Dear QC-MACQC-MACAdvice,Loan Closing
Dear QC-MAC:
After many years of being a top producer for one of the major
commercial banks in the country, I recently changed employment to
one of the mortgage companies that you often hear advertising on
radio and television about how fast they can close a refinance loan
at little or no cost. I was intrigued and thought I could earn more
money if I only had to answer the phone to both originate and close
my deals. Although I am making plenty of money here, the way that
my current company handles the three-day rescission notice on refis
makes me a little nervous, because of my experience at the bank on
similar types of deals. The bank would not allow a refinance loan
to close until after the loan was approved and the borrower was
given the three-day rescission Notice of Right to Cancel. The
company that I am presently working for has all of the closing
documents, including the three-day rescission Notice of Right to
Cancel, signed, along with the upfront disclosures. By the time the
loan is underwritten and approved, the three-day rescission period
has passed; therefore, the loan can be funded and closed
immediately. If the underwriter declines the loan, we just destroy
the signed documents and move on to the next borrower. We are using
what is called an “accommodation rider” that explains
to the borrowers how all of this signing upfront works. Because I
left the commercial banking business and moved to the mortgage
banking business, this seems a little strange to me. Am I, or the
company, leaving ourselves open for a possible problem down the
road?
-Judy L., Irvine, Calif.
Dear Judy:
Wow, what a question! It appears that your tenure with the bank
was profitable and instructive. While we offer our professional
opinion on this subject, based upon our experience within the
industry, we suggest that you obtain a legal opinion on this
matter. First of all, we think that any liability in this matter
would be the responsibility of the lender. Second, we question
whether the three-day rescission period was in fact ever given,
based upon the scenario you described. Specifically, it is not
clear that, at the time the borrowers signed the three-day
rescission notice, there had been a “consummation” of
the transaction. This is because at this point, it appears that
only one party to the transaction had signed off on the loan: the
borrower. Up until this time, the lender had not yet committed on
the loan, since the loan had not been approved, even though the
borrower had signed the three-day rescission notice. In these
circumstances, it seems unlikely to us that, at the time the
borrowers signed the notice, the lender could definitively state
that it had consummation of the transaction. We believe that you
need both parties committed to the transaction before you can give
a borrower an opportunity to rescind the loan. Admittedly, our
position may be a bit conservative. So, if this issue continues to
bother you, we suggest that you discuss your concerns with senior
management of your current employer.
Dear QC-MAC:
I had an interesting situation come up in my last loan closing.
I am not sure if I handled it correctly or if it is something that
I would ever do again. Just as the loan was about to close, the
seller called and asked if I could meet with him about a problem. I
assumed that he was going to tell me about a title problem that he
had encountered, and he wasn't going to be able to close the loan.
However, when we met, he told me that his uncle had passed away and
he needed to borrow some emergency cash. He said he would repay the
emergency cash from his proceeds due at the close of the sale. To
hold the loan together, I agreed to loan him the money. The loan
closed, I was reimbursed from the seller's proceeds, and everyone
lived happy ever after ... until the loan file was audited and my
name showed up on the HUD-1 as receiving a lump sum of money for a
loan to the seller and that I was also the loan originator. The
auditors said it didn't look right, and I had to do a good amount
of explaining to prove that I did not do anything wrong. Please
help me to understand why what I did was wrong.
-Kenny J., Atlanta
Dear Kenny:
We think that this situation raises several potential issues
that could be a problem. Most significant is that since you
originated the loan, being paid a sum of money from the seller's
proceeds could raise a RESPA issue, since there is a potential
conflict of interest that you may have as the loan officer in the
transaction. The primary question is, why would the seller pay you
funds when your role in the transaction was as the loan originator
acting on behalf of the borrower/purchaser of the seller's
property? Receiving funds from the seller suggests, on the surface,
a possible impropriety.
Some additional issues that this situation raises are:
1. Typically, in closing a loan transaction, the lender is
limited to the contributions for closing cost and/or prepaids.
2. You made a loan to someone, and you handled it in a
semi-professional and commercial lending format by being repaid
from the seller's proceeds. One of the things that comes to the
attention of your auditor is whether you are properly licensed to
make personal or business loans.
3. Assuming that you are licensed to make personal or business
loans, was the loan handled properly with all of the correct
disclosures, etc.?
While your actions were motivated by an effort to save the loan,
we strongly urge you to avoid a future recurrence of this problem.
In short, you should avoid making personal or business loans
through a loan transaction in which you are involved. You might
refer the requestor of the funds to another resource (such as a
payroll advance or title loan company) or, if you handle the loan
yourself, ensure that it is done in a professional and legal
manner, with the proper licenses for making such loans.
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 countrys 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.
