Insights

On May 27, 2010, Mortgage Access Corp. d/b/a Weichert Financial Services (“MAC”) entered into a $3 million settlement agreement with representatives of the States of Connecticut, Louisiana, New Jersey, New York, North Carolina and Vermont and the Commonwealths of Kentucky, Massachusetts, Pennsylvania and Virginia. The case involved SAFE Act compliance issues arising from a limited scope multi-state examination. The examination was conducted pursuant to each state’s statutory authority, the Conference of State Bank Supervisors/American Association of Residential Mortgage Regulators Nationwide Cooperative Protocol for Mortgage Supervision, and the Nationwide Cooperative Agreement for Mortgage Supervision. Each state is to be paid $300,000 from the settlement.

The states began their examination on September 13, 2010 to determine whether MAC was engaged in the practice of soliciting and originating residential mortgage loans utilizing individuals not properly licensed in the particular states from July 1, 2008 to September 9, 2010. MAC cooperated with the state mortgage regulators during the course of the multi-state examination by: voluntarily providing documentation, including evidence of its efforts to comply with applicable laws, rules and regulations, access to its employees, systems and facilities and responding to inquiries, both verbally and in writing.

The multi-state examination revealed that MAC implemented and maintained a formal, written policy that permitted individuals unlicensed in particular states to originate a loan within that state and submit the information to a centralized lending area referred to as the “Interstate Lending Desk” ( “ILD”) which was staffed by mortgage loan originators (“MLOs”) who were licensed in multiple states. MAC, through its written policy, permitted individuals to: negotiate loan rates and terms with the applicant, complete a Uniform Residential Loan Application (“1003 Form”); obtain a credit bureau report on the applicant; submit the 1003 Form to the decision underwriter system to determine the applicant’s eligibility; and lock the loan rate for applicants, in particular states in which the individuals did not hold a license.

The multi-state examination also revealed that at times during the examination period, MAC’s written policy permitted individuals unlicensed in particular states to complete a worksheet developed by MAC which, when completed by the unlicensed individual, was transferred to the ILD and forwarded to a licensed MLO for signature on the 1003 Form, in violation of the states’ mortgage originator licensing requirements.

Among the additional findings were that: (1) MAC tracked the identity of the individual unlicensed in particular states for compensation purposes, and further, that MAC compensated the unlicensed individuals for the loan origination; (2) MAC violated certain state reporting requirements; (3) MAC failed to adequately supervise mortgage loan solicitation and origination activities; (4) MAC lacked the proper internal controls necessary to oversee its mortgage origination operations; (5) MAC failed to maintain supervision and control over mortgage originators and failed to keep adequate records of the unlicensed individual’s original documents, files and records; (6) MAC engaged in prohibited business practices by originating loans through the unlicensed individuals; (7) MAC displayed negligence and incompetence in the mortgage business by originating loans through individuals who did not hold a license; and (8) MAC violated the statutory sections of each state’s SAFE Act.

After negotiation and solely for the purpose of resolving all compliance violations found by the state mortgage regulators, and without MAC admitting wrongdoing, the parties entered into the settlement agreement. The major terms of the consent order require the following:

• MAC must pay a civil money penalty in the amount of $3,000,000 which is to be apportioned among the state mortgage regulators in equal shares.
• MAC must ensure that: (i) all mortgage loans are originated by MLOs who are properly licensed in the state in which the MLO conducts business; (ii) all mortgage applications are taken and signed by the licensed MLO conducting the application interview; (iii) all policies, procedures and controls permit only licensed individuals to engage in mortgage origination activities (MAC assures the state mortgage regulators that this is the case and that its ILD no longer exists.); (iv) MAC’s record-keeping complies with the laws in the state mortgage regulators’ jurisdictions; (v) all mortgage applications are taken and signed by a licensed MLO conducting the application interview; and (vi) all records originated by MAC in the course of business are preserved and retained in a manner as prescribed by applicable State and Federal laws.
• Within 90 days of the effective date of the order, MAC must submit an acceptable internal control plan (the “Plan”) to the state mortgage regulators which sets forth at a minimum policies and procedures to:

a. Ensure that MAC’s compliance department is managed by qualified managers who have responsibility for all consumer compliance and related matters, including, but not limited to, monitoring the Corporation’s compliance and ensuring that corrective action is taken to address all compliance violations;

b. Provide for adequate training to applicable staff persons; conducted by qualified and trained personnel, which includes, but is not limited to, proper instruction, adequate supervision and ongoing training to ensure proper implementation and execution of the revised policies and procedures implemented pursuant to the order;

c. Identify the type and number of senior management and officer personnel necessary to manage adequately and supervise properly the Corporation’s mortgage business activity and the compliance department; ensure that each individual identified possesses the ability, experience, and other qualifications necessary to competently perform present and anticipated duties, to follow and enforce MAC’s revised policies and procedures and the Plan adopted pursuant to the order; and confirm the level of staffing needed to conduct competently the Corporation’s operations affecting the States’ consumers;

d. Develop, implement and maintain technology to prevent unlicensed individuals from submitting any consumer information, including, but not limited to: 1003 Forms; obtaining a credit bureau report on applicants; submitting the 1003 Form to the decision underwriter system to determine the applicants’ eligibility; and locking the loan rate for applicants;

e. Ensure an effective system of preventing unlicensed individuals from soliciting, originating and receiving compensation for unlicensed activity;

f. Investigate complaints and other reports from employees, consumers, State or Federal agencies or other individuals alleging that MAC has employees acting in the capacity of an unlicensed mortgage loan originator; and

g. Develop and implement additional internal controls over its mortgage loan origination activities, including revising its policies and procedures to comply with applicable state and federal laws, regulations, and regulatory bulletins.

The state mortgage regulators must make a good faith effort to review the Plan and approve or refuse to approve the Plan within 30 days of the submission of the Plan. If the state mortgage regulators do not approve the Plan, they must provide comments in a coordinated response on why the Plan is unacceptable and give MAC the opportunity to resubmit the Plan with the appropriate changes.

• MAC must identify an independent auditing firm to, at MAC’s expense, conduct a review of all mortgage loan applications taken from Sept. 1, 2010 to March 31, 2011 for compliance with state mortgage licensing laws.

The scope of the auditing firm’s review must be to address and include, but not be limited to, the following: assess compliance with state mortgage licensing laws and rules, including application completion procedures; verification and due diligence procedures; internal policies and quality control procedures; books and records retention, and document destruction procedures, all relative to unlicensed loan activity. The auditing firm also must continue to review loan transactions for a period of time of 18 months from the date that the auditing firm begins its review. The auditing firm also must agree to prepare and submit a monthly report to the state mortgage regulators and MAC describing any violations of law observed during the preceding month so that the States may respond to any such conditions in a timely manner.

• Refund certain fees to borrowers in the state of New York.

Within 90 days of the effective date of the Order, to the extent not already completed to the satisfaction of the New York Banking Department, MAC must refund the following fees collected on transactions originated by unlicensed individuals: application fees, commitment fees, processing fees, underwriting fees, bona fide origination and discount points, and yield spread premiums to borrowers residing in New York. Further, MAC must provide evidence of refunds made to New York borrowers that is satisfactory to the New York State Banking Department. MAC must refund all fees charged on transactions originated by unlicensed individuals and identified in the audit report within 90 days after issuance of the audit report.

• General Compliance.

Finally, upon the effective date of the Order, MAC must establish, implement and maintain procedures to ensure that it has complied with all regulatory requirements imposed by each individual state mortgage regulator pursuant to the provisions of the Multi-State Examination.

This settlement should serve as notice to all lenders that they need to review their policies, procedures and practices to make sure that they are current and comply with all applicable state and federal SAFE Act laws and regulations.

David S. Darland is a partner in the Washington, D.C., office of Hudson Cook, LLP. David can be reached at 202-327-9707 or by email at ddarland@hudco.com.