Looking Through the Maze.
THIS HAS BEEN A BUSY YEAR FOR REGULAtory change and reform. To keep pace with all the changes in 1999, we examined and categorized each new law according to the type of impact it will have on our industry.
One particular trend emerges from the legislation enacted this year: States are taking an increasingly active role in regulating the residential mortgage industry. As a result of this year's legislative sessions, we now have more state licensing statutes, more states requiring individual loan officers to be licensed or registered, more states imposing brick-and-mortar requirements and more states mandating education requirements (see Figure 1 for a round-up).
The bottom line: Mortgage lenders and mortgage brokers have more state requirements and limitations to deal with than ever before.
The most significant legislation enacted this year is North Carolina's predatory lending law. This law is similar to the federal Home Ownership and Equity Protection Act of 1994 (HOEPA), which is codified in the federal Truth in Lending Act (TILA) and in Section 32 of its implementing regulation, Regulation Z. However, the North Carolina law is more expansive than HOEPA. (HOEPA regulates high-cost home loans--it requires disclosures, limits prepayment penalties and prohibits balloon payments, negative amortization and advance payments. It also prohibits lenders from making loans without regard to the borrower's payment ability.) Like HOEPA, the new North Carolina law applies to loans that meet certain rate and/or fee triggers. But it also applies to transactions in which the lender is entitled to charge a prepayment penalty of more than 2 percent of the amount prepaid and to transactions in which the borrower agrees to pay a prepayment penalty when the loan is prepaid more than 30 months after closing.
On these so-called "high-cost" loans, the new law prohibits call provisions, balloon payments, loan flipping, prepayment penalties on loans for $150,000 or less, lending without homeownership counseling, lending without regard to a borrower's ability to repay and financing of fees and charges, including fees charged by third parties. Also, in connection with certain loans, fees that are not expressly authorized by law may not exceed .25 percent of the principal amount of the loan or $150, whichever amount is greater.
After this new law was introduced in the North Carolina legislature in April, several state attorneys general expressed an interest in using it as a blueprint for regulating the mortgage industry in their own states, and the New York State Banking Department proposed predatory lending regulations. It appears that predatory lending legislation/regulation is the next trend in state regulation.
Agreeing that predatory lending is an unacceptable practice is easy. The difficulty comes in drafting language that addresses the alleged abuses but does not, as a result of overly broad language, create unintended consequences. For example, the suggestion that consumers who obtain high-cost loans should only obtain loans that they are able to repay makes sense; however, it is important that we create a bright-line test so that the industry understands, with certainty, how to comply. If we create a statute or regulation that addresses the consumer's ability to repay the loan in such a way that it is vague, and therefore difficult to apply, consumers will likely lose the opportunity to obtain these loans because of the liability associated with making these types of loans.
State and federal regulators should also consider that the mortgage banking industry is already highly regulated and that enforcement of the existing laws is badly needed. It is unfortunate that both state and federal regulators are constrained by limited funds.
New licenses and licensing laws
Six states--Indiana, Louisiana, Minnesota, Nevada, Pennsylvania and Texas--implemented new licensing requirements in 1999.
Indiana's mortgage broker act has been changed from a registration statute to a licensing statute. Beginning July 1, 1999, it requires licensure of mortgage brokers, and, beginning January 1, 2001, it will require registration of a mortgage broker's employees. Licensees and registrants are subject to mandatory education requirements.
Louisiana enacted a new licensing law for mortgage lenders, mortgage brokers and originators. This new law, the Residential Mortgage Lending Act, requires licensure by January 1, 2000, but contains grandfather clauses for lenders and brokers already licensed under Louisiana law. Lenders that were actively engaged in the residential mortgage business in Louisiana on January 1, 1999, must apply for a license by March 1, 2000, and must obtain a license by July 1, 2000.
Similarly, mortgage brokers that are already licensed under Louisiana law do not need to apply for a license under the new law, but instead must renew their licenses in accordance with the procedures contained in the Residential Mortgage Lending Act. In lieu of licensing, those who are exempt from the licensing requirements must register with the commissioner of financial institutions.
The Residential Mortgage Lending Act also sets the interest rates, fees and charges that lenders and brokers may collect, contains education and examination requirements and regulates lending and brokering practices. For example, it requires mortgage brokers to provide each applicant with a mortgage loan origination agreement within three days after application.
Minnesota's Residential Mortgage Originator and Servicer Licensing Act, which was enacted last year, became effective August 1, 1999.
Nevada's regulatory framework for mortgage lending has undergone a number of changes. Its licensing statute for mortgage companies was amended to apply to mortgage brokers and mortgage agents. The state legislature also enacted a new licensing statute for mortgage companies. Nevada now regulates mortgage companies and mortgage brokers under two separate statutes. These changes became effective October 1, 1999.
Under the new framework, licensing for a company may be required under both statutes, depending on whether an entity makes and/or brokers mortgage loans. In addition, under the new requirements mortgage brokers must register their employees with the Financial Institutions Division. This registration requirement applies to employees who are deemed "mortgage agents" under the new framework. Mortgage companies licensed on October 1, 1999, under Nevada's prior statute, must renew their licenses under the new statute by December 31, 1999.
Pennsylvania added three new licensing categories to its Mortgage Bankers and Brokers Act: wholesale table funder, loan correspondent and limited mortgage broker.
Texas enacted a new licensing scheme for mortgage brokers. This law defines a mortgage broker as one who receives an application from a prospective borrower for the purposes of making a mortgage loan from that person's own funds or from the funds of another person." Under this new law, only individuals are eligible for licensure.
Texas' law does not apply to "mortgage bankers," who are defined as lenders approved by the Department of Housing and Urban Development (HUD), Fannie Mae, Freddie Mac or Ginnie Mae. However, a lender that does not fall into this category will also need to be licensed unless it is eligible for another exemption. The new law also requires loan officers to be licensed. This law became effective September 1, 1999, and requires licensure by January 1, 2000.
Licensing of individuals
In what appears to be a growing trend, five states--Florida, Indiana, Louisiana, Nevada and Texas--added licensing and registration requirements for individual loan officers and loan originators. We understand that some states believe that these requirements will allow them to better track mortgage professionals, and help to ensure that loan officers and loan originators have the experience and qualifications needed to provide high-quality services to borrowers and prospective borrowers.
Florida will require licensed mortgage lenders and correspondent mortgage lenders to submit quarterly reports of the employment status of their loan originators. The first report is required after the first quarter of 2000. Florida law already requires the employees of licensed mortgage brokerage businesses to be licensed as mortgage brokers, but until the new requirements were enacted this year, it did not have a similar requirement for a lender's employees.
Indiana's mortgage broker act will, beginning January 1, 2001, require licensed mortgage brokers to register employees who engage in origination activities. Registrants will be subject to mandatory education requirements. Within two years of registering, they must accumulate 24 hours of academic instruction related to the loan brokerage business.
Louisiana's new licensing law requires originators to be licensed. This requirement applies to any person who interviews a consumer in connection with a loan application and signs the application on behalf of a mortgage lender or mortgage broker. This requirement becomes effective January 1, 2000.
Nevada's new regulatory regime requires mortgage brokers to register their employees who act as "mortgage agents" with the Financial Institutions Division.
Texas' new mortgage broker licensing law requires licensing of loan officers. Licensure is required by January 1, 2000.
Brick and mortar
Three states--Kansas, Ohio and Texas--added brick-and-mortar requirements to their regulatory frameworks. Despite the fact that one state--Florida--eliminated its brick-and-mortar requirement, there appears to be a trend toward requiring mortgage companies to have a physical office in the states in which they do business. This gives state regulators more control over mortgage companies and, generally, makes it more convenient for them to conduct on-site examinations. However, brick-and-mortar requirements clash with the growing Internet origination market.
Registrants under Ohio's mortgage broker act must now maintain an in-state office.
Kansas' Mortgage Business Act now requires a registrant to keep an in-state office, unless the registrant posts a bond for $100,000 and maintains a net worth of at least $50,000. Registrants who have an in-state office must post a bond for $25,000, have a net worth of at least $100,000 or be approved as a lender by HUD, Fannie Mae or Freddie Mac.
The in-state office must have regular hours of operation, be accessible to the public, serve as an office for the transaction of mortgage business, be staffed by the registrant or the registrant's employees, be separate from the office of another registrant and contain the registrant's books and records or copies. In addition, the office may not be located in a personal residence.
Texas' new mortgage broker licensing law contains an instate office requirement.
Licensed mortgage lenders and mortgage brokers in Florida are no longer required to have an in-state office. Florida's brick-and-mortar requirement was dropped on October 1, 1999.
Usury, fees and lending practices
Ten states enacted changes to the rates, fees and charges that lenders and brokers may collect from borrowers. These states are Indiana, Iowa, Kansas, Louisiana, Minnesota, Mississippi, Montana, Nebraska, North Carolina and Texas.
Indiana amended the limitations contained in its Uniform Consumer Credit Code in connection with loan origination fees on refinancings. It now limits the amount a lender may charge on a refinancing to 2 percent of the amount of the new loan that is not used to pay the amount due on the prior loan.
Iowa made technical changes to the limitations on delinquency charges for home-equity lines of credit. Iowa law now specifies that all home-equity lines of credit are subject to the limitations on delinquency charges contained in the Iowa Consumer Credit Code.
Kansas changed the maximum rate of interest allowed on first-lien mortgage loans to 15 percent per year. The state also added limitations on high-LTV (loan to value) loans and changed how the finance charge is calculated under the consumer credit code.
Louisiana's new licensing statute regulates interest rates, fees and charges on loans of $10,000 or more. Loans for less than $10,000 continue to be regulated under Louisiana's consumer credit code. Under the new statute, the maximum usury rate is 21 percent per year, or 15 percent higher than the semiannual discount rate published by the Board of Governors of the Federal Reserve in The Wall Street Journal on the first day of January or July in the year the loan is made. The statute exempts many different types of fees from the calculation of the interest rate, including discount fees, origination fees, brokerage fees, commitment fees and lenders' fees. It allows, but limits, prepayment penalty fees and late payment fees. It also expressly allows yield-spread premiums, provided the mortgage broker actually provides goods, facilities or services in connection with the loan. However, before closing, a mortgage broker may collect only fees for appraisals, title searches and credit reports.
Minnesota made technical changes to its limitations on late fees and its override of the federal usury preemption under the Depository Institutions Deregulation and Monetary Control Act.
Mississippi's limitation on mortgage brokerage fees under its Consumer Loan Broker Act has been increased, temporarily, to 6 percent of the loan amount. The change became effective July 1, 1999, and will be automatically repealed on July 1, 2000, when brokerage fees will be limited to 3 percent of the loan amount. The temporary hike is a compromise. Brokers wanted to eliminate the 3 percent limit, but agreed to a 6 percent cap because the state legislature was not ready to deregulate broker's fees.
Montana enacted additional limitations on prepayment penalties for loans that are subject to the Montana Consumer Loan Act.
Nebraska changed the usury ceiling on installment loans where the balance of all outstanding liens on the property does not exceed 100 percent of the appraised value of the property.
As discussed, North Carolina enacted a predatory-lending bill that is HOEPA-like. This bill, S.B. 1149, may be the most significant legislation enacted this year.
This new law also states that it does not "authorize or prohibit a lender, a borrower, or any other party to pay compensation to a mortgage broker or a mortgage banker for services provided by the mortgage broker or the mortgage banker in connection with a home loan." It is unfortunate that the North Carolina legislature decided to not take a position on this critical issue. This is an example of the ongoing need for certainty from legislatures and regulators on permissible practices. This could invite litigation over the legality of both direct and indirect mortgage broker compensation.
Texas made changes to its provisions on default interest and administrative loan fees.
Education and examination
Three states--Indiana, Louisiana and Pennsylvania--have added education and/or examination requirements. Both regulators and some trade groups have been seeking these types of requirements. They have indicated that they share a concern for the professionalism of the mortgage industry and the quality of the services provided to borrowers, and expect that the additional education and examination requirements will ensure that mortgage professionals have the knowledge and experience they need.
Indiana's mortgage broker act will require licensees and registrants to have 24 hours of academic instruction related to the loan brokerage business. This requirement must be fulfilled during the two-year period before licensure or registration, as applicable, and is effective January 1, 2001.
Louisiana's new licensing statute contains both education and examination requirements. Beginning July 1, 2000, 10 hours of continuing education will be required for licensure. Beginning July 1, 2001, each license applicant must pass a written examination provided by the commissioner of financial institutions. However, as of January 1, 2000, applicants actively involved in the residential mortgage lending business for three of the last five years may seek certification without being required to complete the 10 hours of continuing education or pass a written exam.
Pennsylvania now requires mortgage bankers, mortgage brokers and loan correspondents to ensure that at least one person from each licensed office attends a minimum of six hours of continuing education each year. Limited mortgage brokers must attend a minimum of two hours of continuing education each year. (A limited mortgage broker, a new category of licensee, is a person who brokers nonpurchase-money first-lien residential mortgage loans from one location and does not collect any advance fees. This license would be used, for example, by a financial services consultant/adviser to allow him or her to broker loans for his or her clients. As its name indicates, the license is rather limited in its scope and applicability.)
Alaska and Maine enacted "good funds" and "wet settlement" laws, respectively. These laws establish the procedures for disbursing loan funds at closing, and require lenders to provide the settlement agent with funds beforehand. Pennsylvania expanded the wet settlement requirements of its Mortgage Bankers and Brokers Act to include both purchase-money and nonpurchase-money loans, and Nebraska made technical changes to its wet settlement law.
Recording and satisfaction
Ten jurisdictions enacted changes to the procedures or requirements for releasing mortgages and deeds of trust. They are Delaware, the District of Columbia, Louisiana, Maine, Maryland, Nevada, New Hampshire, New Jersey, South Carolina and Wyoming. Such changes have been enacted because of the need to record releases in a timely manner. Particular attention has been given to clarifying the procedures by which a mortgage or deed of trust can be released, and imposing penalties on lenders that fail to execute or record a release on time.
Several jurisdictions enacted other changes to their regulatory frameworks, including, but not limited to, changes to financial requirements, advertising practices, fee limitations and definitions. These changes do not fit into specific categories, but they show the attention each state is giving to the regulation of the mortgage industry.
Arkansas increased the amount of the bond required under its Mortgage Loan Company and Loan Broker Act, from $25,000 to $35,000. This change is effective January 1, 2000.
California eliminated the 5 percent brokering cap under the California Residential Mortgage Lending Act and extended the time when the statute will sunset (or expire) to June 30, 2005. These changes are effective January 1, 2000.
Connecticut made changes to its first mortgage and second mortgage licensing statutes. It amended the definitions of a "first mortgage loan" under the first mortgage licensing statute and added definitions for "advertise," "advertisement" and "simulated check" in both statutes. In addition, both statutes added limitations on advertising practices. They now prohibit advertisements using simulated checks, limit representations using words such as "verified as eligible," "eligible," "preapproved" or "prequalified," and prohibit lenders and brokers from mailing advertisements that use words or symbols that give the appearance that the mailing was sent by a government agency. In addition, advertisements that compare hypothetical loan payments must include specific information.
Florida eliminated its brick-and-mortar requirement. It also added a registration requirement for individual loan originators in conjunction with the quarterly reporting requirements for licensed mortgage lenders and correspondent mortgage lenders. After each quarter, mortgage lenders and correspondent mortgage lenders must submit reports to the Department of Banking and Finance of all loan originators that began or terminated their employment during that quarter. This requirement becomes effective after the first quarter of 2000. Other technical changes were made, including procedures for examinations, additional limitations on advertising, annual reporting requirements and changes to branch licensing procedures.
Georgia made technical changes to its Residential Mortgage Act. The changes limit the exemption from licensing for a mortgage lender's or broker's employees to those that work for only one mortgage lender or broker, require notice of a change in address at least 15 days beforehand and require notice of litigation involving a claim of more than $25,000 or $250,000, depending on whether the licensee is a mortgage broker or mortgage lender, respectively.
Hawaii eliminated the registration requirement for out-of-state lenders under its foreign lender statute and enacted consumer protections for reverse mortgage transactions.
Idaho eliminated the requirement that lenders seeking a regulated loan license publish notice of the application in a local newspaper. It also changed the application procedures for branch office licenses.
Illinois made technical changes to its Residential Mortgage License Act of 1987 to conform exemptions to changes that were made to Illinois' real estate broker licensing law. Illinois also enacted changes to the experience requirements for licensees, allowing license applicants who do not have three years' experience to substitute a program of study in real estate finance and fair lending. Also, licensees that make loans over the Internet are now required to include on their Web site their license number and the telephone number and address of the commissioner of banks and real estate.
Kansas' Mortgage Business Act was expanded to cover both first- and subordinate-lien mortgage loans. Previously, it applied only to first-lien mortgage transactions. Other technical changes were made, including changes in the licensing application procedure, disclosure requirements, trust account requirements and record-retention requirements.
Louisiana made technical changes to its consumer credit law regarding licensee fees, exemptions, disclosures and record-retention requirements for consumer loan brokers.
Maine increased the bond required for licensed supervised lenders, from $25,000 to $50,000.
Maryland conformed its limitations on private mortgage insurance to federal limitations, and enacted a mandatory semiannual payment schedule for real property taxes.
Minnesota enacted limitations on private mortgage insurance and made technical changes to its Residential Mortgage Originator and Servicer Licensing Act.
Mississippi added a definition for a "mortgage company" under its Consumer Loan Broker Act. The term "mortgage company" was clarified because the Consumer Loan Broker Act exempts mortgage companies engaged in the soliciting, packaging and/or selling of conventional residential mortgage loans into the secondary market from its licensing requirement, but subjects them to the 6 percent limit on broker's fees. This exemption was ambiguous because the term "mortgage company" was not defined previously.
Montana made a technical change to its consumer loan act, removing the requirement that people who make "advances of money" on credit obtain a license.
North Dakota's money broker statute was amended to prohibit the transfer of a money broker license and require an application for a change of control of a licensee to be filed within 45 days of the change.
Oklahoma made technical changes to its consumer credit code regarding the requirement to provide notice of the change in terms of a revolving loan account. Lenders are no longer required to provide notice three times, but must provide notice 60 days or 30 days before the change takes effect, depending upon the type of change involved.
Oregon increased the amount of the bond required for licensed mortgage bankers and brokers, which now ranges from $25,000 to $50,000.
Pennsylvania made a number of changes to its Mortgage Bankers and Brokers Act. It added new licensing categories: wholesale table funders (which are not required to have an instate office, but may only fund loans), loan correspondent (which allows table-funding) and limited mortgage broker. The safe harbor has been reduced to two loans per calendar year. Education and fitness requirements were added, as well as a requirement that licensees indicate they are licensed by the Department of Banking in all advertising. The wet settlement requirements of the Mortgage Bankers and Brokers Act were expanded to include both purchase-money and nonpurchase-money loans. Disclosure requirements for lock-in agreements were also added.
South Dakota made technical changes to its mortgage lender licensing statute. Under the amendment, licensed real estate brokers, trust companies, banks, national banks, savings and loan associations and bank holding companies and their subsidiaries are exempt.
Texas made changes to its fee limitations; it now allows additional interest on default and increased the maximum allowable administrative fee. The Texas legislature also passed a joint resolution to increase the size of an urban homestead from 1 acre to 10 acres. By redefining "urban homestead" to mean 10 acres, lenders would be able to make home-equity loans on property that was previously off-limits. This resolution is subject to referendum in November.
Utah made minor changes to its consumer credit code, including technical changes to its limitations on late fees and requiring 30 days' advance notice of a change to an open-end contract and amending the triggers for providing notice of a change.
On the horizon
In addition to the laws enacted so far, the following legislation and regulations, among others, are still being considered:
Alabama, North Carolina and West Virginia failed to pass licensing laws. However, we expect these states to reconsider such laws next year.
Montana and New Hampshire may also consider additional changes. They enacted legislation establishing committees to study the mortgage industry.
The New York State Banking Department has proposed a regulation for high-cost home loans. The proposed regulation contains a number of provisions that are similar to North Carolina's predatory-lending law. For example, the proposed regulation would limit modification and deferral fees, limit the fees and charges that a borrower may finance and limit points and fees on refinancings within three years of closing. The proposed regulation contains disclosure requirements, including a requirement that lenders provide borrowers with a counseling disclosure and a list of counselors. In addition, the regulation includes provisions regarding unfair and deceptive trade practices.
It's been a big year for changes in state law--1999 has brought more new laws, more new licenses and more new requirements than any other year in recent memory. We believe these changes are to be expected; as our industry has grown and prospered, the attention given to it by state legislatures has increased as well.
We expect states will continue to focus on predatory lending practices. The key is to convince lawmakers to draft laws that are not so broadly drafted that they have unintended consequences, as well as to consider that we are in a highly regulated industry that needs greater enforcement of its current laws.
Robert S. Lotstein is a partner with Lotstein Buckman, LLP, a Washington, D.C., law firm specializing in nationwide licensing and compliance for mortgage lenders, brokers and banks. Lotstein is also the author of the 1999 State & Federal Mortgage Banking Regulators Guide. Ray Christian Witter is an associate with Lotstein Buckman.
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|Title Annotation:||state legislation on mortgage lenders and brokers|
|Author:||LOTSTEIN, ROBERT S.; WITTER, RAY CHRISTIAN|
|Date:||Nov 1, 1999|
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