I had a karate instructor who liked to say “if you take care of the little things, the big things take care of themselves.” The internet tells me that’s a quote from Emily Dickinson, but it’s also an appropriate one for compliance because sometimes the little things become big themselves.
For example, let’s say you’re a banker who is looking to broker a loan you don’t normally handle, such as an FHA or reverse mortgage. An applicant has sent an application and—oops!—they forgot some basic but critical information that you know will get the application denied by the lender. What do you do with it?
Let’s look closer at the “little things” here.
Rule for Mortgage Brokers in Massachusetts
Mortgage brokers know they can’t make credit decisions in Massachusetts. It’s a basic, simple rule well known in the industry. But where does this rule come from? Is there a rule out there that says “if you’re a broker in Massachusetts, you shall not make a credit decision”?
Apparently not. The rule comes from how “mortgage broker” and “mortgage lender” are defined and interpreted. Massachusetts law defines “mortgage lender” as someone in the business of making, funding, or committing to make a mortgage loan. So if a broker makes a commitment to make a loan on behalf of an investor, then the broker is acting as a lender under the Massachusetts definition of the term.
And brokers cannot issue the approval or denial notice to the applicant, even on behalf of the lender and even if the broker did not make the decision of whether or not to make the loan. So even if the broker is simply acting as the middle-man, they cannot tell the applicant of the lender’s credit decision. Why not? Well even a broker sending the notice on behalf of the lender is seen as potentially misleading to the consumer, because the consumer might get the impression that it is the broker, not the lender, who is funding their loan.
So that’s where it comes from, and leads to two easy rules: first, mortgage brokers can’t make credit decisions about a mortgage because that’s the lender’s job, and second, brokers can’t inform applicants about the lender’s decision, because that’s potentially misleading to the consumer.
The Incomplete Application Problem
But a notice about an incomplete application isn’t necessarily a credit decision, right? Unfortunately, under ECOA, it is treated about the same. ECOA allows creditors usually 30 days to notify an applicant to a loan of a credit decision, whether it is approved, denied, or requires more information to make. As we just established, brokers can’t send these notices in Massachusetts; they need to let the lenders do it.
So what happens when a broker receives an application that is missing obvious information that would cause the lender to issue a Notice of Incomplete Application? You don’t want to forward an incomplete application which you know the lender will not accept, and the lender doesn’t want to waste its time and resources reaching out to applicants for missing information they should have provided the broker in the first place. Can the broker just send the applicant a Notice of Incomplete Application to avoid this problem from the beginning? Or does the broker need to send out the defective application for the lender to do all the dirty work?
There isn’t a clear answer to this question yet. The strictly compliant thing to do, it seems, is to let the lender make all the decisions and send all the notices. But the result is something both straightforward and silly if you look at it closely. The rules against brokers making credit decisions mean that brokers cannot send a Notice of Incomplete Application to an applicant when they spot an application with an obvious and critical missing piece. At the same time, the rule means that the broker can request the information initially, but cannot go back and request it again if the applicant doesn’t supply it the first time.
So you want an answer, what do you do? Here you go: send it to the lender and let them send the notice. It might be counter-intuitive and against common sense, but until there is some guidance to the contrary it is the right thing to do.
But I think we’ll be looking into this problem more fully in the next few weeks. For now though, the “little things” don’t seem to be so little when looked at closely.
By the way, it’s been a while since this blog has been updated, but I’m taking over the mantle of it. I hope you find it helpful, maybe thought provoking, funny or interesting. I’ll be aiming to post here more regularly in the future, but in the meantime if you have any questions, comments, concerns, criticisms, or would like to contact me for whatever reason, I’d be more than happy to talk with you. Contact me at:
Bryan T. Noonan, Esq.
SPILLANE CONSULTING ASSOCIATES, INC.
501 John Mahar Highway, Suite 101
Braintree, MA 02184