Loan Origination Services and Transfers

Issue/Inquiry

Bank A will accept mortgage loan applications from its customers, which will be assigned to Bank B. Bank B will make the TRID disclosures, do the underwriting, make the credit decision, and close the loans in its name. Bank A will perform origination services for Bank B prior to closing, for which it will be compensated. Bank B will then transfer the loans to Bank A, which will service the loans. Will this arrangement satisfy the requirements of RESPA?

Response Summary

Bank A can receive compensation if it performs recognized origination services. If the loan is subsequently transferred by Bank B to Bank A, both banks will provide loan servicing transfer notices, as required by RESPA. Bank A will also provide a loan transfer notice, as required by Regulation Z. If an escrow account was established for the loan, Bank B will provide a short-year statement and Bank A may be required to make disclosures, depending on whether it changes the payment amount or computation method.

Response Detail

LOAN ORIGINATION SERVICES

As implemented by Regulation X, any person who gives or accepts a fee, kickback, or thing of value (e.g., payments, commissions, gifts, tangible items, or special privileges), pursuant to an agreement or understanding for the referral of settlement business involving a federally related mortgage loan, is in violation of Section 8. Any referral of a settlement service is not a compensable service, except as a permitted exception. 12 CFR 1024.14(a),(b). For the purposes of RESPA, a “federally related mortgage loan” is a loan made by a federally-insured lender (or insured by HUD or intended to be sold to Freddie Mac or Fannie Mae) and secured by one-to-four family residential structures. 12 CFR 1024.2. In addition, no person shall give or accept any portion, split, or percentage of any charge made or received for the rendering of a real estate service in connection with a transaction involving a federally related mortgage loan, other than for services actually performed. 12 CFR 1024.14(c). In order to violate the RESPA prohibition against fees or kickbacks, there would have to be the following:

• The giving of a payment or thing of value;
• Pursuant to an agreement or understanding;
• Resulting in a referral.

In this case, Bank B cannot provide Bank A with compensation simply for the assignment of the mortgage loan application, as this would be compensation for a loan referral and thus, a prohibited kickback.

Section 8 of RESPA permits a payment by a lender to its duly appointed agent or contractor for services performed in the origination, processing, or funding of a loan. “Origination services” are services involved in the creation of a federally related mortgage loan, including but not limited to the taking of the loan application, loan processing, the underwriting and funding of the loan, and the processing and administrative services required to perform these functions. 12 CFR 1024.2(b),14(g)(1)(iii).

In making the determination of whether compensable services are performed, HUD identified the following services as being normally performed in the origination of a loan:

1. Taking information from the borrower and filling out the application
2. Analyzing the prospective borrower’s income and debt and pre- qualifying the prospective borrower to determine the maximum mortgage that the prospective borrower can afford
3. Educating the prospective borrower in the home buying and financing process, advising the borrower about the different types of loan products available, and demonstrating how closing costs and monthly payments could vary under each product
4. Collecting financial information (tax returns, bank statements) and other related documents that are part of the application process
5. Initiating/ordering VOEs (verifications of employment) and VODs (verifications of deposit)
6. Initiating/ordering requests for mortgage and other loan verifications
7. Initiating/ordering appraisals
8. Initiating/ordering inspections or engineering reports
9. Providing disclosures (truth in lending, good faith estimate, others) to the borrower
10. Assisting the borrower in understanding and clearing credit problems
11. Maintaining regular contact with the borrower, realtors, lender, between application and closing to appraise them of the status of the application and gather any additional information as needed
12. Ordering legal documents
13. Determining whether the property was located in a flood zone or ordering such service
14. Participate in the loan closing. 64 Federal Register 10080, 10085

The examples given in Appendix B to Regulation X indicate that the services provided must be substantial and that the amount of payment must bear a reasonable relationship to services rendered. This is to ensure that a referral fee is not disguised by origination services, when the amount of the fee is out of proportion to the services provided.

In this case, Bank A would be expected to perform at least five of the identified activities to qualify for compensation. For example, the services described in letters b, c, d, j, and k above are typical counseling services.  Whatever origination services are performed by Bank A, the records of Bank A and Bank B should document the services provided by Bank A in return for the fee. The amount of the fee, in turn, must bear a reasonable relationship to the services rendered.

In the event that Bank A pays Bank B any fee for the transfer of the mortgage loan to Bank A, Regulation X provides that compensation for the sale of a mortgage loan and servicing rights constitutes a secondary market transaction, rather than a referral fee, and is beyond the scope of Section 8 of RESPA. Appendix B to Part 1024 – 5 (comments).

LOAN TRANSFER REQUIREMENTS

Loan Servicing Transfer Notice

When the transfer of a mortgage loan will result in a change in the name or address of the payee, a notice of loan servicing transfer will have to be provided to the borrower by the bank transferring the loan no less than 15 days before the effective date of the transfer, and by the acquiring bank no more than 15 days after the transfer. The loan transfer notices must provide the following information:

• Effective date of the transfer
• Name, address, and toll-free telephone number of an employee of the transferee who can be contacted regarding the transfer
• Name, address, and toll-free telephone number of an employee of the transferor who can be contacted regarding the transfer
• Whether the transfer will affect the continued availability of mortgage life or disability insurance
• A statement that the transfer does not affect the terms or conditions of the loan except as to mortgage loan servicing

The “effective date of transfer” is the date on which the mortgage payment of a borrower is first due to the transferee servicer of a mortgage loan pursuant to the assignment, sale, or transfer of the servicing of the mortgage loan. 12 CFR 1024.2.

The notices can be combined, provided it is sent out no less than 15 days prior to the transfer. 12 CFR 1024.33(b).

Notices of transfer provided at settlement by the transferor servicer and transferee servicer, whether as separate notices or as a combined notice, satisfy the timing requirements of paragraph (b)(3) of this section. 12 CFR 1024.33(b)(3)(iii).

When Bank B transfers ownership of a mortgage loan to Bank A, Bank B will send a notice of transfer to the borrower at least 15 days before the effective date of the transfer and Bank A will send a notice of transfer no more than 15 days after the transfer.

Regulation Z Loan Transfer Notice

Regulation Z requires the new owner of the mortgage loan (i.e., the “covered person”) to mail or deliver to any consumer primarily liable on the obligation within 30 days of the transfer a disclosure of the following:

• The date of the transfer
• The name, address, and telephone number of the covered person
• The name, address, and telephone number of an agent authorized to receive notice of the right to rescind or resolve payment issues (if different from that of the covered person)
• Where transfer of ownership of the debt to the covered person is or may be recorded in the public records; or, alternatively, that the transfer of ownership has not been recorded in public records at the time the disclosure is provided
• Partial payment policy (i.e., whether partial payments may be accepted by the “lender” and applied to the loan, may be accepted but not applied to the loan until the remainder of the full payment is received, will not be accepted, and that if the loan is sold, the new owner may have a different policy)
• Any other information regarding the transaction the covered person may wish to provide. 12 CFR 1026.39.

In this case, since Bank A is acquiring both the ownership of the loan as well as the servicing rights, it will send the Notice of Loan Transfer required by Regulation Z as well as the Loan Servicing Transfer Notice required by RESPA.

Escrow Accounts

In the event that there is an escrow account established for the loan being transferred, the transferor (i.e., the old servicer) shall submit a short-year statement to the borrower within 60 days of the transfer. 12 CFR 1024.17(i)(4)(ii).

If the new servicer changes either the monthly payment amount or the accounting method used by the transferor, the new servicer shall provide the borrower with an initial escrow account statement within 60 days of the date of the servicing transfer.

If the new servicer provides an initial escrow statement upon the transfer of servicing, it shall use the effective date of the transfer of servicing to establish the new escrow computation year.

Where the new servicer retains the monthly payments and accounting method used by the transferor servicer, it may continue to use the escrow account computation year established by the transferor servicer or may choose to establish a different computation year using a short-year statement. At the completion of the escrow account computation year or any short year, the new servicer shall perform an escrow analysis and provide the borrower with an annual escrow account statement. 12 CFR 1024.17(e).

In this case, if there is an escrow account, Bank B will provide a short-year statement to the borrower within 60 days of the transfer. Bank A will provide an initial escrow account statement within 60 days if it changes the monthly payment amount or method of computation. Otherwise, it can either continue to use the computation year established by Bank B and provide an annual escrow account statement at the conclusion of that year.

This response is for informational purposes only and is not intended for legal guidance.

This entry was posted on Monday, January 18th, 2021 at 12:05 pm.