Why Haven’t Loan Officers Been Told These Facts?
Hard Money Lenders Beware
California Dreamin’ could get you a year in the pokey
California has been a trendsetter for many years. Not only does the Golden State lead the nation with cultural trends such as music and food, but California also leads the nation in matters such as consumer rights. That is why stakeholders outside of California should note the September passage of California law AB 3108. This consumer protection law amends the Covered Loan Law which can apply to companies operating under several existing licensing laws. Those laws include:
California Financing Law (CFL) under the Department of Financial Protection and Innovation (DFPI).
Real Estate Law (REL). The REL, administered by the Department of Real Estate (DRE), requires the licensure of real estate brokers and real estate persons, some of whom may also have a mortgage loan originator endorsement that allows the licensee to originate residential mortgage loans.
California Residential Mortgage Lender Act (CRMLA) under the Department of Financial Protection and Innovation (DFPI).
Protections For A Hard Money Subprime Borrower
The Covered Loan Law applies to a consumer loan that meets specific and narrow lending criteria.
- A consumer loan secured by a residential property used or intended to be used as a consumer’s principal dwelling unit.
- The loan amount does not exceed the current conforming loan limit established by the Federal National Mortgage Association.
The loan must meet one of the following two criteria to be a “covered loan” under 3108:
a) For a mortgage or deed of trust, the annual percentage rate (APR) at consummation of the
transaction will exceed by more than eight percentage points the yield on Treasury securities having comparable maturity periods (in the neighborhood of 12-13% based on 4-5% 30-year bonds).
b) The total points and fees payable by the consumer at or before closing for a mortgage or deed of trust will exceed 6 percent of the total loan amount.
What Begins as One Thing Becomes Another
Most MLOs do not originate hard-money loans. For those unfamiliar with the term, “hard money” transcends the everyday costs associated with subprime or what is today referred to as ” non-QM” lending. The California Cover Loan Law applies to consumer loan costs that exceed those of the TILA High-Cost loan.
However, it is helpful to remember that the legislative process is often incremental. The legislature gains a legal toehold by passing a law that affects only a small number of persons. Then, it more readily expands and deepens the coverage with amendments.
About The New Law
Existing California and federal laws make it a criminal offense to commit mortgage fraud. This includes filing or causing to be filed with the county recorder in connection with a mortgage loan transaction, any document that the person knows to contain a deliberate misstatement, misrepresentation, or omission, and with the intent to defraud.
This bill prohibits a person who originates a covered loan from avoiding, or attempting to avoid, the application of the law regulating the provision of covered loans by committing mortgage fraud.
Specifically, the new law provides that a mortgage broker or person who originates a loan commits mortgage fraud if, with the intent to defraud, the person takes specified actions relating to instructing or deliberately causing a borrower to sign documents reflecting certain loan terms with the knowledge that the borrower intends to use the loan proceeds for other uses (such as indicating the loan is for business rather than consumer use).
AB 3108 targets situations when a lender tricks or otherwise deceives a homeowner into taking out a high-cost, short-term loan supported by improper or misleading documentation. Supporters of this measure argue that in such cases, a lack of clarity in the law makes it difficult for victims to find recourse.
In one example provided by the bill’s author, an elderly homeowner contacted a nonprofit advertising mortgage payment relief for help with his mortgage, which he was struggling to make payments on. This nonprofit promised the victim he could save his home through a reverse mortgage. However, the organization connected the senior to a short-term loan he did not understand and could not pay, resulting in $65,000 in up-front origination fees and a $300,000 balloon payment after one year.
The above case is so problematic and predatory it is unclear how it was able to happen in the first place. According to legal aid attorneys, one strategy being deployed by unscrupulous actors is having the loan described as a “bridge loan” in accompanying documentation, thus ensuring the loan is not covered by existing consumer protection laws. A bridge loan is a short-term loan used to construct or purchase a new home while the existing home is being sold, and in cases like the one described above, the broker convinces the homeowner to sign a document saying the homeowner does not live at the property. The broker will also list the borrower’s primary residence as a different address to give the impression that the loan will be used to secure a new primary residence.
AB 3108 expands the scenarios in which a person could be charged with mortgage fraud to include situations like the above. In these cases, the mortgage broker uses misleading documentation to help deliver the predatory loan to the borrower, including a signed “declaration of non-owner occupancy.”
Notably, AB 3108’s changes to the Penal Code apply to brokers and mortgage originators. The sponsor argues this is necessary because the existing provisions related to mortgage fraud may not be used to consider fraud originating from these entities.
According to the Author
“Predatory lending has evolved since the subprime mortgage crisis of 2008, but the statute has remained the same. Predatory brokers have developed new tactics to target vulnerable Californians and evade prosecution. Victims of predatory lending are almost always people of color, immigrants, the elderly, and low income households who lose everything when they are misled into a loan they can’t afford. AB 3108 seeks to address current and future predatory mortgage lending by clarifying that a loan originator who knowingly causes a borrower to sign a loan or document containing misleading statements is committing mortgage fraud. In doing so, this bill helps attorneys better protect victims of predatory lending and prosecute predatory brokers.”
Arguments in Support
Consumer Federation of California is the sponsor of AB 3108, and argues: “Mortgage fraud schemes vary widely, with some disguised as non-profit groups or “homeowner advocates” offering “free help”. Predatory loans target distressed consumers, particularly vulnerable consumers who are most at risk of losing their home. Many at risk consumers fall prey to so-called “help” that is anything but. Instead, far too often the consumer is unknowingly steered towards unsuitable commercial loans rather than residential ones; these loans are designed to evade applicable consumer protections; they are designed to fail (i.e. there is no realistic possibility of repayment); and to generate extraordinary fees for the broker and lender, at the borrower’s expense. The predatory cycle of high-cost loan refinancing can ultimately deplete the homeowner’s equity and result in foreclosure.”
The law borrows parts of Regulation Z QM requirements.
Excerpts of Section 4973 of the Financial Code is amended to read:
SECTION 1.
(1) A person who originates covered loans shall not make or arrange a covered loan unless at the time the loan is consummated, the person reasonably believes the consumer, or consumers, when considered collectively in the case of multiple consumers, will be able to make the scheduled payments to repay the obligation based upon a consideration of their current and expected income, current obligations, employment status, and other financial resources, other than the consumer’s equity in the dwelling that secures repayment of the loan. In the case of a covered loan that is structured to increase to a specific designated rate, stated as a number or formula, at a specific predetermined date not exceeding 37 months from the date of application, this evaluation shall be based upon the fully indexed rate of the loan calculated at the time of application.
The consumer shall be presumed to be able to make the scheduled payments to repay the obligation if, at the time the loan is consummated, the consumer’s total monthly debts, including amounts owed under the loan, do not exceed 55 percent of the consumer’s monthly gross income, as verified by the credit application, the consumer’s financial statement, a credit report, financial information provided to the person originating the loan by or on behalf of the consumer, or any other reasonable means.
(2) No presumption of inability to make the scheduled payments to repay the obligation shall arise solely from the fact that at the time the loan is consummated, the consumer’s total monthly debts, including amounts owed under the loan, exceed 55 percent of the consumer’s monthly gross income.
(3) In the case of a stated income loan, the reasonable belief requirement in paragraph (1) shall apply, however, for stated income loans that belief may be based on the income stated by the consumer, and other information in the possession of the person originating the loan after the solicitation of all information that the person customarily solicits in connection with loans of this type. A person shall not knowingly or willfully originate a covered loan as a stated income loan with the intent, or effect, of evading the provisions of this subdivision solely from the fact that at the time the loan is consummated, the consumer’s total monthly debts, including amounts owed under the loan, exceed 55 percent of the consumer’s monthly gross income.
(j) A person who originates a covered loan shall not refinance or arrange for the refinancing of a consumer loan such that the new loan is a covered loan that is made for the purpose of refinancing, debt consolidation or cash out, that does not result in an identifiable benefit to the consumer, considering the consumer’s stated purpose for seeking the loan, fees, interest rates, finance charges, and points.
(k) (1) A covered loan shall not be made unless the following disclosure, written in 12-point font or larger, has been provided to the consumer no later than three business days prior to signing of the loan documents of the transaction:
CONSUMER CAUTION AND HOME OWNERSHIP COUNSELING NOTICE
“If you obtain this loan, the lender will have a mortgage on your home. You could lose your home, and any money you have put into it, if you do not meet your obligations under the loan.
Mortgage loan rates and closing costs and fees vary based on many other factors, including your particular credit and financial circumstances, your earnings history, the loan-to-value requested, and the type of property that will secure your loan. Higher rates and fees may be justified depending on the individual circumstances of a particular consumer’s application. You should shop around and compare loan rates and fees.
This particular loan may have a higher rate and total points and fees than other mortgage loans and is, or may be, subject to the additional disclosure and substantive protections under Division 1.7 (commencing with Section 4970) of the Financial Code. You should consider consulting a qualified independent credit counselor or other experienced financial adviser regarding the rate, fees, and provisions of this mortgage loan before you proceed. For information on contacting a qualified credit counselor, ask your lender or call the United States Department of Housing and Urban Development’s counseling hotline at 1-888-995-HOPE (4673) or go to hud4.my.site.com/housingcounseling/ for a list of HUD-approved housing counseling agencies.
You are not required to complete any loan agreement merely because you have received these disclosures or have signed a loan application.
If you proceed with this mortgage loan, you should also remember that you may face serious financial risks if you use this loan to pay off credit card debts and other debts in connection with this transaction and then subsequently incur significant new credit card charges or other debts. If you continue to accumulate debt after this loan is closed and then experience financial difficulties, you could lose your home and any equity you have in it if you do not meet your mortgage loan obligations.
Property taxes and homeowner’s insurance are your responsibility. Not all lenders provide escrow services for these payments. You should ask your lender about these services.
Your payments on existing debts contribute to your credit ratings. You should not accept any advice to ignore your regular payments to your existing creditors.”
Governor Newsome signed the bill into law on September 24, 2024.
BEHIND THE SCENES – Mounting Concerns Over Investigations Revealing NMLS CE Rules Violations
CSBS, AARMR, and NMLS Warn MLOs Over Continuing Education Rule Violations
Several years ago, various stakeholders, led by the CSBS and CA-DFPI, took enforcement action against hundreds of individual MLOs and an approved NMLS course provider for failing to abide by the NMLS education rules of conduct for students and course providers.
Recently, the CSBS (Parent organization of the NMLS) announced that it has stripped individual licensees of 2024 education credit for failing to comply with the Rules of Conduct for Students (ROCS).
Various stakeholders strongly urge licensees to be mindful of the continuing education requirements and rules of conduct. The American Association of Residential Mortgage Regulators (AARMR is a co-sponsor of the NMLS) recently sent a note to MLOs reminding them they need to complete annual CE in accordance with the NMLS education requirements, including the rules of conduct for students.
In November, an executive with the CSBS remarked about the ongoing concerns and investigations into MLOs and continuing education practices.
CSBS Maintains Focus on Continuing Education for
Mortgage Loan Originators
Nov 13, 2024
From the CSBS Vice President Mortgage Testing & Education Programs
Completing continuing education (CE) each year is an important step state-licensed mortgage loan originators (MLOs) must take before they can renew their license to conduct mortgage business for the coming year. However, a CSBS investigation in October revealed 14 MLOs associated with one mortgage company did not provide adequate identification for completing their CE courses online. As a result, these individuals will lose credit for 175 courses completed, collectively, and be required to retake those CE courses.
It is important that MLOs understand failing to verify their identity when taking online CE courses is a serious violation. The SAFE Mortgage Licensing Act of 2008, which requires state-licensed MLOs to complete eight hours of continuation education annually was established to ensure mortgage industry integrity for the purpose of consumer protection.
With more than 171,000 MLOs expected to complete CE online this year prior to requesting license renewal, CSBS is committed to ensuring MLOs have access to the resources needed to complete the process. These resources and instructions are available on the Education page of the NMLS Resource Center and include a list of NMLS-approved course providers, state-specific education requirements, and detailed instructions for the course authentication process.
As the NMLS annual renewal period progresses, CSBS will remain vigilant in monitoring CE activity. If we identify issues with MLOs not completing CE by the NMLS Rules of Conduct, we will take corrective actions.
Bad Things Happen When MLOs Fail to Follow Protocol
In case you missed the 2022 CSBS enforcement action mentioned, here is the press release from the CSBS regarding the matter, as it was concluded that year.
From the CSBS Announcement January 2022
Forty-four state financial agencies, led by the California Department of Financial Protection and Innovation (DFPI), have reached settlements with more than 400 mortgage loan originators nationwide who deceptively claimed to have completed annual continuing education as required under state and federal law.
Danny Yen, owner of Carlsbad, Calif.-based course provider Real Estate Educational Services, is facing administrative enforcement actions for both providing false certificates and taking courses on behalf of mortgage loan originators through other education providers in violation of the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act).
“State financial regulators do not take these violations lightly,” said CSBS Chair and Montana Commissioner of Banking and Financial Institutions Melanie Hall. “Through states’ collective action, consumers can be assured that their mortgages are being handled by loan originators who follow the law and are up to date in their education requirements.”
Congress enacted the SAFE Act to enhance consumer protection and reduce fraud through minimum standards for the licensing and registration of state-licensed mortgage loan originators. The law calls on the states to implement and enforce these standards, and every state has enacted its own version of the SAFE Act that requires mortgage loan originators to have at least 20 hours of pre-licensing education and an annual eight hours of continuing education.
Through the settlements, the mortgage loan originators have agreed to surrender their licenses for a period of three months, pay a fine of $1,000 for each state in which he or she holds a license and take continuing education beyond federal and state SAFE Act requirements.
“Mortgage loan originators are responsible for guiding consumers through the single largest financial transaction in their lifetime,” said DFPI Commissioner Clothilde V. Hewlett. “California will continue to lead on efforts that protect consumers and ensure fairness and resilience in our markets. I am proud of the Department and the historic 44 state-agency effort that, with these actions, remind the mortgage industry of their obligations to be ethical, honest and forthright.”
The irregular education activity was discovered through a gesture-driven authentication tool called BioSig-ID. CSBS uses the tool to monitor all online courses it approves under its SAFE Act mandate.
NMLS Education Page
NMLS ROC V4
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