PURSUANT TO THE PROVISIONS OF THE State Administrative Procedure Act, NOTICE is hereby given of the following action:
Action taken:
Amendment of Parts 38, 410 and 413 and Supervisory Procedure MB 106 of Title 3 NYCRR.
Statutory authority:
Banking Law, sections 14(1), 6-I and 590(3)
Subject:
Mortgage loan regulations.
Purpose:
To make various amendments to mortgage loan regulations.
Substance of final rule:
Section 38.1 – New definitions of net branch, branch manager, branch and application will be added and the definitions of loan solicitation branch and full service branch will be deleted. Additionally, most of the definitions will be re-lettered.
Section 38.3 – The amendment will require a statement to be added to the introductory paragraph of an application which will alert the borrower to the gravity of falsifying any information that they put on their application.
Section 38.3(a)(vii) – The amendment will clarify the disclosure requirements of mortgage brokers in connection with compensation to be received from lenders and borrowers. It specifically will require that fees and points, paid by lenders and borrowers, be disclosed separately and as an aggregate.
Section 38.3(b)(1) – A new section will be added to Part 38. It will require that a statement regarding the charging of discount points by the lender be added to the application. The statement will point out to the borrower that (i) discount points may lower the interest rate paid on the loan but may not lower the overall cost of the loan; (ii) if the borrower refinances or pays off the loan quickly, they will lose the benefit of any lower interest rate provided by the discount points; and (iii) if the borrower finances the discount points, this will increase the amount of money that they must repay to the lender and they will have to pay interest on the discount points as part of the amount they borrowed.
Section 38.7 – A new section will be added to the list of Prohibited Conduct outlined in Part 38.7. This will prohibit a mortgage banker, mortgage broker or exempt organization from engaging any employee or independent contractor who has an employment relationship with any other mortgage banker, mortgage broker or exempt organization, except with the written approval of the superintendent.
Section 38.11 – This section will be amended to address employees working from their homes and net branching. It will explicitly prohibit the establishment of a net branch and it specifically state that, if an employee, independent contractor, or consultant works from a place other than a defined branch, that person must be assigned to a specific branch location for purposes of managerial and regulatory oversight.
Part 410.6 – The amendment will eliminate the reference to "full service branch" and "loan solicitation branch" and replace these references with a single reference to "branch".
Part 413.3(a)(5) and MB 106 – The amendments will clarify the corporate surety bond requirements for mortgage brokers to act as FHA Mortgage Loan Correspondents.
Final rule as compared with last published rule:
Nonsubstantial changes were made in section 38.7(a)(16).
Text of rule and any required statements and analyses may be obtained from:
Sam L. Abram, Esq., State of New York Banking Department, 1 State Street, New York, New York, (212) 709-1658, email: sam.abram@banking.state.ny.us
Revised Regulatory Impact Statement
1. Statutory authority:
Banking Law section 14(1) authorizes the Banking Board to adopt regulations not inconsistent with the law. Section 6-i of the Banking Law specifically states that no banking organization, partnership, corporation, exempt organization or other entity (hereafter "lender") can make a mortgage loan in New York State unless those entities conform to Banking Law requirements pertaining to mortgage bankers (Article 12-D of the Banking Law) and rules and regulations promulgated by the Banking Board or prescribed by the Superintendent. Banking Law Section 590(3) authorizes and empowers the Banking Board to promulgate regulations that are consistent with the purposes of Article 12-D, which include such rules and regulations in connection with the activities of mortgage brokers, mortgage bankers and exempt organizations as may be necessary and appropriate for the protection of consumers and such rules and regulations as may define the terms used in, as may be necessary and appropriate to interpret and implement the provisions of Article 12.
2. Legislative objectives:
The Legislature enacted Banking Law Article 12-D because it found that it is essential for the protection of the citizens of New York State and the stability of the state's economy that reasonable standards governing the business practices of mortgage lenders and brokers be imposed. The Legislature further found that the obligations of lenders and brokers to consumers in connection with making, soliciting, processing, placing or negotiating of mortgage loans are such as to warrant the uniform regulation of the residential mortgage lending process. Consistent with the purposes of promoting mortgage lending for the benefit of citizens by responsible providers of mortgage loans and services and avoiding requirements inconsistent with legitimate and responsible business practices in the mortgage lending industry, the purpose of Article 12-D is to protect New York consumers seeking a residential mortgage loan and to ensure that the mortgage lending industry is operating fairly, honestly and efficiently, free from deceptive and anti-competitive practices.
In furtherance of this mandate, Part 38 was promulgated to provide definitions of terms used in the mortgage banking industry; advertising guidelines; rules regarding application and commitment disclosures and procedures; and prohibitions on improper conduct.
3. Needs and Benefits:
Definitions of Branch
Currently, New York State is the only state in the country to have two types of branches for the mortgage banking and mortgage brokerage industries, a full service branch and a loan solicitation branch. All other states have only a single type of branch defined in their laws or regulations. Since January of 2002, New York has been a participant in the Nationwide Mortgage Licensing System ("NMLS"). This system, developed by the Conference of State Banking Supervisors ("CSBS"), the American Association of Residential Mortgage Regulators ("AARMR") and the Financial Industry Regulatory Authority ("FINRA"), streamlines the licensing process by utilizing uniform application forms that can be electronically submitted to participating state regulators. The applications include ones to become a mortgage banker or mortgage broker, to become a mortgage loan originator or to open a branch. The NMLS system uses only a single definition of branch. Additionally, in 2006, the Department's entire fee structure was changed by the enactment of Banking Law section 18-a. This new law set a single fee for an application to open a branch office. The elimination of the two types of branches listed in the regulation will make the regulation consistent with the Banking Law section 18-a. Furthermore, having a single definition will reduce the regulatory burden associated with manual applications for branch types that could not be processed through the NMLS.
Finally, over the past several years, the Department also met with various members and representatives of the mortgage industry a number of times regarding the amendment of the definitions of branch. The industry has recognized that because of technological advances that have taken place over the years, there needs to be changes in how a branch is defined and there needs to be clarification as to when a branch license will be required.
Section 38.11 (Requirements for full service, loan solicitation branches) needs to be amended to reflect the aforementioned sole definition of a branch as amended in Part 38.1. Part 410.5 (Branch applications; investigation fees) will be amended to reflect the elimination of the distinction between full service and loan solicitation branches.
Net Branching Prohibition
The Department has had a long-standing policy of disallowing any form of what it has termed "net branching" for mortgage bankers or mortgage brokers. This long-standing policy, which has previously been conveyed to the residential mortgage industry primarily by means of an Industry Letter, seeks to deter situations where an employee of a licensee or registrant, acting as a branch manager, operates and exercises control over his or her own branch office without being licensed or registered by the Department. In such instances, the individual or entity approved by the Department to make or broker mortgage loans is not the individual or entity that is actually performing such activities. Rather, an unknown, unapproved individual or entity is performing them outside of the regulatory construct created by Article 12-D. Since the prohibition has been conveyed primarily by means of an Industry Letter, there is a need to codify and update the Department's definition of and position regarding a "net branch" so that it may be clear to the industry what actions may be construed as net branching and therefore prohibited by the Department. Therefore, a definition of "net branch" will be added to Section 38.1.
Definition of Application
Part 38 does not currently contain a definition of "application." Yet this is a term that is used constantly within the mortgage lending industry. Furthermore, the amount of the bond that mortgage brokers are required to have after July 1, 2004 is predicated on the number of New York applications. In order to provide a definition without causing undue confusion in the industry, the Department has decided to utilize the definition of "application" set forth in Regulation B of the Federal Reserve System since it is a definition that is familiar to all mortgage brokers and mortgage bankers. Therefore, a definition of "application will be added to Section 38.1.
Disclosure of Points and Fees
Part 38.3(a)(vii) will be amended solely to clarify the disclosure requirements of mortgage brokers in connection with compensation to be received from lenders and borrowers. Currently, the language in Part 38.3(a)(vii) seems to cause some confusion among mortgage brokers: Should fees and points, paid by lenders and borrowers, be disclosed as an aggregate, or should they be disclosed separately? The proposed amendment would clarify this matter and require that fees and points, paid by lenders and borrowers, be disclosed separately, and as an aggregate.
Dual Employment Prohibition
Part 38.7 will be clarified by adding a specific prohibition against a mortgage banker, mortgage broker or exempt organization engaging any employee who has an employment relationship with any other mortgage banker, mortgage broker or exempt organization. This long-standing prohibition is based on the definition of "employee". Adding this prohibition to the list set forth in Part 38.7 should provide clarity to bankers and brokers as well as eliminate any conflicts of interests that could arise which could negatively affect and harm consumers. However, to address concerns expressed in comments received by the Department, the Department will add the underlined language to the proposed amendment to Part 38.7: "enter into an employment agreement or otherwise engage any employee or independent contractor who has an employment or independent contractor relationship with any other mortgage banker, mortgage broker or exempt organization, except with the written approval of the superintendent." This addition will give the Department the authority to approve certain dual-employment situations where it is determined that conflict-of-interest issues do not exist and therefore a high level of risk is not present.
Discount Points Disclosure
The Department has found in several examinations that discount points are not clearly explained to or understood by consumers who are charged such points. Accordingly, an addition to the subdivision of Part 38.3(b)(1) concerning application disclosures of mortgage bankers and exempt organizations will require that the mortgage banker or exempt organization alert consumers in writing of the consequences of lenders charging discount points. This will be accomplished by providing a new required disclosure in those instances in which such points are charged. This will benefit consumers by highlighting these consequences.
Corporate Surety Bond Requirements
Part 413.3 (Minimum standards required for approval to act as a Federal Housing Administration mortgage loan correspondent) and Supervisory Procedure MB 106.3(i) (Application to act as a FHA Mortgage Loan Correspondent) will be amended to clarify the already existing corporate surety bond requirements stated in Part 410.3 (Mortgage broker registration; minimum standards).
4. Costs:
In the case of the revised application disclosure, minimal increased costs are warranted in order to allow the Banking Department to ensure that consumers understand the costs of the mortgage loan that they are obtaining.
5. Local government mandates:
The amendments to Parts 38, 410 and 413 and Supervisory Procedure MB 106 do not impose any requirements or burdens upon any units of local government.
6. Paperwork:
The amendments to Parts 38, 410 and 413 and Supervisory Procedure MB 106 do not impose any additional paperwork requirements. However, the amendments to 38.3(b)(1) regarding the new disclosure concerning discount points and fees will result in minimal paperwork.
7. Duplication:
None.
8. Alternatives:
During the past few years, the Department has had numerous meetings with various members and representatives of the mortgage industry regarding the definition amendments and the disclosures issues concerning discount points. During these meetings, various alternative forms of definitions were discussed and the now-proposed definitions were finally settled upon among all parties. In January of 2006, the Banking Department, along with banking regulators and law enforcement officials from 48 states and the District Columbia entered into a settlement agreement with Ameriquest Mortgage Company, a subprime lender. This settlement agreement was predicated on the issue of easing consumer confusion regarding discount points. After discussions with the industry, it was decided that the best way to accomplish this goal would be to include an explanatory statement about the discount points in the required application disclosures given to customers.
In the past year, the Department had anticipated that enactment of the New York's Subprime Lending Reform Law and S.A.F.E. Mortgage Licensing Act of 2008 would lead to revisions of the Department's regulations relating to residential mortgages, and it was contemplated that action on the subject regulatory amendments would be included in that process. However, while the broader revision of the Department's mortgage regulations is proceeding, there is a desire to more forward on the subject regulatory changes without further delay given that these amendments are necessary to codify various positions taken by the Department over the years.
9. Federal standards:
None.
10. Compliance schedule:
With regard to the amendments to the disclosure statements, compliance should be within 90 days of the effective date.
Revised Regulatory Flexibility Analysis
The amendments as proposed would have prohibited a mortgage banker, mortgage broker or exempt organization from engaging an employee or independent contractor who has a similar relationship with another such organization (a "dual employer").
As a result of comments received, the proposed prohibition on dual employment has been changed to allow dual employment with the written approval of the Superintendent of Banks. A revised Regulatory Flexibility Analysis is not required because this change, by it nature, will not impose any adverse economic impact or reporting, recordkeeping or other compliance requirements on small businesses or local governments.
Revised Rural Area Flexibility Analysis
The amendments as proposed would have prohibited a mortgage banker, mortgage broker or exempt organization from engaging an employee or independent contractor who has a similar relationship with another such organization (a "dual employer").
As a result of comments received, the proposed prohibition on dual employment has been changed to allow dual employment with the written approval of the Superintendent of Banks. A revised Rural Area Flexibility Analysis is not required because this change, by it nature, will not impose any adverse impact or reporting, recordkeeping or other compliance requirements on public or private entities in rural areas.
Revised Job Impact Statement
The amendments as proposed would have prohibited a mortgage banker, mortgage broker or exempt organization from engaging an employee or independent contractor who has a similar relationship with another such organization (a "dual employer").
As a result of comments received, the proposed prohibition on dual employment has been changed to allow dual employment with the written approval of the Superintendent of Banks. A revised Job Impact Statement is not required because this change, by it nature, will not impose a substantial impact on jobs and employment opportunities.
Assessment of Public Comment
The comment period with respect to the proposal ended on June 20, 2009. The Banking Department received two comments on the proposal, one from an industry association and one from a law firm. The comments will be addressed in the order of the sections of Part 38.
The Department proposed to amend Part 38.1(b) to conform the definition of "application" to the federal definition. One commenter felt that the proposed definition of "application" should be further amended to include language which states that any obligation to issue any disclosures in connection with the taking or acceptance of an "application" shall be based on the acceptance of a "completed application" as that term is defined in Regulation B 202.2(f). After a careful consideration of this comment, the Department has decided not to change this part of the proposal. The Department believes that the result of acceding to the commenter's request would be to effectively eliminate a number of disclosure requirements designed to aid borrowers in making a decision about whether to move forward with a particular lender or broker.
The purpose of incorporating the federal definition in the amendment was to promote consistency in giving consumers pre-application disclosures pertaining to appraisal fees, application fees, credit report fees as well as broker fee arrangements. These disclosures would identify the overall costs to the applicant of making an application. The Department believes that changing the language to provide that the obligation to issue disclosures would attach only at the point at which an application is considered complete would serve to increase costs to the consumer, remove transparency from the credit shopping process and defer disclosure of fees to a stage when the consumer has already invested a considerable amount of time and financial resources in the transaction.
A second comment related to the proposed definition of "branch" in Part 38.1(e). The commenter suggested that the language be changed to state that a branch should be any "physical" location at which loan solicitation and/or loan processing takes place "as the primary activities of that physical location", irrespective of whether the only contact with an applicant from that location is by internet, telephone, facsimile or other electronic process. The commenter further suggested that the following additional exclusion from the definition of "branch" be added: "ii) the temporary location where the employee, independent contractor or consultant makes or accepts a telephonic and or electronic communication in connection with loan solicitation and/or loan processing." This commenter expressed concern that absent such an exclusion the proposed amended definition might capture a location, such as a restaurant or employee residence, where an employee might occasionally place a business call relating to loan solicitation and/or loan processing.
After a careful consideration of this comment, the Department has decided not to make any changes to the proposed amendment to Part 38.1(e) or to add the suggested language. While the Department appreciates the commenter's concern, it believes that the level of activity with respect to loan solicitation and/or loan processing would determine if a location would be considered a branch or not. The proposed language should not be read to imply that an insolated, casual instance of making a telephone call at a location regarding solicitation or processing would rise to the level of activity requiring a branch license for that location. Furthermore, this amendment would only apply to mortgage bankers and mortgage brokers licensed and registered under Article 12-D of the Banking Law and not exempt organizations. The Department intends to issue an interpretive industry letter on this subject to provide further clarification.
The next comment concerns the amendment to Part 38.3 which would require the addition of the following statement to a written application, "It is a crime to intentionally falsify information on this application." One commenter pointed out that this would largely duplicate the language set forth in the Federal National Mortgage Association's ("Fannie Mae") (1003) mortgage application and the Federal Home Loan Mortgage Corporation's ("Freddie Mac") application form 65. In that commenter's opinion, the regulation should not prescribe specific language, but instead should permit lenders to make the substance of the disclosure in any reasonable manner. The commenter believes that banks should have the option of providing this disclosure on or with the application in the form of a separate document. Additionally, the commenter expressed concern regarding the expense of reprinting of applications forms for some entities.
The Department has carefully considered this comment. Rather than changing the language of the proposal, it will provide certain clarifications in an interpretive industry letter. The Department is sensitive to the concerns expressed by the commenter regarding duplicative language when a lender is making a loan in which it is also using Fannie Mae/Freddie Mac loan documents and will address this situation in the forthcoming interpretive industry letter. For lenders that are private investors or lenders that hold loans for their own books and do not use Fannie Mae/Freddie Mac loan documents, the Department believes that the cautionary language in the proposed amendment should be a part of the application document.
Both commenters had concerns about the proposed amendment to Part 38.7 which adds "dual employment" to the list of prohibited conduct by mortgage bankers, mortgage brokers and exempt organizations.
The law firm's comment specifically concerned a situation where two affiliated businesses under common control have a high level officer of one also serving as a high ranking officer of the other. For example, the president of a mortgage bank also serving as an officer of an affiliated securities broker-dealer that is registered as a mortgage broker because its employees solicit mortgage loan business from its securities clients on behalf of the mortgage bank. The commenter believes that the proposed amendment will prohibit this arrangement, which it believes occurs with some regularity in the mortgage loan business.
The Department has considered this comment and does not plan to change its proposal in response thereto. One of the reasons why the Department proposed this amendment was to formalize its prohibitions against situations where an individual, especially a higher-level officer, serves as the "qualifier" under Article 12-D of the Banking Law for both commonly-controlled institutions. A qualifier is an individual in an entity who possesses the required amount of experience in mortgage origination and underwriting in order for that entity to be licensed or registered as a mortgage banker or mortgage broker. In the past, the Department has found that situations where two mortgage entities under common control, having one higher-level individual qualifying for both entities, lead to management decisions which negatively impacted pricing in both entities and availability of mortgage products. The entities in the previously described situation were providing similar products and serving the same demographic, for example, two subprime mortgage banks. As a result, while there was an illusion of competition in the market between the entities commonly controlled, in reality, competition was non-existent between the two and thus consumers were negatively impacted.
The industry association's comment states that it believes the language of the proposed amendment is too broad and will prevent the mortgage industry from engaging the services of third parties to perform functions such as quality control, post closing and underwriting that could not be performed by the engaging entity. The commenter further states that the language, in addition to its intended objectives, will prohibit multi-bank holding companies from employing valid strategies to reduce costs and utilize their best talent across the organization. The commenter believes that the language may prevent exempt institutions from sharing senior leadership as well as compliance, audit, and other administrative employees, not only for mortgage products, but also potentially for deposit products, unsecured consumer loans, and commercial leases, for example.
The Department believes that these concerns stem from a misapprehension regarding the scope of the prohibition on dual employment in the proposal. New Part 38.7(a)(16) covers employment or independent contractor relationships with more than one mortgage banker, mortgage broker or exempt organization. As defined in Part 410.7(a) of the Department's regulations, an "independent contractor" is an individual engaged in regulated mortgage banking or mortgage brokering activities. A "consultant" is separately defined, and that definition specifically excludes, among other things, a lawyer, accountant, real estate agent or other licensed professional acting his or her professional capacity, as well as excluding any "independent contractor" that does not provide mortgage related services.
However, to address the concerns expressed in these comments, to the extent that they may have validity, the Department will add the underlined language to the proposed amendment to Part 38.7: "enter into an employment agreement or otherwise engage any employee or independent contractor who has an employment or independent contractor relationship with any other mortgage banker, mortgage broker or exempt organization, except with the written approval of the superintendent." This addition will serve to give the Department the authority to approve certain dual-employment situations where it is determined that conflict-of-interest issues do not exist and therefore a high level of risk is not present.
