Mortgage Broker Compliance Requirements: Understanding the Rules

As a mortgage broker, it's essential to understand the compliance requirements that govern your business. The National Mortgage Licensing System and Registry (NMLS) is the primary regulator of mortgage brokers in the US, and it's responsible for maintaining a database of licensed mortgage brokers.

To become a licensed mortgage broker, you'll need to meet the NMLS's minimum requirements, which include passing a background check and completing a course on mortgage loan origination.

The NMLS also requires mortgage brokers to maintain a certain level of insurance coverage, including errors and omissions insurance and surety bonds. This ensures that consumers are protected in case something goes wrong with their loan.

Mortgage brokers must also comply with the Consumer Financial Protection Bureau's (CFPB) mortgage regulations, which include rules on loan originator compensation and high-cost mortgage lending.

Mortgage companies must provide for independent testing to monitor and maintain an adequate AML program.

This testing is required to determine compliance of the company's agents and brokers with their obligations under the program.

The scope and frequency of the testing shall be commensurate with the risks posed by the company's products and services.

Failure to comply could cost you in a State Audit as well as a Federal Audit.

The Equal Credit Opportunity Act (ECOA) is a crucial aspect of compliance requirements for mortgage lenders. Regulation B, created by the Federal Reserve, prohibits discrimination based on prohibited factors such as race, color, religion, national origin, sex, marital status, age, parental status, or use of public aid.

Lenders must provide written notice of all actions taken on a credit application within 30 days of receiving the application. This notice is a key requirement under Regulation B.

ECOA applies widely to business and consumer credit, imposing notice and nondiscrimination requirements on every type of credit. Discrimination based on factors such as sex, age, religion, and race or color is strictly prohibited.

Here are the specific prohibited factors under ECOA:

Creditors must also furnish a copy of the appraisal and other valuations to applicants, and apply to any credit applications to be secured by a first lien, regardless of whether the credit is for a consumer or business purpose.

The Appraiser Independence Requirement (AIR) is a regulation that went into effect in 2010. It was developed by the Federal Housing Finance Agency (FHFA), Fannie Mae, Freddie Mac, and others.

AIR requires appraisers to be licensed by the state where they practice and covers conventional, single-family homes sold to Fannie Mae or Freddie Mac. This means that appraisers must meet certain state-specific requirements to work in their area.

Lenders and Realtors must remain separate from the appraisers to prevent any conflicts of interest. This is to ensure that the quality of the appraisal report and home valuation isn't affected by the desire to close the loan for a certain price.

Many lenders use a pre-approved list to select an appraiser, where someone not on the loan production staff chooses the appraiser to complete the home review.

Regulation Z requires lenders to provide borrowers with disclosures for all interest rates, fees, and finance charges in writing, as well as monthly billing statements and fair practices that don't create conflicts of interest between lenders and brokers.

A routine compliance review is recommended to ensure that lenders comply with Regulation Z's extensive disclosure requirements, which can easily slip through the cracks due to disorganization within a lender's pipeline.

Lenders must also comply with Regulation B of the Equal Credit Opportunity Act (ECOA), which prohibits discrimination based on various factors and requires lenders to provide written notice of all actions taken on a credit request within 30 days.

Mortgage lenders must ensure that all application correspondence avoids the collection of specific personal information about an applicant that has no bearing on an applicant's ability to repay the loan requested.

In addition to federal regulations, mortgage lenders must also comply with state-specific regulations, such as obtaining licensure to make loans secured by residential real property, and following state laws that govern predatory lending and high-cost loans.

The Truth in Lending Act and Real Estate Settlement Procedures Act are two critical components of the regulatory framework that mortgage lenders must navigate. These acts impose several disclosures and compliance obligations on lenders, including the Home Ownership and Equity Protection Act (HOEPA), the Ability-to-Repay/Qualified Mortgage (ATR/QM) Rule, the Loan Originator Compensation (LO Comp) Rule, and the TILA-RESPA Integrated Disclosure (TRID).

Lenders must carefully determine whether a loan is subject to TILA and RESPA, as incorrect categorization can lead to stiff penalties. A lender should pay close attention when determining whether RESPA and TILA apply to a loan.

The TILA-RESPA Integrated Disclosures (TRID) rules lay out both informational types and informational deadlines that need to be provided by lenders. TRID rules also regulate fees that can be charged both at origination and maturation.

To prove compliance, lenders must keep impeccable records regarding fee justifications and have clear receipts for any gifts exchanged with third-party providers to combat kickback accusations. Lenders are also required by law to keep copies of loan estimates for at least three years after mortgage papers are signed and disclosure agreements for five years.

Here are some of the key requirements imposed by TILA and RESPA:

These requirements won't apply to loans exempt from TILA and RESPA coverage, but lenders must carefully determine whether a loan is exempt to avoid penalties.

Fannie Mae is a government-sponsored enterprise that provides financing for mortgages in the United States.

Fannie Mae's approval process is crucial for borrowers, as it determines their eligibility for a mortgage.

Fannie Mae has a minimum credit score requirement of 620 for conventional loans.

Borrowers with credit scores below 620 may still qualify for a mortgage, but they'll need to meet other requirements.

Fannie Mae also considers debt-to-income ratio, income, and employment history when evaluating mortgage applications.

A debt-to-income ratio of 36% or less is generally considered acceptable by Fannie Mae.

Fannie Mae's approval process typically takes 30 days or less, depending on the complexity of the application.

Mortgage bankers must comply with the Bank Secrecy Act (BSA) and its Anti-Money Laundering rules to prevent money laundering and suspicious activity.

FINRA Rule 3310 sets minimum standards for Anti-Money Laundering (AML) programs for lenders, and these programs are often outsourced to companies like Richey May.

To meet AML requirements, your entire staff needs proper training, which can be achieved with a comprehensive training bundle that meets NMLS required education for MLOs.

This training bundle can save you money and ensure your staff is up-to-date on AML-SARS (The Bank Secrecy Act) Compliance.

Financial institutions, including mortgage bankers, must comply with the Bank Secrecy Act (BSA) and its Anti-Money Laundering (AML) rules.

The Financial Industry Regulatory Authority (FINRA) sets standards to monitor and prevent possible cases of money laundering and other suspicious activity.

FINRA Rule 3310 spells out minimum standards for AML programs for lenders in its guidelines.

Many lenders choose to outsource their AML programs, including with Richey May.

To ensure compliance, it's essential to provide proper training to your entire staff.

The Compliance Pack Course offers a convenient bundle that meets all required training needs and saves money on NMLS required education for MLOs.

Unfair or Abusive Practices can have serious consequences for lenders and financial institutions. UDAAP, or Unfair, Deceptive, or Abusive Acts or Practices, is a regulation that protects consumers from unfair tactics in banking.

UDAAP was introduced under the Dodd-Frank Wall Street Reform Act of 2010 to safeguard consumers from misleading or harmful information. Roughly 90% of UDAAP regulatory actions focus on deception.

Picking standardized enforcement through a Loan Origination System (LOS) can help reduce liability by minimizing individualized loan officer interpretation. This can also help lenders avoid the vagueness of UDAAP.

Compliance checks and audits are crucial for mortgage brokers to ensure they're meeting all the necessary requirements. A scalable LOS system can help you add applicable compliance regulations to your workflow, taking into account state-specific lending laws that may apply.

To build a robust compliance checklist, you'll want to include regulations that commonly "get" lenders, such as those related to the Mortgage Compliance Checks Lenders Need to Perform. This will help you avoid potential pitfalls and ensure you're meeting all the necessary standards.

Here are some key compliance checks to consider:

An effective quality control program is also essential for identifying potential areas of risk in the origination process. This can help you create a feedback loop that ensures you're meeting all the necessary compliance requirements.

As an auditor, you play a crucial role in ensuring mortgage companies comply with regulations and maintain a safe and sound origination strategy. You must be aware of the fines associated with non-compliance, which can reach up to $43,000 per day.

The FTC has raised the fine for a data breach to $100,000 as of June 2023, making annual penetration testing even more important. You should check if the company has a written Safeguard Plan and a written information security program (cybersecurity) in place.

According to Federal Regulations, Mortgage companies must not only have a Safeguard Plan but also provide for independent annual penetration testing or have a monitored plan in place to safeguard customer information. Failure to comply could cost the company in an audit.

You can use the following checklist to ensure the company is meeting these requirements:

A well-structured quality control program is also essential for identifying potential areas of risk in the origination process.

Flood Insurance is a crucial aspect of compliance checks and audits. Lenders must use flood insurance maps to determine if a property is in a flood plain, which will require the borrower to purchase flood insurance as added protection for their investment interest.

The Flood Insurance Reform Act provides disincentives that discourage property owners from living in flood-prone areas. This is because flood insurance premiums are tied to flood risk, meaning property owners in flood-prone areas will likely pay higher premiums.

False Claims can have serious consequences for lenders, especially when it comes to government-backed programs. The False Claims Act protects the federal government and taxpayers from paying out agency money for false or fraudulent claims.

Lenders must ensure that loans they originate under FHA or HUD programs conform to the guidelines set for that particular loan type. This is crucial to avoid a DOJ investigation and financial penalty.

Attempting to get loans covered by federal insurance when they don’t meet the guidelines can result in a financial penalty. This is a serious issue that can have long-term consequences for lenders.

The False Claims Act is in place to prevent lenders from taking advantage of government-backed programs. By following the guidelines, lenders can avoid any potential issues.