NCCOB’s Regulation of the Mortgage Industry

Will Corbett, Staff AttorneyOffice of the Commissioner of Banks

September 16, 2010

OVERVIEW OF MORTGAGE REGULATION

Phase I: Mortgage Registration (1987)

• Initial effort to identify and track mortgage lenders and brokers

• Concern with lending practices (Predatory Lending Act in 1999) led to initiative to increase supervision of mortgage industry

Phase II: Mortgage Lending Act (2003-2009)

• Required full licensure of “mortgage bankers” and “mortgage brokers”– Bond/net worth requirements– Bricks and mortar requirement for brokers– Branch office licensing

• Required full licensure of individual “loan officers”– Criminal history– Experience– Education and testing– Financial responsibility

• Began requiring licensure of “mortgage servicers” in 2009• Does not apply to depository institutions

Percentage of NC Mortgage Originations by Licensees

2005 2006 2007 2008 $-

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

NC Mortgage Originations

NC TotalNC Licensee Total

$ in

mill

ions

Phase III: SAFE Act

• Federal SAFE Act set minimum federal standards for “mortgage loan originators” and gave states 1-2 years to update state law to meet or exceed minimums

• Failure to update law would lead to US Dept of Housing and Urban Development (HUD) assumption of responsibility for regulating mortgage loan originators

• HUD responsible for ensuring states have effective enforcement regime and for promulgating rules

NC SAFE Act

• NC SAFE Mortgage Licensing Act (2009-current)• Reorganized old-MLA into new article– MLA repealed, but continues to apply to activities prior to

effective date of NC SAFE– NC SAFE Act incorporate many components of old-MLA,

but added components to meet SAFE requirements

• Some elements conditioned on final HUD-Approval– Application to non-profit affordable housing lenders and

government lending– Status of “Loss Mitigation Specialists”

Scope: Residential Mortgage Loans

• Residential Mortgage Loans are defined by N.C. G.S. § 53-244.030(20) as any loan:– Made or represented to be made to a natural person or persons– Primarily for personal, family, household and– Secured by mortgage, deed of trust or other security interest in

• A dwelling located in NC• Residential real estate

• Applies to loans securing vacation homes, but not investment properties or commercial loan (assuming no subterfuge)

• Applies to loans secured by manufactured or modular homes, even if not attached to land

Who has to be licensed?

• Anyone “engaged in the Mortgage Business” (some exemptions)– For or with expectation for Compensation or gain

• Accept applications or negotiate the terms, or offer to• Make or Fund, or offer to make or fund loans• Receive and apply payments from a borrower on an existing loan

– Four Categories• Mortgage Loan Originators• Mortgage Lenders• Mortgage Brokers• Mortgage Servicers

Who is a Mortgage Loan Originator (MLO)?

• 53-244.030(21) defines Mortgage Loan Originator as: Any individual who, for compensation or gain :– Takes residential mortgage loan applications or offers to negotiate

loans;– Accepts or solicits to accept residential mortgage loan applications;– Solicits or offers to solicit a mortgage loan;– Negotiates the terms or condition of a mortgage loan; or– Issues mortgage loan commitments or interest rate guarantee

agreements

• Method of communication is not relevant: Can be in person, by phone, by email or by mail

Loss Mitigation Specialists: License or Not?

• National debate over whether SAFE’s definition of Mortgage Loan Originator covers activities of loss mitigation staff at servicer– Employees talking to borrowers about contractual terms of loan and

possible, offering loan modification and accepting applications

• NC SAFE defines “Loss Mitigation Specialist” – • Employee of servicer authorized to

– Collects amounts owed when borrower is in default– Collects data from borrower– Makes decisions necessary to modify terms of loan or otherwise finalize

collection process

• Loss Mitigation Specialist included in MLO definition only to the extent required by final determination by HUD

Status of Non-Profits and Government Agencies under Prior Law

• Non-Profits engaged in origination of loans to provide affordable housing – Employees processing applications and working with

prospective homeowners, generally not paid any commission

• Government Agencies Administering state, federal or local loan programs– Similarly situated employees

• Both met definition of “exempt person” under under previous MLA

Status of Non-Profits and Government Agencies under SAFE

• Federal SAFE Act– provided for no exemption for either government agencies or non-

profits

• NC SAFE– To avoid failure minimum federal requirements, does not include

specific exemptions – Non-profit and Government Lending activity may not meet definitional

requirement of engaging in business for “compensation or gain”– Also question as to treatment of employees handling applications

• NCCOB position - Pending final HUD decision, NCCOB will not take any enforcement action against existing non-profits or government agencies or employees which previously operated under MLA exemption

Other MLO exclusions

• Does NOT include (among other exclusions in 53-244.030(21)c.– Individuals engaged solely as loan processors or underwriters,

so long as they do not communicate directly with borrowers– Individuals who only inform borrowers of availability of

mortgage businesses, and do not take or assist in the completing of a loan application

– A sales person at a manufactured housing dealer who does not pull a borrowers credit unless at the request of a licensed MLO who has already received an application filled out by the borrower with no assistance, other than physically transmitting it, from the sales person.

MLO exemptions

• Exempted from licensure, G.S. 53-244.040(d):– Depository Institutions and certain subsidiaries – MLOs who are employed by banks or their subsidiaries and

registered– Loans to immediate family members– Purchases financed by someone selling their principal

residence– Attorneys who negotiate loan terms, incidental to their

representation, so long as neither “holding themselves” out, nor compensated by a lender, broker or MLO

– Seller-financer, with limitation of no more than five loans per yer

Requirements of licensure for mortgage loan originators

• No previous revocation, SEE 244.060(1)

• Pre-licensure education – 24 hours total, SEE 244.070

• Test - Pass written national test developed by NMLS&R and a written test on North Carolina law and regulation, SEE 244.080

• Criminal Record - convictions, pled guilty or nolo contendere, SEE 244.060(2) and (3)

– No felonies, convicted, pled or nolo contendere in the last 7 years– Never had certain felonies – e.g. fraud, money laundering– Not had certain Misdemeanors within 5 years

• Financial responsibility (credit score, history of repaying debts), SEE 244.050(C)(2)a. and .060(4)

• Character and fitness determination, SEE 244.060(4)

Requirements of licensure for lenders, brokers, and servicers

• Meet Bond Requirements - indexed by volume, SEE 244.103

• Minimum Net Worth Requirement, SEE 244.104

• Experience – Have “Qualified Individual” SEE 244.040(e) and .050(2)c.

– Principal Officer, manager or general partner– At least three years of experience– Operate business under full, supervision charge, and

control

• Branch manager SEE 53-244.040(f)

– For all branches, manager with at least three years of experience

REGULATORY ACTIVITY

NCCOB oversees mortgage activities

• Routine examinations of books and records (13 examiners)– Examinations scheduled according to agency priority– Confidential Reports of Examination

• Investigations (Mortgage assigned 2 FTE investigators, analyst, director)

• Consumer Affairs – Facilitating and reviewing licensee response to complaints from

consumers

• Foreclosure Prevention Project – Connecting Borrowers to housing counseling and monitoring

Mortgage Servicer efforts to avoid foreclosure

Duties of Mortgage Brokers SEE 244.109

• Safeguard and account for money handled for borrowers• Act with reasonable care, and follow reasonable

instructions from the borrower• Make reasonable efforts to a reasonably advantageous

loan• Timely and clearly disclose material information to

borrowers• Exercise loyalty to the borrower and represent

borrower’s best interest in the transaction• Not engage in discriminatory treatment or advertising

Duties of Mortgage Servicers, SEE 244.110

• Safeguard and account for money handled for borrowers

• Follow reasonable instructions from borrowers• Act with reasonable skill, care, and diligence• Upon accepting servicing of a loan provide timely

disclosures – notice of transfer, list of fee schedule

• Provide NCCOB with a list of fee ranges charged to borrowers

• Report to NCCOB on servicing activity

Prohibited Activities, SEE 53-244.111

• Applies to “any person in the course of a residential mortgage loan transaction”– Licensees– Unlicensed Actors– Depository Institutions and their employees– Individuals otherwise excepted or exempted from

licensure

Prohibited Activities: Key prohibitions (cont’d)

• (1) Misrepresentation to induce a borrower to take mortgage loan• (4) Pay, receive, or collect any compensation for brokering or

servicing a loan in violation of NC SAFE• “(5) To charge or collect any fee or rate of interest or to make or

broker or service any loan with terms or conditions in a manner contrary to provisions of Chapter 24, 45, or 54 of the general statutes.”

• (8) To engage in any transaction, practice or course of business that is not in good faith or fair dealing or that constitutes a fraud upon any person in connection with the brokering or making or servicing of, or purchase or sale of any mortgage loan.”

Prohibited Activities: Key prohibitions (cont’d)

• (9) Failure to promptly pay appraiser for appraisal services

• (11) To improperly influence or attempt to influence an appraisal

• (14) To fail to comply with applicable State and Federal laws and regulations related to mortgage lending or mortgage servicing.

Disciplinary Authority , SEE 53-244.116

• Deny, suspend, revoke or refuse to renew license• Impose Civil Money Penalties up to $25,000• Require disgorgement of amounts received and

collected in violation of Chapter 24• Summary actions (with opportunity for hearing)

– Summarily order licensee or person to cease and desist from any harmful activities or violations

– Summarily suspend license