The compliance efforts required to start and maintain a mortgage brokerage firm can be extremely burdensome. Addressing compliance issues is a detail-oriented but necessary part of being in the mortgage compliance business. This post will focus on a high-level overview of the mortgage acts and practices regulations to consider in starting or operating a mortgage brokerage firm.
Mortgage Broker Compliances and Regulations
There are various mortgage broker compliance requirements to be aware of in order to ensure regulatory compliance for mortgage lenders. These mortgage acts and practices include regulations and requirements regarding marketing and advertising, origination, record keeping, licensing, and compensation. All of which ensure that your firm is achieving regulatory compliance for mortgage lenders. This blog contains a high-level overview of the relevant regulations and requirements involved in mortgage compliance.
Marketing and Advertising
Digital marketing and advertising are some of the most effective ways to reach potential clients. However, digital mediums come with specific regulatory requirements. If the content is designed to advertise your company’s services, then your company’s Nationwide Multistate Licensing System and Registry (“NMLS”) identifier must be included on all advertising. Moreover, certain states have additional requirements, meaning that it is vital to make sure that you check for additional requirements on a case-by-case basis.
As a mortgage broker you are responsible for originating loans for your new clients. This requires ensuring that you are making both state and federal disclosures required for the type of loan you are processing. Your loan origination software (“LOS”) will be instrumental here, as it will provide templates for documents such as disclosures. In lieu of software, your company also has the option of hiring a third-party compliance specialist who will verify that you have met all federal and state-specific origination disclosure requirements.
The next requirement is ensuring that your company has a record retention policy. Having a comprehensive record retention policy will help to make auditing efforts straightforward for all parties involved. As a mortgage broker, you are required to maintain your client and business records for three years. However, there are additional state-specific rules that might modify this time frame. For this reason, it is very important to maintain thorough and accurate documentation of the lifecycle of each mortgage transaction. Your lender can be an essential partner at this step as they typically can enable easy access to these documents.
As you know, mortgage brokers are responsible for obtaining a license to conduct business. The license requirements will vary based on the business structure and the state in which the business is operating. Connecting with well-established mortgage brokerage firms can be a valuable step in learning more about what licensing requirements will be of particular importance to your firm.
It is also important to be timely in renewing your licenses with NMLS. Some states require applicants to start the licensing process over if they fail to renew their license in a timely manner.
To have a successful mortgage brokerage business, you will want to develop a compensation plan that attracts the top talent in the field. The Loan Originator Compensation Requirements are a good place to start in terms of figuring out an appropriate, compliant compensation plan. This resource describes various requirements established under the Truth in Lending Act Regulation Z, including qualifications of loan originators, compliance procedures for depository institutions, and loan originator compensation, among many other requirements. This is another point in your process in which it can be helpful to speak with a well-established mortgage broker.
Sequoia Legal's Tips to Make Your Compliance Processes Easier
As a strategic partner, Sequoia Legal is well-equipped to help your company in satisfying all mortgage broker compliance requirements, including help with communicating and working with the mortgage broker regulatory body. The tips below are designed to make your compliance processes easier and more streamlined.
TRID Disclosure Audits
There are various regulations that detail the different mortgage broker compliance requirements. These regulations include The Truth in Lending Act, the Real Estate Settlement Procedure Act (“RESPA”), and TILA-RESPA Integrated Disclosure (“TRID”) Audits. Truth in Lending Act information is provided to consumers when they close on a mortgage. RESPA information is provided to borrowers during settlement. TRID is consumer protection created during the Dodd-Frank Wall Street reform and part of the Consumer Protection Act. TRID requires mortgage companies to compile Truth in Lending Act information with the RESPA information when the borrower applies and closes on a mortgage.
HOPEA & State High-Cost
The Hope Ownership Protection Act (“HOPEA”) requires mortgagees to share more detailed information with buyers who are purchasing high-valued homes. The types of mortgages covered under the Act include closed-end home equity loans, purchase-money, refinance, and open-end credit plans. Various states have additional rules regarding the lending associated with the purchase of high-cost homes.
State Consumer Credit & Fee Restrictions
States often pass additional laws forbidding predatory lending in the form of consumer credit laws. Typically, they contain restrictions on fee amounts in addition to controlling licensing and regulation of lending activities. These rules will vary from state to state.
RESPA GFE and HUD-1 Disclosures
RESPA revised the Good Faith Estimate Rules that mortgage brokers must provide to borrowers at settlement. With the new rules, brokers must provide a good faith estimate of the total cost of a real estate transaction within three days of receiving the loan application. The total cost is comprised of document preparation, legal fees, title searches, title insurance, taxes, pest and house inspections, notary services, and the like.
HMDA Filings and Data Analysis
The Home Mortgage Disclosure Act (“HMDA”) requires brokers to report to regulators data that shows whether they provide credit in the actual location in which their offices are located. This information guides the government’s decision as to where, geographically, investment dollars should be directed.
Covered financial institutions, including mortgage brokers, must report data on applications and originations for covered loans in addition to information about purchased covered loans. Covered institutions must submit a Loan/Application Register containing the required loan information to their mortgage broker regulatory body. Information including application number or universal loan number, date of application, loan type, loan purpose, owner-occupancy, loan amount, action taken, property location, applicant’s information, purchaser type, reasons for denial, and the difference between APR and benchmark rate (if the rate spread is outside designated thresholds) must be provided in these reports. This information is then compiled and made public by the Federal Financial Institutions Examination Council.
Flood Zone Determination
The Flood Insurance Reform Act of 1994 created disincentives for building in flood-prone areas, particularly raising insurance rates where there is a higher risk of flooding. The Act also requires that buyers located in flood zones buy flood insurance.
Due Diligence and Audits
Mortgage companies must conduct themselves as if they were banks, meaning that you should put a premium on compliance and due diligence efforts. Included in these efforts are developing procedures for identifying risk for fraud or identity theft. In addition, mortgage brokers must comply with Anti-Money Laundering (AML) Laws and must file Suspicious Activity Reports (SARs).
At Sequoia Legal, we have experience navigating the various burdensome requirements and regulations involved in creating and operating a mortgage broker firm. We are here to help you establish and operate your mortgage broker firm in a compliant way.
For more information, contact our expert legal team today!