Residential Magazine

Avoid These Common Compliance Mishaps

Small mistakes can lead to severe consequences, including fines and legal actions

By Houtan Hormozian

Mortgage originators play a crucial role in the homebuying process. They are responsible for guiding borrowers through the complex world of mortgage lending, ensuring that their clients receive the best possible loan products and terms to suit their needs.

Originators also face significant risk in terms of compliance. Even the smallest mistake can lead to severe consequences, including fines, legal action and loss of license. To excel in this business, originators must understand common compliance mistakes and how to avoid them.

“One of the primary compliance risks faced by mortgage originators is the failure to adequately verify a borrower’s income and assets.”

Compliance risks are a serious threat to your business. Beyond the financial losses and legal complications, there’s the potential for harm to your reputation, which can either sink your career and business or cause lingering damage for years.

Borrower confusion

One of the primary compliance risks faced by mortgage originators is the failure to adequately verify a borrower’s income and assets. This can lead to fraudulent applications or subsequent loan default. To avoid this risk, it is crucial to verify all income and asset information provided by a borrower and to ensure that all documentation is accurate and complete.

Originators are responsible for conducting proper due diligence on prospective borrowers, including verification of income, employment and credit history. Failure to conduct proper due diligence can lead to compliance risks and potential legal issues, such as violation of the Equal Credit Opportunity Act.

Another compliance risk that originators face is failing to disclose all relevant information to borrowers. This could include neglecting to provide information about the loan product and interest rate, or not explaining the terms of the loan clearly and concisely.

Undisclosed fees

Another common mistake is the failure to disclose all fees and charges. Mortgage originators are required to provide borrowers with a good-faith estimate of all costs associated with a loan. This includes not only interest rates but other expenses, such as closing costs, origination fees and application fees. Failing to disclose these fees can result in legal action and damage to your reputation.

A failure to divulge all relevant information could lead to misunderstandings between the borrower and the lender, which could ultimately lead to legal action. To avoid this mistake, originators should explain the terms of the loan in simple language, outline all fees and charges, and answer any questions that the borrower may have.

The Truth in Lending Act (TILA) is a federal law that requires lenders to disclose the terms and costs of a loan to borrowers. Originators must comply with TILA requirements, such as providing borrowers with a loan estimate and a closing disclosure within specific time frames.

A lack of compliance with TILA requirements could lead to legal action and fines. Originators must stay up to date with TILA requirements and ensure they provide borrowers with the required documents within the specified windows of time.

Proper licensing

The Secure and Fair Enforcement for Mortgage Licensing (SAFE) Act is a federal law that requires originators to register with the Nationwide Mortgage Licensing System and Registry (NMLS). Originators must also complete prelicensing education, pass a written test and undergo a background check. Not complying with the SAFE Act could lead to fines or the loss of the originator’s license. Originators who work at federally regulated institutions (including most banks) are exempt.

As a mortgage originator, you have a responsibility to ensure that your business is compliant with various laws and regulations. Originators must keep detailed and accurate records of all loan transactions. They should also store these records securely and be prepared to provide them if necessary.

Originators must also comply with state and federal regulations, including the Fair Housing Act, Equal Credit Opportunity Act and Real Estate Settlement Procedures Act (RESPA). They must remain current with state and federal regulations to ensure they comply with all applicable laws.

Lastly, failing to adequately train staff is a common mistake within compliance risk. Mortgage companies should take steps to train all staff members on regulatory and policy compliance. This can ensure that your business is operating within the law. It is important to provide ongoing training so that staff members are up to date on all relevant regulations and policies.

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It is important to maintain accurate records, comply with all state and federal regulations, and disclose all fees and charges to borrowers. Adequately train your staff members and avoid predatory lending practices. By following these tips, you can ensure that your business is compliant and operating within the law. ●


  • Houtan Hormozian

    Houtan Hormozian is a co-founder and executive at Crestico Inc. He is an experienced mortgage professional with nearly two decades of accomplishments in both wholesale and retail operations. He currently serves as the president of the California Association of Mortgage Professionals and as treasurer of its North Los Angeles Chapter. Hormozian’s expertise centers around brand development and recognition, product launch, market share, distribution, expansion and operations efficiency.

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