Mar. 5: Can a Realtor own a lender? TRID costs & title companies; cybersecurity – what regulators expect, and a CFPB penalty

How about this note from an LO: “Rob, do you think that $1,000 is too much to pay a Realtor for a referral fee?” Who says there’s no humor in mortgage banking!


And who says there’s no humor in information technology? David T. sent, “Q: Which program do Jedi use to open PDF files? A: Adobe Wan Kenobi.”


Things become pretty dicey after that, however. Ever heard of “swatting”? It is an IRS scam call, where someone pretends to be collecting back taxes and penalties, which results in “swatting.” Last month in Colorado Springs an incident occurred that was initiated by IRS scammers. After the target of the scam wouldn’t comply with their demand to pay their debts to the “IRS”, the scammers placed a 911 call that caused a SWAT team to be deployed to the targets residence and a nearby school to go on lockdown.


How about a couple new terms to add to your vocabulary? An “exploit kit” is a tool that cyber criminals use to exploit the vulnerabilities in your system and infect it with malware. It is basically a piece of code which is created to be used for malicious purposes. These kits are available for purchase on the dark net and are typically licensed and supported like regular commercially available software.


And a “dark net” is an overlay network that can only be accessed with specific software, configurations, or authorization, often using non-standard communications protocols and ports. Dark nets are typically used in the trade of illegal goods and services.


The Securities and Exchange Commission and the Commodity Futures Trading Commission are increasing their focus on cybersecurity with a push for increased risk assessment and penetration testing. The addition of state regulations is muddying the compliance landscape.


At yet another government entity, the Federal Trade Commission has published a document many consider to be a treasure map to the FTC’s secret vault of security expectations.


But is senior management listening? Here’s an article from Legaltech news: Cybersecurity: A Learning Gap in the C-Suite?


USAA indicates it has 1.3mm members actively enrolled in and using biometric authentication. Of this group, 88% are using fingerprint recognition, 7% are using facial recognition, and a smaller percentage is using voice. USAA also sees a time coming soon when people will not need passwords or user IDs.


A Ponemon Institute report analyzing the activity of hackers finds: the average hacker will spend 70 hours per attack to breach a typical IT security infrastructure, 147 hours to break into an excellent one and will give up completely after 209 hours (8.7 days).


The FDIC says it expects banks to make cybersecurity awareness training available not only to bank personnel, but also contractors, customers, merchants, and other third parties (since they all represent additional access points to a bank’s data systems). Industry groups praised President Barack Obama’s cybersecurity plan while raising concerns about other measures in the budget proposal.


Dwolla fined $100,000 for misrepresenting its data-security practices. This is the first time that the CFPB, which was created by the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, has intruded on the domain of the FTC and fined a company for data-security reasons.


While many of us are looking back on the trials and tribulations of 2015, Jonathan Foxx is looking ahead at 2016. In his new article, Jonathan escorts us away from Memory Lane and discusses some potential case law and regulatory changes to look for in the coming year. He discusses cases such as the PHH litigation as well as new regulatory requirements for cybersecurity and anti-money laundering. If you want to take a peek into the near future, you might want to download Jonathan’s article here.


Switching topics, I received this note. “A realtor I know wants to have ownership in a mortgage company for obvious reasons. All the biz for the mortgage company will be coming from his real estate office. He would have his wife be the non-producing branch manager of the mortgage company and they would have two loan officers. In Albuquerque there is currently Legacy Mortgage which the Qualifying Broker for Coldwell Banker is an owner of the mortgage company. I’m sure they have it set up in different LLCs or other entities but is this structure okay per RESPA? The mortgage company is located in the same building as the real estate office. In my opinion if this was acceptable everyone would be doing it and it seems they are just asking for trouble.”


I asked Steve Lovejoy with Shumaker Williams who answered with, “The question is whether an active real estate agent can legally have an ownership interest in a mortgage origination company. The initial question asks about RESPA, but there are other laws potentially impacting the situation. RESPA certainly does not prohibit anyone from having a legitimate ownership interest in a company that offers ‘settlement services’ (including a mortgage origination company) regardless of the owner’s outside occupation or status. In fact, the statutory ‘affiliated business arrangement’ (‘AfBA’) exception to the RESPA prohibition against payment or receipt of referral fees specifically authorizes a person to receive a return on his or her ownership share notwithstanding any referral arrangement between the owner and the company. The owner cannot receive anything in exchange for any referrals to the company, except the return on his or her ownership interest. Putting together a compliant AfBA can be tricky, so don’t try it without consulting competent regulatory counsel.  


“There are, however, some other laws that have an impact on this scenario.  If the mortgage company offers FHA loans, there is a general prohibition against conflicts of interest in the FHA regulations that takes the form of prohibiting an FHA-approved mortgagee from paying anything to a person who receives any separate remuneration from a party to the same transaction – see 24 C.F.R. § 202.5(l). This could be interpreted as prohibiting a real estate agent from receiving both a commission and a return on ownership in the mortgage company, where the Mortgage company makes a loan to the real estate agent’s customer. The conflict arises because the real estate agent has an interest in getting the mortgage approved that could influence underwriting. 


“The new HUD Single Family Housing Policy Handbook 4000.1 (effective 9-14-15) talks less about conflicts involving ownership than conflicts arising from employee status. Prior to issuance of the new Handbook, there was a blanket prohibition against employees of FHA-approved mortgagees simultaneously working for other mortgage-related companies.  However the new Handbook has significantly pulled back from that prior position. The new provisions read:


‘(iv) Dual Employment

The Mortgagee must require its employees to be its employees exclusively, unless the Mortgagee has determined that the employee’s other outside employment, including any self-employment, does not create a prohibited conflict of interest.’


‘(v) Conflicts of Interest

Employees are prohibited from having multiple roles in a single FHA insured transaction. Employees are prohibited from having multiple sources of compensation, either directly or indirectly, from a single FHA insured transaction.’


“This means that now a person can be employed as a real estate agent and also be employed by a FHA-approved mortgagee so long as they do not involve themselves wearing both ‘hats’ in individual transactions. The question presupposes that you would refer home buyers to the mortgage company in which you have an ownership interest, thereby receiving both a real estate commission and a return on your ownership of the mortgage company, derived from the same transactions. Because of this, I believe the relationship would be deemed by HUD to create a conflict of interest. Moreover, I don’t see any way of segregating the FHA transactions such that your ownership return selectively excludes profits from FHA transactions. 


“In sum, an active real estate agent can have an ownership interest in a mortgage company, but not if that company offers FHA loans and the real estate agent intends to refer buyers, who may decide to obtain an FHA-insured loan, to the mortgage company. 


“There may also be some state law restrictions on ‘double dip’ compensation in a single transaction. One should check the state laws governing real estate agencies and mortgage lending/brokering.” Thank you Steve!


“Rob, I am curious if you have heard varying interpretations of the requirement of a licensed LO to only be conducting licensable activity at a physically licensed location. Case in point….if a properly licensed LO visits with a borrower at their home. Can the LO take the 1003 at the borrower’s place of residence? Or at the local Starbucks? Or do they have to take the 1003 from their licensed office? Thoughts?”


I am not an attorney or an NMLS expert, but yes, branch licensing requirements can get tricky under some state laws and not uniform in every state. They can even be interpreted differently even within the state by different examiners. It is a very fact specific inquiry applying the regulations of that state to the facts at hand. FHA also has very specific requirements for mortgage company offices. Ask your company’s attorney.


TRID costs got you down? Andrew Liput from Secure Insight writes, “Secure Insight conducted a survey of 9,560 escrow and settlement agents nationwide from 2/29 through 3/2 regarding the impact of TRID and the new Closing Disclosure on the settlement industry. The responses reflect that the overwhelming majority of agents nationwide were prepared for TRID and have trained offices to support the completion and delivery of the new Closing Disclosure (97%),  this level of confidence and preparedness came about with less lender collaboration than was expected as 63% of the respondents indicated they had little or no training conducted by or with their lender clients, instead conducting their own meetings and training programs leading up to the Closing Disclosure launch date. Almost 83% of agents polled spent a few months conducting their own staff training to ensure that they could support lenders in the TRID requirement for earlier notification of closing costs. Now that TRID is here and the new Closing Disclosure is being used, the reaction is very mixed. Survey respondents rated the impact of the new Closing Disclosure on business operations as ‘Negative’ or ‘Very Negative,’ fueled mainly by increased operational costs. More than 75% indicated that the new Closing Disclosure requirements have increased their costs of doing business, with 40% stating the cost increase was ‘significant.’ As to the new form’s impact on consumers, from the agents’ point of view it has not been as positive as perhaps the CFPB had hoped. Nearly 60% of those polled feel that the new disclosure has not helped with efficiency and transparency, and that the impact has generally been ‘Negative.’ Only 9% have seen the new form as a positive for the consumer experience, while the balance feel the ‘jury is still out.’ This poll is one of a series of industry polls conducted by Secure Insight throughout the year to gain the pulse of the industry on issues important to escrow and closing services regarding compliance and overall risk management.”



Jack decided to go skiing with his buddy, Bob.

So they loaded up Jack’s minivan and headed north. Towards Canada!

After driving for a few hours, they got caught in a terrible blizzard.

They pulled into a nearby farm and asked the attractive lady who answered the door if they could spend the night.

“I realize its terrible weather out there and I have this huge house all to myself, but I’m recently widowed,” she explained. “I’m afraid the neighbors will talk if I let you stay in my house.”

“Don’t worry,” Jack assured her. “We’ll be happy to sleep in the barn, and if the weather breaks, we’ll be gone at first light.” The lady agreed, and the two men found their way to the barn and settled in for the night. 

Come morning, the weather had cleared, and they got on their way.

They enjoyed a great weekend of skiing.

But about nine months later, Jack got an unexpected letter from an attorney.

It took him a few minutes to figure it out, but he finally determined that it was from the attorney of that attractive widow he had met on the ski weekend.

He dropped in on his friend Bob and asked, “Bob, do you remember that good-looking widow from the farm we stayed at on our ski holiday up north about 9 months ago?”

“Yes, I do,” answered Bob.

“Did you, uh, happen to get up in the middle of the night, go up to the house and pay her a visit?”

“Well, um, yes! Bob replied, a little embarrassed about being found out, “I have to admit that I did.”

“And did you happen to give her my name instead of telling her your name?”

Bob’s face turned beet red and he said, “Yeah, look, I’m sorry, buddy, I’m afraid I did. Why do you ask?”

“She just died and left me everything.”


(And you thought the ending would be different, didn’t you?)



If you’re interested, visit my twice-a-month blog at the STRATMOR Group web site. The current blog is, “The Fed’s QE: Help or Hindrance to Lending?” If you have both the time and inclination, make a comment on what I have written, or on other comments so that folks can learn what’s going on out there from the other readers.



(Market data provided in partnership with MBS Live. For free job postings and to view candidate resumes visit LenderNews. Currently there are over 300 mortgage professionals looking for operations, secondary and management roles. For up-to-date mortgage news visit Mortgage News Daily. For archived commentaries, or to subscribe, go to Copyright 2016 Chrisman LLC. All rights reserved. Occasional paid job listings do appear. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Rob Chrisman.)



Rob Chrisman