North Carolina Mortgage Licensing and Examinations - What have we learned?

It should surprise no one that NCCOB - the nation's FIRST state regulator to initiate anti-predatory lending laws, and one of the first to initiate robust pre-licensing training, AND was a leader in pre-Dodd-Frank regulation - has now taken the flag as one of the most detail-oriented examiners. 

Expect an initial examination within the first 12 months of licensing. Existing licensees who have never been examined should expect one, and this normally coincides with a complaint or other inconsistency.

For those licensed in the state, NCCOB (North Carolina Commissioner of Banks) has clearly and transparently posted its expectations. Yet over and over we see brokers and lenders alike responding with surprise to examination findings and questionnaires. When we review the findings to help licensees comply we aren't surprised, just a little disappointed at what some might call willful blindness.

We have a great deal of respect for the rational approach that the regulator has taken. Nothing in the findings represent anything that brokers or lenders shouldn't be responsible for. If anything, our concern is that these problems exist elsewhere and propagate because of a lack of oversight.

Broker Fee Agreements

It's illegal to collect a fee without the customer's explicit agreement. These files show missing or incorrect broker fee agreements, or incorrectly completed lender financing agreements. The common response or argument is that the LE or CD provides the customer's tacit agreement. However, it's usually too late at that point; the information on the LE/CD should come from the financing or broker agreement.

For our customers, we devote a section of our quality control plan for correct completion and retention of financing or fee agreements.

BSA/Anti-Money Laundering Plans

We sell both stand-alone anti-money laundering plans, or better yet, QC (Quality Control) plans that identify the full set of FinCEN (FINancial Crimes Enforcement Network) identified Red Flags. Our BSA/AML (Bank Secrecy Act/Anti-Money Laundering) plans use these to identify potential SARs (Suspicious Activity Reports) for reporting.

Most people don't read them.

Otherwise, they would know that they include:

• A SAR Reporting Workflow
• A Compliance Officer (You have to put the person's name where it says "Insert Compliance Officer here")
• Initial and Periodic Training (We give this away here, or provide a checklist to ensure you have taken AML specific training as part of your Continuing Education)
• Both FinCEN and Industry Specific Red Flags

When we see a finding related to "deficient AML plans" these all fall under that category.

Missing Documents in Audit Files

Inexcusably, many files reflect missing exhibits or data reflected in reporting doesn't match loan files. THIS IS JOB ONE of a quality control plan! Time spent retrieving documents from investors, closing agents or even borrowers represents lost loan production time; wouldn't you rather spend time originating than chasing old loan file exhibits? 

This is the reason our QC Plan has a closed loan checklist. Click to download NCCOB's version here. We find it interesting that the checklist they provide bears some resemblance to the one in your plan:

1099's - Beware EVERYONE

We recently wrote an article on 1099 compensation of originators. NCCOB takes the position that originators are employees. Unless you follow the recommendations in our article, expect an issue with 1099 payments. Further, BRANCH MANAGERS ARE EMPLOYEES by definition; you can't be a contract manager. No Branch Manager 1099s. Also, you can't have branches in homes.

Contract Processors and other unlicensed entities

As above, compensating 3rd parties for work normally done by employees, such as processing, should automatically prompt you to require licensing of that individual or service.

Can I pay a Loan Originator by 1099?

As we roll into tax season, we return again and again to the topic of originator compensation; it remains the most ambiguous topic in compliance. Varying comp, broker company compensation, borrower-paid or lender-paid, all represent areas of confusion. But nothing confounds more, with multiple layers of regulations, than whether you can pay a loan originator as a contractor by 1099.

Conflicting Interests

Ironically, originators WANT this, while other industries experience the opposite with employees decrying the "gig economy" and its loss of employment benefits. But mortgage brokers want to minimize costs and payroll taxes represent a high margin expense. Originators also may benefit from treatment as self-employed with a much wider latitude to expense business development costs than employees. 

On the other side, state and Federal governments have taken aim at the contract labor movement because of the loss in payroll taxes. The IRS has taken steps to formalize the delineation between formal W-2 employees and 1099 contractors.

https://www.irs.gov/pub/irs-pdf/p1779.pdf

The IRS guidelines basically say, “If you have the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees.” The IRS focuses on three main areas when determining employment status:

• How much control the employer has over the worker’s behavior and work results. (Who controls training, where and when the person works, what equipment they use?)
• How much control does the employer have on finances? (Does the employer have primary control over the person’s profit or loss?)
• What is the relationship between parties? (Does the worker receive benefits and is it a long-term relationship?)

Here is the 20-point checklist from the IRS, which may be used as guidelines in determining if a worker can be legally paid as a contractor:

• Must the individual take instructions from your management staff regarding when, where, and how work is to be done?
• Does the individual receive training from your company?
• Is the success or continuation of your business somewhat dependent on the type of service provided by the individual?
• Must the individual personally perform the contracted services?
• Have you hired, supervised, or paid individuals to assist the worker in completing the project stated in the contract?
• Is there a continuing relationship between your company and the individual?
• Must the individual work set hours?
• Is the individual required to work full time at your company?
• Is the work performed on company premises?
• Is the individual required to follow a set sequence or routine in the performance of his work?
• Must the individual give you reports regarding his/her work?
• Is the individual paid by the hour, week, or month?
• Do you reimburse the individual for business/travel expenses? 
• Do you supply the individual with needed tools or materials?
• Have you made a significant investment in facilities used by the individual to perform services?
• Is the individual free from suffering a loss or realizing a profit based on his work?
• Does the individual only perform services for your company?
• Does the individual limit the availability of his services to the general public?
• Do you have the right to discharge the individual?
• May the individual terminate his services at any time?

Further, fair labor laws stipulate minimum wages, safe working conditions, and benefits. 

https://www.dol.gov/sites/dolgov/files/WHD/legacy/files/misclassification-facts.pdf

Draw a Bright Line

We may never get closure on this matter; too many variable circumstances exist for a regulator to draw a definitive line. This exposes the mortgage industry to individual legal or regulatory actions such as those we have already seen; lawsuits for minimum wage claims and licensing censure for incorrect classification of marketers as contractors. 

There's Only ONE Legitimate Solution

In our estimation, the ONLY legitimate solution lies in having the employee/contractor affirmatively claiming self-employment. For mortgage brokers, this means licensing as a company as well as an individual. In other words, instead of just an MU-4, the loan originator will also file an MU-1 and MU-2 in his or her natural name. In this way, the mortgage originator can insist on payment as a contractor with no risk to the employer for misclassification or wage-hour claims.

The state, then, will ensure that there is an EXCLUSIVE agreement between the company and the loan originator firm, that will ensure that all business gets conducted through the company, and not through multiple other firms. In other words, you are an exclusive wholesaler for the loan originator. 

In Virginia, there is an exclusive loan brokerage agreement. 

But Everyone's Doing It

Yes. We hear of this all the time. The fact that other companies pay via 1099, and even advertise it,  does not mean you've missed something. Structures like this take advantage of the ambiguity in the rules, hoping to "fly below the radar" of lax oversight. Many states don't validate compensation plans by drilling down into W-2 employees versus contract employees. It's likely that this is what you are seeing. You take a chance when offering non-standard plans. 

Exceptions

• HUD requires that lenders participating in its programs affirmatively eschew conflicts of interest created by outside employment. Lenders offering FHA financing must compensate employees by W-2. 

You Cannot EVER Pay a Branch Manager as 1099

This is a contradiction in terms. A manager, by definition, is an employee responsible for ensuring employees perform their duties according to company policy. 

SAFE Act Update

Transitional Licensing Update - We updated the SAFE Act Licensing Policy to iterate the requirements of Transitional Licensing for LOs. Remember that you MUST have an existing license to transition. Registration does not count. Also, the company has to be licensed before you can transition to the company.

Licensing Processors - It should be obvious that processors or other employees don't need to be licensed. It should be equally obvious that processors who aren't employees MUST be licensed. Among other things, besides a license, that your contract processor must have:

• Processing Policies and Procedures
• Information Security
• Fair Lending
• Anti-Money Laundering
• Anti-Predatory Lending

Consult your Vendor Management plan.

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.

Advertising, VA QC Requirements, NY Compliance Plan Update

We continue to update our products as we get feedback from our customers. We list the recent updates here, some of which relate to our review of materials from our Compliance VP CMS product. You will notice three themes for this series of updates:

Advertising on the Radar

Prompted by a Washington state review this past spring, advertising for particular products have come on to the Federal government's radar. The CFPB has stated its renewed interest in protecting veterans, and so has Veterans Affairs. Specifically, the question surrounds whether the way companies advertise certain programs comprises puffery or a deceptive act.

Reporting Notices of Advertising Related Findings to HUD-FHA

A company must report any notice, sanction or citation received, from any state or federal regulator, agency or investor, relating to its advertising practices as a "Notice of Material Event" through their Quality Control plan.

Advertising
We recommend that you review all advertising (even business cards, emails and social media postings) using an advertising approval checklist. Look most carefully at unsubstantiated claims, like best rate, fastest service, or lowest cost and avoid them unless you can substantiate them.

Advertising Trigger Terms
An updated checklist reviews what text or information you have to include if your advertising includes "trigger" terms.

VA Adamant about following Updated Pamphlet

Inclusion of VA Specific Requirements in Plan
The VA now uses a checklist to validate that you have included its specific quality control plan requirements in your plan. The updated pamphlet published 2/1/2019, has a listing of QC requirements, which the VA simply has memorialized in writing. We have most of this material in the QC plan, so this update references where a reviewer can find it. The only addition focuses on the use of Staff Appraiser Reviews, which doesn't really impact Post Closing QC, but which we add to the post-closing review process anyway.

New York State DFS - Again

New York State Compliance Plan
We have prepared a New York State-specific compliance plan to align with licensing application and renewal review feedback. To meet their requirements, we stripped out a lot of material they felt was extraneous. You should not exclude other elements of your compliance plan and rely solely on the DFS' explicit requirements, because we have found myriad other implicit and explicit requirements within the rules which could also result in findings.

Other Updates also available

Fraud Prevention – Red Flag Process
We inadvertently truncated the Fraud Reporting process, as it applied to possible organized crime. Or maybe an unseen hand silenced the author?

Unfair Deceptive Abusive Acts and Practices (UDAAP)
Certain investors wanted us to include CFPB definitions of unfair, deceptive and abusive acts. Reading the definitions you realize their redundancy; all UDAAP actions really tie back to the same actions. One unfortunate side-effect of so much regulation: policies and procedures that no one can follow because lawyers write them for legal action.

Can't access the links?

Members receive free access to updates. Request access through the link if it prompts you, and we will respond with authorization once verified.

In addition, we now offer the Compliance VP compliance management system for small companies.

Industry Firm Directly Supports Association Membership Through Financial Assistance

Industry Firm Directly Supports Association Membership Through Financial Assistance: MortgageManuals.com, a provider of mortgage policies and procedures and compliance services, saved 118 mortgage broker firms $10,600 in the last 12 months through its association discount program, according...