What Your Attorney Didn’t Tell You: Consumer Laws that Apply to Business Purpose Loans

Kat Hungerford:

I'd like to welcome everyone to our webinar today hosted by AAPL and Geraci Law Firm. Today we have presenting Melissa and Nema. And I'm Kat Hungerford AAPL's Project Development Manager. So this, as many of you probably know, is a webinar about consumer laws that apply to business purpose loans. Nema and Melissa will be discussing various federal consumer protection laws that still apply to business purpose loans today. Many private and nonconventional lenders are unaware that while their loans are exempt from most federal regulations, they still must comply with certain consumer laws. This includes the Equal Credit Opportunity Act, the Home Mortgage Disclosure Act, the Fair Credit Reporting Act, the Service Members Civil Relief Act, and the Fair Housing Act. They will also be discussing best practices for lenders to incorporate compliance with these regulations into their day-to-day operations. So during this webinar, Nema and Melissa will be showing you a PowerPoint presentation. If you have questions about what they're covering, please go ahead and ask those into the chat window that we have within the webinar. You may also use the raise your hand feature to let us know that you would like to speak, and then we will go ahead and make sure that those get to Melissa and Nema's attention so that they can answer any questions that you might have. So I think with that I'll hand it over to Nema and Melissa to get this started.

Nema Daghbandan:

Well, good morning and good afternoon depending on where you are at and listening to this. My name is Nema Daghbandan. I'm a partner here with Geraci LLP. I also have Melissa Martorella, who is an attorney on the banking and finance team here at the firm. I serve on the Education Committee of American Association of Private Lenders, and it was very wise of them to set up a webinar series with education members to make sure they were furthering the objective of educating the community and maintaining high standards. Melissa serves on the government relations committee of the association as well. As you're all probably aware, they were very instrumental in Florida in defeating the Florida licensing regulations out there, and Melissa sits on that committee and was integral in making that happen as well. A little bit about Geraci LLP. For those of you who are not familiar with us, we are a vertically integrated law firm and media company.

We have a corporate and securities group, which prepares private placements and other fund formations. Melissa and I both serve on the banking and finance team at the firm, primarily providing compliance advice like you'll hear today, as well as providing loan documents for our clients. We have a litigation group which does title claims and other litigation matters between lenders here in California and elsewhere. And lastly, we have our media division, which does investor pitch decks and other media services for our clients as well as our conferences, which we'll talk a little bit about today as well. So before we jump into the slides here today, a little bit of exciting things to discuss first. So the first one here is the 10th anniversary, the American Association of Private Lenders Conference, which will be at Caesars Palace this year. It will be from November 7th through 9th. I have been attending these for many, many years.

They are a you cannot miss type event they will bring unlike any other event that you will experience. All key principles of every single legitimate private lender in this community will be attending this event. It is the go-to conference for the industry and we're very, very excited for this year as it is the 10th anniversary. As you'll see on the screen here, the early bird rate expires on August 9th and there is a website here that you can go ahead and select in order to go ahead and register early, which we would obviously highly recommend doing. Next is the Geraci Media Conference. So our Captivate Conference will be coming up on August 21st through 23rd. For those of you that don't know, this is really our flagship event in Las Vegas. It's at the Cosmo and it is an event that we very much enjoy and one that we would highly recommend you take a look at.

And before we dive into the subject matter material here, wanted to discuss some of the housekeeping issues that you'll want to take into consideration. So the first thing that we always get asked is can I get a copy of these slides? And absolutely there'll be at the very end here. There will be a slide with how to access the slides. The second question is always, do you record these? And if so, where can I access these so I can show 'em to my team members later? This is being recorded live. American Association of Private Lenders will have the recording and for its members, you'll be able to access this after the fact and a link will be shared to you. Lastly is there is a little question box that you can use. You can also type into the chat box here and there's a raise your hand feature that you'll be able to use to ask questions.

We're looking forward to an engaging webinar here where we can hopefully answer all of your questions here today. Time permitting. To the degree that we run out of time, we will typically send a follow-up email to answer any remaining questions that we were unable to get to today. So first kind of a big picture summary about what is the webinar's purpose today and kind of how did it come about. So Melissa and I wrote an article for Law 360 describing the consumer laws which apply to business purpose loans. When that article got published, we received significant feedback because people were surprised, sometimes argumentative, but generally speaking we got a lot of feedback saying, I had no idea this is true. I've always understood that business purpose loans had no consumer laws, hence the name business purpose. And so there was a lot of confusion. The purpose of today is to really go over the various consumer laws which do apply to business purpose loans.

But before we even do that, let's really just make sure that we all have the same understanding and definition of what is a business purpose loan. So when you read most consumer laws, they will define a consumer loan typically as a loan that is primarily for personal, family, or household use. So when you think business purpose, it's really the opposite of that. So a loan that is for business, commercial, or agricultural purposes or really any use that it is not primarily for personal family or household use. Oftentimes when I'm talking to clients or to people at conferences, they'll make statements to me such as I make non-owner occupied loans. And that's helpful, but that's not necessarily indicative of whether it's a business purpose loan. For example, you could have a rental property and the purpose of the loan is to borrow money against your rental property so that you can pay for your kid's student loan.

And in that situation you would have a non-owner occupied property, but you would have a consumer loan and there are even more laws that would apply in that loan. So for consistency purposes today, we are only going to be discussing loans which are primarily for business purposes. And the test that we are going to utilize to determine that is why is the borrower borrowing the funds? What are they using the money for primarily for these business purposes, or are they primarily using the funds for consumer purposes? So jumping into this first, and this is probably why people are confused here, is that there are most people think of either TILA or RESPA or TRID or kind of the acronyms that I hear thrown out a lot, and these are all consumer laws. So TILA for those that don't know is the Truth and Lending Act, RESPA is the Real Estate Settlement Procedures Act and TRID is the TILA RESPA integrated disclosure, which is required by those two acts. These are consumer laws. They primarily deal with disclosure of loan terms and sometimes the limitation of loan terms. These are federal laws and neither of them apply to business purpose loans. So if the reason that the borrower is using the funds is for business purposes, neither TILA nor RESPA nor TRID will apply.

Melissa Martorella:

So TILA and RESPA and TRID, those are the three major federal exemptions or where business purpose loans are exempt from federal consumer loan reporting requirements or any sort of requirement. However, there are several federal consumer loans, or I'm sorry, consumer regulations that still apply even though you're making these business purpose loans. So the first one we're going to talk about today is eCOA or Reg B. eCOA stands for the Equal Credit Opportunity Act. And as a really brief overview, this act prohibits discrimination and it sets certain procedures for extending credit and your communication with credit applicants and just big picture, that's what eCOA is about. This applies to all creditors. It doesn't matter what the loan purpose is. The statute is very specific that it deals both with consumer and business purpose loans. So it doesn't matter that you're making business purpose loans, you still have to comply with eCOA and their requirements. And in particular, there are three notable requirements that you have to deal with when you're complying with eCOA. Those deal with appraisals, discrimination, and adverse action letters, and we'll get into each one of those.

So the first item you'll have to deal with as a business purpose lender under eCOA are appraisal requirements. And these requirements apply to all loans, business and consumer purpose. If loan is secured by a first position lien on a dwelling and that's defined as a one to four family property. So to restate that in different terms, if you are making a loan to somebody, that's going to be a fix and flip. You're in first position and obviously it's a fix and flip. It's going to be on an SFR eCOA here. These appraisal requirements are going to apply. It doesn't matter that it's business purpose, it's going to be a first position lien on dwelling. That being said, if you are doing a junior loan, so you're going to be in second or third position, it doesn't matter if you do not have to deal with this appraisal requirement or if you're not going to be making a property secured by a dwelling.

So if the property securing your loan is a multifamily property or it's a commercial property, these requirements will not apply. So the requirement under eCOA here is that all lenders have to provide written appraisals and valuations to their credit applicant regardless of whether that application is incomplete or withdrawn. So in addition, you have to notify any applicant of this right within three business days of the submitted loan application, and you also have to provide the written appraisals and valuations promptly after they're completed or at least three days before the loan closes at no cost to the applicant. You can still charge them for the appraisal or valuation, but you cannot charge them for any additional costs. Photocopying emailing, putting it on a thumb drive, whatever you do to deliver it to the applicant, you cannot charge for that, but you can charge for the actual appraisal itself.

One big thing about this appraisal requirement though is that applicants can waive that timing requirement for providing the appraisal or valuation. So our recommended practice for our business purpose lenders is in your loan application package to your borrower, just stick in there a one page little disclosure that notifies that borrower of this right to their appraisal or valuation and also includes a waiver of the timing requirements. That way they sign it right up front during in the loan application package and you've got that good to go. What that means then is as soon as you know that you're either going to deny credit or you're at the closing table at that time, you provide them the copy of the written appraisal or valuation, otherwise good to go on that. And as a reminder, applicants do not need to request a copy of that appraisal or valuation. It's an obligation of the lender to provide it to them. So just because they haven't asked you for it doesn't mean you have to give it to them.

So moving on to the next portion that eCOA covers it's discrimination. So big broad overview here, but you can't discriminate when you're making business purpose loans. And with respect to anything regarding race, color, religion, national origin, sex, marital status, age, and whether their income comes from a public assistance program, really broad, but make sure that you're complying with that based on your application questions and the way that you evaluate your applications. Reality is most business purpose lenders are evaluating other factors. You're looking at the type of the collateral, you're looking at the borrower's credit score, you're looking at their project type experience. If they're a fix and flip borrower, you want to make sure that they know what they're doing. So you're evaluating most of the time other factors that have nothing to do with those items above. So you're in the clear as far as how you're making your decision whether or not to extend that loan, but a recommended practice just to be safe, you have postmortem file audit of all of your files, and that way you can make sure that, okay, I extended 30 loans last year, where did I make those loans?

And then look at all the loans that you denied and where did you deny those loans? That way you can make sure there wasn't any unintentional redlining or maybe denial of credit to certain areas where maybe it's a predominantly minority location or low income locations. That way you can make sure that you're complying with this even if it's unintentional, the last item that eCOA deals with or adverse action letters. So big picture, what's an adverse action that occurs whenever a lender denies or revokes credit changes the term of credit or refuses to grant credit? So this does not apply if a lender decides not to extend additional credit to a current borrower beyond the previously approved credit limit or if the borrower is in default. So what does this mean? This means that if you have extended a loan to a borrower and then you're going to revoke that credit or change those terms, that's an adverse action.

You got to send a letter or if you have an application come through and you're going to deny extending credit, that's an adverse action. You have to send a letter. So big picture, if you take an adverse action, you have to provide that applicant or your borrower with a written notice stating the reasons for that adverse action within 30 days of taking that action. Our recommended practice here provides the applicant and upon notice of receipt of the application, so when an applicant fills out a loan application and sends it to you and you say, thank you borrower, we've received your loan application and we're reviewing it, add a disclosure in there that, Hey, if we deny your credit request, if we deny your loan application, you have the right to request your reasons of denial. This places the burden on the borrower to ask you for the reasoning and ask you for this adverse action letter. Otherwise, if they don't request it and you've given them this at the loan application, you've given them this, Hey, you're entitled to it. You don't have to send an adverse action letter. The other recommended practice would be every time you do take one, make sure you send one out. That could be burdensome, especially if you're receiving a lot of loan applications, but that's the other way that you would make sure that you comply with this statute.

Nema Daghbandan:

Next up here we have HMDA, which stands for the Home Mortgage Disclosure Act. So HMDA is really a reporting regime, and it's something that I, for those of you that have listened to other webinars, we've probably had two or three webinars and we had a session last year at the AAPL conference about HANA compliance. And the reason why you're hearing about it so much more, or at least you particularly probably did last year, was that there were significant changes to HMDA in its application. And so previously HMDA was kind of a patchwork where it was designed for these very, very large financial institutions. So your Chase banks and your Wells Fargo, the regulators of those institutions wanted the institutions to collect significant amounts of data on the borrower so they could understand macroeconomic trends, right? So where are lenders making loans? What are the loan amounts?

Who are they making loans to from a demographic perspective? They wanted to basically collect this data to understand any significant trends. And so if fewer an FDIC regulated lender might go there, if you were a federal agency, may go to a different regulator. And so each different originator at that time had to report to a different regulator. One of the significant changes that occurred was that all collection of data now has to be submitted to the CFPB. The big thing that really changed last year was really twofold. One is, and primarily dealing with the definitions of who this applies to. So if you look at almost every consumer lending regulation, they typically apply to a fact pattern that says this law applies to a loan primarily for personal family or household use or these consumer uses. And when the collateral is a one to four family residential property or oftentimes referred to as a dwelling and most consumer laws will kind of track that definition, what HMDA did was it really turned both of these definitions on their head first, they really make no mention of whether it's for consumer or business purposes.

They made no exemption for business purposes. So they cast this wide net saying, we don't care about why you're making this loan. The fact that you're making a loan is all we care about here. And they did define it that it would only apply to dwellings, but here's the only instance I've ever seen this language ever being used here is they said a dwelling is necessarily any residential structure period. So you could be in the business of making 500 unit apartment loans and if that was your line of work, you are actually covered by HMDA because they make no distinction between A SFR or duplex or a 500 unit apartment building. And so as long as the collateral is any residential structure you would need to apply or this regulation would apply. And so in terms of what HMDA is requiring and whether you would have to do HMDA reporting, there are a couple of different litmus tests.

So the first one here is that if you originated at least 25, either closed end loans, which your typical loan is a closed end loan in each of the two preexisting years, so 25 loans in each year or a hundred lines of credit in each of the two previous years. And so the interesting thing here is the definition of really who is the party doing the reporting because it's not necessarily clear really effectively they're trying to get at the loan originator. A loan originator could be a broker, it could be the lender in a direct lender situation. In theory, it could be both the lender and a broker in a situation. The definition that they track here is a party who is making the credit decision. And I've had a lot of clients kind of push back and have discussions with me saying, well, really my high net worth investors that I broker to are effectively making the credit decision.

But when you get down to the crux of who is they're trying to cover here, really a broker in that situation is at least making an initial credit determination because the broker's going to look at this deal one way or another and probably outright reject or at least push it through. And that's the first determination here. And so this will really apply to both brokers and lenders. For any of you that are really in the business of doing this, it's going to apply to you. So assuming that you meet these thresholds, these 25 loans in the two previous years, you would then have to report for the following year. And so what does reporting actually mean, right? What does this mean to you and why do you care? So effectively is the report is what's called a loan activity register or a law, and it looks like a giant Excel spreadsheet.

It's probably over a hundred columns basically. And in each column you're going to have to enter a number, usually one to five, which will state, and that number will correlate in that column to a specific question being asked. So for example, a question could be what is the collateral for this loan and option? And the number one correlates to a single family residence. Number two could relate to a two to four family residence. And number three could be a multifamily. And so depending on the collateral and the loan, you would enter the correct numerical designation. And so what's problematic here and AAPL, actually the government relations committee put out a position paper on this very specific issue because this is one where Congress I think really dropped the ball here. It wasn't well thought through in terms of applying HMDA to business purpose loans.

And the reason why it doesn't make a lot of sense is that a lot of times the borrowers are LLCs and corporations and a lot of what Hum does trying to figure out is, is there any sort of direct or indirect discrimination occurring? And so oftentimes you are having to answer questions which fundamentally just don't make sense when you're answering them because oftentimes they will ask you for the ethnicity for your borrower. But if your borrower is an LLC, there is no ethnicity there. So there's a lot of complaints we've heard, and they're quite honestly valid about the log and how a lot of these questions simply don't make sense regardless. At this juncture, you're just going to have to use your best faith efforts. We have a few compliance experts on our team that really understand HMDA in and out. So to the degree that you're having issues either understanding where to report to the data that you need to report, it's something we can definitely facilitate and assist with here in terms of the next steps and what you need to do to be able to do HMDA reporting properly, the primary one is really adjusting your loan application.

And what you need to adjust your loan application for is you need to make sure that in your process of underwriting and going through this loan file is are you gathering everything you need to do to submit the report, right? You have to collect that a hundred column worth of data. And so are you asking all the questions necessary to do so? So you need to take a look at all the questions being asked and then take a corollary look at your loan application to make sure you're capturing that information. So that typically requires some sort of revision of applications. The second thing is if you're relying upon a 10 0 3, the CFPB did actually publish an addendum to that 10 0 3, which captures a lot of this information. And so if you Google search, you can find it or send Melissa and I an email, we can send you that addendum after this.

The last thing here is kind of how do you do the reporting? Because you could theoretically do it in that spreadsheet, but it's cumbersome. And the problem you run into is if you make a single error in one spot, it's very difficult to understand and isolate out that error. So we typically see our clients use some form of software to manage the questions here, or sorry, the submittal of the information here. And so one common piece of software that we hear a lot about that we think that we understand is probably the preeminent piece of software being used as Quest Soft, but there's other loan origination systems who are all tracking this now and are doing a good job of tracking it, but we would recommend looking into a software solution to track all this information.

Melissa Martorella:

So the next applicable law here that you'll need to comply with is called the Fair Housing Act, and this is very similar to those eCOA discrimination requirements or anti-discrimination requirements. So big Picture Fair Housing Act deals with prohibition of discrimination based on sex, familial status, race, color, religion, national origin or disability, and that deals with it for all transactions involving a dwelling. So again, very similar to eCOA, don't discriminate and review your application, review the reasons that you extend or deny credit so that you can make sure that you're not discriminating based on any of these factors. Kind of digging in a little bit. Fair Housing Act, this does apply to transactions involving dwellings, so it doesn't matter the loan purpose, it's going to deal with that property type. So what's a dwelling? A dwelling is any building occupied currently or intending to be occupied as a resident by one or more families or land sold for the construction of such a building.

So if you are extending a loan to an individual and it's going to be secured by vacant land, but that individual is going to be building an SFRA one to four family residence on that property that people are going to be living in as a primary residence, even though he's not the person that's going to be living there, he might not even be involved with the ultimate sale of that property to the owner or resident of that property. That's the purpose of that loan and of the building of that property. And so that would apply here. The Fair Housing Act would apply here, so any loan secured by a dwelling in that sense, you're going to have comply with the Fair Housing Act. It's less broad than eCOA. So if you are compliant with eCOA, you are going to be compliant with the Fair Housing Act. But just wanted to point this out as well. Recommended practice very similar to eCOA. Make sure your application questions, you're not discriminating based on the answers you receive. And then also that post closing audit of your loan files just to make sure that you're not unintentionally redlining or discriminating on the areas that you extend your loan.

Nema Daghbandan:

So the next one here is FCRA or the Fair Credit Reporting Act, and that really just regulates the preparation, distribution and use of credit reports. So oftentimes many of you will run credit as a matter of course, as part of your underwriting criteria. And so Melissa's alluded to this before is oftentimes we will audit client's loan files after they've closed the loan. We'll kind of do a broad sweep. We'll look at all of these sorts of laws as well as any particular state law that may be applicable and we'll kind of just do a full blown legal audit and understand additionally, from a securities perspective or other compliance side of this is was this file properly originated? One of the things that we almost always hit on when we're doing these audits is that there are generally two deficiencies in the way that most clients will collect will get a credit authorization.

The first is that the party who is authorized to run the report is not the party who ran the report. And so oftentimes the party who is authorized to run the report is the broker, but really the lender is the one who did it, or the lender may have a management company or some third party vendor run the report, but the only authorization that was ever given was given to the lender. And oftentimes the disclosure form is, or sorry, the authorization form is signed by the borrower, but oftentimes your borrower is an LLC or a corporation or some other entity, but in fact, you are running the principal's credit, and so you have the wrong signature on there. So those are the typical deficiencies that we're going to see. But as say before is more often than not, there is some kind of deficiency in the way people are running credit based on one of those scenarios.

So one thing that I highly recommend after this webinar is just take a look at the form you're using and apply basic common sense to it is do I have the right party here? Do I have the right party running the credit? Do I have the proper authorization? Because typically people just use whatever form that they found online or that was given to them, and typically it's too generic of a statement and it's not actually designed for your very specific processes there at your organization. So something that you are going to want to take a look at after this.

Melissa Martorella:

And then the last applicable law here that we're going to be discussing, that's a federal law that applies to business purpose loans is the SCRA. So the SCRA is the Service Members Civil Relief Act, and that provides financial protections to service members that are on active duty when they changed their military status. And those protections include reduced interest rates like inability to foreclose certain terms that you are not allowed to have in your loans. So really a lot of protections for service member borrowers. The big important thing about the SCRA though is that there has to be a change in military status. So when you originated that loan to the borrower, they had to have been off duty or reserved, and then they have to be turning to active duty during the course of your loan if they were active duty when you extended the loan and they're still active duty when you go to foreclose, these protections don't apply.

It's really meant for people who are in the service that are on reserve that get called to active duty and maybe they don't go through with modifying their loans and things like that just to really protect our service members when they do go on active duty. That being said, that service member borrower has an affirmative duty to notify the lender of their change in military status. So at the end of the day, for you to comply as a lender, only if the borrower is telling you that they've changed to active duty from a reserve status, then you would have to comply with the requirements in the SCRA. That being said, our recommendation here is anytime during loan enforcement, so foreclosure modification, forbearance litigation, anything like that where you have to enforce your rights under the loan, if you have made a loan to an individual prior to taking any of those enforcement actions, just do a quick search with the Department of Defense.

If you literally Google Department of Defense SCRA search, you'll be able to pop that right up, do a search, see if they're an active member of the military. If they are, just follow up with your borrower, see if that's a new status from the time that you made the loan. If it is, you'll need to comply with the SCRA. If it's not, then you're good to go even though that burden is on the borrower to let you know it's really helpful not to be caught in litigation down the road that who notified who you just don't want to be dealing with that after the fact. In addition, this only deals with borrowers, individual borrowers. So if Nema is my borrower and Nema is in the military and he has a change in status, the SCRA would apply. However, if I made a loan to Nema Corporation, he may be the principal of that corporation, but he is not the borrower. His corporation is the borrower, and so the SCRA would not apply in that case. So it only deals with individual borrowers that are in the military.

Nema Daghbandan:

And one of the things that the premise of today's webinar and the reason why we wrote that article is really dealing with the federal consumer lending laws, which apply to business purpose loans. There are a myriad of state laws in any given state that you will lend in, for example, insurance disclosure limitations on late charges or default interest usurious rates of interest. There could be licensing issues, whether you broker, lender service, each state will have its own foreclosure regime and typically states do not care whether it's a consumer or business purpose loan when it comes to how you foreclose in the state. So this was not meant to be an exhaustive guide of every single consumer law, which could ever apply, but really the big federal ones, particularly the ones where we get the most confusion from where people don't believe that they apply in their situation, but just note that there are additionally going to be consumer laws.

It's one of the things that we really advise on a lot here at the firm is kind of the 50. We have a fairly well developed 50 state matrix, really dealing with a lot of these issues to kind of navigate the 50 state landscape. But today's purpose was really to focus on the federal side of it. So the key takeaways that we want you to have from this are one that consumer laws do apply to business purpose loans. Two, that you're kind of going through the documentation that you are currently use to make sure that you are compliant or setting up the policies and procedures so that you are capable and able to provide because a lot of these will require some look at how you actually underwrite your processes to make sure that you're capable of complying. Again, you'll see on this slide here, if you would like a copy of today's slides, please go ahead and email Lesley at lboyd@geracillp.com.

A recording of this webinar will be put up by American Association of Private Lenders in a week or so, so you'll be able to get it from them as well. Melissa and I will always be happy to answer any questions that you may have as it pertains to any things that we discussed. If you haven't already done so, feel free to go ahead and use the question box here or raise your hand. We've been getting a fairly lengthy list of questions here and we're going to answer as many as we can from a time constraint perspective. I suspect we will not be able to get to all of them because it does look like there are over 30 questions that are already in the queue, and again, you can feel free to continue to populate and we'll just kind of keep going through the list.

The last thing is, as we discussed at the beginning of the webinar here, the real genesis of this webinar was our Law 360 article that was published. There's a link to it on this slide if you kind of want a real detailed dive into these various regulations in their application and the statutory support behind them so that you could go back to whatever counsel you might be using and to the degree that they've got questions or they tell you it doesn't apply. That article does have every single citation to all of the things that we discussed here today. So thank you for everyone who attended. For those of you who need to drop off, again, thank you for your time. I know it's very valuable at this time. We're going to go ahead and start looking through your questions and start answering some of the questions that we've got here.

So I'll take the very first one here, which is dealing with eCOA and specifically the eCOA appraisal requirements. So one of the big changes that occurred when eCOA Reg B was revised was previously it would only apply for actual appraisals and the borrower would have to request a copy of the appraisal. And so what changed here is they modified it so that it wasn't necessarily just an appraisal, it could be any valuation. So it could be as simple as you, the lender or the originator was relying upon Zillow or some BPO or whatever it was. However you determine the value of that property and whatever that valuation is, you have an affirmative duty to provide it to your borrower. It does not need to be an appraisal.

Melissa Martorella:

Similarly, kind of going off of that one, the next question is what if the lender's valuation is the lender's own opinion of value? So you didn't use a third party appraisal. Again, it could be as simple as a drive by look at the property and you came up with a value of the property that would count as the valuation here. So it does not have to be a formal third party appraisal.

Nema Daghbandan:

Next one here is does receipt of the application date start when the broker receives the application or when the lender receives the application? Effectively is at some point a valuation needs to be made either by your broker or by your lender. The technical answer really effectively, probably both, right? If your broker is going to be, for example, creating any sort of valuation, they would have an affirmative duty to provide it to the borrower. Similarly, you as a lender who is definitely going to come to have some sort of valuation produced, you would absolutely have an affirmative requirement to share that valuation with your borrower without their demand for that.

Melissa Martorella:

Also, kind of going off this question here, would the appraisal notification if a broker sends the file over, does the lender also have to notify the borrower or does that fall on the broker? And on this situation as well, I would recommend that the lender also makes sure that if that broker didn't provide a waiver of the timing requirements for giving a valuation, that that lender immediately follow up, either asking them to fill out that waiver or giving them the valuation or appraisal as soon as they've received it or three days before closing.

Nema Daghbandan:

Next one here is does HMDA, that's the act that has the reporting requirements in terms of that loan activity register. Does HMDA apply to a land acquisition to develop 32 condo units? Generally speaking, when you're looking at these acts, and I don't memorize this particular portion of the definition, but generally speaking, when you're looking at the definitions, they do typically state that it is either for what they would call a dwelling, and so a 32 unit, if it was currently 32 units, it'd be no question. Typically, they will also say is a current existing structure or one intended to be there? So typically an acquisition, which was the intended purpose of that loan was to turn that into 32 unit condo would apply in this situation. So yes, you would treat a development of a residential property as applying within the statute.

Next one here is are we required to comply with GLB and AMIL? I'm assuming they mean AML or anti-money laundering. Some of my purchase and sale agreements are asking us to rep and warranty that we are compliant. So particularly right now in the marketplace, many, many originators are selling to the various institutional loan buyers, and you have all probably seen that very lengthy 60 page MLPA that you had to negotiate or have your counsel negotiate, and they are making you rep and warrant the world. One of them is AML. So that's kind of a nuanced question because AML is one of the grayer areas of law in terms of its application side of it. The short answer is yes, you absolutely will need some policies and procedures in place to comply with AML. So for example, making sure that you are running OFAC searches, that you are determining the source and origin of wires. So yeah, regardless of take it from a need to comply with standpoint, it would be foolish not to do basic AML compliance work, which is not all that difficult or challenging to do, and it's probably worthy of an offline conversation to kind of give you some rules of the road in terms of how to do AML compliance.

Melissa Martorella:

The next question here is two parts. The first question was can the appraisal waiver and the notice of the adverse action letter or notification be emailed to the borrower? My general recommendation is to do a formal letter on your letterhead. Whether you email that or mail that, I'm not actually sure whether the statute requires one or the other. Safe bet is probably mail that as well in addition to your email just to cover your bases, but we can look into that further. The second part of this question was do those waivers need to be provided if the loan is being brokered to us by another mortgage broker? And yes, they do, because at the end of the day, especially that adverse action letter, the person taking the adverse action is you the lender. So absolutely on that one you would have to provide that. I don't know if you want to add to that at all.

Nema Daghbandan:

No, that makes perfect sense. Yeah. So the next one here is a HMDA related question, which is can you answer not applicable to ethnicity regarding an LLC or a corp? And I remember looking at this prompt and it's actually one of these funny areas. So effectively you were supposed to make an educated guess, which is somewhat hilarious about what ethnicity your borrowers, because as I can imagine very few times, especially in today's technology, are you actually meeting with your borrower anymore? So if I recall correctly, as you were supposed to make an educated guess, I don't recall.

Melissa Martorella:

There isn't a not applicable one, but they said you should only use it or you absolutely have no idea. So

Nema Daghbandan:

Next one here, and I might need Kat's assistance is I see that Ernesto, and sorry if I messed up your name, Ernesto has raised his hand, so we may be, I dunno if you're able to unmute him or if he's able to type in the question here.

Kat Hungerford:

Oh, Ernesto just put his hand down. So I think we're good to move on. Thanks. Great,

Nema Daghbandan:

Great, thank you. Technology is a wild thing. Alright, next one here. So if you hit the HMDA requirement for the past two years, do you need to start tracking in year three? And the answer is yes. So remember from earlier that if you have made 25 loans in the two previous years, you would track in the third year and report in the fourth year is how that would work. Next question here, what about clients itself? Pull credit on our portal. So I think I understand the question where you may have built some kind of online portal where the borrower comes in and basically it's sent to a third party site where they enter their social security number and credentials to verify themselves and basically it generates a credit report which is then submitted to the lender. That would be fine. The key here though is making sure, going back to the original statement that we have in here is do you have the author authorization to do this in the first place, right? I would make sure that there is an explicit authorization from the borrower stating that you're going to send them to a third party site who will then run the credit report, which will then be distributed to you. The key here is in plain English, explain that you have the authorization to have this information and who is going to be running this information.

Let's see here. Kind of the same question being asked there. Do you have a sample credit authorization form? We do. I mean, and they're all over the internet as well, but the key here is that the sample credit authorization form probably doesn't work because it's a very fact intensive scenario. Let me give you an example is you have lenders oftentimes that have management companies in place and the management company is the one that actually is running the credit report. So what I would do in that situation is I would either say one of two things I would either say is management company will be the one running the credit report or we will say as lender and or its affiliates will be running the credit here. So you don't necessarily have to always identify the very specific party, but you have to make sure that you're using language that covers a potential circumstance. And this would also make sense, for example, if you're going to discuss a broker who's got a credit authorization form, I would typically say is either I meaning the broker or one of the lending parties which we work with or their affiliates have the authorization to run credit by signing this disclosure document. So that's kind of how you can finesse and massage language, but it is too fact intensive to give a kind of generic form that would apply in every situation.

Melissa Martorella:

Jumping down to another question, are we required to do appraisals if we do short-term business purpose loans and are non-owner occupied? This is really depend actually go down to more of a state level. If coa, you never did an appraisal, you never did an A valuation, there's nothing to provide to your borrower. That being said, for example in California, especially if you are a mortgage broker, you have requirements for disclosures that you would have to provide to your lender and some of that is based on the valuation of the property. So in that situation, even if you're doing a short-term business purpose loan that's not under occupied, you would still need to provide some sort of appraisal or valuation to your lender and therefore you would also have to provide that to your borrower. So big picture, I think that's more of a state specific question at the end of the day, whether you absolutely need to complete an appraisal valuation for your business purpose loans, but if you do in any way, shape or form, then you absolutely must comply with eCOA at that time.

Nema Daghbandan:

And it could be as simple as we just do a Zillow search or whatever it might be. It doesn't have to be anything complex, but typically you determine a valuation or someone determine a valuation, that's what you would need to provide to them. Next one here is with must you provide a broker privacy policy statement for a business purpose Loan privacy is another one of those where I always say is, well, what do you do? So privacy should match your business practices. Do you share this information with lenders or third parties? Will you sell this information? Who do you share this information with? That's the key to a privacy policy. And obviously you've got both federal and state regulators looking heavily at this. California passed some very, very comprehensive privacy regulations. The European Union simply did with GPDR. And so when we met Capitol Hill on behalf of AAPL, we understood from talking to the legislators there that they are looking at federal regulations, which will really kind of come in and tighten the screws, particularly modeling after California's privacy regulations. So the short answer is yes, you need a privacy policy. The second is that the privacy policy should be crafted to your actual business practices with what you do with people's information.

Melissa Martorella:

This next question is, if the valuation is determined by an inspection done by the lender or broker, how do you provide that to the borrower? I mean, even if you have an email saying, Hey, FYI is flown by the property, I'd say it's worth about 200,000. Send that to your borrower. Even something as simple as that, that's what I would do to provide that valuation and to comply with the eCOA requirement.

Nema Daghbandan:

Next one here is the link for the recent article in law 360 is not working. I am sorry. Technology has won today and we have lost if whoever sent that one, kudos for you reading it, appreciate that or looking into it. Second is you have both Melissa's and my emails sitting there. If you can send us an email off of the fact, we will make sure that you get it right away. Sorry for putting up a broken link in the first place.

Melissa Martorella:

Sorry. And in addition, I'm sure what we can do as well, we can have our marketing team do a little wrap up blast for all of our attendees to say thank you for joining, and we can send the correct link for the law 360 article in there as well.

Nema Daghbandan:

So the next question here is if all the funds go for a business, go to a business, actually, let me just read the question as it is and what I think they're stating. If all funds go to a business, the property still needs to be non-owner occupied to be a non-consumer loan. So what I believe that this person is asking here is, if I'm making a business purpose loan, does the property have to be non-owner occupied as well to be considered a business purpose loan? And the answer from a federal perspective is no. It does not matter that the property is occupied or not occupied by the borrower. So long as the proceeds, the use of those proceeds are going to be for business purposes. Some states may require a license to make that kind of loan. So for example, Washington and Georgia are two examples of states which would require a license to make a business purpose loan secured by a owner occupied property. But from a federal lending regulation perspective, no, that would be considered a business purpose loan even though it was occupied by the borrower.

Let's see here. Do you have to have an NMLS license in order to submit info to HMDA? The answer is no. You can submit the data is submitted to the CFPB. You do not need to have an NMLS license. For those of you that do not know what an NMLS license is, it is a imposition from the SAFE Act, which requires a license in all 50 states to originate a consumer purpose loan secured by a one to four family property. Some states have gone further than that and they require a license, an NMLS license to originate a business purpose loan if it's secured by a one to four family property. So for example, the state of Oregon, the state of Utah and a few other states would still require an NMLS license in order to originate a business purpose loan. But 40 of the 50 states in the country would not require any kind of license in order to originate a business purpose loan. Regardless, you'd still have to submit the the data over to CFPB.

Melissa Martorella:

Next question, is an adverse action letter or denial required for any application received or only after you have run credit? The answer is after any application received. I know a lot of business purpose lenders make the decision not to run credit at all on their borrowers, so that's not part of the actual timing requirements there. It's any application that you've received and you're going to deny.

Nema Daghbandan:

All right, next one here was thank you for the AML information. What about GLB? I don't know what GLB acronyms for, so feel free to share with me and I can give you my thoughts on GLB. Next one seems just for informational purposes, right? Okay, do you want to tackle that one?

Melissa Martorella:

Sure. Let me see here. Is the act of doing a valuation or appraisal itself, the trigger requiring that it be sent to the borrower or is it some other trigger which necessitates the requirement to provide it? Yeah, it's the actual doing the valuation or appraisal. So we were talking about before states like California are going to make you do some sort of valuation on your property if you're going to be making a loan, but if you never looked into the value of the property, you just like the loan, you like your borrower, you trust them, you don't care what the property's worth, you don't even Google on Zillow what it might be worth, then you don't have to deal with this. But if you did anything at all as far as that valuation or appraisal, that's going to trigger the need to send that to the borrower.

Nema Daghbandan:

All right, and we've got a few hands raised, we'll go through those in a second, but let's, let me answer a few more questions here. Are we obligated to provide the borrower a copy of their credit report if they ask for it? It's a good question. I actually don't know the answer off the top of my head. So that one I have to get back to you on. I would provide it to them.

Melissa Martorella:

Yeah I would as well.

Nema Daghbandan:

Whether you are absolutely required. I don't know off the top of my head, but I would actually send that over to them. Let's see, next one here. That one one year,

Melissa Martorella:

Same thing?

Nema Daghbandan:

Yeah. Got it. Alright, so let's go to a couple hands that are raised here. So the first one I see is Penny Juco.

Kat Hungerford:

I am unmuting Penny now.

Penny Juco:

I actually just typed in my question. I'm just wondering because we are actually new and what happened if you don't file HMDA report?

Nema Daghbandan:

Good question. So when we've read the CFPB guidance, lemme just restate the question. For those that may not have heard well is new to the business or maybe have qualified to hit the HMDA thresholds for the two previous years and didn't so. When we've read through the HMDA regulations on this, the CFPB basically has stated the following, we want you to do the reporting to us. We understand it is likely going to be inaccurate the first couple of years, so we're not going to penalize you for an accuracy. That's not what we're going for. They haven't explicitly stated what happens when you don't file. So we don't have guidance one way or another. If you don't, presumably the CFPB will send you a letter demanding action or corrective action, but it's not necessarily clear what happens if you don't do it. But when we counsel clients on this particular issue, what you should do is continue to do the filing, even if it's a late filing. And again, they've made it clear that they're not interested in penalizing any sort of initial filers and they understand that it is not necessarily clear on its face. Barbara Kilo, you have your hand raised as well.

Barbara Kilo:

My question was, you didn't mention anything about the US Patriot Act and it does apply to all credit transactions, correct? Both consumer and business.

Nema Daghbandan:

Yeah, so there is a thank you, Barbara. So there is a Patriot Act notice that we do include, it's kind of standard form for all forms of loan documents, but typically it's not an extensive requirement or some sort of big onerous regime that you'd have to comply with. For those of you that don't have, sorry, a Patriot Act notice in your files, you should include one as part of your loan document package. So going into the GLB. So thank you for the panelists who have advised us about GLB. GLB is Gramm Leach Bliley. That goes back into what we initially discussed earlier, which is really what do you do with information sharing of your borrowers, right? The key thing here is that you are explicitly stating what you do and do not do and stay within the confines of those. We oftentimes see this manifest when people, for example, we'll see lawsuits between your borrower and other parties where the party, well, you'll get a nasty letter or some sort of comment from an attorney saying, I demand that you send me the loan file on this one.

Well, you've got a privacy issue problem because presumably that person, your borrower has not authorized you to release that information. And so typically in those circumstances where advising clients to go get a subpoena, and that's how we'll do it. But this also manifests when you may have a investigative body, so for example, the FBI or a DA or otherwise requesting private information and oftentimes confusion about what you should do as a lender, similarly as your privacy policy probably doesn't permit you to share that sort of information. And so we typically would require some kind of subpoena in order to divulge it. So kind of perfect timing here. That was the last question I see on here. Again, my email, Melissa's email is on here. We'd be happy to answer any questions that you may have after this webinar. Thank you so much for sitting on here. We hope that you received value out of this and a very, very big thank you for AAPL for hosting this and really being at the forefront of educating the community. Thanks everyone. Hope you have a wonderful afternoon. Thank you.