Wednesday, February 22, 2017

State Examinations - AML/BSA Compliance - Self-Audit Checklist to Ensure Compliance

The Anti-Money Laundering rule (AML) implemented by the Bank Secrecy Act (BSA) creates many questions for lenders and brokers. We know that state examiners focus on a number of specific issues. A recent spate of calls reveals that New York, Indiana, Texas and Pennsylvania have questionnaires and examiners that ask pointed questions about the AML/BSA compliance program for mortgage originators.  To ensure that you are hitting all of the requirements we have compiled a self-audit checklist for you to use to evaluate and collect data.  You should run through this checklist annually.

Use the BSA/AML Self-Audit Checklist for mortgage originators, to ensure you keep all of the information needed for an examination.  Members may download the original form for customization from or

Compliance Officer Training

New York's examination findings sometimes cite a recommendation for the compliance officer to have training.  The FinCEN rule requires training, but does not say that it must come from a certified 3rd party.  FinCEN offers training on its website, and many compliance providers provide training for a fee. Familiarity with the rule - actually reading your policy - also counts as training.

Here is a video that instructs the Compliance Officer how to register for the FinCEN portal to report SARs

Quality Control and AML

We do not recommend that firms maintain a separate Anti-Money Laundering Plan, but rather that they integrate the AML process with their Quality Control function.  After all, FinCEN wrote the AML rule as a fraud detection/reporting requirement, and that is exactly what the quality control plan should do.  As a consequence, make sure your quality control plan has a robust red flag feature.

Register for the Portal

Your plan loses credibility if your compliance officer isn't even registered with the FinCEN portal.  It implies that you have no intention of participating in the program.  This simple fix will eliminate many citations.

Tuesday, February 21, 2017

Brokers Don't Approve Loans, so do not deny them - Either action is a credit decision

Is it an App? Don't Assume Excess Regulatory Responsibilities - treat all inquiries as pre-qualifications. Every pre-qualification should show what is possible, not whether you can get a loan. 

The use of the 1003 form confuses the question, particularly for brokers

The 2/14/17 Mortgage Call Report (MCR) prompted a waterfall of questions. Many of these questions center on which loans get reported. The confusion surrounds the phraseology of the MCR instructions, which seem contradictory. At the heart of the matter: Is it an application or something else? Another point became clear; people aren't using their LOS the way they should in preparing their submissions. Take the time now to learn how to generate custom reports that you can use to complete the reports. 

One point we repeatedly try to make to industry participants - don't add to your regulatory burden by including prospects to your reporting pipeline. In the case of the Quarterly Call Report, you have to report your application activity. Here's the ambiguity; what does application mean?

According to call report documentation, an application is 1.) an oral or written request for extension of credit on a residential property. Clearly, then, an application is a request for credit. If your company policy allows verbal applications, or defines any other application methodology, including the 1003 Uniform Residential Loan Application, then that becomes a report-able application. Most companies defer to the 1003 date as the application date, whether the date completed by the originator or the date signed by the customer.

So is a rate inquiry or pre-qualification request an application? According to the NMLS' instructions, (#2) inquiries or pre-qualification requests which result in denial are treated as simultaneous application and denial. But that doesn't make any sense, because a pre-qualification simply is a discussion of available products - it CAN'T be denied, because it's not a request for anything. EVEN IF THE BORROWER AUTHORIZES A CREDIT REPORT, there is no request for a credit decision. The instructions force the lender to make the jump from pre-qualification to application. But this is a big jump for the lender to make. A pre-qualification request would never result in a loan approval, so why would it result in a denial. It's not a request for credit, it's a request for an eligibility determination.

Limit your use of 1003 as the tool to collect information - use a Pre-Application process

Lenders should pay close attention to how they define application within their own policies. This impacts HMDA, ECOA, and disclosures in addition to the MCR reporting information. By developing defined application paths which segregate inquiries from applications, you close many loopholes and tripwires which could result in under reporting. This also means that deciding to complete a 1003 for an applicant takes on new significance; someone who has signed a 1003 is no longer a prospect.

Brokers should carefully consider how their prospects convert to applications. As a pre-qualification inquirer, a prospect doesn't receive disclosures - there's no property address and no credit decision. This perfectly reflects the organizational capabilities of a mortgage broker. Taking applications using a 1003 form should be reserved for the customer who has found a property and is proceeding with a loan the broker has registered with a wholesale investor. This process eliminates all of the confusion about who is responsible for disclosures, as the wholesaler will send the LE and ancillary disclosures at registration, eliminating the possibility of incorrect disclosures resulting in a rejection.

A "Pre-Application" allows you to collect information necessary for a pre-qualification without creating a credit request.

Both lender and broker can benefit from a defined "pre-application" process. The gray area of inquiry no longer exists when the status is Application Not Taken Yet. This also allows the company to completely validate a customer's eligibility, prior to assuming a regulatory or reporting burden.

More on MCR and HMDA Reporting - Brokers don't deny loans

If you are not a creditor, you cannot approve a loan. By the same token, if you cannot approve a loan then you cannot deny it, either. Brokers who complete a 1003 form should dispose of that application within 30 days through the incomplete application process or customer withdrawal. A broker will never report a denial, merely withdrawals and cancellations.

To ensure you do this correctly, look at your complete application checklist, also known as the items needed worksheet. Does it have a date by which the customer must respond? If not, you need to change the form to add a date field; code that field to reflect 30 days from the date of application. You can automatically withdraw the loan if the customer doesn't respond. If the customer does provide documentation, but that documentation doesn't meet the guidelines of a program, or what was requested, you can respond with a cancellation or termination due to incomplete information. If the information does meet the requirements and an application was completed, forward the case on to the underwriter. If the rate that the borrower wanted no longer exists, advise the customer and withdraw the request.

The paradigm; don't take on regulatory duties that exceed the scope of your duties.

Wednesday, February 1, 2017

Warning Shots for Paid Referrals: Legitimate Violations at Heart of Prospect Lead Generation Program

Behind the headline splash - real violations

We have gotten used to the CFPB picking on things in the range of "technical violations" and announcing large penalties. This induces paranoia and an acceptance of the idea that, despite our best efforts, fines and penalties in the course of operations have become a "cost of doing business." In the Prospect Mortgage case, however, these incidents would be clear violations for even the uninitiated.

We recommend a review and audit of referral relationships and lead generation arrangements, but this finding doesn't mean abandoning balanced and compliant lead generation techniques. As a simple measure, if you find any "quid pro quo" activity, you probably have a violation.

Click here to read the entire consent order, which includes detailed findings.

  1. An active referral, by itself, is not a violation. The fact that, in addition to marketing agreements, the agents referred business in great concentration raised suspicion that there were other elements at play.
  2. Exclusively referring business is a referral red flag. A best practice for all referrals revolves around recommending at least 2 or 3 providers. This raised further suspicion.
  3. Leads or referrals, by themselves, are not an indication of a kickback. Payment for a lead to an individual who has a financial interest in that lead - without an arm's length transaction - can point to a kickback.
  4. Sliding scales, or evaluating the quality of a lead before making payment is a RED FLAG. So a lead that is unqualified being evaluated as less valuable than a lead that results in a closed loan is a "pay for performance" strategy and is prohibited.

5. Ultimately, it was easy for the CFPB to draw a straight line from the referral to the payment, particularly with the concentration of this activity.

Beyond this, though, some of the activities that called the arrangement into question would not be violations if they did not have the issue of payments associated with them. For instance, requiring the approval of a particular lender or lenders (such as those appearing on an approved list) does not constitute a kickback scenario. If the companies had not received per loan payments, then the idea of a reputable local lender re-qualifying prospects makes sense and is in both buyers' and sellers' interests.

Joint Venture and Co-Marketing Violations are Less Clear

Planet Mortgage Loan Servicing referrals to Prospect look like a legitimate fulfillment referral arrangement. However, because the payments were not based on standard services provided, but rather on a split of the fees that Prospect received, the ownership and activity tests should have been applied to make sure that these were not sham arrangements, simply for the purposes of generating a referral fee. There is nothing wrong with paying for services provided or fulfillment, nor is there a problem with joint ownership and risked capital splitting fees.

Perhaps the most troubling finding surrounds the penalties for joint marketing. So long as the parties share the actual cost (that the originator isn't paying for the ads on behalf of the agent), there is no prohibition on co-marketing. In this case, the decision of the CFPB seems to hinge on several e-mails which alluded to steering the customer as a consequence of the arrangement. 

MSA's are NOT Illegal - You Have to Look at the Circumstances

Here is the CFPB's cautionary memorandum on this topic. MSA's , they say, can be disguised as payments for referrals. Each situation has to be examined. If you look at our suggested policy on this matter, as reported in our January 2014 issue, you will see that management must review these arrangements to ensure that fees paid are commensurate with the value received - whether it is joint marketing, desk rental, or even affiliated business arrangements. 

"Quid Pro Quo" Arrangements at Heart of All Findings 

Many of these actions, in a vacuum, are not violations. In any review, focus not only on the written agreement, but exercise extra diligence beyond the paper documentation to see if the action causes any pressure or steering on the part of the consumer or other parties.

The payment of referral fees corrupts the customer's ability to evaluate whether they are receiving a fair offer by encouraging the use of providers whose costs are inflated by the need to pay referrals. Ultimately, the best prevention of these kinds of violations rests in a sales culture of referrals sourced through value-added relationships where lenders who provide the best service and pricing lead financing decisions. Value is also added by lenders who provide community services, such as home financing seminars, financial counseling and education, and who work in partnership with real estate sales professionals to promote transparency in their relationships. Refer three lenders or title companies, not just one. Let the borrower choose.