HMDA, ECOA and What's an Application?... again

Regulators do not understand Pre-Qualifications

Implications for NMLS Call Reporting and HMDA Reporting

Recent discussions make it apparent that regulators do not understand the concept of pre-qualification versus qualification or pre-approval. This is critical given the impending 2018 data recording season, when, with substantially lower reporting thresholds, even the smallest company becomes a potential HMDA reporter with its incumbent responsibilities and tasks.

Make sure you are armed with the facts when confronting a regulator who insists you are under-reporting your call volume or HMDA data.

What is Pre-Qualification?

"Pre"-Qualifying is a prior-to-application discussion of eligibility and rates, applied against published standard qualifying guidelines; ratios, down payment, loan type, and maybe even credit score. This analysis should result in a number; the maximum loan amount a customer could afford. It's not an application and the result states "THIS IS NOT AN UNDERWRITING DECISION", something that you must feature prominently on any correspondence. This is so consumers don't represent or think that they have been approved when they haven't.

If you Add a Property Address to a Pre-Qualification, the regulator will expect a Loan Estimate

Why Do Regulators Think Pre-Qualifications are Applications?

Buried in Reg B (ECOA/Fair Lending) commentary is a statement that has now become the lynchpin for the argument that pre-qualifications are applications. This opinion holds that pre-qualifications if failed, must be disposed of via Adverse Action and consequently are subject to activity reporting.

Comment for 1002.2(f)-3 When An Inquiry Or Prequalification Request Becomes An Application.
 3. When an inquiry or prequalification request becomes an application. A creditor is encouraged to provide consumers with information about loan terms. However, if in giving information to the consumer the creditor also evaluates information about the consumer, decides to decline the request, and communicates this to the consumer, the creditor has treated the inquiry or prequalification request as an application and must then comply with the notification requirements under § 1002.9. Whether the inquiry or prequalification request becomes an application depends on how the creditor responds to the consumer, not on what the consumer says or asks. (See comment 9-5 for further discussion of prequalification requests; see comment 2(f)-5 for a discussion of preapproval requests.) 

This comment illustrates the conundrum because, in this case, the consumer doesn't have to ask (apply) for credit but rather simply be ineligible for financing (according to the comment); the discussion must be treated as an application and denied. It also belies the intent of the pre-qualification which is, by its very nature, a positive discussion of what is possible. Even if the current scenario yields a $500 loan, it's positive, not negative. You CAN offer someone a loan if the income increases by a prospective amount, decrease debts by some prospective amount, save some prospective amount of money, and then identify what the pre-qualification yields. This is the purpose of the pre-qualification discussion - educating the consumer about how he or she should proceed if trying to obtain financing in the future.

This also shows the other flaw in the logic of considering a failed pre-qualification a reportable event; what's the number? It's ZERO! Where do you report that?

A "Failed Pre-Qualification" Doesn't Actually Exist

If we agree with the regulator that declining to issue a pre-qualification is a declined loan, you should consider this instance a "Failed Pre-Qualification." A "Failed Pre-Qualification" doesn't mean you issued a pre-qual that didn't meet the customer's expectations - such as one where the customer was looking at a 500,000 house but could only afford 125,000 - but merely should reflect the result of the qualification calculation, subject to underwriting.  So if they can afford a $500 loan, you should issue a pre-qual for $500 and call it a day - no reporting required. In theory, you should never have a failed pre-qualification under this structure.

Your pre-qualification process must show you are determining a maximum loan amount, not meeting a specific loan request criteria. Once you begin trying to meet a specific criteria, it's no longer a pre-qualification , but a qualification. 

Regulators are Correct About Pre-Approvals and Qualifying

Logically, the regulatory interpretation of pre-qualification activity WOULD be true if we called the process "qualification," eliminating the "pre-," instead. In a qualification exercise you start with a specific number - a desired property or particular loan amount - and work through the prospect's financial profile to determine whether the customer is eligible for that particular number. Results of this process identify, in binary form - YES/NO - whether the prospect can afford or is eligible for that number. In this case, if the borrower has too many debts, or has insufficient income or cash, or because of the limited profile, the credit score is insufficient for this particular instance, you now have a number that you are not eligible for. Either change the number (counter offer) or decline to proceed (adverse action).

Similarly, a Pre-Approval is a loan commitment resulting from a customer's application for a specific amount of financing prior to property selection. A customer submits an application and all supporting documentation which the lender completely processes in the absence of a property - no sales contract and subject to appraisal, title and property conditions. All decisioning rules apply.  If the amount the borrower requests cannot be approved, then the underwriter may counter-offer for different terms, which the customer may accept. If not accepted, the loan must be declined and notices provided. Disclosures, except those which apply to a property, must also be provided.

You Can't Fight City Hall

Sadly, to this date, logic doesn't necessarily dissuade regulators from attempting to corral these innocuous discussions into a regulated process. According to several state regulators and the NMLS, while you don't count pre-qualifications in your call report, you must report declined pre-qualifications.

The golden rule applies. No amount of good reasoning will persuade a regulator, who has made a public determination about a policy, to admit that he or she is incorrect. So if you are in a state where the industry has allowed the regulator to control the definitions of what construes a credit inquiry, then you have to build policies around it, to ensure you comply.

Building a Compliant Pre-Qualification Process

Since this ECOA interpretation can open your business to regulatory scrutiny, you should build a process that inoculates you against under-reporting or fair lending findings. Simply, you could issue a pre-qualification certificate or letter for every single discussion, even if the result included a prospective versus current solution.

• Generate and retain a copy of all pre-qualification letters/certificates from every discussion.
•  Create a standard pre-qualification letter or certificate
• There may be multiple formats
• as is or
• prospective
• If you do not issue a pre-qualification (a failed pre-qualification) you should issue an adverse notice stating "we don't offer any program matching your requirements."  

A defined pre-qualification identifies a potential maximum, but does not state any basis for a declination. 

Should You Reprocess Your Mortgage Loan File Before Submitting It to a Regulator for Review?

When it comes to regulatory reviews, presenting a meticulously organized and thoroughly vetted mortgage loan file is crucial. You might wonder if reprocessing your loan file before submission is worthwhile. The short answer is yes, especially if you are not already post-closing and organizing loans when they close. In this case, reprocessing your mortgage loan file could be the difference between a smooth review and a costly, time-consuming ordeal.

Why Reprocess? It’s All About Precision

Loan files are complex, containing numerous documents, verifications, and disclosures that must be accurate and complete. Even with the best intentions and processes, items can be missed. The reality is that we often discover missing or incorrect items when we take the time to reprocess files. These oversights might seem minor but can lead to significant issues during a regulatory review.

By reprocessing your loan file, you ensure that every document is where it should be, every calculation is correct, and every compliance box is checked. The attached FORM 1-4 QC PROC Closed File Pre-Audit Compliance Checklist is an excellent example of a comprehensive tool to guide this reprocessing. This checklist covers everything from verifying borrower information to ensuring all regulatory disclosures are accounted for. You might use the state required version of the file, such as that provided by North Carolina or Texas, for your review (even though the FORM 1-4 does contain all these items.)

The Benefits of Reprocessing

1. Reducing Findings and Penalties: Regulators are thorough, and they will catch mistakes. By reprocessing your file, you can correct errors before they become findings in an audit. This proactive step can save you from fines, penalties, or even more severe regulatory actions.

2. Cost Savings: When a file is well-organized and accurate, it takes less time for the examiner to review it. This not only makes the review process faster but can also reduce the overall cost of the examination. A clean file means fewer questions, less back-and-forth, and ultimately, less time spent by the examiner—time that you won’t be billed for.

3. Building Confidence: Presenting a thoroughly reprocessed file with a detailed checklist like the Post-Closing Audit Preparation/Regulatory Compliance Checklist gives the examiner confidence in your compliance processes. While it’s unlikely that an examiner will completely forego reviewing your files based on this alone, a well-organized submission can lead to a more favorable outcome, potentially reducing the depth of the review.

4. Streamlined Communication: A file that has been reprocessed is easier to navigate, not just for the examiner, but for anyone in your organization who might need to answer questions or provide additional documentation. Having a checklist attached that shows exactly what has been reviewed and included in the file simplifies communication and ensures everyone is on the same page.

What Happens If You Don’t Reprocess?

If you decide to submit your file without reprocessing, you’re taking a risk. Missing or incorrect items can lead to findings that will need to be corrected under the pressure of a regulatory deadline. This can be more stressful and costly than simply reprocessing the file upfront. Moreover, repeated findings can damage your company’s reputation with regulators and may lead to increased scrutiny in the future.

A Checklist to Guide Your Reprocessing

Consider using a tool like the FORM 1-4 QC PROC Closed File Pre-Audit Compliance Checklist as part of your reprocessing efforts. This checklist is comprehensive, covering all the necessary components of a loan file, including:

• Borrower and Loan Information: Ensuring all borrower details, loan amounts, and terms are correctly documented.
• Fee/Cost Reconciliation: Verifying that all fees are correctly calculated and documented, with copies of relevant checks and invoices attached.
• Record Retention: Confirming that all required documents are included and appropriately filed, from the initial loan application to the final promissory note.
• Post-Closing Audit: Preparing for a regulatory review by double-checking that all compliance requirements are met and that the file is ready for submission.

Conclusion

In conclusion, reprocessing your mortgage loan file before submitting it to a regulator for review is not just advisable—it’s essential. By taking the time to review and organize your file, using a comprehensive checklist, you can significantly reduce the likelihood of costly errors, streamline the review process, and potentially save your company both time and money. So, next time you’re preparing a file for submission, take that extra step to reprocess—it’s well worth the effort.

How to create a compliance library for your company

Creating content takes weeks and months. That's why many people purchase off-the-shelf training subscriptions for compliance training. But in truth, much of this material is the same stuff that's been trotted out for years. Why not take the material directly from the source (e.g., government agency, regulator, or mortgage insurance company) and just document that our employees have taken it with a quiz? 

This allows you to devote your training program development to those areas where there is a gap or where your specific situation needs more attention. 

Step 1 - Assemble the Playlist

We did this here on YouTube. It's a great resource for compliance managers who need to have more than their line employee's training. Visit https://www.youtube.com/@Mortgagemanuals/videos

You can curate playlists with the content you want your employees to see.

Then it's just a matter of developing a quiz to ensure the students have gotten the message. You can create a quiz in Chat GPT, or use our models here:

https://www.mortgagemanuals.com/annual-aml-training.html

Where's my Privacy Policy?

Most Important - The first form you should give to a customer

In this era of wholesalers taking applications in your name at the point of sale, it's important to note the timing of the Privacy Policy. It should be delivered BEFORE you share the information with a vendor (credit bureau, appraiser, WHOLESALER/INVESTOR, etc.)

Where's my Privacy Policy?

Gramm-Leach-Bliley (GLB) Privacy rules received an inordinate amount of attention in the pre-crisis compliance era. This is due to corporate structures that share consumer information, often without the customer's knowledge. To protect consumers against unauthorized sharing so that affiliates and other firms can market to your consumer, the Opt-Out Provisions of the Gramm-Leach-Bliley privacy rules require that companies tell consumers how they treat consumers' private information. In addition, the company must give the consumer the option to elect NOT to share that information. This results in the form the consumer receives and the instructions they use to opt out. 

We still see MANY questions regarding this form and its proper completion, so we have provided this simple guide to correctly populating the form fields. 

When a Regulator Asks for your Privacy Policy

We get the question, "where is my Privacy Policy?" in the policies and procedures we provide. It's natural to ask us because of how the question is phrased. But this one does not come in a formulaic narrative manual. It's embodied in your disclosures and (hopefully) on your website. The "Model Privacy Notice" is your "Privacy Policy" as far as GLB is concerned. 

How to Correctly Complete the Form

1. Add income/employment, asset, credit history, and property information as necessary.
2. YES - you send to investors, underwriters, secondary market partners, title companies, etc. 
3. NO - they can't limit it because they wouldn't get a loan if you didn't share it.
4. Depends on your marketing - do you market to your customers - past or present? (e.g., email blasts) If yes, then yes, and your customer must be able to opt out, and you have to have a toll-free number.

Many States Require Specific Disclosures on the Form, Such as Vermont

Build Your Own Form

You can use the CFPB's form builder tool here to build your own privacy document:

Not Every Privacy Policy is a GLB Privacy Policy

Often, a regulator will ask for a Privacy Policy, referring to a policy or procedure describing how you will keep your customer's private information secure. In other words, "Information Security" and not "Privacy."

Why do I need an 800 Number? New York State Whistleblowers

This update addresses some of the issues we discovered in the past 30 days.

Privacy policies and marketing - The reason you MUST have a toll free company number

An 800 number provides customers with a direct, toll-free line to communicate with company representatives. The Gramm-Leach-Bliley (GLB) Act states that customers must have an opportunity to do what is called "opting out" of information sharing. Customers have the absolute right to call and direct that their personal information not be shared with non-affiliated third parties. Having an 800 number fulfills the requirements of the GLB Act.

Further, we recommend using the Privacy Policy from your LOS to populate your website or marketing policy, so you provide the same information across all platforms.

Download Link

Whistleblower Policy - Reporting responsibilities and protection of those reporting

Employees should maintain high standards of business and personal ethics in their conduct within the workplace. New York State, among others, requires lenders and brokers to have a Whistleblower Policy in place. Acting ethically in a workplace includes reporting any concerning or suspicious activity as soon as possible and in a professional manner. The Whistleblower Policy encourages directors, volunteers and employees to report suspicious activity, as well as protects those who report activity from any retaliation or adverse employment consequences.

View Sample Policy Here

Vet exhibits and organize your loan files efficiently!!

Prior to forwarding files to an underwriter or investor, ensure you properly organize and vet the contents. Using a checklist will help you do this efficiently. However, until you send them, do they sit on your computer as a mish-mash jumble of files? While many LOS systems will index exhibits for you, having access to the specific document before and after you upload it can help with further processing and post-closing document review.

This policy provides guidance on proper loan file taxonomy of exhibits which will help with post-closing delivery, audits, submitting exhibits to insuring and guarantee, and state regulatory reviews.

In addition, proper file naming conventions can help organize many individual exhibits into one single file.

View Sample Electronic Document Stacking Policy

Some CE Training May Meet Non-NMLS Compliance Training Requirements

Your Loan Officer's continuing education (CE) program may cover some of the compliance training requirements. We offer a compendium of compliance training recommendations on our affiliate site - www.lendertraining.com. With several of our affiliates, you can request add-on certificates to meet required non-NMLS compliance training, such as Anti-Money Laundering, Fraud, and TILA-RESPA. This can save your loan originators time and money.

Unfortunately, the CE training can't cover every element of your compliance training and for those we provide those to you here:

https://www.mortgagemanuals.com/training-services.html

Did you know that we can also verify whether your licensing or other training does meet some of the regulatory requirements? All we need is a copy of the syllabus and training course materials, such as text, quiz or powerpoint.

Updated Regulatory Compliance One-Pager

Mortgage Compliance One-Pager - Desk Reference/Study Guide for laminating

Updated 3/17/17

I recently re-took the NMLS' National Test with Uniform State Component. I neglected to take the Uniform State Test add-on when it first came out, but thought that if I needed to add additional licenses later, it wouldn't be so bad to re-take the National Test. I worried that I might have a problem because the last time I took it, I really struggled with the intricate test questions, puzzling over three or possibly four correct answers to decide which one was the "best right answer." This time, I found the test questions much more straight-forward. The bad news: I didn't score 100. What did I get wrong?

I should have studied my own mortgage compliance guide!

I have found that people don't really like to read pages and pages of material. "Can't you cook it down for me?" they ask. So we did. We authored a series of "QuickNotes" (QuickStart: QuickNotes... get it?) which have helped thousands cram and pass the national test. These one page "cheat sheets" boil the material down to its most fundamental level.

Regulatory Compliance Matrix - Click to Download

Document Not Clicking? Try this link.

Loan officers love our cheat sheets. Compliance trainers and regulators hate them. "There's not enough content!" they complain. But the infographic tells it all. Sure you can study MORE, but loan officers aren't attorneys. We get lost reading 3000 pages of code. Just like an attorney or compliance officer would get lost reading 3000 rate sheets and program guidelines a day.

We use this methodology in our new loan originator training, too. Instead of 2000 words describing how to to something, we give an illustrated form, a checklist, or a reference tool like this one which highlights Ability to Repay Guidelines.

Ability to Repay and Mortgage Knowledge Tools - Click to Download

Click here to download these tools at no cost or obligation. Also, feel free to provide feedback.

What I THINK I got wrong...

• PMI Cancellation @78% 
• Do Not Call from 8am to 9pm
• Balloon Payment Qualifying
• Section 32 (High Costs) max Debt Ratio is 50%
• Confusing question on Finance Charges with options I would consider ALL to be finance charges. (I think they wanted the recording fee, still not sure)

These items are ALL on the study guides, so my advice is to study these all. I knew I was going to pass, but I was surprised about how many questions I had to review at the end.

Mortgage Compliance Service Providers Using Scare Tactics

Why do they use Scare Tactics? They get the phone ringing.

But they also  create a lot of unnecessary disruption for companies that are trying to comply. For instance, one e-mail we saw recently, sent from a compliance company, warned Florida mortgage brokers over license suspension issues for non-compliance. As you know, we always try to shed light on issues that confuse participants, and there are some misleading problems with this solicitation. The first one is that the enforcement action WASN'T IN FLORIDA, it was in North Carolina, so Florida brokers can stop worrying about why they weren't aware they needed certain disclosures that don't exist in Florida.

Beyond this misleading alarm, there are other elements to consider.

First, let's just clarify one thing: you have to do something egregious to receive a cease and desist order. In the case of the broker who was the subject of this cautionary tale (whose name was redacted in the marketing piece), the egregious act involved charging borrowers fees which they did not agree to in writing. When a regulator cites you for this type of behavior, if it was unintentional and not systematic,  you can usually negotiate to correct the activity by making restitution for the unearned portion of fees. As we all know, most investors WON'T LET US collect more than we are legally entitled to, so one can conclude that this particular broker didn't have that type of oversight.

Second, in this case the broker surrendered his or her license, rather than deal with compliance. In this case, the broker likely didn't submit or negotiate any required policies and procedures. For regulators, this is standard procedure. If you cite an entity for one element, you cite them for everything that they lacked. Certainly, the lack of a compliance system was not the primary violation.

That said, brokers do need to have a compliance system in place. Regulators generally require policies to cover the elements for which they cited the broker:

1. Lack of control and supervision over its operations and staff; (a quality control plan should provide supervisory guidelines for staff - part of our broker pack)
2. Failure to have a written information security plan;  (Information Security is a requirement of FACTA - part of our broker pack)
3. Failure to have a written Anti-Money Laundering Program and policies and procedures for reporting and maintaining Suspicious Activity Reports; (AML required by FinCEN, is a fraud detection plan - your Quality Control plan doesn't have legs if there isn't a reporting structure - we provide a plug-in)
4. Good Faith Estimates that did not comport with state and federal laws and regulations pertaining to mortgage lending; (Compliance policies and procedures address how to properly disclose - clearly this action is also pre-10/3, due to the GFE reference)
5. Improper charging or collecting of third party fees for loan-related goods, products, and services; (A quality control plan should address the completion of a loan agreement, retention of documents and financial audit to avoid these types of findings)
6. Failure to maintain required records; (you should conduct a Quality Control Compliance audit on each loan you close. This procedure, which is part of Quality Control, identifies documents you must keep and any deficiencies)
7. Failure to provide required disclosures to borrowers (Your production quality control should include a checklist that identifies all required disclosures - this way you can prove you sent and checked for them, even if the borrower doesn't return a signed copy)

Laundry Lists Don't Help you Identify What's Needed

Regulators and investors often provide lists of specific policies or procedures they want to see. Complying with the laundry list creates a false impression that you have satisfied all concerns when in reality much risk remains in the uncertainty of how your procedure gets implemented. The individual responsibility for compliance starts at the function level; the person who actually does the work. If you map out a person's job duties, and provide a detailed rubric for how it gets completed, you ensure compliance. 

There exists a panoply of policy solutions for mortgage industry participants, but only those which specifically spell out HOW you comply will eliminate the risk of non-compliance.