Buyer’s Broker

The following is the course notes for a seminar for real estate professionals who are interested in becoming buyers brokers.

Introduction:

I’m Don Romano, president of Shelter Rock Mortgage Corporation. I’ve worked in this industry for over 15 years. During that time I’ve invested a portion of my time to Association work. I’ve served on numerous committees of the National Association of Mortgage Brokers, New York Association of Mortgage Brokers as well as LIBOR (the Long Island Board of Realtors). I have also served as the president of the NYAMB. By investing this time, I’m able to better understand where our industry will be in the years to come. This is obviously good for business.

In November, 2000  LIBOR held a leadership meeting for their directors and committee members. The purpose of this meeting was to bring them up to date as to what was happening nationally and to give them the data needed to assist them in moving LIBOR forward. As a member of their Legislative committee, I was invited to attend this meeting. The information presented confirmed what I’ve been saying for years. The Real Estate Industry will need to move from a seller representation to a buyer’s representation business model.

• The national average real estate brokerage commission is down to 5.1% and dropping.

• Services are being unbundled and being priced by unit. Brokers are beginning to give homeowners a menu of services, so they can buy only the services they wish.

• The industry always focused in on the seller for payment; after all, the seller is the one with the money at closing.

• The Internet prevents the industry from controlling the flow of listing information.

• The brokerage commission on a successful closing needs to be high enough to cover the time invested in the properties that don’t sell. The public is no longer accepting that. They are only willing to pay for the time spent on their purchase.

• The industry is still trying to maintain the status quo. You are trying to utilize the Internet to market your listing through Realtor.com. At the same time the public expects the Internet to supply information at no cost to them. This combination of conditions has led to over 185 FSBO sites. Owners.com, FSBO.com, Byowner.com, to name a few.

In order to add value to your services (justify your fees) companies are looking to add all kinds of things. From mortgages to arranging for the electricity to be turned on, you are trying to meet the one-stop shopping model.

Sellers are becoming price conscious, which is why the commission rate is falling, even in a hot market. Imagine what will happen should the market cool. Brokers are trying to keep their sellers happy by offering a menu of services, effectively cutting into their commission in another way. The industry’s response so far has been to offer additional services. The only problem is that all these additional services supply the needs of the buyer, not the seller and yet the seller is still the one paying for it.

The argument that the fee is passed through to the buyer in the price doesn’t really work because homes are, for the most part, sold at market price. The market doesn’t price brokered homes any differently than direct sales. Let’s face it, under current conditions the seller is paying your commission and the seller’s are bringing into question the value of what they’re getting versus the amount they are paying.

Dual Agency:

The only ancillary service being offered today by Real Estate Brokers, that generates any real money, is mortgage brokerage. Conventionally, real estate offices that also offer mortgages, have to address the dual agency issue. As we will discuss later, both the Department of State will regulate your for your real estate work and the State Banking Department for you mortgage work. Both departments view duel agency a little differently.

You are already familiar with DOS’s form, but you probably never have seen the Banking Department’s form. Even if you are currently working in an office that does mortgages as well as real estate sales, you probably haven’t seen this form. It’s a document that has been conveniently overlooked in most offices. It’s only a matter of time before this disclosure becomes a hot audit issue for the department.

Reasons to work as a Buyer’s Broker:

1. The first reason to consider becoming a buyer’s broker is that you are open minded to new ideas. Your personality is such that you are also looking for new approaches to making a living.

2. You recognize the weaknesses in the current business model. That is, the seller’s resistance to properly compensate you for your time and effort.

3. You acknowledge the fact that your buyers are receiving most of the benefits of your efforts and you are prepared to expect compensation from the people actually getting this benefits.

4. You’ve noticed that all the major franchises either have, or are planning to have, additional buyer oriented services to justify their commissions. Coldwell Banker has its “concierge service”, Daniel Gale is using “Luxury Domain”, National Homefinders provides a similar service and Prudential Long Island is preparing to set up their own service. Bear in mind, all these services are being offered to the buyer at no charge.

5. You understand the concept of “value set proposition”. This is a marketing concept that states that consumer perception is more important than reality. A perfect example is Starbucks Coffee. We were all happy enough to stop in a deli to buy a 75 cent cup of coffee. Then Starbucks comes to town and we are merrily spending $3.00 for the same cup of coffee. Why? The perceived input into the buying process. We are no longer buying just a cup of coffee, we are choosing the country of origin, choosing straight milk or steamed milk, etc. Consumers are willing to pay a premium price for a service, as long as they recognize the value of the service. This is exactly why sellers are balking at your real estate commissions. They no longer have the perception of value.

6. By working exclusively with the buyer, you never have a dual agency problem.

Mortgage Brokerage:

Regulations, regarding mortgage brokerage in this State, have evolved over the years. Up until 1986, any licensed Real Estate Broker could originate mortgages for a fee and you answered to the Department of State (DOS) for your actions. As the use of mortgage brokers began to increase nationwide, the State decided that consumers needed additional protections and created the title of Registered Mortgage Broker. Since their concern was strictly to protect consumers and not professionals, the Banking Department only supervises mortgage brokers placing mortgages on owner-occupied, one to four homes, co-ops and condos. Investment properties, commercial loans and the like are not covered by the Banking Department regulations. Those loans still fall under DOS supervision. Credit line mortgages are another type of lending that falls outside the Banking Department's jurisdiction. They are regulated on the Federal level. A lender will only accept an application for a credit line mortgage through a NYS Registered Mortgage Broker but these applications are not subject to Banking Department audits. Lenders are using the existence of the Registration as proof that the person or company they're dealing with is a professional.

Any individual or entity who is engaged in the business of soliciting, processing, placing or negotiating owner-occupied mortgage loans for others is required to be registered with the State Banking Department.  By regulation, you are working for the applicant. The applicant hires you and is responsible to pay you. You are acting as the applicant’s agent. You must have the applicant’s best interests in mind to stay in compliance.

As a buyer’s broker, it is a necessity to also be a mortgage broker. Besides the obvious benefit of having another source of income, it enables you to be a better negotiator. Of course this will only happen if you take the time and put in the effort to learn the mortgage business. Arranging for the financing on a real estate deal requires a different set of skills than you are currently using as real estate brokers.

Since you are now working strictly for the buyer, you are entitled to more detailed information regarding their financial situation. This data, combined with the knowledge of the different underwriting standards from your lenders, will give you a complete set of tools to present your offer as strongly as possible. As the buyer’s representative, you can negotiate right on the spot, all the terms of the transaction, without having to deal with any conflicts of interest.

Impact on your office staff:

The skills needed by your office staff will change when you add mortgage brokerage to your service mix. As a real estate broker, your support staff basically did clerical work. They answered phones, typed letters, confirmed your appointments, etc. You couldn’t have them do much else or you risked loosing your license. As you are well aware, any work that an employee does that gets them involved in the transaction itself will require them to be licensed as a salesperson to stay within Department of State guidelines.

You will now need to have at least one employee that is capable of processing mortgage applications. This employee will need to understand the different underwriting standards of each lender, do follow up calls with the applicants and the lenders and most of all know how to deal with people. You will not have the time to get all the documentation from your applicants; you will need someone in your office to do it. This person needs to have set of people skills as you do, since he or she is speaking to the applicant for you.

Your staff now will need additional tools to work with in order to take on this new level of responsibility. You will need access to a credit agency that generates credit data from all 3 repositories all well as the credit scores. Although, it’s not a necessity, a processing software program should be purchased. Loans can be processed completely manually, but you will soon see that it’s not cost effective.

Your processor, receptionist or any other support personnel does not need to be licensed or registered with the Banking Department. However, any personnel that works directly with the applicant discussing loan products will need to be registered with The Banking Department as of a new law that went into effect January 1, 2007. They will need to be registered as a Mortgage Loan Originator" (MLO). In order to get registered each MLO will need to pass a background check done by The Banking Department and be required to take 18 hours of approved education every 2 years. This law also requires you, as the broker, to fulfill this same ongoing education requirement.

Adding mortgage brokerage to your office will require dedication of your time and money for it to be profitable. So be prepared. If you don’t commit the resources to do it right, it will turn out to be a liability instead of an asset.

Definition of Terms:

• Registered Mortgage Broker - Any individual or entity engaged in the business of soliciting, processing, placing or negotiating owner-occupied mortgage loans for others.

• Licensed Mortgage Banker - Any individual or entity engaged in the business of making mortgage loans. That is, funding mortgages or issuing a commitment to fund a mortgage.

• New York State Banking Department – The State agency responsible for supervising mortgage bankers and brokers.

• Application Fee – A fee collected at the time of application by either a mortgage broker or banker. This fee can either be refundable or non-refundable but it must be disclosed upfront whether it is or isn’t. Only one application fee can be charged on an application.

• Processing Fee - A charge for the actual processing of the mortgage application. Either a banker or a broker can charge it. Only one processing fee can be collection on an application.

• Credit Report Fee – The fee charged by the credit agency for the preparation of the credit report. This fee can only be passed through to the consumer, the mortgage broker or banker cannot add a service charge.

• Appraisal Fee – The cost of the appraisal of the property. This can be passed through to the consumer, but again nothing can be added on.

• HUD – Department of Housing and Urban Development. This is the Federal agency which supervisors mortgage lending on the national level. In addition to staying in compliance with the State Banking department, you will also need to stay in compliance with all HUD regulations.

• Sub-Prime Lending – Lending to individuals that do not meet standard underwriting guidelines. Commonly used due to the lack of creditworthiness of the applicants but also used on non-conforming properties and questionable flow of income to the applicants. These loans will always come with higher than normal interest rates and/or closing costs to reflect the higher risk involved in funding these mortgages.

• Predatory Lending – Lending with the intent to eventually foreclose on the property or simply to earn an unconsciousably high rate of return on the investment. Typically targeted to the undereducated and elderly population.

• Part 41 Mortgage – In an attempt to limit the practice of predatory lending, the State Banking department added Part 41 to the Banking regulation. The definition of a “High Cost Loan” is set and when a mortgage meets that standard; a higher level of disclosure by the lender and the broker needs to be met. The concept here is to make the consumer aware of what he is signing. Part 41 was written in the hope that additional disclosures will protect the applicant from himself. Details of the regulation will be addressed later.

• HOEPA or Section 32 Mortgages – The Home Owners Equity Protection Act which is Section 32 to the Federal regulations, is Washington’s answer to predatory lending. This act preceded NYS’s Part 41 and uses a different set of definitions as to what determines a high cost mortgage. We will be looking into this in more detail later.

How do you make money as a mortgage broker?

As a mortgage broker your make you money through collecting points. As per the regulation, the term “point” shall mean any fee or discount calculated as one percent of the principal amount of the loan or one percent of the amount financed, irrespective of how such point may be denominated by the mortgage broker, banker or exempt organization. Points can be paid directly from the borrower, from the lender or both.

You are operating a retail shop. You are pricing your product, mortgages, to be offered to the general public. The lenders you are dealing with, your wholesalers, will be offering you pricing that is better than what they are offering to the general public. You will be dealing with lenders that may not even have the ability or desire to offer mortgages to the public. Remember, from the lender standpoint, delivering mortgages to the public through mortgage brokers is the most cost efficient method of closing loans. A lender can make demands on their brokers regarding mortgage types and closure rates. They cannot make the same demands on the general public.

Periodically, usually daily, you will receive wholesale pricing from your lenders. For each loan type they will issue a matrix of combinations. Let’s look at an example: 7% with 3 points, 7 ¼% with 2 points, 7 ½ % with 1 point, 7 ¾% with 0 points (par pricing), 8% with 1 point paid back to you, 8 ¼% with 2 points paid to you, etc.

When a lender pays you points, they are called premiums. The availability of premiums allows a broker to offer a 0 point mortgage to the consumer and still make the profit he wants. A broker can use premiums to offset a portion of the closing costs if the situation calls for it. Premiums are a very important tool available to a broker. In many instances they can make a deal work, where on the surface, the buyer had insufficient cash to close.

Premiums can also be used to take advantage of the public. Using our sample matrix, a broker representing himself as charging a 1 point fee can actually earn 3 points by closing the loan at 8 ¼%. He collects 1 point from the borrower as well as a 2 point premium from the lender. If our borrower was unaware what market rates were at the time his rate was locked, he wouldn’t have a clue how much additional money he just gave to the broker.

When can you collect your fee?

As a real estate broker, you technically earn your fee “at the meeting of the minds”. Although you can get paid at this point, you never do. You “voluntarily” defer to closing to get paid.

As a mortgage broker, your fee is earned once you present a commitment to your buyer and the buyer accepts it. As long as you’ve disclosed it upfront, you are free to collect you fee now. There is no need to wait till closing, if you don’t want to. You will, however, have to wait till closing to collect any fees from the lender. No lender is going to pay you until they have closed the loan. In fact, many lenders have added an additional clause into their broker agreements protecting themselves even further. What they are doing is looking for you to repay them any premiums you’ve received from them on a mortgage that is refinanced within a short timeframe, usually 12 months or less.

Procedure to Become a Mortgage Broker:

As a licensed Real Estate Broker in good standing, you already meet the first requirement to become a Registered Mortgage Broker. The remaining requirements are first, to prove to the Banking Department that you are of the proper character to deserve the trust of the general public. You do this through their application process. Second is to acquire a surety bond or be prepared to pledge assets of between $10,000 and $100,000. The amount of the bond, or pledge, is determined by the number of mortgage applications that you anticipate doing in your first year of business. After that the size of the bond will be determined by your actual origination total for the previous year. 

You start by contacting the Banking Department @ (800) 334-3360 or writing to them at 1 State Street, New York, NY 10004. Tell them you’re interested in becoming a mortgage broker and they will then forward you a blank application. In the past they would include a copy of Article 12D of the Banking Law, Part 38, 41 and 410 of the Superintendent’s Regulation. This is no longer done. They will direct you to the publisher which they've contracted with and you are left on your own to acquire your copies.

At this point you are entering a world few of you are accustomed to.  This is a regulated industry. Everything you say or do will be checked to see if you are in compliance with both State and Federal Law. In most instances, the regulations are vague and open to interpretation. Get used to it. Lawmakers are not known for specifics, making it difficult for everyone in the industry. To make matters worse, the rules under which you operate your business are constantly under revision. It is your responsibility to stay on top of the changes. As regulated as you feel the real estate industry is, it is nothing compared to what you are now getting into.

In filling out your application keep in mind what the ultimate question is. The department is looking to confirm that you have the financial responsibility, experience, character and general fitness to command the confidence of the community and to warrant belief that your business shall be operated honestly and fairly.

Think of this application as your first mortgage application. Everything you write on the application needs to have the necessary supporting documentation. If anything is left blank or a question is raised, the package will be sent back to you for correction. No matter how fast you would like to move forward, the department will move at its own pace. There is nothing more you can do than try to anticipate any questions and be thorough in your presentation. An investment of a little time in the beginning will go a long way in shortening the turnaround time.

Along with your completed application you need to provide at least the following documents:

1. A copy of your real estate broker’s license. If you are not a broker, then you will need a signed affidavit from a previous employer to confirm you have a least 2 years experience in the lending industry. The letter needs to be specific as to the duties and responsibilities of your position under that employer.

2. A check for $1,500.00 to cover the department’s cost for the investigation.

3. The department will send you 2 fingerprint cards with the application package. You will need to go to a local police precinct and get fingerprinted. You need to submit those cards along with another check to cover the cost of a State as well as a Federal investigation regarding any criminal past you may have in the financial industry. The costs of these investigations are constantly going up. The amount of the check you will need to write will be in the department’s cover letter that accompanied the application package. The current fee is around $75.00.

4. If the name of your mortgage brokerage company contains a restricted word, then you must get permission first from the Department prior to using it. Words such as mortgage, finance, acceptance, bank, investment, loan, savings or trust, need prior approval. You must to request the use of the word in writing. Send a letter to the Banking Department requesting the use of the word and note that the reason is for application for a mortgage brokerage registration. The department will then issue you an official letter of permission that you will need to add to your application package.

If you have any questions while you are putting your package together, don’t be afraid to call the department for answers. I’ve always found them to be responsive and if you ask specific questions, you will get specific answers. The more specific your question, the more useful the answer will be.

Some people feel the need to hire an attorney to review the application prior to submission. This is an added expense of $3,000 or more, that you probably can avoid. If you can’t assemble an application package on yourself or your company, where you know everything there is to know, what chance do you have of getting a stranger, who you know very little about, a mortgage? Of course if you have some unusual complications in your life, such as a felony conviction or have a broker’s registration or banker’s license revoked, then using an attorney would definitely be advisable. Just be sure to use one who is familiar with the banking regulations or he will do you no good.

Magnitude of the Investment of Time & Money:

It will take several months for the department to approve your application. While you’re waiting for your approval, it is a good idea to examine how much time, effort and money you are going to need to invest. It would also be a good idea to take your first 18 hours of approved education while you're waiting for the approval. This will give you a stronger foundation to conduct a successful business once your registration is issued.

You’ve already invested in several days of work just to get familiar with the regulations and set up your application package. You’ve spent nearly $1,600.00 just to get your application submitted. When you are told you are approved, you will need to apply for your surety bond. As of 2004 every mortgage broker needs to have a bond issued for the exclusive use of the Superintendent of Banks to collect unpaid fines to the department and for reimbursement of improperly collected consumer fees by the mortgage broker. Besides the paperwork the bonding company will require, you will have the additional ongoing annual expense of the bond, typically about $500.00. Once this is done you need to invest another day going down to the Banking Department, meeting with them so they can tell you what they expect from you. Then you will need to invest 18 hours of your time every 2 years to meet the new continuing education requirements that became effective January 1, 2008.

Your ongoing expenses with the department will consist of an annual assessment based on the gross revenue of your business in the previous calendar year. The Banking Department is totally funded by the entities it regulates. Each year they calculate their budget for the upcoming year. They then analysis how much of their budget is spent supervising each type of business they regulate. The projected cost for supervision of Registered NYS Mortgage Brokers in the upcoming year is then billed proportionally to each Broker. At the end of each calendar year a broker must file a Volume of Operations Report (VOOR) with the Department. This report contains, among other things, the total amount of money a Broker collected in application, processing, origination fees and yield spread premiums. This number is then used to determine the broker's share of the Department's budget and he is then billed accordingly.  

Your ongoing cost for the bond is based on you volume of originated mortgages. The more mortgage applications taken, the higher the amount of the bond. The range is from a low of a $10,000 bond (24 applications or less per year) through a $100,000 bond (600 and above applications per year).

I would budget at least 50% of one employee’s time to handling the mortgage side of your business to start with. Anticipate it going to 100% within a short period of time. This person will be responsible for processing your files, answering routine questions from both the applicants and the lenders, monitoring the status of your files and coordinating the closings. Of course you will need to train this employee. Either you will have to take time out of your schedule to train this person or you have to pay to someone else to do the training.

Once you have your mortgage broker’s registration, technically you can originate mortgages. In reality, however, you can’t originate a mortgage until you have a lender prepared to accept submission packages from you. So, the first thing you need to do after the department gives you your registration, is to get on board with the lenders you wish to do business with. Each lender will have its own application package for you to fill out and each lender will take a different amount of time to approve you. Another investment of time.

You must also address all the little things that need to be done. Business cards, stationary, phone lines, signage, etc. are just a few of the things that don’t take much time individually but when totaled up, will eat up a substantial amount of your time. Time that is taken away from the business of making money.

Overview of Regulatory & Compliance Issues:

The New York State Banking Department is not the only agency you are accountable to. You must remain in compliance with the regulations issued by the Department of Housing and Urban Development (HUD). These Federal regulations were not given to you in the original package you received from the Banking Department. It is left up to you to find them, understand them and stay on top of any revisions to them.

The first set of federal regulations you need to be aware of are part of the Real Estate Settlement Procedures Act (RESPA). RESPA was written to prevent kickbacks in a real estate transaction. It essentially states that there can be no payments made to any entity in a real estate sale for any services that were not actually performed.  Every cost paid by the consumer, either directly or indirectly, must be itemized. A “Good Faith Estimate” of closing costs must be given to an applicant within 3 days of an application being taken. Since you are originating the mortgage, you are responsible for issuing this disclosure.

You are also responsible to the Truth in Lending Act (TILA). TILA requires a disclosure of the true cost of credit to the applicant during that same 3 day period. This act requires you to calculate the Annual Percentage Rate (APR) on each application. The APR is a calculation that factors in the note rate of the mortgage and certain closing costs that are considered to be a prepayment of interest. This, in theory, alerts the consumer as to the true cost of credit of the mortgage they are applying for and can compare it to other sources of financing.

Since you will be required to make this disclosure also, this would be a good time to explain what this disclosure is all about. Back in the 70’s, mortgage rates were set by the Federal government. Everyone  paid the same rate, no matter where in the country they bought a home. When it was 8 ¾% in New York, it was 8 ¾% in Florida. If the cost of money went up and it wasn’t particularly profitable for a lender to make money in the home mortgage market, they simply wrote less mortgages until the Federal government raised the rate. With the inflation rate increasing and the public having more places to save their money besides the basic savings account, something needed to be done to stabilized the flow of money into the mortgage market.

The government’s response was to allow the mortgage rate to become a free market rate. As the cost of money would increase, so would the mortgage rate. When the cost of funds would go down, so would the mortgage rates. At the same time the GSE’s, FANNIE MAE & FREDDIE MAC, came into play as a place for lenders to sell off their mortgages, if they chose to. Making mortgage rates responsive to market conditions permitted a consistent flow of money into the mortgage market.

Once lenders had some pricing flexibility, they began to look for ways to differentiate themselves from each other. One way they did this was by introducing the concept of points. A lender could offer a lower interest rate by collecting points up front on the loan. The government said this is all well and good, but a disclosure would have to be made so the consumer could compare different rate and point combinations. The A.P.R. (Annual Percentage Rate) was created. The APR is a blend of the note rate and any upfront interest charges.

Let’s take an example. Let’s say you are borrowing $100,000 @ 8% for 30 years. The monthly payment would be $733.76. If, however, you paid 2 points you really didn’t receive $100,000 you only received $98,000 ($100,000 – 2 points). You are now required to recalculate the interest rate based on a mortgage amount of $98,000, a monthly payment of $733.76 over a 30 year term. Your new interest rate is 8.21%. This is the APR. Now over the years additional charges have been deemed to be prepayment of interest and also must be added in to the upfront finance charges. This makes the calculation a little more complex, but the theory behind it is still valid. It gives the consumer a wake up call that the real cost of the mortgage is higher than the note rate. How much higher is dependant on certain up front costs. If the disclosure is read by the applicant, it will generate the question. That really is all the disclosure was meant to do.

Another federal regulation you need to be aware of is the Home Owners Equity Protection Act (HOEPA), also known as Section 32. This is a form of consumer protection, written to protect the public from predatory lending in refinancing. A mortgage will under this Act if it meets either of the following thresholds. First there is the rate test. If a mortgage is written with an interest rate, which is 8% or more above a similar term T-Bill for a first mortgage or 10% or more above a similar term T-Bill for a subordinate mortgage, the mortgage will need to comply with the additional restrictions imposed by this Act. Then there is the fee test. If the closing costs exceeds 8% of the mortgage amount or $561.00 whichever is higher, then again the mortgage will need to comply with the additional restrictions of the Act. Section 32 requires additional disclosers and more stringent consumer protections making it more burdensome for a lender to seek legal recourse in the case of a default. Since a borrower can easily lose the equity of the home or lose the home completely in a foreclosure action, the penalties in violating this act are severe.

Any lender involved in closing on loans with costs of such a magnitude that they are either close to being a HOPEA loan or have crossed the threshold into a HOPEA loan, have a high potential for financial liability. They will closely monitor your actions to protect themselves. By working closely with the lender, you will be able to protect yourself also.

New York State, unlike most other States, identifies the mortgage broker as the agent of the borrower. You are required to disclose, on first contact with the applicant, what services you can and cannot provide as well as the cost of your services. These upfront disclosures will need to be signed before you can do anything. In Part 38 of the Banking Law you will find a detailed description of what you need to have in these disclosures. They even supply you a model disclosure form that you can simply copy onto your letterhead if you wish.

Although this guarantees compliance, I don’t recommend you take this approach. This form was written by a committee made up of banking department personnel, brokers, bankers and attorneys. As a result, the disclosure becomes burdensome and certainly not user friendly. It definitely pays to take the time and develop your own form.

The Disclosure form needs to include the following:

1. You do not make mortgage loans or commitments.

2. You cannot guarantee acceptance into any particular loan program.

3. Your services are advisory and administrative in nature.

4. You are being authorized by the applicant to assist them in securing financing. You will counsel them on available mortgage products, general mortgage qualifications, their financial capabilities and meeting conditions of the loan commitment.

5. If you work with 3 or fewer lenders, you need to state that and identify the lenders.

6. You need to state the rate, points, fees and other terms quoted at commitment by or on behalf of the lender encompassing the consideration to be received by you from the lender for your services.

7. You will need to disclose the maximum amount of such consideration to be received. Since this disclosure is made at first contact and you cannot commit a lender to make a mortgage, it would be impossible to specify the exact compensation you will receive from the lender.

8. You need to show the amount of the application fee, processing fee and a good faith estimate of the cost of the appraisal and credit report, and the terms and conditions for obtaining a refund of such fees, if any.

9. You will need to show the specific services, which will be provided or performed for the application fee and the processing fee.

10. You need to disclose the points paid from the applicant to you for compensation for your services. You also need to disclose when the fee is payable, it cannot be any earlier than at the time the commitment is accepted by the borrower.

11. Any premiums or bonuses to be paid by the lender to you as well as on what basis or eligibility there is for receiving the premiums or bonuses.

12. If the transaction involves more than one mortgage broker, a co-broke situation, then this must be disclosed as well as the terms of the co-broke.

13. You must disclose that certain mortgage products impose a prepayment penalty. You will disclose the amount of, or the formula for calculating, the prepayment penalty, and the terms of the prepayment penalty, if any, as soon as you know them.

14. You must give them the name and phone number of a person in your company that can be called for questions regarding the application. If your applicant lives greater than 50 miles from your office you must provide them either with an 800 number or be willing to accept collect calls from them.

15. If you are placing loans with private lenders, that is a lender that is neither an exempt organization nor licensed pursuant to Article 12-D of the Banking Law, you must disclose that. Therefore, certain consumer protections will not apply to the loan.

At the time of application, the only fees you can collect are the application fee and the estimated costs of the appraisal and credit report. If you are collecting a processing fee, you can collect it only at closing. Remember there can only be one application fee and one processing fee paid per mortgage. If your lender is charging either one, you cannot.  These fees, as all fees regarding a mortgage, must be reasonably related to the services performed on behalf of the applicant. Neither fee can be based upon a percentage of the principal amount of the loan or the amount financed.

If you are taking the application electronically, that is via the Internet, then your e-mail address must also appear on the pre-application disclosure.

Part 41:

New York State’s response to predatory lending concerns is found in Part 41 of the Banking Law. This regulation went into effect in October 2000. Just as in HOEPA, there are 2 threshold tests to see if a mortgage will fall into the high cost category. Here the fee threshold is 5% of the mortgage amount, without any alternative minimum dollar amount. The rate test is 8% over the Treasury rate for first liens and 9% for any subordinate liens.

Any charges  received by the lender or an affiliate of the lender including all compensation paid to a mortgage broker are used to calculate the fee threshold. The only fees that are not included in the total are bona fide discount points, money collected in escrow for taxes or insurance as long as the charges are not ultimately being paid to an affiliate. A point is presumed to be a bona fide discount point if it reduces the interest rate by a minimum of 35 basis points (approximately 3/8%).

These tests apply for mortgages written on primary residences only and for loan amounts below the FNMA limit or $300,000, whichever is lower (Currently the FNMA limit for all property types is greater than $300,000 making the threshold $300,000 in all cases). The mortgage can be for purchases or refinances and the borrower must be a natural person. The debt incurred by the borrower is primarily for personal, family or household purposes.

If you are originating a mortgage that will fall into this category, the following will apply:

1. No call provision. No high cost loan may contain a call provision that permits the lender, in its sole discretion, to accelerate the indebtedness. This prohibition does not apply when repayment of the loan has been accelerated by a bona default, pursuant to a due-on-sale provision, or pursuant to some other provision of the loan agreement, unrelated to the payment schedule such as bankruptcy or receivership.

2. No balloon payment less than 7 years. The department has discovered a high number of mortgages that were written with very short balloon periods, sometimes less than 1 year. It became obvious to the department that these loans were written for the sole purpose of forcing a refinance as quickly as possible, so new fees can be generated.

3. No negative amortization. Negative amortization is created when the required monthly mortgage payment is not high enough to even pay the interest due for the month, so the shortfall of interest payment is added onto the mortgage amount. Negative amortization is a powerful tool under the right circumstances, however the department has found lenders abusing the tool and responded by restricting its use.

4. No increased interest rate.  This doesn’t mean a high cost loan can’t be an adjustable, what it does mean is that in the case of the loan defaulting, the interest rate can’t be increased. The premise here is that the rate is already high enough and therefore no increase is warranted.

5. No advanced payments. You cannot incorporate into the mortgage amount more than 2 mortgage payments. For example, a mortgage closing in January cannot have February's through June's mortgage payments paid directly out of the proceeds of mortgage at the closing.

6. No modification or deferral fees. You cannot refinance a high cost loan into another high cost loan, and charge fees for it. If you are refinancing a loan from a high cost loan to one that is not, the interest rate must drop by 2%. If the refinance is a cash out situation, a lender can only charge closing costs on the new money and those costs must be in line with the closing costs normally charged by that lender. In other words you cannot increase the closings costs on the new money to make up for the fees you are not entitled to on the original mortgage amount.

7. A list of approved counselors must be provided to the applicant. The list is provided by the banking department and it is your obligation to give the list to the applicant. Counseling is not mandatory, just the disclosure is.

8. No lending without due regard to payment ability. This is an attempt to eliminate pure high cost equity lending. If the borrowers disclosed income is no greater than 120% of the median family income for the Metropolitan Statistical Area (MSA) in which the subject property is located then you must be able to prove that the borrower can reasonably expect to afford the monthly payments. This was in response to lenders writing mortgages in which their only goal was to foreclose on the property. Remember if the applicant discloses an income greater than this threshold, then this restriction doesn’t apply.

9. Financing of points, fees or charges. In making a high cost purchase mortgage loan, a lender cannot require an applicant to incorporate any fees in excess of 5 percent of the mortgage amount into the mortgage amount. The key phrase here is – require. Should the borrower elect to finance any or all of his closing costs into the mortgage, he certainly can. The lender, however, cannot make it mandatory. In the case of a refinance, the lender cannot finance more than 5 percent of the mortgage amount to cover closings costs. This is the case even if the borrower wishes to, or has no other way to pay the additional costs. This is done to protect people from themselves.

10. Frequent refinancing of high cost loans. This section only applies to a lender refinancing its own high cost mortgage and all refinances originated through mortgage brokers. In refinancing one high cost mortgage into another, fees can only be charged on the new money. The part of the mortgage that is over and above the balance of the existing high cost mortgage. These fees can only be in line with the lender’s typical point and fees structure for high costs loans.

11. Restrictions on home improvement contracts. A lender cannot disburse directly to a home improvement contractor. Checks must be drawn directly to the borrower, issued as two party checks or if the borrower requests it, to a third party escrow agent with a specific agreement between the agent and the borrower as to the conditions specifying when the money is to be released to the contractor.

12. Detail the actual effect of the new monthly payments. In addition to the standard Part 38 disclosures, this additional disclosure must be made, when applicable. “Although a borrower’s aggregate monthly debt payment will decrease, the high cost home loan may increase both (i) a borrower’s aggregate number of monthly debt payments and (ii) the aggregate amount paid by a borrower over the term of the high cost loan.” Again, if this is not the case, this disclosure does not need to be made. Remember this disclosure must be made at least 3 days prior to closing.

13. Reporting requirements to credit agencies. Lenders must report both the favorable and unfavorable payment history of the borrower to a nationally recognized consumer credit bureau at least annually.

14. Referral Sources disclosure. Mortgage brokers and lenders must report to the Banking Department annually, on or before March 31st in each year, the names and addresses of the three home improvement contractors, the three consultants and the three attorneys who provide the most referrals, if any and the three to which the broker or lender make the most referrals, if any. They must also provide the names and address of any home improvement company that is an affiliate.

15. High Cost Mortgage acknowledgement. The following statement must appear above the borrower’s signature line on the application: “The loan which will be offered to you is not necessarily the least expensive loan available to you and you are advised to shop around to determine comparative rates, points and other fees and charges.”

16. Unfair and deceptive acts or practices. This last section of the regulation addresses how you conduct business. If you meet any of these standards, then you are deemed not to meet the requisite character and fitness to be licensed or registered by the State.

• The making of high cost home loans that demonstrate a pattern and practice of violating any provision of this part. The provision of this section shall apply to any lender that seeks to avoid its application by any device, subterfuge or pretense whatsoever.

• Engaging in any unfair, deceptive or unconscionable practices in the course of advertising, brokering of making high cost home loans.

• Brokering or making a high cost home loan which includes points, fees or other finance charges that, considering the loan transaction as a whole (including creditworthiness of the borrower, the terms of the loan, the value of the collateral, and the owner’s equity in the collateral), so significantly exceeds the usual and customary charges incurred by the consumers in this state for such points, fees or other finance charges as to be unconscionable.

• Brokering or making high cost home loans in which the broker or lender charges fees and retains fees paid by the borrower for services that are not actually performed or for which the fee bears no reasonable relationship to the value of the service actually performed.

• Brokering or making high costs loans with repayment terms that so exceed the borrower’s financial capacity to repay as to be considered unconscionable.

• Flipping high cost home loans, that is, brokering or making a high cost home loan to a borrower that refinances an existing mortgage loan when, considering all the circumstances of the refinancing, such refinancing is unconscionable.

• Packing high cost home loans. That is, the practice of selling credit life, accident and health, disability or unemployment insurance products or unrelated goods or services in conjunction with a high cost home loan without the informed consent of the borrower. Specifically when the broker or lender solicits the sale of the goods or services, receives compensation either directly or indirectly or are prepaid with the proceeds of the loan by being financed as part of the principal amount of the loan.

17. Recommending or encouraging default or further default by a borrower on an existing loan or other debt, prior to closing on a high cost home loan that refinances all or any portion of such existing loan or debt.

18. Advertising that refinancing pre-existing debt with a high cost home loan will reduce a borrower’s aggregate monthly debt payment without also disclosing, if such are likely the case, that the high cost home loan will increase both (i) a borrower’s aggregate number of monthly debt payments and (ii) the aggregate amount paid by a borrower over the term of the high cost mortgage loan.

Office Issues:

We’ve addressed your responsibilities to the public, both on the State and Federal level. Your responsibilities don’t end here. You also will be signing contractual agreements with your lenders. You will be expected to perform proper due diligence on each submission package. You will also be expected to have a fraud prevention policy in place. These issues can’t be taken lightly. Lenders supply you with the place to broker your loans, without them you have no business.

You last responsibility is to your staff. By hiring originators, processors, etc. you are representing to them that you are willing to give them the training they need and the support necessary for them to do their jobs. Remember, your company is only as good as your staff. They are an extension of your company and can make or break you. If they cannot do their job correctly and with integrity it is your problem, not theirs.

While we are on the topic of staff it would be a good time to look at the differences between how a real estate office currently operates and how a mortgage brokerage operates. A real estate office basically consists of the broker-owner, licensed salespeople and support staff. The broker-owner pays the salespeople as independent contractors and support staff as employees. The broker can do this because of a specific clause in both the State and Federal labor laws. That clause identifies licensed real estate salespersons, when they are acting in their licensed capacity, as independent contractors. The only downside to this arrangement is that the broker must be careful that the support staff doesn’t cross the line, doing any work that might be interpreted as needing a license for.

In a mortgage brokerage company you will have the owner-broker, originators and support staff, similar to the real estate office setup. There is however one important differences. The use of independent contractors. There is no carve out in the labor laws regarding originators or any other member of the staff. So if you plan on compensating your originators as independent contractors, be prepared to prove they are in fact independent. This will not be particularly easy to do. The Banking Department requires you to file with them an undertaking of accountability, where you identify each independent contractor as originating mortgages for you, and only for you. This flies in direct conflict with the basic premise of an independent contractor. You also need to be aware that only individuals can be on your undertaking. No other entities, such as a corporation, can be listed.

Effective January 1, 2008 anyone originating mortgages needs to be assigned a Mortgage Loan Originator (MLO) number. If the owner/broker originates mortgages he will need to get a MLO number also. An originator will need to make application to the NYS Banking Department, pass a criminal background check, pay all the required fees and agree to attend 18 hours of approved continuing education every 2 years in order to receive his MLO number. The originator will then be listed on the Department's web site along with the banker or broker that he is working for. Every application taken will not only be signed by the originator but will also show his MLO number. This prevents an originator from working with multiple bankers and/or brokers at the same time. It also creates an audit trail ending with the individual that originated the mortgage. Originators are now being held accountability for their actions. 

In setting up your buyer’s brokerage you will need to address this issue from the very beginning. Mortgage brokerage compensation can be paid the same way you pay your real estate brokerage compensation, and take your chances. You can segregate the mortgage brokerage fee out of the total commission and pay that as employee compensation. Or pay all the commission earned as salary. It will be your choice. Just recognize all the pros and cons under each scenario, acknowledge the risk exposure and make a business decision. Whichever way you chose to go, be sure to have a written agreement with your originators. In this way you will have documentation in the event you have any problems with an originator. 

Personally, I would seriously consider paying all compensation as salary. Salary can be commission based, all you need to do is to withhold the payroll taxes, pay your share of Social Security and pay for unemployment insurance. In return you have the ability to set up a company benefit program, either company paid, employee paid or shared. It gives you many different options to create a package of benefits that assist you in retaining your staff. The employment contract that you enter into with your commissioned based personnel needs to be carefully written. It would be a good investment to have this agreement written by a labor law attorney. 

The reason for this is to protect you from problems developing with the Department of Labor. If this agreement is not properly done you can find yourself in violation of the minimum wage law or laws governing when overtime needs to be paid. It is much less expensive to set yourself up properly in the beginning than it is to correct mistakes in later years. It would be in your best interest to have an attorney who specializes in labor relations write this employment contract for you. It should also be reviewed periodically to confirm it is in compliance with any revisions to the Law.

Remember, a ruling made by the Department of Labor against you can easily put you out of business. Both the Federal and State governments feel that they are losing revenue due to the misclassification of employees as independent contractors. The better your employee contract is written today, the stronger position you will be in should the Department of Labor have questions for you. This is why I strongly recommend that your contract by written by a professional.

At your office you will need to post your mortgage brokerage registration and all the MLO registrations along with your real estate license. Confirm that the address that’s on the registration matches exactly the address of your office. If it doesn’t match, it will be cited as a violation by an auditor. You will need to have a sign made up that reads, “A mortgage broker is not empowered to make mortgage loans”. The lettering must be at least 2” high and the sign need to be prominently displayed. Use the exact wording and maintain the 2” requirement, or it will be cited.

Any place your company name appears, it will now have an additional tag added to it. “Registered Mortgage Broker-NYS Banking Department” needs to appear wherever your name is used to solicit business. Any signage on your building, fliers, etc. require this to appear. Business cards, letterhead and general electronic media communications, to the extent that they are not used for general advertising purposes, need not include the legend.

In any advertising you do, in addition to the legend, you will need to comply with the following:

1. The ad must include the name of the entity and the address.

2. If you are advertising a specific product, you must have the product available to a reasonable number of qualified applicants responding to the advertisement on the day of the advertisement, or the next business day.

3. The wording of the ad cannot in anyway imply that the mortgage broker will fund a mortgage loan. The phase, “arranges mortgages loan with third-party providers” must appear in all advertisements.

4. No mortgage broker shall fraudulently or deceitfully advertise a mortgage loan or misrepresent the terms, conditions or charges.

5. If you quote an interest rate, you must also quote the APR of the loan. The APR must be in at least the same size and font as the note rate.

Branch offices:

You can operate out of more than one location. Each location you operate at must maintain a branch office registration.

A branch is any location where applications are taken and/or loans are processed on an ongoing basis. Taking an application at a borrower's home or office doesn't require a branch location. If you have a location where you regularly meet applicants then you will be required to set up a branch at that location. This will require a person responsible for the office, its own set of files and logs, dedicated phone lines and stationary.

At one time The Department recognizes the fact that most branch offices were created for the sole purpose of meeting applicants and taking the application. Processing is done at the main office. In May of 1997, the Department created the category of Loan Solicitation Office. As the name implies, this location is set up for the sole purpose of taking applications and didn't require it own set of logs or an office manager. As of 2006 The Department changed their position on this and eliminated the category of the Loan Solicitation Office. Now all branch offices are treated the same regardless of how much work is being done at that location.

Co-Brokering:

As a mortgage broker you are permitted to co-broke a mortgage application. The first thing you will need to do is disclose it. The nature of the co-broke, what fees and how much are being split and to whom will need to be added to your pre-application disclosure and fee agreement.

Since this disclosure is submitted to the lender as part of the submission package, the lender will also be notified of the arrangement. Lenders, as the ones with the money at risk, don’t like to deal with entities that they know nothing about. If you are co-brokering a file with another mortgage broker and the lender hasn’t already approved that broker to submit files, the file will be immediately returned.

Co-brokering is commonplace in real estate transactions, but they are rare in residential mortgages. Remember the co-broker disclosure, as well as everything else we’ve been discussing, only applies to 1 to 4 family, co-op’s and condo which are for owner occupancy. 

Required files that you need to maintain:

The Banking Department requires you to maintain several files at all times in your office. These files need to be made available for audit purposes whenever the department wishes to evaluate your company.

1. The Banking Department file. All communications from the banking department to you and all communications from you to the banking department must be maintained in this file. This file actually started the day the department sent you copies of Article 12D, Part 38 and Part 41 of the Banking Law.

2. Advertising File. You must maintain a copy of all advertisements, whatever form, for a 2 year history. All printed ads, radio, TV, hand-outs, fliers, etc. must be in that file.

3. Volume of Operations Report. Each year the Department will request you fill out a Volume of Operation Report. This report will include the total number of applications you wrote, the total dollar value of these applications and the 3 most frequently used lenders with their individual submission totals. These reports must also be kept.

4. Customer Compliant File. You need to keep a record of any complaints filed against you with the Department and what you did to address the compliant. A customer files a complaint with the Department. The Department forwards you a copy of the complaint and directs you to address it. You address the issue, respond to the customer and to the Banking Department. This entire package of correspondences need to be kept on file. If you have no complaints, you need to have an empty file labeled "complaints".

5. Audit file. You need to maintain the findings of at least your most recent audit. I recommend you keep the results for several cycles. Each auditor looks at things slightly differently and what looks like repeated violations can be shown to be personality revisions. Having historical records available for the auditor will prove to be to your advantage when you are discussing issues with him.

6. Application Log. You must maintain a log of every application you take in and it must include the following data:

• An application number

• Date of the application

• Mortgage amount

• Applicant’s name & address 

• Property address

• Referral source (name and description)

• Was a referral fee paid and if so, how much

• Originator’s name

• Lender’s name

• What fees were collected by you

• When did you receive the fees

• What were the fees for

• What fees did you pay out

• What person or entity did you pay

• When did you make the payments

As you can see, the application log covers the entire money trail on an application by application basis. You cannot be too careful with this log.

Audits:

Within 6 months from receiving your registration you will be contacted by the Banking Department to arrange for your first audit. An examiner will come to your office and review what you’ve been doing since you received your registration. They don’t expect to find many files, as they know you’ve only been in business for a short period of time. They are simply coming in to make sure you are starting off on the right foot.

The examiner will go through your office looking for the proper signage, check your files and look over your log. As of 2007 the scope of the audit has been expanded to include confirmation of the "safety and soundness" of the entity being audited. The auditor will be looking at the financial condition of the entity. Does the company have sufficient cash reserves to properly function? He will be looking at what controls you have in place to secure access to your client's personal information. The audit has been expanded to cover all aspects of the business in order to confirm 3 general things. First, that the customer's privacy is being properly protected. Second, that the day to day operations of the business is in full compliance with State and Federal Regulations. Third, that there is enough capital available to the company to meet its obligations in the event The Department obliges customer fees to be refunded and/or fines and penalties to be paid. When he’s done, he will sit down with you to discuss what he’s found and what he wants you to do to correct the issues. He will then file his report to the Department.

Six to eight weeks later you will receive a written report with the results of the audit. Hopefully you took notes with the auditor so you can now address the specific issues he had and respond to the report. Make whatever revisions you need to your operation and respond to the Department. File this package away in your audit file. The Department has built into your annual assessment the cost of a routine audit. If for some reason the auditor spends more time than expected doing your audit, you will be billed for the additional hours involved.

The cycle for routine audits is normally 1 every 3 years. The Department will increase the frequency of the audits if it feels that your company needs to be monitored more closely based on consumer complaints or audit findings. They will also increase the frequency of audits industry wide if they feel it necessary. An increase in Predatory Lending complaints would be one example that would trigger more frequent audits throughout the State.

You can be assured that if the Department is not happy with the way you are conducting business, you will see them more often than the average broker. You may even see them for more than the two day timeframe of a typical audit if you give them reason.

If a serious problem is detected, either at the audit or in your response you will be invited to come down to the Department for a more detailed discussion, which could lead to disciplinary action. The enforcement powers of the Banking Department run from a warning through fines (limited to $5,000 per violation and $100,000 per proceeding), suspension or revocation of your registration and in extreme cases they can bring legal action against you.

No matter what the result of this meeting, outside of a warning, all other responses become public knowledge. It is printed in their weekly bulletin and posted on their website at: www.banking.state.ny.us. The one group that religiously reads the weekly bulletin are the wholesale lenders. Should your name appear for any disciplinary action, you can be assured each wholesaler will be contacting you to reevaluate their relationship with you. As I mentioned earlier, you can’t conduct business if you have nowhere to place your applications.

Relationships with lenders:

The simplest way to originate mortgages for a fee would be to work as a MLO for a mortgage broker or banker. The advantage here is simple. You need only to find a broker or banker with whom you think you can work, arrange a compensation package for yourself, get your office registered as a branch office of his and you’re in business. The limiting factor here is you are the only individual that can originate the mortgage. Your staff cannot, unless they have arranged a deal directly with that broker or banker. There is no legal way for you to be compensated as the originator and be able to pass any of that compensation to anyone else. If you’re a one person brokerage, this will work fine, but you’ve sacrificed all growth potential.

The other extreme is to become registered as a mortgage broker, deal with all the complications we’ve been discussing today, maintaining full autonomy and therefore expand as you see fit. There are several other approaches that can also be used. We are going to look at some of those options now. You must remember that all these variations carry a risk factor. I began the day by pointing out that all the regulations we deal with are vague and are under constant evolution. An interpretation that appears legal today could prove to be wrong tomorrow. As the industry gets more and more creative in their business structures, it draws more and more attention to itself from the regulators.

Several years ago HUD revised RESPA to permit Controlled Business Arrangements (CBA’s). Shortly after they changed the name to Affiliated Business Arrangements because the word controlled sounded like they were condoning kickbacks by putting consumers in a controlled arrangement. This was a method for a lender to compensate real estate brokers by giving them a role in the application process. A lender would enter into an agreement with a real estate office. The office would agree to take applications from their purchasers for that lender and that lender alone. The lender would agree to pay the office for their role in originating the mortgage. This arrangement would require the broker to be registered as a mortgage broker but does permit other members of the company to also be compensated. The first drawback here is that the contractual arrangement with the lender may not be as easy to break as simply being an originator to a banker or broker. The second drawback is that you are not likely to see the compensation being as large as it would be when you are independent and you are limiting the possible places for funding mortgages to one source.

The latest variation to come on the scene is the concept of net branching. The theory here is that an ongoing, profitable mortgage brokerage wants to expand the business through utilizing the size and back office of a lender. The brokerage becomes a net branch of the bank. The bank supplies all the funding sources, back office support, better pricing on files based on the economies of scale of the bank, leads, advertising support, etc. The broker maintains control of the day-to-day operations of the business and is compensated based on the net profit of the business.

The big problem here is for this net branch to be 100% in compliance it does not have its own identity. Everything, including signage and licensing, is in the bank’s name. The only real difference here between a CBA and a net branch is that in a net branch arrangement you have pricing control and control of day-to-day operations. All fees are paid to the bank and the bank is responsible for paying your mortgage brokerage bills. Your compensation will be based on a percentage of the profits of your office.

Dual Agency:

As long as you work exclusively as a buyer’s broker, you should never be caught in a dual agency situation. In the event your office is doing conventional real estate brokerage in addition to working as buyer’s broker, you need to be aware of what triggers a dual agency.

Whenever you, or your company, are working with both the buyer and seller on a real estate transaction you enter into a dual agency relationship. Both the Department of State and the Banking Department have their own disclosures that will need to be executed. As a real estate agent you probably never had a dual agency issue arise. You have always been the agent of the seller, even when you are presenting an offer to purchase you are still recognized as the agent of the seller.

Dual Agency is deal specific. If your office is operating both as a conventional real office as well as a buyer’s broker every deal does not create a dual agency. If you’ve sold an office listing and are also doing the mortgage, then you have a dual agency. If you’ve sold a listing off of MLS or any co-broke from another real estate office and are doing the mortgage, you have a dual agency. If you are not doing the mortgage you may or may not have a dual agency. That would depend on the details of the agreement you have with your client and what representations you’ve made to the sellers and their agent.

Currently there hasn’t been much attention directed to dual agency issues by the Banking Department. That’s why the real estate brokers today that also are doing mortgages have been able to get away without having this disclosure signed. It is only a matter of time for dual agency to be a target issue with the Department.

The reason I feel this will become an issue shortly with the Department is based on the observation that they are currently collecting data from all licensees and registrants regarding their ownership and affiliations with other industry entities. They started several years ago with a survey that demanded from all companies that they identify all cross ownerships and affiliations. Their latest revision to the Banking Law (Part 41), is requiring similar data on an annual basis. The Department isn’t collecting this data for general information. They are creating a database, which will be used as a starting point to detect kickbacks, dual agency violations and fraud.

On each audit cycle, the Department focuses in on an aspect of the business. On one recent cycle, it was the application log. The auditors wanted more detail than ever before to be added to the log. In 2005 they were focusing in on the checkbook. The only reason for them to be focusing on the checkbook is to see who is getting paid. In 2006 the focus has expanded to include the financial stability of the entity and its security protocols. We've been told by the Deputy Superintendent of the Banking Department that through 2006 they have been moving more senior auditors into the mortgage banking division. Higher seasoned staff responsible to do more thorough audits is the current trend. It is only a matter of time before dual agency questions arise. It will be in your best interests to be prepared.

The regulation specifically states that, “The dual role performed by the mortgage broker, or a mortgage banker or an exempt entity acting as a mortgage broker, in those instances when the mortgage broker is also the real estate broker in the same residential real estate transaction, must be disclosed at the first substantive contact between the mortgage broker and the buyer/borrower. The appropriate disclosure form and acknowledgement…must be provided and signed by the buyer/borrower and the seller before services as a mortgage broker may be rendered.  The…disclosure and acknowledgement apply to those transactions in which the real estate broker representing the seller and the mortgage broker representing the buyer/borrower are the same person or entity.”

The disclosure needs to have very specific language in it. For example:

• By consenting to Dual Agency you are giving up your right to undivided loyalty. You should carefully consider the possible consequences of a Dual Agency relationship before agreeing to such representation.

• Since I am not a legal expert or an attorney, you may wish to consult one before signing this form.

• I understand that as a real estate/mortgage broker you may be representing the interests of the seller in the sale of the residential real property and the buyer in the acquisition of the mortgage loan and that you will be unable to offer the full range of fiduciary duties to each of us.

• I understand that…I the seller may engage my own broker as a real estate broker who will not act as a mortgage broker for any potential buyer/borrower in this transaction; or that as a buyer/borrower may engage my own broker as a mortgage broker and/or my own broker as a real estate broker who will not act as a real estate broker for the seller in this transaction.

This form must be signed and dated by both the buyer and the seller and must be kept on file by the mortgage broker for at least 3 years.

The requirement went into effect in March of 1993. In order to clarify any questions the industry may have had, the Department also published a Q&A sheet. I’m now going to go over a few of those questions.

Q.     Is a real estate broker/mortgage broker acting as a buyer’s agent on the real estate side of the transaction required to make disclosure?

A.     Yes, but only when the real estate broker representing the buyer is also representing the seller as listing broker for the property the buyer seeks to purchase. This would arise when the buyer chooses a property listed by the real estate broker (in-house sale) and receives mortgage services from the real estate broker/mortgage broker. A buyer’s agent selling another broker’s listing does not represent the seller and disclosure is not required.  

Q.   Can I represent the buyer as a mortgage broker if the seller objects?

A.   No. In order to proceed in a dual agency capacity, informed consent of both parties is required.

Q.      If the real estate brokerage and the mortgage broker are separate corporations under common ownership, is the dual agency disclosure required?

A.     No. Common ownership by itself does not constitute dual agency. However, related entities should be careful in their dealings, to avoid dual agency by incorporating strong functional separation of duties and careful compliance with controlled business arrangement disclosures and restrictions imposed by the Real Estate Settlement Procedures Act (RESPA).

Let’s take a closer look at this condition. You own a real estate company and a mortgage company as 2 separate entities. They work totally independent of each other on a real estate purchase. As long as there is no exchange of information between the companies, you have no problem here. 

Let’s say however, you want to compensate the real estate person in some way for directing the mortgage application to your other company. Now you have a problem. If no work was performed on the application by the salesperson, then any compensation paid to the salesperson is now a RESPA violation. Payment made but no services actually performed. If work is actually done on the file by the salesperson, then you have a duel agency situation and the disclosure needs to be signed by both buyer and seller.

None of this poses a problem when you are exclusively a buyer-broker.

 © Shelter Rock Mortgage Corporation, 2001 - 2008

One Hollow Lane (Suite 104) Lake Success, New York 11042

info@shelter-rock.com

Phone: (516) 627 - 0800

Fax: (516) 627 - 1056