As published in Scotsman Guide's Residential Edition, January 2011.
Now more than ever, mortgage brokers and loan originators must know if the loans they originate are for business or consumer purposes. Discovering and documenting this information can help you determine when certain regulations come into play -- and when they don't. Here's how.
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Generally speaking, mortgage brokers, loan originators and lenders process, package, underwrite and fund residential loan files based on policies and procedures that comply with consumer-lending regulations. These mortgages, typically made on properties with one to four residential units, are most often treated as consumer loans. As such, the borrowers in question receive the benefits of consumer-lending regulations, including various loan disclosures.
There's just one problem: These loans aren't necessarily all consumer loans.
With a bevy of federal, state and local regulations taking effect in the past few years and more on the way, brokers and loan originators must classify loans properly. Trouble looms for those who don't.
To make the proper classification and subsequently deliver the proper disclosures, brokers and loan originators must understand the distinction between loans made for consumer purposes and those made for business purposes.
Historically, loan originators and brokers have relied on the lenders' submission requirements to facilitate regulatory compliance. If something went wrong, they knew with reasonable certainty that borrowers and regulators would seek recourse against the lender or loan servicer. This is no longer the case.
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, brokers and loan originators will be liable for compliance errors in loans they originate. Lenders will no longer be the only ones facing civil or administrative penalties stemming from potential violations of lending laws and regulations.
To get an idea of how much opportunity exists for errors to occur, consider a small sample of legislative and regulatory changes in the past three years:
Changes to the Real Estate Settlement Procedures Act (RESPA) and the introduction of a new good-faith estimate and new U.S. Department of Housing and Urban Development (HUD)-1 form. These changes include a mandate that all loan fees and charges be correctly disclosed and that they may not change at closing, except under limited circumstances.
Changes to delivery of the truth-in-lending disclosure, including specific rules as to when and how to provide the disclosure and a mandatory waiting period after a re-disclosure.
Introduction of higher-priced mortgage regulations and additional restrictions on high-cost mortgage loans.
New requirements for mandatory property-tax and insurance escrows on first-mortgage loans for higher-priced mortgages.
The recently released final rule from the Federal Reserve Board regulating loan-originator compensation. A battery of industry attorneys is currently devoting a significant amount of time attempting to help originators, brokers and lenders understand how to apply the rules to their operations.
The recently released interim rule from the Federal Reserve providing for new disclosures for loans with features such as adjustable rates, stepped payments or interest-only payments.
Numerous state and local foreclosure-prevention regulations intended to stop or slow the flow of residential foreclosures.
What's a consumer loan?
The most important phrase to keep in mind when considering all these financial regulations is consumer loan. Most of the new regulations apply to consumers or consumer loans. In fact, the vast majority of mortgage-lending laws, rules and regulations written in the past 30 years have been for the protection of consumers.
When it comes to the Dodd-Frank Act, you need look no further than the title to know it's a consumer-protection law. So are the Truth in Lending Act (TILA) and RESPA. Rules pertaining to higher-priced and high-cost mortgages apply to consumer loans on primary residences. Most of the foreclosure-prevention regulations enacted across the country also apply only to consumer loans.
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