Homeowners Report on Refinancing
QC-MACQC Xpertsquality control, three-day rule, application disclosures, affiliated builder's lender
Our company is a federally chartered credit union. One of our
mortgage loan officers has been presented with a purchase and sales
agreement that looks suspicious to us. A builder is selling a home
to one of our members. The builder has an ownership interest in a
mortgage company and has disclosed this fact. An addendum to the
purchase and sales agreement indicates if the member (borrower)
completes the transaction with a loan through his preferred lender
(the affiliated builder's lender), the borrower will receive a
$3,000 credit toward their closing costs. If our member chooses
another lender (us), nothing will be paid toward the closing cost.
Is the builder's offer a violation of any laws and/or
--Mark H., Columbus, Ohio
We all know that every loan transaction is very important to all
lenders in today's tight, competitive mortgage market, but we must
tell you that we believe the builder is within his rights to offer
the borrower (your member) the $3,000 credit toward the payment of
his closing cost if he uses the builder's affiliated mortgage
company. Based upon what you said in your question, the builder did
disclose to the borrower that he has a financial interest in the
affiliated mortgage company, and it appears that the borrower was
given an opportunity to use another mortgage company (your credit
union) if he chose to. It's our understanding that a lender and/or
a builder can give the "consumer" (the borrower) anything of value,
including a trip to Hawaii if they want. The problem arises when an
interested party (seller, lender, builder, agent, etc.) other than
the consumer (borrower) receives or gives something of value
because of a mortgage transaction. However, if the loan is a
HUD/FHA-insured loan, then there are some underwriting
considerations that must be applied and could possibly reflect in a
lower loan amount. Therefore, based upon the information stated in
your question, we conclude that there was not a violation of RESPA,
or any other law or regulation.
We were recently audited by our state examiner, and they reviewed
several of our loan files. They found that we had violated the
regulations for the Good Faith Estimate, Truth in Lending and
various other upfront disclosures, stating that we were not in
compliance with the three-day rule, and the date at the top of the
page indicating when the document was prepared is not evidence of
the date of delivery. In your opinion, what could we do to show
that we did actually deliver the documents to the borrower within
the required three days?
--Michelle J., Denver
We agree with your regulators. The date that a document was
prepared does not show evidence that the document was "delivered"
to the borrowers, as the regulations require. Based upon your
question, we are going to assume that your business model of
originating mortgage loans does not include a large percentage of
your loan applications being taken face-to-face with the borrowers.
Assuming that is the case and the majority of your applications are
taken by telephone, Internet and/or mail, we would suggest the
following ways to show evidence that you did indeed deliver your
disclosure documents to the borrower within the required three-day
•Certified mail: You could send the
disclosures to the borrowers by U.S. certified mail with a request
for return receipt. Attach your (the sender's) copy of the request
for return receipt to a copy of the documents that were mailed
•Processor's certification: Attach a
processor's certification to each document that was delivered to
the borrower and have the processor sign and date each
•Rubber stamp: Use a rubber stamp that
states the date the document was mailed (delivered). Stamp each
document and have the person who sent (delivered) the documents
sign and date each document that was sent (delivered).
•Cover letter: If you choose this method for
your evidence of delivery, we would highly suggest that you place
in your cover letter the names of each document enclosed within the
mailing (delivery). Since it is a letter, it must have a date and
will require someone's signature at the bottom.
When auditing a loan file, we've found that lenders use these
four most common ways to show evidence that they did in fact
deliver the disclosures within the three-day time period. Now, all
you have to do is decide which one fits your business model and
implement it. However, any method you choose should be evidenced in
all of your loan files, thereby establishing that this method is
your everyday business procedure for handling this requirement.
In a recent compliance training session that our company sponsored,
several questions came up. What is an "application" verses an
"inquiry?" When (and do) application disclosures need to be sent if
the borrower withdraws at point of contact, or when it has been
determined that the application will not be able to be completed by
our company? Do we need to disclose on every lead? Do we have to
send out adverse letters to borrowers that do not fit our
qualifications and were received from our lead generation service?
What is the easiest way to explain these issues to our sales
--Lisa G., Newark, N.J.
It's very difficult to answer all of your questions in this forum
without knowing more details about your company. But, we will give
it a shot.
1. What is an "application" verses an
In our opinion, an application is an application when your loan
officer has obtained enough information from the prospective
borrower to substantially complete the loan application and there
is a subject property associated with the application. An inquiry
in its purest sense is when a consumer is simply gaining general
information about loan products and the lending process. The key to
inquiry activity is the fact that only general information is
discussed with the consumer. However, if you are using a
pre-qualification application to obtain enough preliminary
information from the "prospective borrower" to make your decision
not to make the loan to the prospective borrower within the first
three days of the initial application, RESPA and TILA guidelines
state that the lender is not required to send out the upfront
disclosures. However, if you turn down a prospective borrower, you
must send an adverse action letter within three days.
We would also caution you about allowing loan officers and
underwriters make a unilateral decision about declining a loan
without someone in senior management having a second look and
signing off on the declination prior to sending the adverse letter
to the prospective borrower.
2. What if the borrower withdraws at the point of
If the prospective borrower withdraws at the point of contact, it
is our opinion that you did not even have a prospective borrower,
all you actually had was a lead and the activity occurring with the
consumer was in the form of an inquiry. However, we would warn you
to be very careful to ensure that this "inquiry" did not involve
information being taken from the prospective borrower by the loan
officer and obtaining a credit report. If the latter is the case,
in our opinion, this is not an inquiry with a "withdrawal from
point of contact" but application-type activity requiring
compliance with Equal Credit Opportunity Act regulations at a
3. Do you have to send adverse letters to borrowers who
do not fit your qualifications?
Yes, if it was your decision that the borrower did not qualify.
4. What is the easiest way to explain the rules to your
We are not aware of how large your company is, but we think that
the best thing for you to do is to contact a compliance expert.
Have them assist you in developing some policies and procedures,
and put on some training classes for the sales staff and the entire
company, getting everyone pointed in the right direction before
there is a major train wreck.
Nothing in this article constitutes legal advice or
represents how HUD, RESPA, Fannie Mae, Freddie Mac or any state or
federal regulatory body may actually answer your questions. The
answers to these questions are based on QC-MAC's professional
experience as one of the country's leading quality control
companies. If you have a quality control and/or compliance
question, contact QC-MAC toll free at (888) HUD-AUDIT or visit www.qcmac.com.
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