Over the past six months, I’ve had the opportunity to be an instructor for the newly created prelicensure classes for loan originators and continuing education classes for the Responsible Individuals (the equivalent of a real estate office’s designated broker) for Arizona mortgage brokers and bankers.
This is the first time in the history of Arizona mortgage lending that any type of continued education courses has been required, and as one of a handful of instructors, it has been quite the experience. I’ve come across a wide range of levels of professionalism, attitudes, questions and comments. It has served as concrete evidence that establishing a barrier to entry for the mortgage profession is a very good thing!
One of the things that I have noted is that there is a lot of confusion related to what is the role of a loan originator and what duties does he or she have. This is due to the fact that loan originators have not been uniformly taught one standard. As such, we have been left to adopt standards based on our previous professional experience, the “training” we have previously received and our personal morals and code of conduct. The new loan originator education requirements should help distribute a uniform definition of the duties of a loan originator.
The following is my personal understanding of the role and duties of a loan originator and the information that I feel comfortable presenting when I teach the MLO continuing education classes.
Definition of a Loan Originator
A.R.S. §§ 6-991 (12) states the following:
(a) Means a natural person who for compensation or gain or in the expectation of compensation or gain does any of the following:
(i) Takes a residential mortgage loan application.
(ii) Offers or negotiates terms of a residential mortgage loan.
(iii) On behalf of a borrower, negotiates with a lender or noteholder to obtain a temporary or permanent modification in an existing residential mortgage loan agreement.
As such, according to Arizona law, a loan originator is anyone who takes a loan application, offers or negotiates loan terms or negotiates a loan modification and expects to compensation or gain in one form or another. The Arizona Department of Financial Institutions has determined that anyone who falls under this definition, and is under their supervision, must be licensed through NMLS as of July 1st, 2010. This includes loan officers, senior loan officers, junior loan officers, assistant loan officers, mortgage originators, mortgage planners, mortgage specialists, CMPS, CMB, mortgage commentator, online mortgage lead generator, etc.
Services Provided To a Borrower by a Loan Originator
A loan originator performs the following services as part of his or her occupation:
- Collecting financial and other required information,
- Analyzing income and debt to determine maximum mortgage amounts,
- Advising borrower on available loan programs,
- Explaining the loan process,
- Filling out a loan application,
- Providing required disclosures,
- Preparing a loan file for processing and underwriting
- Assisting borrowers to understand and respond to lender decisions, and
- Participating in the loan closing process.
It should be noted that the loan originator represents the lending institution that he or she works for, whether it is a federal bank, a mortgage banker or a mortgage broker. He or She does not have an agency relationship with the borrower. However, this does not excuse the loan originator from upholding the highest standard of care with their borrower.
Professional Conduct of a Loan Originator
The mortgage industry has been heavily regulated on a federal and state level for many years now and the current political and economic climate is bringing increased regulatory requirements. Each loan officer must be familiar with the federal and state laws and how they impact fair lending, consumer rights and disclosure obligations. However, it is not sufficient to simply know and comply with regulation; loan officers must also endeavor to satisfy the intent of the laws. On top of compliance, loan originators should always adhere to the following basic standards:
- Treating everyone equally,
- Being honest,
- Giving full disclosure (transparency),
- Never taking advantage of others and,
- Keeping good documentation.
Furthermore, a loan officer must work with reasonable care and skill and try to find a fair and workable solution for each and every borrower.
Consequences to a Loan Originators Offenses and Oversights
Negligence: If a borrower suffers harm or loss of money due to a loan originators incompetence or carelessness, he or she can be held liable for negligence, the widest-ranging tort. A loan originator can be sued for negligence.
Fraud: If a loan originator intentionally misrepresents or conceals a material fact, he or she is guilty of actual fraud. If the loan originator unintentionally misrepresents or conceals a material fact, he or she is guilty of constructive fraud.
A.R.S. §§ 6-991.02 (9) states:
A loan originator shall not make a false promise or misrepresentation or conceal an essential or material fact in the course of the mortgage broker or mortgage banker business.
According to A.R.S., a loan originator in Arizona who has knowingly violated “any provision of this title” (i.e. one of these laws) can be assessed a civil penalty and is guilty of a class 6 felony.
Furthermore, mortgage fraud on a federally related loan (almost all of them) is a serious federal crime.
To ensure compliance with the SAFE Act, every loan originator in Arizona that falls under the supervision of the Department of Financial Institutions will have to complete their prelicensure education requirements, pass a national and state-specific exam and register with the NMLS (Nationwide Mortgage Licensing System) and obtain a unique identifier. Ethics in Loan Origination is a required topic that must be covered every year.
This new barrier to entry into the mortgage origination profession should serve to reduce the number of unethical loan originators and help circulate a uniform definition of the duties of to the remaining honest, professional loan originators and those who are freshly seeking to join the industry.
Arizona Loan Officer