Florida OFR Audit Alert

August 12th, 2018

This is a special alert for my clients.

In the last ten days five clients have received audit letters from the OFR. All five clients had NOT been audited in 8 to 10 years. One had not been audited in 20 years.

It appears to me as if the OFR is on a “catch up” campaign. This means we know of three confirmed danger areas for an OFR audit.

  1. If you are a new company with a new NMLS number, you will be audited in the first 18-24 months. Perhaps, sooner. 

  2. If it has been at least 7 years since your last audit, get ready. Use the checklist in Compliance Book Three to see how prepared you feel. Then let me know.

  3. If you have had a consumer complaint that you failed to respond to, you can expect a visit. 

But the big shocker is you old timers. Many of you may have been feeling complacent. That is not good.

Let’s pull out the checklist and be sure you feel aware and prepared. 

We are now offering a two session “MOCK AUDIT” for companies who want to go the extra mile to be sure they are prepared. If you have interest, email me and let me know so we can get you scheduled.

There is a cost of $1,000 for this service. It will save you many times that much in potential fines. We have proof. 

That’s it for now.

Nelson A. Locke, Esq

Compliance Services USA

(800) 656-4584

Some good Q&A for you Mortgage Brokers to read…….

Q: Can an Alta Settlement Statement REPLACE the use of a HUD-1 or a Closing Disclosure?

A: ALTA has developed standardized ALTA Settlement Statements for title insurance and settlement companies to use to itemize all the fees and charges that both the homebuyer and seller must pay during the settlement process of a housing transaction. Settlement statements are currently used in the marketplace in conjunction with the federal HUD-1. The ALTA Settlement Statement is not meant to replace the Consumer Financial Protection Bureau’s Closing Disclosure, which went into effect on Oct. 3, 2015. Four versions of the ALTA Settlement Statement are available.

Q: Do we need to use a Closing Disclosure for non-agency loans?

A: The final rule applies to most closed-end consumer mortgages.  It does not apply to home equity lines of credit, reverse mortgages, or mortgages secured by a mobile home or by a dwelling that is not attached to real property (in other words, land).  The final rule also does not apply to loans made by a creditor who makes five or fewer mortgages in a year.

Q: Who has to prepare the CD?

A: Under the final rule, the creditor is responsible for delivering the Closing Disclosure form to the consumer, but creditors may use settlement agents to provide the Closing

Disclosure, provided that they comply with the final rule’s requirements for the Closing Disclosure.20  The final rule acknowledges settlement agents’ longstanding involvement in the closing of real estate and mortgage loan transactions, as well as their preparation and delivery of the HUD-1.  The final rule avoids creating uncertainty regarding the role of settlement agents and also leaves sufficient flexibility for creditors and settlement agents to arrive at the most efficient means of preparation and delivery of the Closing Disclosure to consumers.

Q: What about a HECM? Is it a LE or a GFE?

A: Reverse mortgage transactions subject to RESPA.  (1)(i) Time of disclosures.  In a reverse mortgage transaction subject to both § 1026.33 and the Real Estate Settlement Procedures Act (12 U.S.C. 2601 et seq.) that is secured by the consumer’s dwelling, the creditor shall provide the consumer with good faith estimates of the disclosures required by § 1026.18 and shall deliver or place them in the mail not later than the third business day after the creditor receives the consumer’s written application.

Q: I’m a Mortgage Broker Business. Can I do my own disclosures?

A:  If a mortgage broker receives a consumer’s application, either the creditor or the mortgage broker shall provide a consumer with the disclosures required under paragraph (e)(1)(i) of this section in accordance with paragraph (e)(1)(iii) of this section.  If the mortgage broker provides the required disclosures, the mortgage broker shall comply with all relevant requirements of this paragraph (e).  The creditor shall ensure that such disclosures are provided in accordance with all requirements of this paragraph (e).  Disclosures provided by a mortgage broker in accordance with the requirements of this paragraph (e) satisfy the creditor’s obligation under this paragraph (e). If provided by the creditor, copies of the creditor disclosures MUST be kept in the mortgage broker’s files to show an auditor that the rule was complied with.

Q: I only do foreign national loans, am I exempt from TRID?

A: Not if the property is a 1-4 family dwelling and not if the buyer is a human person. There could be some crossover here to commercial lending, but most of what I have seen is probably TRID lending. I have seen a lot of issues here, sham entities.

Q: I only make ten or fewer loans a year with my own money. Do I need a Lender’s License?

A: Probably – YES. And if all you do is create entity after entity to act as your lender, and you own each entity, that is a probable sham and is probably avoiding the licensing rules of Dodd-Frank and your state regulator. Folks, the regulators are smart enough to see though this kind of conduct. If you hold yourself out to lend money, even in as small way as a business card, or using an agent ( a lawyer, a mortgage broker) who brings you borrowers, YOU ARE ACTING AS A LENDER.

I am also attaching an ALTA Training Webinar to the blog. The blog can be found at nltrainingsite. You guys should look at this ALTA Webinar. Very good information.

trid-webinar-82715

Happy Holidays to all! We will be working right up to Friday afternoon, so feel free to call. And we are here next week. Regulators never sleep so we won’t either.

Respectfully,

Nelson A. Locke, Esq.

Mortgage Industry Compliance Expert

Attorney and Expert Witness

Office (800) 656-4584

Cell (305) 951-2785

http://www.lockelaw.us

http://expertlenderservices.com

 

On December 1st, the FLSA “Overtime Rule” is being updated. Who does this affect?

Back in May 2016 the Department of Labor (“DOL”) announced that effective December 1st, 2016 employers would have to raise the salary level of exempt employees to $47,476 per year for the employee to still be considered exempt. That is about $900 a week.

Now I am getting panic calls and emails asking me if this means you should increase your mortgage loan originator hourly wages to keep the exemption. So here comes the shocker.  

Folks, your mortgage loan originators are NOT exempt. This December 1st rule applies to true administrative employees and managers. Based on last years DOL ruling, this new ruling does NOT apply to mortgage loan originators. MLOs have not been exempt since May of 2015. The MB had sued the DOL to make them exempt, but SCOTUS agreed with the DOL regarding the DOL ruling that MLOs were not exempt because MLOs were involved in sales.

Let’s start out with the history behind the rule.

Under the old administrative exemption of the FLSA, employees who are paid on a salary basis of at least $455 per week (pre-December 1st 2016) may be exempt from overtime compensation if the employee’s primary duty is the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers, and their primary duty includes the exercise of discretion and independent judgment with respect to matters of significance. Employees in the financial services industry generally meet the duties requirements for this exemption if their duties include work such as collecting and analyzing information regarding the customer’s income, assets, investments, or debts; determining which financial products best meet the customer’s needs and financial circumstances; advising the customer regarding the advantages and disadvantages of different financial products; and marketing, servicing, or promoting the employer’s financial products; provided, however, that their primary duty is not selling financial products.

There’s the rub: provided their primary duty is NOT selling financial products.

So, pretty much, any MLO who is originating cannot be considered exempt any longer. So December 1st does not affect them. It affects non-selling managers and administrative staff. The new level of over $900 a week is real. That is what you should review.  

Back to your MLOs. What can you do to protect yourself from being sued for overtime by a disgruntled or opportunistic former MLO?

  • Don’t fight the rule but rather have a policy in writing that prohibits any non-exempt employee (which is what the DOL calls your MLO staff) work beyond 35 hours a week unless approved in writing.
  • If you enforce this strongly I think this creates a rebuttable presumption for the DOL that you may have used your best reasonable efforts to comply.
  • You may experience an MLO who stepped outside his job description if he worked more hours than 35 hours a week without written approval. If you kept an eye on him or her and then they raise this issue, you can counter with an “ultra vires” or “frolic and detour” argument. The key to this is to enforce your policy and keep an eye on your non-exempt employees.
  • You would need a procedure in place that creates and monitors regular non-exempt employee time sheets and has your non-exempt employee sign a certification about hours worked under penalty of perjury every pay period, whether they have commission due or not. And you would need to demonstrate you enforce your rule and send people home when appropriate.

SUMMARY: Mortgage Loan Originators are non-exempt employees. As such they are subject to the protections of the overtime rule of the FLSA. If you don’t monitor and manage their hours worked, you can end up in a very bad place. Don’t prohibit overtime; rather require they obtain your pre-approval in writing. Next, monitor every pay period with non-exempt employee certification regarding hours reported. Keep these records carefully. When you find a violator, be able to show you enforce your own rules.

ONE FINAL COMMENT. We are still engaging with plenty of loan originators who think they can be paid as a 1099 contractor. The DOL decision applies the common law definition of employee.

Here you go, compliments of Black’s Law Dictionary. “Black Letter Law”.

“An employee is a person who works in the service of an employer under an express or implied contract of hire, under which the employer has the right to control the details of the work performed.”  

So you have a license that requires a sponsor who is paid instead of you, who provides you with documents, compliance overview, and training, and maybe even leads. And you must originate and process your loans under his or her direction. And then, your employer has to pay you from what he is paid, because you cannot be paid directly under the current rules.

If you still think you are independent, you are just not listening.  You are an employee.

 Respectfully,

 Nelson A. Locke, Esq.

Mortgage Industry Compliance Expert

Attorney and Expert Witness

Office (800) 656-4584

Cell (305) 951-2785

http://www.lockelaw.us

http://expertlenderservices.com

I’m not changing my mind on this one. An NMLS sponsored MLO is an employee. Period.

October 18th, 2016

The debate rages on. Unfortunately, most of those who have challenged our position that an MLO must be a W-2 – are either asking the wrong people for advice, or are not asking the question in an open and honest way.

If you have found an attorney who is telling you your 1099 practice is just fine, ask him for his written legal opinion. You will need that to show to the regulator that makes this an issue. While it won’t guarantee you won’t have a finding or fine, it is a defense of sort. Except I warned you, didn’t I. And the attorney won’t pay your fine for you.

The only reasonable conclusion is that a sponsored MLO is an employee.

We include the attachment titled 22-mlo-w2-discussion-021015 to our clients at the front of our MLO Policy Manual – Book Two. You should read this first. Let’s set the stage.  

Now, if you are saying your state regulator is ignoring this issue their misfeasance does not mean you are not at personal risk for violating Safe Act, CFPB, IRS, and DOJ rules. The facts are clear – the CFPB has asked the states to look for violations of federal regs when auditing. When the CFPB issued its updated exam guidance, it again asked the states to assist.

Now see attached pdf extractions, highlighted sections. The cfpb-exam-manual-irs-references-and-employee-definition-101816 is a 924 page “guide”. I saved you some time and copied the three pages that matter for you. Next, look at originatorcompensation-and-thefedrule_q-a. This is a transcript from an Industry Legal Webinar held in 2011.

Note the reference to the common law test – the common law definition of employee. Not YOUR definition, but what the IRS test uses to determine if a MLO is independent, or not. Let me give it to you here.

Directly from the IRS:

Under common-law rules, anyone who performs services for you is your employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed.

You are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done). This applies even if you are given freedom of action. What matters is that the employer has the legal right to control the details of how the services are performed.

NOW about the Fair Labor Standards Act:

In an attempt to interpret provisions of the Fair Labor Standards Act and discern between employee and independent contractor status, courts and federal agencies have come up with the “economic realities test.” It looks at the dependence of the worker on the business for which he or she works. If a person gains a large portion of their salary or commission from that business, chances are that person qualifies as an employee.

These courts also use the “right to control” test. When the hiring party controls the way work is carried out and a product is delivered, the relationship between the parties is employer/employee. If you are sponsored and your Broker has to answer for your work, you are an employee.

If an employer does not have any authority over how a party accomplishes his or her work the relationship between the parties is that of independent contractor. But that can’t be: you are sponsored, right? And can only “work” at one place at a time, right?

We are always looking for new clients. If you need to tighten up your compliance efforts, call us at (800) 656-4584.

If in doubt, get a license.

I am being barraged by questions regarding commercial lending and the need or not to be licensed. The area is not as grey as you may think. The problem is many commercial lenders disguise what would otherwise be a RESPA loan on a 1-4 family – by using LLCs. These lenders and brokers are completely ignoring the legal doctrine of beneficial ownership. And many times these lenders and brokers actually believe that no auditor or regulator has ever seen this scheme before. Really?

Auditor Auditee 022015

I believe that the best business practice for any person originating any kind of mortgage residential or commercial – is to obtain the proper license first.

RESPA is applicable to all “federally related mortgage loans,” except as provided under 1024.5(b). “Federally related mortgage loans” are defined as:  1.A loan secured with a first or subordinate lien on residential property  2.Where a one to four family unit is located  3.Where a properly qualified manufactured home is located or to be constructed 4. Where the loan is made by a proper creditor, lender, or dealer 5. If the loans are insured by an agency of the federal government 6. If the loan is intended to be sold to HUD, FNMA, FHLMC, USDA, or the VA 7. If the loan is a home equity conversion mortgage or reverse mortgage subject to federal regulations.

A true commercial loan is a mortgage loan made on a property that is NOT residential (a 1-4 family unit) and where there is NO possibility the true owner or beneficial owner might occupy the property either as a primary or as a secondary. That goes for citizens or legal aliens or consumers of any kind – if the property is a RESPA property that is going to be used by them it will not matter who you call the borrower or how you try to hide the true ownership. A 1-4 family might fall into an exception but the overwhelming position will be that if it is a 1-4, it is a RESPA loan requiring licensing.

To provide a resource for you that will put all this information on one blog entry, I am providing the following list of state requirements.

The following states may require licensing to originate commercial mortgage real estate loans.

One more time – commercial mortgage loans means a loan secured by real estate that is not a residential 1 to 4 family dwelling.

These states require licensing. Arizona California Illinois North Dakota Nebraska Nevada (Company and LO) South Dakota (Company and LO)

These states show that a license may be required. That means get a license. District of Columbia North Carolina

These states require a license to broker these types of loans. Michigan (Real Estate Broker) – Brokering Only Minnesota (Limited Real Estate Broker) – Brokering Only New York (Real Estate Broker)- Brokering Only New Jersey (Real Estate Broker)- Brokering Only

Regarding FLORIDA – “Most” commercial companies are exempt in Florida providing the property is not a 1-4 family unit or the entity is not a sham LLC. The word “most” is the issue. This is a regulator grey area.

Business Purpose Residential Mortgage Loans – The famous Reg Z exemption 226.3: Brokers and Lenders often refer to non-owner occupied business purpose residential mortgage loans as commercial loans. The following states may require licensing: Alabama, Arizona, California, Colorado, Florida, Idaho, Illinois, Louisiana, Michigan, Minnesota, Nevada, New Jersey, North Dakota, Oregon, Rhode Island, South Dakota, Texas, Utah, and Vermont.

Here’s my take. Get a license. It increases your credibility and avoids you being pulled into a situation where the regulator believes you needed a license to originate or make the loan. If the regulator believes it, you will lose the argument. Of course, this is just my opinion.

Respectfully,

Nelson A. Locke, Esq.

Mortgage Industry Compliance Expert

Office (800) 656-4584

http://www.lockelaw.us

http://expertlenderservices.com

 

 

 

Identity Theft Scam involving Realtors, Brokers, and Lenders

Well, the criminals have discovered yet another way to steal identities and money.

Title Company Wire Scam 032916

I would strongly suggest you take a good hard look at any requests from closing agents that involve wires, and verify the request is valid. Further, keeping in mind the requirements of the Financial Services Modernization Act of 1999 – DO NOT transmit any of this non-public information in an unsecured manner. Always use a drop box or a password protected email.

This is getting crazier and crazier. Don’t take chances. Protect your data, trust but verify.

Call us if you would like to discuss our Compliance Services.  Ask about the Audit Protection Plan – included with our program.

(800) 656-4584

This is what should be on your Compliance Shelf.

Hi Folks,

We get asked a lot what we mean when we talk about the power of the Compliance Shelf. So I decided to tell you and show you a few pictures. These are from clients of ours.

When you are visited by your regulator it goes pretty far if he or she notices a dedicated area for your Compliance Manuals and Notes (the “Compliance Shelf”). The mere existence of this shelf creates an impression that your company takes compliance seriously. So you come out of the audit gate having impressed the regulator with your preparation. That good first impression.

What does a strong Compliance Shelf look like? It has your Audit Policies and Procedures, your MLO Policies and Procedures, your Regulatory Reference Book, an Advertising Log (back two years), a Customer Complaint Log (back two years), and finally, your QC Manual and Audit Report Log, with copies of all audits and management response. Here are two examples – the one on the right was recently audited by Texas and passed.

Books   WP_20160112_001

But please, don’t think for a moment that just making this impression will save your audit from disaster. You need to live by your policies and procedures. You need to know what they mean and you need to put them into practice.

Compliance is not a part time thing. You must form a “habit of compliance”. Every day, every file. That’s how you have good audit results. It has to be your company culture. Your “shelf” is just part of the big picture.

So, what’s on YOUR “Compliance Shelf”?

Want to learn more? Call us at (800) 656-4584. Over and out.

(Thanks to Eddie and Fred for providing us with these outstanding pictures.)