Predatory Lending
- An Overview of the New Laws Impacting Mortgage Lenders-
August 2007
Nash & Lodge, PLLP
by Stephen J. Nash
As of August 1st a new set of laws dealing with mortgage lending (by amendment to Minnesota Chapter 58) became effective.
Mortgage brokers and loan officers must become familiar with these changes and incorporate them into their business. In many
ways, the new laws will fundamentally change the mortgage industry.
To understand the changes you must first know who they apply to. They apply to all mortgage lenders but not banks and credit
unions. Many feel this gives banks an unfair advantage. Some mortgage lenders may end up looking into becoming a bank
to avoid these new laws. I’m not aware of any lender that has done this but I will not be surprised if it happens and
it certainly has created an opportunity for banks to expand their residential mortgage presence. Since banks have been looking
for an opportunity to take a bigger share of the residential real estate market and mortgage lenders are looking at how to
survive in a tough market with a new set of laws to contend with, merging operations or selling to a bank may be an advantage
to both.
To obtain a residential mortgage originator license you must meet the following requirements:
1. you must be a business entity (an individual person can no longer hold a license)
2. you must maintain one of the following: approval as a mortgagee by HUD or the FNMA; a tangible net worth of $250,000.00;
or irrevocable letter of credit in the amount of $50,000.00.
As stated earlier, banks are exempt from the state licensing requirements. Individual loan officers working for a lender
do not need a license but must work for (either as an employee or independent contractor) an entity who either holds a license
or is exempt (a bank). Insurance agents and real estate agents are no longer exempt from the licensing requirements so they
must either form an entity to obtain a license or work for a licensed entity or bank in order to continue working as a loan
officer.
Other than banks, credit unions and their subsidiaries, you can also be exempt from licensing requirements in certain limited
situations. If you make no more than 3 loans, using your own funds, in a 12 month period, you are exempt from the licensing
requirements.
While the individual loan officer does not need a license, he/she does need to obtain educational credits. Loan officers
need 15 hours of education (approved by the Department of Commerce) concerning state and federal laws relating to residential
mortgage lending by March 1, 2008. If you work as an employee of an exempt lender the educational requirements do not apply.
If you work as an independent contractor for an exempt lender, you would have to apply to the Department of Commerce (“DOC”)
for an exemption.
The licensed entity must do the following:
1. maintain a list of all loan officers;
2. affirm that each loan officer has meet his/her educational requirements,
3. do a background check on each loan officer,
4. report any material change to the information submitted with their application to the DOC within 10 days of the change,
5. must keep and maintain business records regarding residential mortgage loans (applied for, originated or serviced) for
26 months.
6. maintain a trust account for any funds received from the borrower that are held in a fiduciary capacity for later disbursement.
The Agency Relationship Between the Mortgage Broker and the Borrower
One of the main changes to the existing law is the imposition of an “agency” relationship between the mortgage
broker and the borrower. This is a fundamental change. In the past, the loan officer was “selling” a product
to the borrower and owed the borrower no duties. In reaction to the many loans that were sold that were ultimately determined
to not be in the best interests of the
borrower and in many cases mainly benefited the loan officer, the legislature imposed the following duties on mortgage brokers:
1. “mortgage broker shall act in the borrower’s best interest and in the utmost good faith toward borrowers,
and shall not compromise a borrower’s right or interest in favor of an other’s right or interest, including a
right or interest of the mortgage broker”;
a. “a mortgage broker shall not accept, give or charge any undisclosed compensation; or realize any undisclosed renumeration,
either direct or indirect means, that inures to the benefit of the mortgage broker on an expenditure made for the borrower”;
2. “mortgage broker will carry out all lawful instructions given by borrowers”;
3. “mortgage brokers will disclose to borrowers all material facts of which the mortgage broker has knowledge which
might reasonably affect the borrower’s rights, interest, and/or ability to receive the borrower’s intended benefit
from
the residential mortgage loan. But not facts which are reasonably susceptible to the knowledge of the borrower”;
4. “mortgage brokers will use reasonable care in performing duties”; and
5. “mortgage brokers will account to a borrower for all the borrower’s money and property received as an agent.
Residential Mortgage Originator or Servicer Prohibitions
Minnesota Statutes 58.13, subdivision 1 sets out 26 prohibitions of which four are new. Many residential mortgage originators
or servicers may not be fully aware of the original 22 prohibitions but this article is focused on the recent changes. I
highly recommend that anyone subject to Chapter 58 review it carefully to become familiar with all of its requirements. The
new prohibitions basically prohibit “No Doc” loans; churning and certain negative amortization loans and require
disclosure of anticipated tax and insurance payments.
Loan Ability to Pay Verification
The mortgage originator is now required to verify the borrowers “reasonable ability” to repay the loan according
to its terms. You cannot look just at the initial “teaser” rate but must look at the “fully indexed rate”
and a repayment schedule that achieves “full amortization over the life of the loan”. You cannot rely on the
borrowers statement of income or financial resources but, instead,
must verify each by “tax returns, payroll receipts, bank records, or other similarly reliable documents”.
Churning
Churning under this subdivision means “knowingly or intentionally making, providing, or arranging for a residential
mortgage loan” when the loan “does not provide a reasonable, tangible net benefit to the borrower considering
all of the circumstances including the terms of both the new and refinanced loans, the cost of the new loan, and the borrower’s
circumstances”. This forces a
fundamental sift in the mortgage originator/borrower relationship. Previously, the mortgage originator was a salesperson
selling a product. A salesperson typically does not have a duty to protect the customer from themselves. But the mortgage
originator is no longer a salesperson and must now protect the borrower from themselves. They now must look at the transaction
through the borrowers eyes, not their own. In some cases the mortgage originator may have to decline to provide the borrower
a loan that they want because the mortgage originator does not believe that there is a reasonable, tangible net benefit to
the borrower! How difficult in this market will it be to turn away a borrower who wants the loan?
Tax and Insurance Payment Notice Requirement
The first time the mortgage originator orally informs the borrower of the anticipated or actual periodic payment for a primary
residential mortgage, the mortgage originator must inform the borrower that there will be an additional amount due for taxes
and insurance and, if known, the anticipated amounts due for taxes and insurance.
Negative Amortization
Any residential loan subject to Chapter 58 that results in negative amortization during any six month period is prohibited
except for reverse mortgages.
Borrower Remedies Against Mortgage Originators and Servicers
As a part of the new “Predatory Lender” additions to Chapter 58 the legislature added a remedies section for a
private cause of action and a private attorney general action. The statute allows borrowers to sue for violations of the
duties, prohibitions and requirements of Chapter 58. Borrowers can recover actual, incidental and consequential damages;
statutory damages (the amount of all lender fees included in the amount of the principal of the loan); punitive damages and
court costs and attorney fees.
While the remedies section does make it easier to bring a lawsuit against lenders by allowing a broad range of remedies including
attorney fees, I don’t believe that it is going to trigger a rash of lawsuits. There is no remedy unless you win.
How many borrowers are going to want to pay the cost of a lawsuit to find out the if they are going to win? How many lawyers
are going to undertake such a case under a contingent fee arrangement? I think the answer to the first question is that not
many borrowers in this situation will have the money to afford a lawsuit and the answer to the second is not many lawyers
will take such a risk. On the other hand, if faced with such a lawsuit the lender should feel real fear in that if they lose
they will lose big.
Conclusion
The “Predatory Lending” changes represent a fundamental change for residential mortgage lenders (other than banks
and credit unions). Loan officers and lenders must change the way they deal with borrowers, to learn how to document their
files and set-up review systems to make sure that the proper documentation is in the file.
NOTICE
The foregoing is not intended to constitute legal advice for any specific circumstance, but is intended to reflect broadly
applicable principles, under Minnesota law, relevant to a typical situation. Each set of facts and each contract is, or can
be unique; the unique facts and specific language of the contract may require a different legal analysis and may result in
a different outcome. Before proceeding in reliance upon this or any other general description of law, consult with an attorney
competent in the field of practice relevant to your situation.
Copyright 2007 Nash & Lodge, PLLP
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