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   ARTICLE   |   From Scotsman Guide Residential Edition   |   June 2009

Understanding the Industry's Gray Areas

Often, the decision to comply or to let it fly comes via one of four issues

When I started dealing  with licensing, compliance and other legal issues in the mortgage industry, I often would hear, "Well that's a gray area, so we can go ahead and do it." Like many professionals, I was unsure about moving forward into that gray area. After all, what is a legal gray area if the law should be black and white?r_2009-06_sheasby_spot

In the mortgage industry, gray areas often come via four issues.

  1. Widespread unenforcement
  2. Differing rules
  3. Misunderstanding
  4. Unclear or contradictory laws

To get a better feel for how to act ethically in today's mortgage environment, it's a good idea to get a handle on all four.

1. Widespread unenforcement

An unenforced area of the law is one in which a decision on law enforcement is unclear, at best.

For example, consider the Internal Revenue Service's (IRS) guidance on mortgage companies paying loan officers as 1099 contractors. In 1996, an IRS technical advice memorandum stated that companies should pay all workers meeting its definition of loan officers as W-2 employees. But the IRS does not necessarily enforce this.

If the IRS caught you paying your loan officers as 1099 contractors, you most likely would be required to prove that you will change everyone to W-2 pay. If there is no willful intent shown to violate tax code, there would be neither a retroactive decision forcing you to fix the past payroll nor any fines. Thus, no enforcement.

Is it alright to do business in this gray area because you won't get caught? The law says no -- it's the enforcement that lags.

2. Differing rules

Many regulatory agencies govern the mortgage industry. In fact, if you're doing business in all 50 states and the District of Columbia, you probably face more than 60 mortgage-regulatory agencies. That doesn't even include the U.S. Department of Labor, the IRS, secretaries of state and county governments.

As a mortgage company, you must create policies and procedures to deal with all federal and state laws and regulations. Sometimes you will have to make more-universal company policies for the sake of simplicity.

Consider, for example, that every state has different regulations and opinions regarding the names of "junk fees" that brokers can charge. Generally, brokers charge origination and processing fees. But often, they also charge broker, administration, application and lock-in fees.

Some states will make brokers refund fees that carry certain names because they consider these fees duplicative and not customary. Other states will let you charge any fees you want, as long as they don't exceed federal or state fee limitations. What does a mortgage company do in these cases, when it's difficult to set different policies for each state?

This is a gray area. Remaining on the conservative side and redisclosing fees before final documentation could help.

3. Misunderstanding

This type of gray area comes from not knowing what the law really says. Whenever you hear someone say, "I was told that this is how you do it," you can probably assume that this person isn't sure about the topic at hand.

A good example of this is state broker- and loan-officer-licensing laws. Many people are only familiar with the licensing laws in their home states. When they do business in another state, they often assume that other states have equal or similar laws.

With the Secure and Fair Enforcement for Mortgage Licensing Act of 2008, each state's loan-originator licensing must meet minimum criteria. These include use of the Nationwide Mortgage Licensing System, fingerprint background checks and credit checks, initial live education, and initial testing.

Even with these minimum criteria, however, some states still have stricter licensing laws than others.

The thing to do when there is a lack of understanding or knowledge is to learn more about the law and to work toward compliance. Instead of treating these as gray areas because they are often misunderstood, brokers must dig for the truth and make honest decisions based on what they know to be true.

4. Unclear or contradictory laws

The law can contradict itself. In these cases, we usually use case law or audit and examination results to get a clearer picture of what the law is teaching.

Though there are contradictions and unclear statements in law, brokers should attempt to interpret laws based on the laws' intentions. Remaining conservative is always recommended.

•  •  •

When encountering gray areas, mortgage brokers' first question should be: With whom does the decision about this lie? Is it the choice of the compliance manager, the sales manager or the company-owner? Often, it's the owner's. Many times, reaching the final decision about a gray area will be difficult, even for business-owners. If brokers don't agree with the decision of their company's owner, it is OK to place an objection -- but ultimately, the owner's decision stands.

If you own a mortgage company, listen carefully to your compliance staff. They usually do their best to keep you out of trouble -- and out of gray areas altogether, which can be good for everyone.


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