent in Rhode Island for subordinate-lien loans.
As is generally the case, the bills also include a points-and-fees trigger. A loan is a high-cost home loan in Tennessee if the total points and fees payable at or before loan closing exceed the greater of 5 percent of the total loan amount or $2,400 if the total loan amount is more than $30,000, or 8 percent of the total loan amount if the total loan amount is $30,000 or less.
In Rhode Island a loan is a high-cost home loan if the total loan amount is $50,000 or more and the total defined points and fees payable exceed 5 percent of the total loan amount. For loans with a total loan amount under $50,000, a loan is considered high-cost if the total defined points and fees payable exceed 8 percent of the total loan amount.
Both bills share some common elements that are consistent with many states' existing predatory lending statutes and bills, including prohibitions on negative amortization, accelerated indebtedness at the lender's sole discretion, flipping and balloon features. Both bills also address credit counseling.
Tennessee requires that a lender not make a high-cost home loan unless the lender has given a prescribed written notice to the borrower advising the borrower of the right to talk to a credit counselor. Rhode Island affirmatively requires that a loan qualifying as a high-cost home loan first receive certification that the borrower has obtained credit counseling.
Ohio passed amendments to its existing Consumer Credit Mortgage Loans chapter regulating covered loans, which will become effective on Jan. 1, 2007. Some of the noteworthy provisions of the bill include a bifurcated points-and-fees trigger based on loan amount (5 percent if total loan amount is $25,000 or more, and 8 percent if total loan amount is less than $25,000).
Additionally, the Ohio bill adds a provision requiring verification that the consumer received counseling and has signed a disclosure acknowledging the risk of entering into a covered loan if the consumer's monthly debt exceeds 50 percent of the consumer's monthly gross income.
While states have effectively passed predatory lending statutes and regulations for the last several years, local predatory lending ordinances have not fared so well. This year saw Montgomery County, Maryland's local ordinance 36-04 come under attack. The ordinance, if allowed to take effect, would establish a series of limitations on loan terms and lending practices in connection with residential mortgage loans originated in Montgomery County, an affluent suburb of Washington, D.C.
A preliminary injunction was issued by Montgomery County Circuit Court on March 7, one day before the ordinance's March 8 effective date, in connection with a case brought by the American Financial Services Association and others. Most recently, on July 6, 2006, a Montgomery County Circuit Court judge has agreed to take the legality of the ordinance under advisement and has continued the preliminary injunction until a final ruling. There is no indication of when that final ruling may be dispensed.
Notwithstanding the relative difficulty localities have had enforcing their local predatory lending ordinances, the Providence, Rhode Island, city council recently adopted a predatory lending ordinance that went into effect on July 12, 2006. The ordinance prohibits a "predatory lender" from being awarded a contract with the city.
It seems clear that states are not relenting and, in fact, are devising new ways to attack what they see as predatory lending practices. In that regard, Illinois has authorized a predatory lending pilot program that was scheduled to go into effect on Sept. 1, 2006. The pilot program will be established in certain areas of Cook County, Illinois (the county in which Chicago sits), and requires mortgage brokers or originators to submit to the predatory lending database certain information within 10 days of taking an application for a mortgage on residential real property.
That information is analyzed by the Illinois Department of Financial and Professional Regulation, which then makes a determination as to whether credit counseling is recommended for the borrower. The counseling may not be waived by the borrower. Mortgages under this program must have a certificate of compliance attached to them in order to be recorded. Within 10 days after closing, the title insurance company or closing agent must submit further data to the database maintained by the Illinois Department of Financial and Professional Regulation.
The trend of regulating what legislators and regulators see as predatory lending practices is unlikely to slow down, especially as legislators are campaigning in an effort to win support from their constituencies.
Continuing a trend begun in full force in 2005, data-security legislation has been a major trend in 2006. So far this year, 10 states have enacted laws requiring notice of a security breach, bringing the total number of states with breach notification requirements up to 31. Fourteen states have enacted laws in 2006 permitting individuals to place a security freeze on their credit report, for a total of 25 states with credit-freeze laws.
These new state laws are the result of the tide of concern about protecting personal information brought to light by the Federal Trade Commission's (FTC's) settlements with ChoicePoint Inc. and DSW Inc. (the shoe discounter company), among others. Mortgage companies also have been targets of FTC actions for failure to properly safeguard data.
At the time of this writing, data-breach notification laws had been enacted this year in Arizona, Colorado, Hawaii, Idaho, Indiana, Kansas, Maine, Nebraska, Utah and Wisconsin. While the statutory language of the data-breach notification laws differs from state to state, the basic elements are very similar. Typically, personal information includes the individual's first name or initial and last name, when combined with any one of the following data elements: Social Security number; driver's license or state identification number; or financial account number with the security code needed to access it.
A universal exception to personal information is information that is available to the general public from federal, state or local government records or, for some states, widely distributed media. A security breach involves the unauthorized acquisition or access to the unencrypted computerized data that compromises the security, confidentiality or integrity of the personal information. Within the definition of a security breach, states differ on materiality standards or whether the breach must be reasonably likely to cause substantial economic loss to an individual.
State data-security laws require that notice be given to individuals when there is a breach of security involving certain personal information. The state laws generally require that notice to the individual be given "without unreasonable delay, consistent with the needs of law enforcement."
The method and extent of notification vary from state to state, and include written or electronic notice to the individual, notification by media in the event of a breach involving substantial numbers of individuals, and in some instances notification to credit-reporting agencies. Statutes typically require entities holding personal information owned or licensed by another to give notice to and cooperate with the owner or licensee relative to the breach.
Unfortunately, a data-security breach rarely is limited to personal data for individuals of one state. With the collection of state laws to be satisfied, entities are faced with the prospect of complying with the notice provisions of a number of different jurisdictions in connection with a security breach.
The second group of statutes relative to data security gives an individual who has been the victim of identity theft the right to place a security freeze on the individual's consumer credit report with a consumer-credit-reporting agency. So far in 2006, credit-freeze laws have been enacted in Florida, Hawaii, Illinois, Kansas, Kentucky, Maine, Minnesota, New Hampshire, New York, Oklahoma, Rhode Island, South Dakota, Utah and Wisconsin.
As with the data-breach notification laws, statutory language for a credit freeze varies from state to state, but has common elements. An individual effectuates the security freeze by sending a written request to a consumer-reporting agency, including with the request certain identification information for the individual.
The majority of states permit an individual to place a security freeze on his or her credit information irrespective of whether the individual was a victim of identity theft; however, Hawaii, Kansas and South Dakota require that the individual be a victim of identity theft to place the security freeze and require that a copy of the police or investigative report or complaint the individual has filed with the law enforcement agency be included with the request.
The consumer-reporting agency has an obligation to place the credit freeze on the account within a statutory time period after receiving the request. In connection with the security freeze, the credit-reporting agency provides the individual with a personal identification or password to enable the individual to provide access to the credit report, together with the process used to permit access to the information.
While the security freeze is in place, information from the individual's consumer credit report may not be released to a third party without prior express authorization from the individual; however, the credit-reporting agency can reveal that a security freeze is on the account. The statutes generally provide for some exceptions in which the credit report can be revealed, including creditors attempting to collect on a debt, state or local agencies, private collection agencies pursuant to a court order or to law enforcement agencies, among others.
Although not exhaustive, the significant issues arising so far in 2006 include the expansion of licensing regulations, identity theft and predatory lending on both a state and local level. States have, however, enacted additional legislation addressing other relevant mortgage banking issues. Some other 2006 legislation topics include the following:
* Foreclosure procedures, including clarifying a property owner's right to cure for non-payment.
* Advertising and marketing restrictions--some states, including Arizona and Oklahoma, now prohibit a person from including a lender's name, trade name or trademark; or loan numbers, loan amounts or other loan information in certain solicitations without lender consent.
* Permissible fee restrictions placed on mortgage lenders and brokers, and restrictions on the types and amounts of fees that lenders and brokers may charge borrowers were enacted in Alabama, Indiana, Maine and Wisconsin.
Looking to the future
In the coming months and on into 2007, state regulators will continue to react to and anticipate developments in the industry. One area to watch is the rise in popularity of alternative mortgage products, including interest-only mortgage loans, option adjustable-rate mortgage (option ARM) loans and 40-year--or longer--mortgage products.
In December 2005, the federal agencies issued for comment proposed guidance in connection with nontraditional mortgage products. In June 2006, CSBS and AARMR issued a press release revealing that they also are developing guidelines for nontraditional products offered by state-licensed entities. The intent of the CSBS/AARMR project is to develop a modified version of the federal guidance focusing on residential mortgage underwriting and consumer protection for use by state regulatory agencies.
The result of these efforts likely will be a renewed state emphasis on consumer protection in the form of mortgage product restrictions and cautionary disclosures to borrowers.
Carol M. Tomaszczuk is senior counsel with Lotstein Buckman LLP, Washington, D.C. Amber Ried-Barrett is a staff attorney and Anna C. Pane is director of operations with iComply Inc. in Washington, D.C. They can be reached at firstname.lastname@example.org, email@example.com and firstname.lastname@example.org.
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|Title Annotation:||Cover Report: Legislative/Regulatory|
|Author:||Tomaszczuk, Carol M.; Ried-Barrett, Amber; Pane, Anna C.|
|Article Type:||Cover story|
|Date:||Sep 1, 2006|
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