Must Mortgage Brokers Complete and Deliver Mortgage Loan Disclosure Statements in Residential Mortgage Loan Transactions?

By Guy Puccio

Business and Professions Code Section 10240(c) purportedly extends an exemption to mortgage brokers when arranging “federally regulated residential mortgage loans.” However, this exemption is inapplicable to most loan transactions conducted by mortgage brokers registered with the NMLS as an LO (MLB/MLO) and even when arranging transactions where the loan proceeds are used for personal, family, or household purposes.

The phrase “federally regulated” is substantially narrower than “federally related.” Under current law, “federally regulated” loan transactions are loans made by nationally chartered or licensed banks, savings and loans, savings banks, thrifts, and credit unions; or if state chartered or licensed, those financial institutions that have opted for FDIC insurance coverage. The phrase “federal regulation” is operative with financial institutions and licensed lenders where oversight by the federal government extends to underwriting and funding loans, i.e., to ensure the “safety and soundness” of the financial institution.

Pursuant to the Truth in Lending Act (TILA), MLBs/MLOs are not “creditors” and, therefore, the completion and delivery of TILA required disclosure statements and notice of rights by brokers as third party originators is ineffective.

This issue was discussed in a case where a car dealer completed and delivered a TILA disclosure statement to a consumer/borrower when the loan was funded by a commercial bank. Similar to a mortgage broker, the car dealer was acting as a third party originator and not acting as the actual lender/creditor. The court held that the completion and delivering of a TILA disclosure statement by other than the actual lender/creditor is ineffective. See 15 USC Section 1601 et seq. and 12 CFR 226 et seq.; Vallies v. Sky Bank, Third Circuit No. 08-4160, 591 F.3d 152 (2009).1

California mortgage brokers may not characterize themselves as a lender/creditor unless the loan is made with the broker’s “own funds,” as defined. Except when subject to a specific exemption authorized by the Real Estate Law for commercial loans being delivered to a financial institution (as defined), mortgage brokers may not concurrent or table fund loans in California transactions. Further, neither California finance lenders acting under the Finance Lender Law nor mortgage bankers acting under the Residential Mortgage Lending Act may engage in concurrent or table funding, except when the mortgage banker is relying on funds advanced by a financial institution with whom the mortgage banker is affiliated or is a subsidiary. See Business and Professions Code Section 10234 et seq.; 10 CCR, Chapter 3, Section 1460; and, Financial Code Section 50003(t).2

Mortgage brokers typically act in an agency capacity. To fit the definition of a lender and creditor, the mortgage broker is required to make the loan from his, her, or its own capital or with funds obtained from an independent credit line that appears as a debt on the broker’s financial statement and the lender extending the line neither is committed to nor engages in the purchase of the loans funded off the line. In addition, the mortgage broker must approve of the loan and the loan may not be prior approved by the extender of the credit line. While it is possible to delegate loan underwriting, it is inappropriate to delegate loan approval. Unless the entity making the loan is a federally regulated financial institution or a federally approved mortgagee or seller/servicer (holds a “federal eagle”), the person or entity qualifying as a lender/creditor must regularly make loans with their or its name appearing as the payee on the promissory note and the beneficiary on the deed of trust, must approve of each loan, and must rely on their or its own capital or independent credit lines, as previously defined.2ibid Also, See 12 USC Section 2601 et seq. and 24 CFR Parts 3500 et seq.; and 15 USC Section 1601 et seq. and 12 CFR Section 226 et seq.

Even if a mortgage broker could fit the lender/creditor definition as outlined above, such loans would not be “federally regulated” under current law when funded by a mortgage broker. This may change if regulations under the “Dodd-Frank…Act” are promulgated as the Obama Administration would like control over all mortgages, including loans made by “non-banks,” e.g., mortgage brokers, mortgage bankers, hedge funds, etc. and whether such loans are secured by one to four units or otherwise secured.

In the meantime, TILA disclosures to have any effect or validity must be completed and delivered by the lender/creditor and not by a third party. However, a mortgage broker may act as the exclusive agent of the lender/creditor or as an authorized subsidiary of the lender/creditor (as defined) and, in such capacity, complete and deliver the TILA disclosures and notices of rights to the intended borrower. Few institutional or licensed lenders/creditors will authorize a mortgage broker to act as their exclusive agent or as a subsidiary. Thus, when the mortgage broker is acting as an agent of the borrower, the broker cannot comply with Section 10240(c). Accordingly, this statutory exemption from completing and delivering the mortgage loan disclosure statement would be inoperative and without efficacy.1ibid. In my opinion, Business and Professions Code Section 10240(c) should be repealed, as its application is too limited to have any significant effect.

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