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HUD reports 3Q homeownership

National Mortgage Professional
Aug 24, 2005

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
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