June 29: State & national law changes impacting lending; reverse occupancy fraud

Lots of people in the biz are talking about the great June they had, and, given the size of their pipelines, are looking forward to July and August funding months. Yet compliance, quality control, and rules & regulations are always on the minds of top lenders.

I received this compliance/underwriting question. “My company had a request for a non-owner-occupied loan. But the borrower had two prior purchases that were both owner-occupied, one in 2015 and the second in 2016. The 2015 property was renovated and the borrower elected to rent it out after receiving an offer. The 2016 property was occupied by the owner for a brief time but then the owner moved back to previous housing (renting a room in a rental arrangement in a group home). Both properties are rented and the mortgages are performing. As a lender, should we be concerned with occupancy misrepresentation based on the two prior cases? Would others extend credit to the borrower to purchase another investment property?”

I asked Michael Steer with MQM Research. “The issue a lender needs to look at is if it’s the ‘reverse occupancy fraud’ scenario that flew into the market place a year or so ago. We really need more information such as whether the investment income is allowing him/her to qualify. It is possible that the applicant does not need the income to qualify in which case the reverse occupancy fraud does not appear to be an issue. The lender needs to be very diligent here and eventually make a decision based on the information they acquire. I do not think there is anything wrong when you look at the issue in a vacuum but there could be an issue once you start peeling away the onion. I would definitely suggest the lender check with their investor to see what their take is and advice.

“I know some lenders do occupancy inspections after the fact once the loan closes and will call the borrower out if they do not occupy the property (if it’s an OO loan) and vice versa if they do occupy the property (if it’s a NOO loan), going so far as to calling the loan due if there’s occupancy misrep. The lender should definitely do a prefunding QC audit on this loan and potentially a post-closing QC review, along with documenting everything very closely. There are definitely some concerns on this one based on the information provided. The ultimate decision is on the lender and whatever their investor will decide, assuming they sell the loan. As always, the more information, the better.”

State law changes

In response to New Jersey’s residential foreclosure crisis, two measures were signed into law. A-4997, the “Mortgage Servicers Licensing Act,” sponsored by Assembly Democrats Yvonne Lopez (D-Middlesex), Vincent Mazzeo (D-Atlantic) and Carol Murphy (D- Burlington); requires anyone working as a mortgage servicer to obtain a license from the Commissioner of Banking and Insurance for each main office and each branch office where business is conducted, unless the person is exempt under provisions outlined in the bill.

License applicants will be required to meet specific financial, character and fitness requirements and be mandated to file information annually regarding the mortgages serviced in the state. The law also stipulates that mortgage servicers file a surety bond, fidelity bond, and evidence of coverage with the Commissioner. A mortgage servicer exempted from licensure will still be required to maintain records of each residential mortgage loan transaction and produce related records as requested.

“A major part of the foreclosure crisis has been mortgages that were serviced by individuals who were not properly trained and, in many cases, simply operated using unethical practices,” said Mazzeo. “This new law creates a checks and balances of sorts as it pertains to mortgage services.”

The law authorizes the commissioner to investigate and examine mortgage servicers and suspend, revoke, or refuse to renew a mortgage servicer license for reasons defined in the bill. Violators can be penalized with a crime of the third degree and be subject to civil penalties of up to $25,000. The law will take effect in 90 days.

The second new law, A-4998, clarifies provisions of the “New Jersey Residential Mortgage Lending Act.”  Sponsored by Assemblyman Benjie Wimberly (D-Bergen, Passaic) and Assemblywoman Patricia Egan Jones (D-Camden, Gloucester), it sets guidelines whereby out-of-state residential mortgage lenders, brokers and originators will need to be licensed as per the provisions defined in the act specifically by regulating the originator activities of mortgage companies and their individual originators.

It also establishes licensing requirements for mortgage companies and MLOs; sets the qualifications needed to obtain those licenses; lists the fees mortgage companies may charge consumers; regulates how mortgage companies may deal with consumers; gives New Jersey Department of Banking and Insurance supervisory and enforcement authority over mortgage companies and MLOs; and imposes mortgage companies various reporting requirements.

“Mortgage lenders must be held to the same standards, regardless of whether they are located in New Jersey or elsewhere,” said Wimberly. “They must be authorized to operate here, monitored and held accountable.”

In nationwide lending, the Oklahoma Mortgage Bankers posted a message from attorney Ari Karen of Offit Kurman, and founder of Strategic Compliance Partners. “The EEOC announced a court-approved deadline of September 30 for all employers of 100 or more employees to collect and report to the EEOC data on hours and wages for all job positions broken down by race, gender and ethnicity. 

“With this information, the government will be able to determine the aggregate income received by employees to ascertain if there is a basis for initiating pay bias lawsuits/complaints and investigating potential violations of equal pay laws. It is important to note that this data is not only reportable to the government. It could be sought by former employees claiming that they were paid unfairly based upon a protected characteristic. From that perspective, a proverbial Pandora’s Box may just have been opened. 

“Given the current legal environment arising out of the #MeToo movement, employers would be well advised to conduct self-audits ahead of their submissions to ascertain whether their payroll data creates a statistical basis for claiming bias in pay practices.”

Effective July 1, 2019, multiple Indiana provisions under House Bill 1447 that include its Uniform Consumer Credit Code as well as First Lien Mortgage Lending have been modified.

The amendment provides that the department of financial institutions (“department”) may not issue or renew a person’s license to engage in first lien mortgage transactions or to make consumer loans if the department of state revenue notifies the department that a person is on the most recent tax warrant list until the person provides to the department a statement from the department of state revenue that the person’s tax warrant has been satisfied; or the department receives a notice from the commissioner of the department of state revenue. Notices made by a person licensed under the UCCC must be in writing and submitted through the NMLSR or any other electronic registration system that may be approved by the director of the department of financial institution.

The amendment makes changes to the rental purchase agreement provisions by prohibiting leasing of, and rental purchase agreements involving, live domestic animals. It adds an new section defining “Initial rental payment” to mean “any up-front payment: (i) that is made by a lessee to a lessor, or to an agent acting on behalf of a lessor, for property under a rental purchase agreement; (ii) that includes a rental payment that permits the lessee’s use of the property for the initial rental period; (iii) that may be in an amount that is larger than a regular rental payment due under the rental purchase agreement; and (iv) that may include one or more of the following: (a) an amount intended to be paid toward the rental or ownership of the property that is the subject of the rental purchase agreement, (b) additional charges permitted under IC 24-7-5; (v) a security deposit.”

The amendment also defines “regular rental payment” to mean “a periodic payment in a fixed amount that permits a lessee’s use of property under a rental purchase agreement for a specific time after the initial rental period.” The lessor should furnish the lessee with the copy of the written and signed rental purchase agreement at the time of consummation of the agreement. Current law provides that a copy of the rental purchase agreement should be provided before any regular rental payment is due under the rental purchase agreement.

The amendment repeals several provisions that include: (a) rental purchase agreements provisions specifying that any up-front payment made by the lessee: (i) must be treated as an initial rental payment; (ii) is subject to the disclosure requirements under the statute; and (iii) may be in a sum larger than a regular rental payment; (b) provisions in the UCCC that provide that civil proceeding advance payment transactions (CPAP) are subject to the UCCC; (c) all provisions concerning CPAP transactions and provisions in the UCCC that define certain terms relating to CPAP transactions. It also authorizes the director to designate the NMLSR to serve as the sole entity responsible for processing applications and renewals for license; issuing unique identifiers for licensee; and performing other services that the director determines are necessary for the orderly administration of the department’s licensing system.

Florida Governor Ron DeSantis signed HB 409 on June 7. Effective January 1, it creates procedures to allow online notarization and requires registration of online notaries public.

New York AB 2667 passed the Assembly and was referred to the Senate Rules Committee on June 4. If enacted, the bill would prohibit pre-payment penalties for mortgages secured by real property owned in a cooperative form of ownership where over 50 percent of the units are shareholder occupied. Similar Senate bill SB 3346 is pending in the Senate Judiciary Committee.

New York SB 5575 passed the Senate and was referred to the Assembly Ways and Means Committee on June 5. If enacted, it would make various amendments to current law related to security breach notifications, including amending the definition of private information to include an account number, credit or debit card number, if circumstances exist wherein such number could be used to access an individual’s financial account without additional identifying information, security code, access code or password. Similar Assembly bill AB 5635 passed the Assembly Ways and Means Committee on June 5.

New York AB 8024 passed the Assembly Governmental Operations Committee and was referred to the Assembly Rules Committee on June 4. If enacted, the bill would clarify employee requirements for appraisal management companies. AB 8024 is sponsored by Asm. Kenneth Zebrowski, who chairs the Assembly Banks Committee.

Texas Governor Greg Abbott signed SB 37 on June 7. Effective immediately, it amends law to prohibit student loan default or breach of student loan repayment or scholarship contract as a ground for nonrenewal or other disciplinary action in relation to residential mortgage loan originator licensing.

(Recently this commentary posted quotes about dogs. Thank you to Colorado’s Cindy L. for suggesting that cats needed equal time.)

“Meow” means “woof” in cat.”

George Carlin

“Women and cats will do as they please, and men and dogs should relax and get used to the idea.”

Robert A. Heinlein

“Owners of dogs will have noticed that, if you provide them with food and water and shelter and affection, they will think you are god. Whereas owners of cats are compelled to realize that, if you provide them with food and water and shelter and affection, they draw the conclusion that they are gods.”

Christopher Hitchens, The Portable Atheist: Essential Readings for the Nonbeliever

“Cats are connoisseurs of comfort.”

James Herriot, James Herriot’s Cat Stories

“If animals could speak, the dog would be a blundering outspoken fellow; but the cat would have the rare grace of never saying a word too much.”

Mark Twain

“A cat has absolute emotional honesty: human beings, for one reason or another, may hide their feelings, but a cat does not.”

Ernest Hemingway

“The smallest feline is a masterpiece.”

Leonardo da Vinci

“Time spent with a cat is never wasted.”


“A lie is like a cat: You need to stop it before it gets out the door or it’s really hard to catch.”

Charles M. Blow (columnist)

“It is very inconvenient habit of kittens (Alice had once made the remark) that, whatever you say to them they always purr.”

Lewis Carroll (author, Alice’s Adventures in Wonderland)

“Cats choose us; we don’t own them.”

Kristin Cast (author, House of Night series)

“Way down deep, we’re all motivated by the same urges. Cats have the courage to live by them.”

Jim Davis (cartoonist, Garfield)

“How we behave toward cats here below determines our status in heaven.”

Robert A. Heinlein (author, Red Planet)

“A cat can be trusted to purr when she is pleased, which is more than can be said for human beings.”

William Ralph Inge (author, Outspoken Essays)

“Cats have it all — admiration, an endless sleep, and company only when they want it.”

Rod McKuen (poet, Stanyan Street & Other Sorrows)

“You cannot look at a sleeping cat and feel tense.”

Jane Pauley (journalist, The Today Show)

“If a dog jumps into your lap it is because he is fond of you; but if a cat does the same thing it is because your lap is warmer.”

A.N. Whitehead (mathematician and philosopher)

“The phrase ‘domestic cat’ is an oxymoron.”

George Will (columnist)

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Rob Chrisman