Section 10: Unit 1 Flashcards
Violations of the Gramm-Leach-Bliley Act
The Gramm-Leach-Bliley Act (GLBA) was passed to implement financial industry reforms, involving finance-related regulations and required disclosures to consumers. One reform was requiring standards for safeguarding consumers’ nonpublic personal information (NPI).
Violations of the GLBA
NPI, such as sharing it with a nonaffiliated third party without first giving the consumer the required notice and opportunity to exercise the nondisclosure option by opting out of nonaffiliated third-party sharing. Such violations are costly: $100,000 per violation, imprisoned for up to five years, or both.
kickbacks
MLO is taking illegal kickbacks or fees (which we’ll review soon), when MLOs give referrals, their incentive is that they believe they’re helping their borrower clients.
Redlining: A Lending Violation
The name stems from mortgage lenders using maps with a red line drawn around certain geographical regions deemed a default risk and refusing to do any lending business in those areas
Assumptions Are a Danger Zone
on’t judge a book by its cover” means don’t make assumptions about anyone based on appearance or other identity-related characteristics. An MLO must avoid ever making assumptions about an applicant’s ability to qualify for a loan or to make mortgage payments based on the applicant’s protected class. Fairness involves using the same qualifying criteria for everyone—regardless of race, national origin, etc.
RESPA Prohibitions: Kickbacks, Compensation, and Fee Splitting
he Real Estate Settlement and Procedures Act (RESPA) is a consumer protection law that protects borrowers from overcharges by requiring disclosure and prohibiting kickbacks. RESPA’s Section 8 outlines the prohibitions on abusive practices, including kickbacks and compensation that inflate settlement costs for borrowers. MLOs must recognize what’s allowed and what’s not under RESPA.
Kickbacks
kickback is any item of value (not counting a thank you card!), regardless of the amount, given in exchange for a business referral. RESPA also prohibits fees being split with a settlement service provider who hasn’t performed an actual service related to the transaction. For example, a lender can’t tell a title attorney, “If you refer borrowers to us, we’ll split our fee with you,” if the title attorney hasn’t rendered any title-related services for any of the transactions. With the fee-splitting prohibition, the fee split is based on the referral, not on actual services performed.
Regulation X:
Real Estate Settlement Procedures Act (RESPA)
Requesting Personal Information
Loan applications involve information—a lot of information. When taking the loan application and in follow-up communications, an MLO must request additional information. When doing so, the MLO must be wary of crossing legal and ethical lines.
enders may not ask the applicant’s marital status unless:
The applicant’s collateral secures the credit.
The applicant resides in or lists assets located in a community property state.**
Can MLO Ask windowed or divorced?
For applicants applying for joint credit, lenders may ask about the applicants’ marital status. The three acceptable terms are married, unmarried, or separated. An “unmarried” individual includes someone who’s widowed or divorced.
That was a challenge, but you aced it! If loan applicants state that they’re unmarried, an MLO may not ask, “Are you divorced?” Angela meant well and was on the right track. What could she have done that was ethical and legal? She might have said, “I wanted to share with you that if you’re divorced, the underwriter may ask for a copy of the divorce decree.” An MLO may give information about marital status-related underwriting requirements.
Loan Processors
Unlicensed loan processors may perform certain duties related to borrowers and their loan applications and are prohibited from performing others. An individual must be licensed to take a loan application and quote interest rates. A loan processor may take a completed loan application from a borrower.
For example, if a borrower filled out a loan application at home, the unlicensed loan processor may accept it. However, if the borrower said, “I heard about interest rates on a commercial. Do you think I can get 3.5% interest today?” the loan processor may not quote that or any other rate. The loan processor also may not negotiate with borrowers, nor ask questions to help them fill out their loan application. These are license-required activities that only licensed MLOs may perform.
What’s a Referral?
While it’s illegal and unethical for MLOs to accept or give referral fees, they’re permitted to develop relationships in the real estate industry to obtain non-compensated referrals. Ethical mortgage practices include ensuring consumers are informed about referrals. Per RESPA’s Regulation X, a referral is “any oral or written action directed to a person which has the effect of affirmatively influencing the selection by any person of a provider of a settlement service or business.” Referrals may also involve requiring a borrower to use a specific settlement service provider.
Balancing Referrals and Consumer Protection
Referrals are the lifeblood of any service business, saving valuable time in finding new clients and becoming part of an MLO’s marketing repertoire. While referrals can make life a little easier for consumers—not everyone has a title company on their phone’s contact list—they may also present an ethical issue. For one, referral fees and kickbacks are prohibited. In addition to keeping down transaction costs, this protects the consumer in several ways:
The consumer’s right to shop around for a service provider is unimpeded. A bad service provider isn’t referred to consumers just because the provider gives big fees. Consumers receive full transparency related to what may be the largest financial transaction of their lives.
What Prompted a Referral Incentive Clampdown
Before the 2008 financial crisis, referrals were being slung all over the mortgage industry. The incentive? Kickbacks, referral fees, gift cards, vacation condo weeks—MLOs were making money or getting other financial benefits. The rules changed, and that money dried up. Now when MLOs give referrals, they do so because they believe they’re helping borrower clients. There’s a fine line that MLOs must not cross when providing referrals.
Affiliated Business Arrangements
a real estate company has an affiliated business relationship with a mortgage company because they’re both owned by the same corporate entity, and they swap referrals. If a real estate agent gives a referral to the mortgage company, it falls under the definition of an affiliated business arrangement.
Per RESPA, referrals to consumers for settlement services
permitted for affiliated business arrangements if the arrangement is properly disclosed. Specifically, the Affiliated Business Arrangement (AfBA or ABA) Disclosure Statement (see example of the required notice format) must be provided to a consumer at the time of the referral. This disclosure form must be used when the creditor owns more than 1% interest in the referee service.
Coercion
When you think of coercion, you may visualize someone twisting another person’s arm to force them to do something the person doesn’t want to do. Lenders and their affiliates may use coercion—a type of influencing—in their lending-related practices. To use coercion in a mortgage loan transaction is considered predatory lending. What does coercion look like in lending?
Coercive Measures
Coercion can be the obvious arm-twisting variety, such as the MLO who targets seniors and tells them they will be a burden to their families if they don’t express interest in getting a reverse mortgage through him. Or, coercion can be more subtle, such as leading a loan applicant to believe that if she doesn’t take the loan the MLO is offering, she’s unlikely to qualify for any loan ever again. Or, that rates will only go up from today, so the applicant had better take the offered loan right now. Coercion is an unfair lending practice because it doesn’t allow a borrower to truly weigh pros and cons on her own—she’s being told what’s best for her, even while her choice has been limited in some way.
Appraiser Conflict of Interest
Fairness in lending applies to appraisers, too. Appraisers may not conduct an appraisal in which they have a direct or indirect interest in the property or transaction. The interest may be financial, business, or personal. The same applies to an appraisal management company procuring or facilitating an appraisal for a mortgage loan. The conflict of interest may impact the appraiser’s independent judgment—or at minimum, raise ethical questions—that may sway the appraisal results.
Discrimination Against Applicants
The federal Fair Housing Act (FHA) prohibits discrimination in housing. Specifically, the law prohibits discrimination in any residential real estate transaction—whether it’s the sale, rental, or financing of residential property—based on a protected class. The law, which applies to most housing, includes actions and practices deemed discriminatory if based on one (or more) of the law’s protected classes.
The federal FHA recognizes seven protected classes:
- Race
- Color
- Religion
- National origin
- Sex (this covers gender, gender identity, and sexual orientation)
- Familial status (this also covers pregnant women)
- Disability/handicap
Does FHA enforces 7 Protected classes?
he FHA is enforced by the Department of Housing and Urban Development’s (HUD) Office of Fair Housing and Equal Opportunity (FHEO).
The Fair Housing Act and Lending Practices
he FHA applies to fair lending practices. The act prohibits discrimination in lending based on an individual’s protected class status in a residential real estate transaction. Lenders must employ fair practices when working with borrowers seeking to borrow money to purchase, construct, or improve a home. Fair practice requirements extend to other aspects of residential real estate transactions.