Loan Origination Articles, Mortgage Origination, Mortgage Banking

Paul Schieber

A DECADE BRINGS CHANGES TO PENNSYLVANIA MORTGAGE BANKER/BROKER LICENSING A DECADE BRINGS CHANGES TO PENNSYLVANIA MORTGAGE BANKER/BROKER LICENSING

Reprinted with permission of Blank Rome Comisky & McCauley LLP "Consumer Lending/Retail Banking Update." Blank Rome is a national law firm with offices in Pennsylvania, New Jersey, Delaware, Maryland, Washington, DC and Florida and its Consumer Financial Services/Retail Banking Group provides advice and counsel to mortgage companies, banks, thrifts, real estate professionals and all others involved in residential mortgage finance and other areas of the law. For further information, contact the Group's chairman, Paul H. Schieber at 215/569-5567 or schieber@blankrome.com. http://www.blankrome.com/

On December 21, 1998, Governor Tom Ridge signed into law Senate Bill No. 94, which contains the first amendments to the Mortgage Bankers and Brokers Act, originally enacted in law on December 22, 1989. The MBA governs the licensing and certain other activities of first lien residential mortgage lenders and brokers. The amendments create new categories of licensing, provide the Department of Banking with greater enforcement tools, impose continuing education requirements on licensees, clarifies what assets will qualify for calculating the minimum net worth requirements under the MBA, and make certain other changes to the statute. These Amendments are summarized below.

Licensing

Until amended, the MBA provided for two licensing schemes; first mortgage banker and first mortgage broker. The Amendments create two new licensing categories. A. Loan correspondent.

This new category of licensee is defined as:

A person who, in the regular course of business, directly or indirectly originates and closes loans in his own name, utilizing funds provided by a wholesale table under and simultaneously assigns the loans to the wholesale table under. A loan correspondent may close a mortgage loan utilizing other funding sources, but only in an emergency circumstance where wholesale table funding is not available. Unlike the already existing mortgage broker status, a loan correspondent may close loans in its own name. Yet, unlike a mortgage banker, it need not have its own warehouse or other source of funds to make those loans, with the limited exception of "emergency circumstances." The Department contemplated that "emergency circumstances" would encompass situations in which the loan correspondent had received approval from its investor to make the loan but for some unforeseen reason, that approval was retracted prior to closing but too late to afford the loan correspondent an opportunity to find a replacement investor.

To obtain a loan correspondent license, the applicant must obtain a bond in the amount of $100,000 and maintain a minimum tangible net worth of $100,000. An entity licensed as a loan correspondent may also act as a mortgage broker without obtaining an additional license.

A loan correspondent may not service mortgage loans.

B. Limited Mortgage Broker

Limited mortgage brokers will be licensed individuals who may only operate from one location, maintain no branch offices and who neither accept nor collect advance fees. There are no minimum net worth or bonding requirements for a limited mortgage broker licensee.

Neither a mortgage broker nor a limited mortgage broker may service loans, enter into lock-in agreements (more on these in section VI, below) or collect lock-in fees except that they may provide a lender’s lock-in agreement to a borrower on behalf of that lender and collect those fees on the lender’s behalf.

C. New Exemptions from MBBA Licensing

While creating additional license categories, the Amendments also provide additional exemptions from licensing, including:

n Any person who makes a mortgage loan to an employee of that person as an employment benefit, given that person does not hold himself out to the public as a first mortgage lender; and

n nonprofit corporations making mortgage loans to promote home ownership or improvements for the disadvantaged, given that the corporation does not hold itself out to the public as a first mortgage lender.

Furthermore, a non-Pennsylvania corporation which only acts in the capacity of a wholesale tablefunder, which is defined as an entity which "in the regular course of business provides the funding for the closing of mortgage loans through loan correspondents and who by assignment obtain title to such mortgage loans," while still subject to licensing and many of the other requirements of the MBBA, will no longer be required to maintain an office within Pennsylvania.

D. Partially Exempt Entities.

The Amendments put into statutory effect the policy adopted by the Department a number of years ago, which requires entities which are partially exempt from licensing, i.e., subsidiaries and affiliates of banks, thrifts, credit unions, and insurance companies (although subject to certain other MBBA requirements), to register their existence and business in Pennsylvania with the Department.

Until amended, the MBBA exempted from licensing entities making 11 or fewer first mortgage loans. Under the amended version, that de minimus rule has been reduced to two or fewer "unless he is otherwise deemed to be engaged in the first mortgage loan business." The "first mortgage loan business" is defined as:

A person is deemed to be engaged in the first mortgage loan business in this Commonwealth if that person advertises, causes to be advertised, solicits, negotiates or arranges in the ordinary course of business, offers to make or makes more than two first mortgage loans in a calendar year in this Commonwealth, whether directly or by any person acting for his benefits. Essentially, this revision requires licensing of any entity wishing to originate three or more first mortgage loans in any calendar year, even if ultimately unsuccessful in doing so.

An entity licensed as a loan correspondent may also act as a mortgage broker without obtaining an additional license.

II. Educational Requirements

Among the most substantive revisions to the MBBA are the amendments' imposition of a continuing education requirement on certain licensees. To maintain a mortgage banker, loan correspondent or mortgage broker license, the entity or the applicant for such licensing must demonstrate to the Department that at least one person from each of the licensee's licensed offices has attended a minimum of six hours of continuing education annually. A limited mortgage broker licensee must attend at least two hours of continuing education each year. The Amendments authorize the Secretary of Banking to adopt regulations for applying this continuing education requirement within three years of the effective date of the Amendments. [The effective date of the Amendments is February 19, 1999.] The Amendments provide the Secretary with the authority to "review and approve continuing education programs to satisfy the continuing education requirements." The Department presently contemplates that it will review and approve specific educational programs to be offered by trade organizations and others.

III. Minimum Net Worth Requirements

As already noted, certain categories of license impose minimum net worth requirements. Under the pre-amended MBBA, no specific definition or formula was provided for calculating an applicant's net worth. The Amendments now define tangible net worth to mean net worth less the following assets:

(1) That portion of any assets pledged to secure obligations of any person or entity other than that of the applicant;

(2) any asset, except construction loans receivables secured by first mortgages from related companies, due from officers or stockholders of the applicant or related companies in which the applicant's officers or stockholders have an interest;

(3) that portion of the value of any marketable security, listed or unlisted, not shown at lower of cost or market, except for any shares of Federal National Mortgage Association stock required to be held under a servicing agreement, which should be carried at cost;

(4) any amount in excess of the lower of the cost or market value of mortgages in foreclosures, construction loans or foreclosed property acquired by the applicant through foreclosure;

(5) any investment shown on the balance sheet in the applicant's joint ventures, subsidiaries, affiliates or related companies which is greater than the value of the assets at equity;

(6) goodwill;

(7) the value placed on insurance renewals or property management contract renewals or other similar intangibles of the applicant;

(8) organization costs of the applicant;

(9) the value of any servicing contracts held by the applicant not determined in accordance with American Institute of Certified Public Accountants Statement of Position 76-2, dated August 25, 1976, or subsequent revision thereto;

(10) any real estate held for investment where development will not start within two years from the date of its initial acquisition;

(11) any leasehold improvements not being amortized over the lesser of the expected life of the asset or the remaining terms of the lease; and

(12) any commitment fees paid or collected which are not recoverable through the closing or selling of loans.

Existing licensees will need to reexamine their financial statements immediately to assure that such licensees continue to meet the MBBA's net worth requirements. The amendments do not provide any transition grace period for licensees to meet the new net worth definition/requirements.

IV. Enforcement

A. Application Procedures

The Amendments authorize the Department to "conduct such investigation as it deems necessary to determine that the applicant and its officers, directors and principals are of good character and ethical reputation" before issuing a license to an applicant. In the same vein, the Amendments also authorize the Department to deny a license if:

the applicant or any person who is a director, officer, partner, agent, employee or ultimate equitable owner of 10% or more of the applicant has been convicted of a misdemeanor or felony in any jurisdiction or of a crime which, if convicted in this Commonwealth, would constitute a misdemeanor or felony under the laws of this Commonwealth. For the purposes of this act, a person shall be deemed to have been convicted of a crime if the person shall have pleaded guilty or nolo contendere to a charge thereof before a court or Federal magistrate or by the verdict of a jury, irrespective of the pronouncement of sentence or the suspension thereof, unless the pleas of guilty or nolo contendere or the decision, judgment or verdict shall have been set aside, vacated, reversed or otherwise abrogated by lawful judicial process. Furthermore, if within two years prior to or from the date of application, the Department may deny or "otherwise restrict" a license if it determines that:

the applicant or any person who is a director, officer, partner, agent, employee or ultimate equitable owner of 10% or more of the applicant:

(1) has had a license application or license issued by the Department denied, suspended or revoked;
(2) is the subject of an order of the Department denying, suspending or revoking a license as a mortgage banker, loan correspondent, mortgage broker or limited mortgage broker; or
(3) has violated or failed to comply with any provision of this act or any rule or order of the Department.

B. Suspension

The Amendments grant the Department substantial new authority to suspend, revoke or refuse a license renewal. These include when the licensee has:

n Become insolvent, meaning that the liabilities of the applicant or licensee exceed the assets of the applicant or license or that the applicant or licensee cannot meet the obligations of the applicant or licensee as they mature, or is in such financial condition that the applicant or licensee cannot continue in business with safety to the customers of the applicant or licensee;

n engaged in dishonest, fraudulent or illegal practices or conduct in any business or unfair or unethical practices or conduct in connection with the mortgage business;

n been convicted of a misdemeanor or of a felony;

n filed an application for a license which, as of the date the license was issued or as of the date of an order denying, suspending or revoking a license, was incomplete in any material respect or contained any statement that was, in light of the circumstances under which it was made, false or misleading with respect to any material fact;

n permanently or temporarily been enjoined by a court of competent jurisdiction from engaging in or continuing any conduct or practice involving any aspect of the mortgage business;

n become the subject of an order of the Department denying, suspending or revoking a license as a mortgagee banker, mortgage broker, limited mortgage broker or loan correspondent; n become the subject of a United States Postal Service fraud order that is currently effective and was issued within the last five years;

n failed to comply with the requirements of the MBBA to make and keep records prescribed by rule or order of the Department, to produce such records required by the Department or to file any financial reports or other information the Department by rule or order may require;

n become the subject of an order of the Department denying, suspending or revoking a license under the provisions of any other law administered by the Department;

n failed to comply with a cease and desist order entered after notice and opportunity for hearing and issued by the Department within the last five years;

n demonstrated negligence or incompetence in performing any act for which the licensee is required to hold a license under the MBBA; or

n in the case of a limited mortgage broker, negotiated or placed, either directly or indirectly, a mortgage loan other than a nonpurchase money mortgage loan.

In addition to its authority to revoke a license and its existing authority to impose fines, the Department is now authorized to issue cease and desist orders and "such other orders as the Department in its discretion may issue."

V. Recordkeeping

To buttress these new enforcement authorities, the Amendments also provide the Department with the authority to examine records outside of Pennsylvania; the cost of such examination is to be borne by the licensee. The Amendments reiterate the Department's ability to grant a licensee the authority to maintain records outside of Pennsylvania and emphasize that such authority may be revoked "for good cause in the interest of consumer protection for [Pennsylvania] borrowers."

VI. Lock-In Agreements

In a departure from the licensing and otherwise administrative role of the MBBA, the Amendments also provide that all lock-in agreements must be in writing and contain at least the following:

(i) The expiration date of the lock-in, if any.
(ii) The interest rate locked in, if any.
(iii) The discount points locked in, if any.
(iv) The commitment fee locked in, if any.
(v) The lock-in fee, if any.

It does not appear that the MBBA now requires that lock-in agreements be provided; but rather imposes the foregoing requirements if lock-in agreements are proffered.

VII. Advertising

The Amendments require that any advertising by a licensee "indicat[e]" that the licensee is licensed by the Department.

VIII. Insurance

In response to comments that loan closings have been delayed or canceled because certain lenders or closing agents were refusing to accept hazard insurance binders, versus whole policies, as evidence of insurance, the Amendments clarify that when insurance is required in connection with a loan, a policy or binder or a copy of either may be accepted.

IX. Wet Funds

The MBBA's "wet funds" provision, which had required that the proceeds of a mortgage loan be disbursed via electronic fund transfer, certified or cashier's check, has been clarified to state that this requirement applies only when the closing for a loan is handled by a closing agent, i.e., someone other than the lender. The Amendments also make clear that this does not impose on a lender the requirement to use a closing agent.

X. Effective Date

As already noted, the effective date for the Amendments is February 19, 1999, which is 60 day from the date of their enactment.

XI. Conclusion

As in any major new statutory scheme or substantive revision to existing schemes, numerous questions will unquestionably arise which will need to be addressed by the Department, in either regulations or other guidance, mortgage finance professionals doing business in Pennsylvania and their counsel.

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