14 Hour Mortgage Broker 2007 2008

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14 Hour Mortgage Broker 2007 2008

  1. 1. Mortgage Brokering/Lending14-Hour Continuing Education Course 2 0 0 7- 2 0 0 8 E D i t i o n
  2. 2. Acknowledgements Bert Rodgers Schools of Real Estate, Inc. expresses our gratitude and appreciation to the thousands of Mortgage Professionals who have completed our 14-hour course to fulfill their continuing education requirements. We would like to thank the author of this edition, Janine Spiegelman. We recognize her expertise and appreciate her participation. We also want the Student Services Department—both the customer contact employees and those “behind the scenes” processing all the paperwork—to know how much we appreciate their hard work, day after day, making sure our valued students are satisfied customers. And we certainly are grateful to our Publications Department staff. No matter what obsta- cles you encounter in putting together these editions, you always create a product that, year after year, our customers say is by far the best in the industry. Finally, Bert Rodgers Schools would like to thank Julie Wild of Wild Dezign for her typeset- ting expertise and patience, and Mark Mazzuki of Digital Ink Design Group for his cover design of this edition and his design of all our marketing materials. Lori J. Rodgers, Presidentii Bert Rodgers Schools of Real Estate, Inc.
  3. 3. table of Contents 14-Hour MorTGAGE BroKErING/LENDING CoNTINuING EDuCATIoN CoursEFOuNDER w MODULE 1 Bert Rodgers Florida Mortgage Brokerage andPRESIDENT Lori J. Rodgers Lending Act Rules and Regulations | 1ADMINISTRATIVE VICEPRESIDENT William E. Giffard w MODULE 2DIRECTOR OF OPERATIONS Credit Scores and Credit Scoring | 17 Tom HarnerDIRECTOR OFINFORMATION SYSTEMS w MODULE 3 Alison M. HarnerDIRECTOR OF FINANCE Exotic and Nontraditional Mortgages | 23 Aaron PulonePROjECT MANAgERS w MODULE 4 Valerie Churchillo Lisa Lacey Subprime Loans and PrepaymentINSTRuCTOR Penalties | 31 Janine SpiegelmanPROjECT COORDINATORS Michelle Headley w MODULE 5 Jerry Schmitt Lack of Credit DocumentationPRODuCT SuPPORT MANAgER Kelli Finnigan Promotes Mortgage Fraud | 39STuDENT SERVICESSuPERVISOR w MODULE 6 Patti PasquiniSTuDENT SERVICES Updates on Flood and Hazard Insurance | 45REPRESENTATIVES Barbara Dolnick Anthony Fasciano w MODULE 7 Colletta Finnigan Mark Forsman Affordable Housing | 55 Jenncie Grove Laraine Jansen Mary Killoran w MODULE 8 Shirley Samson Kayla Smillie New and Updated Fannie Mae/Freddie Mac Christopher Smith Roman Vizvary Appraisal and Property Report Forms | 61TYPESETTINg Wild DezignPRINTINg Registration/Affidavit Form Action Printing
  4. 4. Author Biography Janine Spiegelman has been a licensed Florida Mortgage Broker since 1987 and has taught the mortgage pre-licensure course since 1999. She has worked for the State of Florida, Department of Banking and Finance as a Financial Examiner/Analyst II. In the mortgage field, she has held every position possible–processor, closer, underwriter, post closer, mort- gage broker, and wholesale account executive. She has her own real estate brokerage and enjoys working with first-time home buyers. Janine is our continuing education instructor for real estate and mortgage brokering/lending. Bert Rodgers Schools of Real Estate, Inc. ©2007 All rights reserved, including the right to reproduce this manual or any portion of this manual in any form, or to use it for teaching purposes without the express written consent of the copyright holder. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Bert Rodgers Schools of Real Estate, Inc. shall not be liable in any way for failure to receive and/or process your Registration/Affidavit Form within any specific time period. It is your responsibility to ensure that you have complied with your license renewal requirements in a timely manner. Bert Rodgers Schools of Real Estate, Inc. recognizes and respects its students’ privacy. Course records are confidential, and the School does not sell or rent students’ names or other information to any company or organization. Cover design: Digital Ink Design Group ISBN: 1-891753-40-1 Printed in the United States of Americaiv Bert Rodgers Schools of Real Estate, Inc.
  5. 5. MODULE 1 Florida Mortgage brokerage and Lending act rules and regulations Learning ObjectivesAfter completing this module, you should be able to: 1. Summarize the changes made to Chapter 494 6. Identify the prohibited practices pursuant to F.S. effective October 1, 2006. Chapter 494. 2. List the changes to Chapter 69V-40 Florida 7. Explain the purpose for the enactment of the Administrative Code made through 2004. Florida Fair Lending Act. 3. Summarize the organizational structure of 8. Identify the types of transactions covered by the Florida Department of Financial Services, the Florida Fair Lending Act. including the Financial Services Commission 9. Define a high-cost home loan. and the Office of Financial Regulation. 10. Identify the acts prohibited by the Florida Fair 4. Explain the powers and duties of the Financial Lending Act. Services Commission and the Office of 11. Identify the disclosure requirements of the Financial Regulation. Florida Fair Lending Act. 5. Explain the penalties, which could be imposed 12. Explain the enforcement and penalties of any for a violation of Chapter 494, F.S. violation of the Florida Fair Lending Act.intrODUctiOnThe Department of Financial Services regulates serves as agency head for the Office of Financialmortgage broker individuals (MB), mortgage broker- Regulation (OFR or Office) and the Office ofage businesses (MBB), mortgage lenders (ML), and Insurance Regulation (OIR). The commission iscorrespondent mortgage lenders (CL) by the use of composed of the governor and Cabinet. The com-Florida Statutes (F.S.) and the Florida Administrative mission appoints the commissioner of the OFR andCode (F.A.C.). Chapter 494, F.S., is known as the the commissioner of the OIR. Although both officesFlorida Mortgage Brokerage and Mortgage Lending are administratively housed within the DepartmentAct Rules and Regulations. Chapter 494 originally of Financial Services, they report directly to thebecame effective in October 1991, and several sig- Financial Services Commission, headed by the newlynificant amendments have been made since 1991. elected Chief Financial Officer, Alex Sink. The OfficeChapter 69V-40 of the Florida Administrative of Financial Regulation has offices located in Miami,Code (formerly Chapter 3D-40 F.A.C.) is called Fort Lauderdale, West Palm Beach, Tampa, Orlando,Rules Regulation Mortgage Brokers. Certain minor Jacksonville, Pensacola, and Fort Myers. The regionalchanges to Chapter 69V-40 were made effective on offices are primarily responsible for conducting exam-August 2, 2002, and a few minor amendments were inations to ensure regulatory compliance by financialmade between 2003 and 2004. The purpose of this institutions and financial service companies.module is to review Florida mortgage brokerage rules The Office is dedicated to safeguarding the privateand regulations including changes effective October financial interests of the public by licensing, char-1, 2006. tering, examining, and regulating financial institu-In 2002, legislation placed the regulation of bank- tions and financial service companies in the Stateing, securities, and insurance under two appointed of Florida. The Office strives to protect consumersofficials who are selected by the Financial Services from financial fraud while preserving the integrityCommission. The Financial Services Commission of Florida’s markets and financial service industries.© 2007 Bert Rodgers Schools of Real Estate, Inc. 1
  6. 6. 2 Module 1This is the Office’s mission statement found at recent cHanges in FLOriDa statUtes regULating MOrtgage brOKerage www.flofr.com/Director/abouttheoffice.htm anD MOrtgage LenDing This section discusses the more significant changes inWithin the Office are 2 Divisions. The first is the the Florida Statute Chapter 494 regulating mortgageDivision of Financial Institutions. This division brokerage and mortgage lending effective October 1,licenses, examines, and regulates all state-authorized 2006.or state-chartered financial institutions to ensure theyoperate in a safe and sound manner and in compliance NEWwith applicable statutes and rules. Those institutions Definitioninclude commercial banks, credit card banks, creditunions, non-deposit trust companies, savings banks, Control person means an individual, partnership,savings and loans, and international bank offices. corporation, trust, or other organization that possesses the power, directly or indirectly, to direct the man-The second division within the Office is the Division agement or policies of a company, whether throughof Securities and Finance. Within this division are ownership of securities, by contract, or otherwise.three Bureaus— the Bureau of Financial Regulation; A person is presumed to control a company if, withthe Bureau of Securities Regulation; and the Bureau respect to a particular company, that person:of Regulatory Review. The Bureau of FinanceRegulation regulates retail installment sales busi- (a) Is a director, general partner, or officer exercisingnesses, consumer finance companies, mortgage bro- executive responsibility or having similar status orkers and lenders, collection agencies, and money functions;transmitters. The bureau provides consumer protec- (b) Directly or indirectly may vote 10 percent or moretion from illegal or improper activities performed by of a class of voting securities or sell or direct thethese companies. The Bureau of Securities Regulation sale of 10 percent or more of a class of voting secu-protects the public from investment and securities rities; orfraud. The Bureau of Regulatory Review reviews all (c) In the case of a partnership, may receive upon dis-applications for a financial services firm or a securi- solution or has contributed 10 percent or more ofties firm, reviews individual applications, and either the capital (Chapter 494.001(9)(a-c), F.S.).approves, places licensing restrictions, or denies licen-sure based upon its findings (See Figure 1.1). Office of Financial Regulation Office of Financial regulation Flow chart Commissioner Financial Regulation Chief, Financial Director, Cabinet & General Counsel Inspector General Investigations Legislative Affairs Director of Deputy Commissioner Auditing Financial Regulation Director Director Director Division of Financial Division of Securities Division of Finance Institutions Chief, Bank Chief, Bank Chief, Credit Union Chief, Securities Chief, Regulatory Chief, Finance Chief, Money Chief, Regulatory Regulation District I Regulation District II Regulation Regulation Review Regulation Transmitter ReviewFigure 1.1 Source: www.flofr.com/Director/OFRorgchart.pdf
  7. 7. Florida Mortgage Brokerage and Lending Act Rules and Regulations NEW NEWPowers and Duties of the commission and Mortgage brokerage business branch Offices;Office Principal Place of business requirementsAllows the Office to require the electronic filing Deleted Chapter 494.0036(3), F.S. and Chapterof applications, renewals, and fees, unless granted 494.0039(3), F.S. Eliminated from the statute thea waiver by OFR due to a hardship. Prior to this requirement to display main office, branch office, andchange, the only license type that could file an individual licenses.application online was a mortgage broker (Chapter494.0011(2)(6), F.S.). NEW requirements of Licensees NEW Provides that each licensee shall report any changebooks, accounts, and records; Maintenance; in the principal broker, principal representative, offi-examinations by the Office cers, partners, members, joint venturers, directors, control persons or any individual who is the ultimateAuthorizes the commission to adopt rules for the equitable owner of 10% or greater interest (Chapterrequirements for the destruction of records main- 494.004(6). F.S.).tained by licensees after the retention period hasexpired ( Chapter 494.0016(4), F.S.). Provides that a change of control whether through the power to direct management, ownership or oth- erwise shall require an application to be submitted to NEW the OFR unless a waiver has been granted (ChapterMortgage business schools 494.004(6)(a-d), F.S.).Requires permitted mortgage business schools toelectronically report to the Office the names of pupils NEWwho have successfully completed required trainingcourses (Chapter 494.0029(4), F.S.). administrative Penalties and Fines; License violations Authorizes disciplinary action if fees are paid with a bad NEW check. (Chapters 494.0041(2)(s) and 494.0072(2)(s), F.S.).Licensure as a Mortgage brokerage business; Provides grounds for disciplinary action when a finalMortgage broker’s License judgment is entered against an applicant or licensee inProvides that applications are not deemed received a civil action upon grounds of fraud, embezzlement,until all required fees are received (Chapters misrepresentation, or deceit (Chapters 494.0041(2)(t)494.0031(2)(a); 494.0033(2)(c), F.S.). and 494.0072(2)(t), F.S.). Provides grounds for disciplinary action when action is taken by other federal and state regulatory organiza- NEW tions located in or outside the State of Florida involvingrenewal of Mortgage brokerage business securities, insurance, real estate, mortgage brokers andLicense or branch Office License lenders, or other related or similar industries (ChaptersThe license for a branch office must be renewed in 494.0041(2)(u)1.2. and 494.0072(2)(u)1.2.,F.S.).conjunction with the renewal of the mortgage broker-age business license (Chapter 494.0032(1)). NEW Mortgage Lender’s License requirements; NEW correspondent Mortgage Lender’s LicenseMortgage broker’s License requirements; savings clause; branch OfficesAllows the Office to contract with a third party ven- Provides that applications are not deemed receiveddor to administer the mortgage broker test. This will until all required fees are received (Chaptersallow the test to be conducted electronically at mul- 494.0061(2)(b), 494.0062(2)(b), 494.0065(3)(5)(b) andtiple locations several times a week versus the old 494.0066(2), F.S.).once a month process at limited locations (Chapter Audited financial statements of all licensed lend-494.0033(2)(b), F.S.). ers have to be in accordance with United States
  8. 8. 4 Module 1generally accepted accounting principles (Chapters the power to direct management, ownership or oth-494.0061(2)(c), 494.0062(2)(c) and 494.0065(2)(5)(c), erwise shall require an application to be submitted toF.S.). the OFR unless a waiver has been granted. (Chapter 494.0067(4)(a-d),F.S).Provides under certain conditions that existingprincipal representatives can be grandfathered in changes between 2002 and 2004 to the ruleswithout class or testing requirements (Chapters of the Florida administrative code494.0061(2)(f)(8-9) and 494.0062(2)(f)(11-12) and494.0065(4)(c)1.2.(10), F.S.). The most significant changes were that the Rules Regulation Mortgage Brokers were moved from 3D- 40 F.A.C. to a new chapter 69V-40 F.A.C. and all ref- NEW erences to the Department of Banking and Financerenewal of Mortgage Lender’s License; were replaced with the Financial Services Commissionbranch Office License renewal and the Office of Financial Regulation, dependingChapter 494.0064(1)(b), F.S. deleted. Eliminated the upon the specific division of responsibility betweenrequirement to report the continuing education of the departments. See Table 1.1loan associates when renewing a lender’s license. To access any of the required forms, go to website and select the appropriate form. NEW www.flofr.com/licensing/MBlist.htmrequirements of Licensees Under chapters494.006-.0077 To access Chapter 494 online, go to www.Chapter 494.0067(1), F.S. deleted. Eliminated from leg.state.fl.us/Statutes/index.cfm?App_the statute the requirement to display main and mode=Display_StatuteURL=Ch0494/branch office licenses. titl0494.htmStatuteYear=2006Title=- 2006-Chapter%20494Provides that each licensee shall report any change inthe officers, partners, members, joint venturers, direc- To access the Florida Administrative Code,tors, or control persons. (Chapter 494.0067(4), F.S). Rules 69V-40, go to www.flofr.com/licensing/ RulesStatutes/Rule69V-40.htmProvides that a change of control whether through table 1.1 Updates to the rules of the Florida administrative code between 2002 and 2004 books and records 69v-40.170 Amended to substitute the Office of Financial Regulation for all references to the Department of Banking and Finance. application Procedure for Mortgage 69v-49.031(1) Provides that all applications for licensure as a mortgage bro- broker License ker must be filed with the OFR. The address is: Office of Financial regulation 200 East Gaines Street Tallahassee, Florida 299-075 69v-40.031(1)(a) The application form for Licensure as a Mortgage Broker changed to OFr-Mb-101, and is available by mail from the OFR. 69v-40.031(1)(c) The fee which must accompany the applicant’s fingerprint card changed from $15.00 to $2.00. In the remainder of this section, all references to the Department of Banking and Finance changed to the Office of Financial Regulation. application Procedure for Mortgage 69v-40.051 All applications for licensure as a mortgage brokerage busi- brokerage business License ness must now be filed with the OFR. The form that must be used for this application is OFr-Mb-201, and can be obtained by mail from the OFR or accessed online at http://www.flofr. com/licensing/Forms/MBBapp.pdf
  9. 9. Florida Mortgage Brokerage and Lending Act Rules and Regulations 5 table 1.1 Updates to the rules of the Florida administrative code between 2002 and 2004 69v-40.051(2) Regarding the fingerprint cards and Biographical Summary, now provides as follows: Each ultimate equitable owner of 10% or greater inter- est, the chief executive officer and each director of an entity applying for licensure as a mortgage brokerage business, shall submit a completed fingerprint card and Biographical Summary, Form OFR-MBB-BIO-1 (revised 10/99), to the Office of Financial Regulation along with a $2 nonrefundable processing fee. Form OFR-MBB-BIO-1 is hereby incorporated by reference and available by mail from the Office of Financial Regulation, 200 East Gaines Street, Tallahassee, Florida 299-075. All former references to the Department of Banking and Finance have been changed in this section to the Office of Financial Regulation. application Procedure for change 69v-40.100 All references to the Department of Banking and Finance have in Ownership or control of saving been changed to the Office of Financial Regulation. The ap- clause Mortgage Lending plication for Change in Ownership or Control of Saving Clause Mortgage Lending must use the form OFr-MLst. The form must be mailed to the Office at the address. The same changes to the fingerprint card filing and Biographical Summary that were made to the other license application regula- tions, (i.e. form OFr-ML-biO-1 and the fee of $2), were also made to this section. application Procedure for Mortgage 69v-40.200 The application form for licensure as a mortgage lender changed Lender License to OFr-ML-222 and is to be mailed to the Office at the address. Further, the surety bond must be submitted on form OFr-ML-444, Mortgage Brokerage and Mortgage Lending Act Surety Bond. The completed fingerprint card and Biographical Summary form OFr- ML-biO-1, and the nonrefundable, processing fee of $2 must be submitted to the Office. All references to the Department of Banking and Finance have been changed to the Office of Finan- cial Regulation. Mortgage Lender License, Mortgage 69v-40.205 The form for renewal and reactivation of a mortgage lender Lender License Pursuant to saving license is OFr-ML-r, and the form for renewal and reactivation of clause, and branch Office License a mortgage lender license pursuant to saving clause is OFr-ML- renewal and reactivation rs. The form for branch office renewal is OFr-ML-rb, Mort- gage Lender and Correspondent Mortgage Lender Branch Office License Renewal and Reactivation Form. All forms must be filed with the Office. application Procedure for correspon- 69v-40.220 Changed the applicable forms, processing fees, and references dent Mortgage Lender License to the Office of Financial Regulation. The application form for licensure as a correspondent mortgage lender is OFr-cL-333. The surety bond form is OFr-ML-444. The fingerprint card and Biographical Summary form is OFr-cL-biO-1, and the processing fee is now $23. All forms must be filed with the Office. correspondent Mortgage Lender 69v-40.225 Changed the applicable forms and references to the Office of License and branch Office License Financial Regulation. The renewal and reactivation form for renewal and reactivation correspondent mortgage lender license is form OFr-cL-r. The surety bond form is OFr-ML-444. The Mortgage Lender and Cor- respondent Mortgage Lender Branch Office License Renewal and Reactivation form is OFr-ML-rb. All forms must be filed with the Office. application Procedure for Mortgage 69v-40.240 Changed the application form and references to the Office of Lender or correspondent Mortgage Financial Regulation. The application form for mortgage lender Lender branch Office License branch office or correspondent mortgage lender branch office license is OFr-ML-222b. All forms must be filed with the Office. Principal representative 69v-40.242 Changed the applicable form and references to the Office of Financial Regulation. The Principal Representative Designation form is OFr-ML/cL-Pr. All forms must be filed with the Office.Source: Compiled by author.
  10. 10. 6 Module 1MOrtgage brOKerage License LaWChapter 494, F.S., is divided into five parts: Part I, General Provisions (494.001-494.00295); Part II, MortgageBrokers (494.003-494.0043); Part III, Mortgage Lenders (494.006-494.0077); Part IV, Florida Fair Lending Act(494.0078-494.00797); and Part V, Loans Under the Florida Uniform Land Sales Practices Law (494.008). Part i: generaL PrOvisiOns (494.001-494.00295)the Financial services commission • may, at intermittent periods, conduct examinationsAs introduced at the beginning of this module, the of any licensee or other person under the provi-Financial Services Commission serves as agency head sions of 494.001-494.0077 F.S.for the Office of Financial Regulation (OFR or Office) • may bring action through its own counsel in theand the Office of Insurance Regulation (OIR). OFR and name and on behalf of the state against any personOIR are administratively housed within the Depart- who has violated or is about to violate any provi-ment of Financial Services, headed by the Chief sion of 494.001-494.0077 F.S. or any rule of theFinancial Officer. The Office is responsible for con- commission or order of the Office issued underducting financial investigations into allegations of sus- 494.001-494.0077 F.S. to enjoin the person frompected illegal financial activities within its jurisdiction. continuing in or engaging in any act in furtherance of the violation.Powers and Duties of the commission and • has the power to issue and serve upon any personOffice an order to cease and desist and to take correctiveThe Office of Financial Regulation is responsible action whenever it has reason to believe the per-for the administration and enforcement of Chapter son is violating, has violated, or is about to violate494.001-494.0077, F.S. The Financial Services any provision of 494.001-494.0077 F.S., any ruleCommission may adopt rules pursuant to Chapters or order issued under 494.001-494.0077 F.S., or120.563(1), F.S and 120.54, F.S to implement any written agreement between the person and theChapters 494.001-494.0077, F.S. The Commission Office. All procedural matters relating to issuancemay adopt rules requiring electronic submission of and enforcement of such a cease and desist orderany forms, documents, or fees required by this act if are governed by the Administrative Procedure Act.such rules reasonably accommodate technological or • has the power to order the refund of any feefinancial hardship. The Commission may prescribe directly or indirectly assessed and charged on aby rule requirements and procedures for obtaining mortgage loan transaction which is unauthorizedan exemption due to a technological hardship. The or exceeds the maximum fee specifically authorizedCommission may also adopt rules to accept certifica- in 494.001-494.0077 F.S.tion of compliance with requirements of Chapter 494,F.S. in lieu of requiring submission of documents. • may prohibit the association by a mortgage brokerThe grant or denial of any license under this chapter business, or the employment by a mortgage lendermust be in accordance with Chapter 120.60, F.S. or correspondent mortgage lender, of any person who has engaged in a pattern of misconduct whileThe Office: an associate of a mortgage brokerage business or an• has the power to issue and to serve subpoenas and employee of a mortgage lender or correspondent subpoenas duces tecum to compel the attendance of mortgage lender. For the purpose of this subsec- witnesses and the production of all books, accounts, tion, the term “pattern of misconduct” means records, and other documents and materials rel- the commission of three or more violations of ss. evant to an examination or investigation. 494.001-494.0077 or the provisions of Chapter 494• or its duly authorized representative, has the power in effect prior to October 1, 1991, during any one to administer oaths and affirmations to any person. year period or any criminal conviction for violating ss. 494.001-494.0077 or the provisions of Chapter• may conduct an investigation of any person when- 494 in effect prior to October 1, 1991. ever the Office has reason to believe, either upon complaint or otherwise, that any violation of Penalties 494.001-494.0077 F.S. has been committed or is about to be committed. Chapter 494.0018 provides whoever knowingly vio-
  11. 11. Florida Mortgage Brokerage and Lending Act Rules and Regulations 7lates any provision of Chapters 494.0041(2)(e), (f), or course of business which operates as a fraud(g); 494.0072 (2)(e), (f), or (g); or 494.0025 (1), (2), upon any person in connection with the pur-(3), (4), or (5), is guilty of a felony of the third degree, chase or sale of any mortgage loan; orexcept that any person convicted of a violation of any (c) To obtain property by fraud, willful misrep-provision of 494.001-494.0077 F.S., in which viola- resentation of a future act, or false promise.tion the total value of money and property unlawfullyobtained exceeded $50,000 and there were five or more (5) In any matter within the jurisdiction of thevictims, is guilty of a felony of the first degree. All the Office, to knowingly and willfully falsify, con-violations are punishable as provided in Chapters ceal, or cover up by a trick, scheme, or device a775.082 F.S., 775.083 F.S., or 775.084 F.S. Each such material fact, make any false or fraudulent state-violation constitutes a separate offense. In addition, if ment or representation, or make or use any falsea mortgage transaction is made in violation of any pro- writing or document, knowing the same to con-vision of Chapters 494.001-494.0077 F.S., the person tain any false or fraudulent statement or entry.making the transaction and every licensee, director,or officer who participated in making the transaction (6) To violate 655.922(2) F.S., subject to 494.001-are jointly and severally liable to every party to the 494.0077 F.S.transaction in an action for damages incurred by theparty or parties. However, a person is not liable under (7) Who is required to be licensed under ss. 494.006this section upon showing that such person’s licens- - 494.0077, to fail to report to the Office theees, officers, and directors who participated in making failure to meet the net worth requirements ofthe transaction, if any, acted in good faith and with- 494.0061 F.S., 494.0062 F.S., or 494.0065 F.S.out knowledge and, with the exercise of due diligence, within 48 hours after the person’s knowledge ofcould not have known of the act committed in viola- such failure or within 48 hours after the persontion of Chapters 494.001-494.0077, F.S. should have known of such failure. (8) To pay a fee or commission in any mortgage loanProhibited Practices transaction to any person or entity other than aChapter 494.0025 F.S. provides that it is unlawful for mortgage brokerage business, mortgage lender,any person: or correspondent mortgage lender, operating under an active license, or a person exempt from (1) To act as a mortgage lender in this state without licensure under this chapter. a current, active license issued by the Office pur- suant to 494.006-494.0077, F.S. (9) To record a mortgage brokerage agreement or any other document, not rendered by a court (2) To act as a correspondent mortgage lender in of competent jurisdiction, which purports to this state without a current, active license issued by the Office pursuant to 494.006-494.0077, enforce the terms of the mortgage brokerage F.S. agreement. (3) To act as a mortgage broker in this state without (10) To use the name or logo of a financial institution, a current, active license issued by the Office pur- as defined in 655.005(1), F.S., or its affiliates or suant to 494.003-494.0043, F.S. subsidiaries when marketing or soliciting exist- ing or prospective customers if such marketing (4) In any practice or transaction or course of busi- materials are used without the written consent ness relating to the sale, purchase, negotiation, of the financial institution and in a manner that promotion, advertisement, or hypothecation of would lead a reasonable person to believe that mortgage transactions, directly or indirectly: the material or solicitation originated from, was (a) To knowingly or willingly employ any device, endorsed by, or is related to or the responsibility scheme, or artifice to defraud; of the financial institution or its affiliates or sub- (b) To engage in any transaction, practice, or sidiaries.
  12. 12. Module 1 Part ii anD iii: MOrtgage brOKers anD MOrtgage LenDersAll the relevant changes made to Chapter 494, F.S. were discussed at the beginning of this module. Included hereis a brief recap of the changes to Chapter 494.003-494.0077, F.S.• Allows the Office to contract with a third party ven- principal representatives can be grandfathered in dor to administer the mortgage broker test. without class or testing requirements.• Provides that applications are not deemed received • Eliminates the requirement to display main and until all required fees are received. Authorizes dis- branch office licenses. ciplinary action if fees are paid with a bad check. • Eliminates the requirement to display individual• Provides that each licensee shall report any change mortgage broker licenses. in the principal broker, principal representative, • Eliminates the requirement to report the continu- officers, partners, members, joint venturers, direc- ing education of loan “Associates” when renewing tors, control persons or any individual who is the a lender’s license. ultimate equitable owner of 10% or greater inter- est. • Provides grounds for disciplinary action when a final judgment is entered against an applicant or• Provides that a change of control whether through licensee in a civil action upon grounds of fraud, the power to direct management, ownership or oth- embezzlement, misrepresentation, or deceit. erwise shall require an application to be submitted to OFR unless a waiver has been granted. • Provides grounds for disciplinary action when action is taken by other federal and state regula-• Audited financial statements of all licensed lend- tory organizations located in or outside the State of ers have to be in accordance with U.S. generally Florida involving securities, insurance, real estate, accepted accounting principles. and lending activities.• Provides under certain conditions that existing Part iv: FLOriDa Fair LenDing act abUsive MOrtgage LenDingIn 494.0078, F.S. the Florida Legislature found that: ate effectively for conventional mortgages, too many homeowners find themselves victims of overreach- “abusive mortgage lending has become a problem ing creditors who provide loans with unnecessarily in this state even though most high-cost home loans high costs and terms that are unnecessary to secure do not involve abusive mortgage practices. One of repayment of the loan. The Legislature finds that as the most common forms of abusive lending is the competition and self-regulation have not eliminated making of loans that are equity-based rather than the abusive terms from home-secured loans, the income-based. The financing of points and fees consumer protection provisions of this act are nec- in these loans provides immediate income to the essary to encourage fair lending.” originator and encourages creditors to repeatedly refinance home loans. As long as there is sufficient equity in the home, an abusive creditor benefits even DeFinitiOns if the borrower is unable to make the payments and Chapter 494.0079, F.S. sets forth the following defi- is forced to refinance. The financing of high points and fees causes the loss of equity in each refinanc- nitions. ing and often leads to foreclosure. Affliate: Any company that controls, is controlled by, Abusive lending has threatened the viability of or is in common control with another company, as set many communities and caused decreases in home forth in 12 U.S.C. 1841 et seq. and the regulations ownership. While the marketplace appears to oper- adopted thereunder.
  13. 13. Florida Mortgage Brokerage and Lending Act Rules and Regulations 9Annual percentage rate (APR): The annual percent- (B) the total points and fees payable by the con-age rate for the loan calculated according to the provi- sumer at or before closing will exceed thesions of 15 U.S.C. 1606 and the regulations adopted greater of—thereunder by the Federal Reserve Board. (i) 8 percent of the total loan amount; or (ii) $547.00, for the year 2007.Borrower: Any natural person obligated to repay a (2) (A) After the 2-year period beginning on theloan, including, but not limited to, a co-borrower, co- effective date of the regulations promulgatedsignor, or guarantor. under section 155 of the Riegle CommunityBridge loan: A loan with a maturity of less than 18 Development and Regulatory Improvementmonths that only requires the payment of interest Act of 1994, and no more frequently than bien-until such time as the entire unpaid balance is due and nially after the first increase or decrease underpayable. this subparagraph, the Board may by regula-Commission: The Financial Services Commission. tion increase or decrease the number of per- centage points specified in paragraph (1)(A),Office: The Office of Financial Regulation of the if the Board determines that the increase orcommission. decrease is—Lender: Any person who makes a high-cost home (i) consistent with the consumer protectionsloan or acts as a mortgage broker or lender, finance against abusive lending provided by thecompany, or retail installment seller with respect to a amendments made by subtitle B of title Ihigh-cost home loan, but shall not include any entity of the Riegle Community Developmentchartered by the United States Congress when engag- and Regulatory Improvement Act of 1994;ing in secondary market mortgage transactions as an andassignee or otherwise. (ii) warranted by the need for credit. (B) An increase or decrease under subparagraphResidential mortgage transaction: A transaction (A) may not result in the number of percent-in which a mortgage, deed of trust, purchase money age points referred to in subparagraph (A)security interest arising under an installment sales being—contract, or equivalent consensual security interest is (i) less that 8 percentage points; orcreated or retained against the consumer’s dwelling to (ii) greater than 12 percentage points.finance the acquisition or initial construction of such (C) In determining whether to increase or decreasedwelling. (15 U.S.C.) 1602(w) the number of percentage points referred to in subparagraph (A), the Board shall consultHigH-cOst HOMe LOans with representatives of consumers, including low-income consumers, and lenders.Definition (3) The amount specified in paragraph (1)(B)(ii) shall be adjusted annually on January 1 by the annualThe provisions of the Florida Fair Lending Act deal percentage change in the Consumer Price Index,primarily with high-cost home loans. as reported on June 1 of the year preceding suchHigh-cost home loans are defined by 15 U.S.C. adjustment.1602(aa), which provides in pertinent part as follows: (4) For purposes of paragraph (1)(B), points and fees(1) A mortgage referred to in this subsection means a shall include— consumer credit transaction that is secured by the (A) all items included in the finance charge, except consumer’s principal dwelling, other than a resi- interest or the time-price differential; dential mortgage transaction, a reverse mortgage (B) all compensation paid to mortgage brokers; transaction, or a transaction under an open end (C) each of the charges listed in section1605(e) of credit plan, if— this title (except an escrow for future payment (A) the annual percentage rate at consummation of taxes), unless— of the transaction will exceed by more than 10 (i) the charge is reasonable; percentage points the yield on Treasury secu- (ii) the creditor receives no direct or indirect rities having comparable periods of maturity compensation; and on the fifteenth day of the month immediately (iii) the charge is paid to a third party unaffili- preceding the month in which the application ated with the creditor; and for the extension of credit is received by the (D) such other charges as the Board determines to creditor; or be appropriate.
  14. 14. 10 Module 1PrOHibiteD acts required under the loan are consolidated and paid in advance from the loan proceeds providedChapter 494.00791,F.S. provides for prohibited acts to the borrower.involving high-cost loans. (6) Extending Credit Without Regard To The (1) Prepayment Penalties Payment Ability Of The Borrower (a) A high-cost home loan may not contain A lender making a high-cost home loan shall not terms that require a borrower to pay a pre- engage in any pattern or practice of extending payment penalty for paying all or part of the high-cost home loans to borrowers based upon loan principal before the date on which the the borrowers’ collateral without regard to the payment is due. borrowers’ ability to repay the loan, including (b) Notwithstanding paragraph (a), a lender the borrowers’ current and expected income, making a high-cost home loan may include current obligations, and employment. in the loan contract a prepayment fee or penalty, for up to the first 36 months after (7) Payments To A Home Contractor the date of consummation of the loan, if: A lender shall not make any payments to a con- 1. The borrower has also been offered a tractor under a home improvement contract choice of another product without a pre- from amounts of a high-cost home loan other payment penalty. than: 2. The borrower has been given, at least 3 (a) In the form of an instrument that is payable business days prior to the loan consum- to the borrower or jointly to the borrower mation, a written disclosure of the terms and the contractor; or of the prepayment fee or penalty by the (b) At the election of the borrower by a third- lender, including the benefit the bor- party escrow agent in accordance with terms rower will receive for accepting the pre- established in a written agreement signed by payment fee or penalty through either the borrower, the lender, and the contractor a reduced interest rate on the loan or prior to the date of payment. reduced points or fees. (8) Due-On-Demand Clause A high-cost home loan may not contain a provi- (2) Default Interest Rate sion that permits the lender, in its sole discre- A high-cost home loan may not provide for a tion, to call or accelerate the indebtedness. This higher interest rate after default on the loan. provision does not prohibit acceleration of the However, this prohibition does not apply to loan due to the borrower’s failure to abide by interest rate changes in a variable rate loan oth- the terms of the loan, or due to fraud or material erwise consistent with the provisions of the loan misrepresentation by the consumer in connec- documents, provided the change in interest rate tion with the loan. is not triggered by a default or the acceleration of the interest rate. (9) Refinancing Within an 18-Month Period (a) A lender, its affiliate, or an assignee shall not (3) Balloon Payments refinance any high-cost home loan to the A high-cost home loan having a term of less than same borrower within the first 18 months 10 years may not contain terms under which the of the loan when the refinancing does not aggregate amount of the regular periodic pay- have a reasonable benefit to the borrower ments would not fully amortize the outstanding considering all of the circumstances, includ- principal balance. However, this prohibition ing, but not limited to, the terms of both the does not apply when the payment schedule is new and refinanced loans, the cost of the adjusted to account for the seasonal or irregular new loan, and the borrower’s circumstances. income of the borrower or if the loan is a bridge (b) A lender or assignee shall not engage in loan. acts or practices to evade this requirement, (4) Negative Amortization including a pattern or practice of arrang- A high-cost home loan may not contain terms ing for the refinancing of the lender’s or under which the outstanding principal balance assignee’s own loans by affiliated or unaffili- will increase at any time over the course of the ated lenders or modifying a loan agreement, loan because the regular periodic payments do whether or not the existing loan is satisfied not cover the full amount of the interest due. and replaced by the new loan, and charging a fee. (5) Prepaid Payments A high-cost home loan may not include terms (10) Open-Ended Loans under which more than two periodic payments A lender shall not make any loan as an open-
  15. 15. Florida Mortgage Brokerage and Lending Act Rules and Regulations 11 ended loan in order to evade the provisions of to a borrower in substantially the following this act unless such open-ended loans meet the form: definition in 12 C.F.R. s. 226.2(a)(20). If you obtain this high-cost home loan, the lender will have a mortgage on your(11) Recommendation of Default home. You could lose your home and any A lender shall not recommend or encourage money you have put into it if you do not default on an existing loan or other debt prior meet your obligations under the loan. Mortgage loan rates and closing costs and to and in connection with the closing or planned fees vary based on many factors, includ- closing of a high-cost home loan that refinances ing your particular credit and financial all or any portion of such existing loan or debt. circumstances, your employment history, the loan-to-value requested, and the type(12) Prohibited Door-To-Door Loans of property that will secure your loan. The A high-cost home loan may not be made as a loan rate and fees could also vary based direct result of a potential or future lender or upon which lender or broker you select. its representative offering or selling a high-cost As a borrower, you should shop around home loan at the residence of a potential bor- and compare loan rates and fees. You should also consider consulting a quali- rower without a prearranged appointment with fied independent credit counselor or other the potential borrower or the expressed invita- experienced financial adviser regarding tion of the potential borrower. This subsection the rates, fees, and provisions of this mort- does not apply to mail solicitations that may be gage loan before you proceed. You should received by the potential borrower. contact the United States Department of Housing and Urban Development for a(13) Late Payment Fees list of credit counselors available in your A lender may not charge a late payment fee for area. You are not required to complete a high-cost home loan except as provided in this this agreement merely because you have received these disclosures or have signed subsection. A late payment fee: a loan application. Borrowing for the (a) may not be in excess of 5 percent of the purpose of debt consolidation can be an amount of the payment past due. appropriate financial management tool. (b) may only be assessed for a payment past due However, if you continue to incur sig- for 15 days or more. nificant new credit card charges or other (c) may not be charged more than once with debts after this high-cost home loan is closed and then experience financial dif- respect to a single late payment. If a late ficulties, you could lose your home and payment fee is deducted from a payment any equity you have in it if you do not made on the loan and such deduction causes meet your mortgage loan obligations. a subsequent default on a subsequent pay- Remember that property taxes and home- ment, no late payment fee may be imposed owners’ insurance are your responsibility. Not all lenders provide escrow services for such default. If a late payment fee has for these payments. You should ask your been imposed once with respect to a par- lender about these services. Also, your ticular late payment, no such fee shall be payments on existing debts contribute to imposed with respect to any future payment your credit rating. You should not accept which would have been timely and suffi- any advice to ignore your regular pay- cient, but for the previous default. ments to your existing creditors.(14) Modification or Deferral Fees (b) Annual percentage rate A lender may not charge a borrower any fees A lender making a high-cost home loan shall or other charges to modify, renew, extend, or disclose: amend a high-cost home loan or to defer any 1. In the case of a fixed mortgage, the payment due under the terms of a high-cost annual percentage rate and the amount home loan on a minimum of one modifica- of the regular monthly payment. tion, renewal, extension, or deferral per each 12 2. In the case of any other credit transac- months of the length of the loan. tion, the annual percentage rate, the amount of the regular monthly payment and the amount of any balloon paymentHigH-cOst LOan DiscLOsUres permitted under this section, a statementChapter 494.00792 F. S. provides: that the interest rate and monthly pay- (1) In addition to other disclosures required by law ment may increase, and the amount of and in conspicuous type: the maximum monthly payment based (a) Notice to borrower. A lender making a upon the maximum interest rate allowed high-cost home loan shall provide a notice pursuant to law.
  16. 16. 12 Module 1 (c) Notice to purchasers and assignees and Office are responsible for the administration and All high-cost home loans shall contain the enforcement of this act. The Commission may adopt following notice: rules pursuant to ss. 120.536(1) and 120.54 to imple- Notice: This is a mortgage subject to the ment this act. The Commission may adopt rules to provisions of the Florida Fair Lending Act. allow electronic submission of any forms, documents, Purchasers and assignees of this mortgage or fees required by this act. could be liable for all claims and defenses The Office: with respect to the mortgage which the borrower could assert against the creditor. • may conduct an investigation of any person when- ever the Office has reason to believe, upon com- (2) Timing of Disclosure plaint or otherwise, that any violation of the act has (a) The disclosure required by this subsection shall be given not less than 3 business days occurred. prior to the consummation of the high-cost • any person having reason to believe that a provision home loan. of this act has been violated may file a written com- (b) New disclosures are required when, after plaint with the Office setting forth the details of the disclosure is made, the lender making the alleged violation. high-cost home loan changes the terms of • may conduct examinations of any person to deter- the extension of credit, including if such mine compliance with this act. changes make the original disclosures inac- curate, unless new disclosures are provided • may bring action through its own counsel in the that meet the requirements of this section. name and on behalf of the state against any person (c) A lender may provide new disclosures pur- who has violated or is about to violate any provision suant to paragraph (b) by telephone, if: of this act or any rule or order issued under the act 1. The change is initiated by the borrower. to enjoin the person from continuing in or engag- 2. At the consummation of the high-cost ing in any act in furtherance of the violation. home loan: • in any injunctive proceeding, the court may issue a. The lender provides the disclosures in a subpoena or subpoenas duces tecum, requiring the writing to the borrower. attendance of any witnesses and the production of b. The lender and the borrower cer- any books, accounts, records, and other documents tify in writing that the new disclosures were provided by telephone no later and materials that appear necessary to the expedi- than 3 days prior to the consumma- tious resolution of the application for injunction. tion of the high-cost home loan. • may issue and serve upon any person an order to (d) A creditor must disclose to any high-cost cease and desist and to take corrective action when- home loan borrower the rights of the bor- ever it has reason to believe the person is violating, rower to rescind the high-cost home loan has violated, or is about to violate any provision within 3 business days pursuant to 15 U.S.C. of this act, or any written agreement between the s. 1635(a) and shall provide appropriate person and the Office. All procedural matters relat- forms for the borrower to exercise his or ing to issuance and enforcement of such cease and her right to rescission. The notice, forms, desist orders are governed by the Administrative and provisions thereof must be in accor- Procedure Act. dance with the requirements of 15 U.S.C. s. 1635(a). • whenever the Office finds a person in violation of this act, it may enter an order imposing a fine in an amount not exceeding $5,000 for each count orregULatiOn OF tHe FLOriDa Fair separate offense, provided that the aggregate fineLenDing act for all violations of this act that could have beenThe Office of Financial Regulation and the Financial asserted at the time of the order imposing the fineServices Commission are responsible for the adminis- shall not exceed $500,000.tration and enforcement of The Florida Fair Lending Any violation of this act shall also be deemed to be aAct. Duties include investigations, examinations, violation of Chapter 494, Chapter 516, Chapter 520,injunctions, and orders. Chapter 655, Chapter 657, Chapter 658, Chapter 660, Chapter 663, Chapter 665, or Chapter 667. The com-Powers and Duties of the commission mission may adopt rules to enforce this subsection.and Office; investigations; examinations;injunctions; Orders enforcement of the Florida Fair Lending actChapter 494.00795, F.S. provides that the Commission Chapter 494.00796, F.S. provides:
  17. 17. Florida Mortgage Brokerage and Lending Act Rules and Regulations 1(1) Any person or the agent, officer, or other repre- cOncLUsiOn sentative of any person committing a material vio- In conclusion, it is important to be aware of current lation of the provisions of this act shall forfeit the rules and regulations governing the mortgage lend- entire interest charged in the high-cost home loan ing business and the extent to which they affect daily or contracted to be charged or received, and only practice. These rules and regulations apply to a wide the principal sum of such high-cost home loan range of topics, including licensure requirements, can be enforced in any court in this state, either at continuing education requirements, and penalties for law or in equity. violations of the rules. The Department of Financial(2) A creditor in a home loan who, when acting in Services is responsible for regulating the activities of good faith, fails to comply with the provisions of mortgage brokers, mortgage brokerage businesses, this act shall not be deemed to have violated this mortgage lenders, and correspondent mortgage lend- act if the creditor establishes that within 60 days ers by the use of Florida Statutes and the Florida after receiving any notice from the borrower of Administrative Code and, when necessary, for impos- the compliance failure, which compliance failure ing penalties on licensees found to be in violation. was not intentional and resulted from a bona fide error notwithstanding the maintenance of proce- resOUrces dures reasonably adapted to avoid such errors, the borrower has been notified of the compliance fail- To access any of the required forms, go to www.flofr. ure, appropriate restitution has been made to the com/licensing/MBlist.htm and select the appropri- borrower, and appropriate adjustments are made ate license type. to the loan. Bona fide errors shall include, but not To access Chapter 494 online, go to be limited to, clerical, calculation, computer mal- www.leg.state.fl.us/Statutes/index.cfm?App_ function and programming, and printing errors. mode=Display_StatuteURL=Ch0494/titl0494. An error of legal judgment with respect to a per- h t m S t a t u t e Ye a r = 2 0 0 6 T i t l e = - 2 0 0 6 - son’s obligations under this section is not a bona Chapter%20494 fide error. To access the Florida Administrative Code, Rules (3) The remedies provided in this section are cumu- 69V-40, go to www.flofr.com/licensing/Rules lative. Statutes/Rule69V-40.htm
  18. 18. 14 Module 1 MODULe revieW eXercises Use the exercise questions to review the module material. The answers are found on the bottom of the next page. 1. In Chapter 494, an individual, partnership, corporation, trust, or other organization that possesses the power to direct the management or policies of a company is referred to as a: a. joint venturer. b. control person. c. principal broker. d. principal representative. 2. The most significant change to the Rules Regulation Mortgage Brokers by 2004 was the creation of which new Chapters? a. 40-69V F.A.C. b. 96V-40 F.A.C. c. 69V-40 F.A.C. d. 3D-40 F.A.C. 3. Which of the following is not a relevant change to Chapter 494 that became effective October 1, 2006? a. Elimination of the need to display individual, main and branch office licenses. b. Provision that applications are not deemed received until all required fees are received and authorizes disci- plinary action if fees are paid with a bad check. c. Provision that grounds for no disciplinary action when action is taken by other federal and state regulatory organizations located in or outside the State of Florida involving securities, insurance, real estate, and lending activities. d. Allows the Office to contract with a third party vendor to administer the mortgage broker test. 4. Which of the following is not a prohibited act per Chapter 494? a. To act as a mortgage lender in this state without a current, active license issued by the Office pursuant to 494.006-494.0077, F.S. b. To record a mortgage brokerage agreement or any other document, rendered by a court of competent jurisdic- tion, which purports to enforce the terms of the mortgage brokerage agreement. c. To pay a fee or commission in any mortgage loan transaction to any person or entity other than a mortgage brokerage business, mortgage lender, or correspondent mortgage lender, operating under an active license, or a person exempt from licensure under this chapter. d. In any matter within the jurisdiction of the Office, to knowingly and willfully falsify, conceal, or cover up by a trick, scheme, or device a material fact, make any false or fraudulent statement or representation, or make or use any false writing or document, knowing the same to contain any false or fraudulent statement or entry. 5. Audited financial statements of lenders must be prepared according to: a. U.S. generally accepted accounting principles. b. U.S. generally accepted auditing principles. c. U.S. generally accounted accepted principles. d. audited financials are not required by lenders once licensed. 6. Electronic filing of applications, renewals, and fees can be done by: a. mortgage brokers. b. mortgage brokerage businesses. c. mortgage lenders. d. all of the above. Transfer your answers to the space provided on the Answer Sheet.
  19. 19. Florida Mortgage Brokerage and Lending Act Rules and Regulations 157. A person is presumed to control a company if, with respect to a particular company, that person: a. is a director, general partner, or officer exercising executive responsibility or having similar status or functions. b. directly or indirectly may vote 10 percent or more of a class of voting securities or sell or direct the sale of 10 percent or more of a class of voting securities. c. in the case of a partnership, may receive upon dissolution or has contributed 10 percent or more of the capital. d. any of the above. 1) b 2) c 3) c 4) b 5) a 6) d 7) d ANSWERS: Transfer your answers to the space provided on the Answer Sheet.
  20. 20. 16 Module 1
  21. 21. MODULE 2 credit scores and credit scoring Learning ObjectivesAfter completing this module, you should be able to: 1. Define the terms credit score and credit 3. Discuss what counts in a credit score, what scoring. can be done to raise a credit score, and how 2. List the consumer’s rights under the Fair Credit to create one through the use of nontraditional Reporting Act (FCRA) and the Fair and Accurate credit. Credit Transaction Act (FACT ACT). 4. List the entities that use credit scores as a tool to evaluate a borrower’s credit worthiness and how the credit score affects the terms offered.intrODUctiOn creDit scOresMaking payments on time creates a solid credit rat- When consumers apply for a mortgage loan today,ing, but it takes time to build. However, getting into the lender is looking for a certain minimum credita bad credit situation can happen very quickly by pay- score to make an automated underwriting decision. Aing accounts late or not at all. If one of the accounts credit score is determined by a complex mathematicalis a mortgage loan, the lender can foreclose on the equation that evaluates the information contained inproperty to recover their loss, and the consumer will a consumer’s credit file. Myfico.com defines a creditno longer have a home. score as: …a number generated by a statistical model which isWho Uses credit scores? used to objectively evaluate information that pertains toThe 3 national consumer reporting companies sell making a credit decision.the information in the report to creditors, insurers,employers, and other businesses that use it to evalu- credit bureausate applications for credit, insurance, employment, Equifax, Experían, and TransUnion, are nationalor renting a home. Since a credit report includes credit reporting agencies that maintain credit reportsinformation on where the applicant has lived, how in the United States and work independently of eachthey pay their bills, and whether they have been sued, other to gather information from businesses andarrested, or filed for bankruptcy, all types of creditors update consumer credit profiles. Each bureau haspull credit reports and use credit scoring. a name for the score model they use. Experían uses the FICO score, created by Fair Isaac and Company.Mortgage lenders use credit scores to help them Equifax uses the Beacon score model. TransUnionevaluate a borrower’s request quickly and efficiently uses the Empirica score model.through automated means. Higher scores normallymean better interest rate and terms. In fact, the inter- Until 2005, the 3 major credit bureaus only providedest rate offered is normally directly related to the these scores to lenders. That changed when the Fair and Accurate Credit and Transaction Act (FACTcredit score. ACT), effective September 1, 2005 allowed con-Insurance companies use credit scores to determine sumers to receive once a year, upon request, a freeauto and home owner policy premiums. Car dealers, copy of their credit report. Consumers can alwaysfurniture stores, cell phone service companies, credit receive a free copy of their credit report if they havecard companies, and landlords use credit scores. been denied credit due to information contained in a© 2007 Bert Rodgers Schools of Real Estate, Inc. 17
  22. 22. 1 Module 2credit bureau within 60 days of being denied credit. rizing disclosure for an employer to access the fileThe Equal Credit Opportunity Act (ECOA) requires is required.that the creditor provide a notice disclosing the rea- • Consumers can limit prescreened offers by optingson the loan was rejected. The Fair Credit Reporting out.Act (FRCA) requires the creditor to give the name,address, and phone number of the consumer report- • Consumers can seek damages from violators.ing company that supplied the information. • Identity theft victims and active duty military per- sonnel have additional rights. www.annualcreditreport.com www.equifax.com The Federal Trade Commission (FTC) handles www.experian.com consumer complaints. Their contact information is www.transunion.com below: Phone: (877) -FTC-HELP (382-4357)credit scoring Mail: Federal Trade CommissionThis process of evaluating past credit performance CRC-240to predict future credit performance is called credit Washington, D.C. 20580scoring. Credit scores for mortgage purposes rangefrom 300 – 850. Higher credit scores are indicative of Online complaint form: https://rn.ftc.gov/better credit performance and lower scores indicative pls/dod/wsolcq$.startup?Z_ORG_CODE=of possible default in the future. Since it is based on PU01statistics and real data, it is more reliable than sub-jective methods as it treats each subject objectively. What counts in a credit score?Under the ECOA, a credit scoring system may notuse race, sex, marital status, national origin, or reli- When a credit score is provided, 4 reason codes aregion as factors. The ECOA states that a person cannot also provided to explain the scoring decision. It alsobe denied credit or have credit terminated because of gives insight on how the score may be improved.their age. However, creditors are allowed to use age in Each bureau places different weight on different fac-a properly designed system but must give equal weight tors. Some look more heavily upon installment loansto elderly applicants. and others on collections. If a credit report is used in making a decision to accept or reject a mortgageconsumer credit rights loan, then the customer must be provided a National Credit Score Disclosure. The National Credit ScoreThe federal FCRA promotes the accuracy, fairness, Disclosure provides the reason codes that were usedand privacy of information in the files of consumer most heavily in determining the score. See a samplereporting agencies. Consumer reporting agen- disclosure in Exhibit I.cies include credit bureaus and specialty agencies.Specialty agencies include agencies that sell informa- FICO Score. According to FICO, a consumer’stion about check writing histories, medical records, credit score is composed of 5 factors each weightedand rental history records. Consumers’ rights under differently.the FCRA include: 1. 35% of the FICO score is determined by how the• Consumers must be told if information in their consumer pays their credit accounts. Late pay- credit file has been used against them. ments, bankruptcies, and other negative items con-• Consumers have the right to know what is in their tribute negatively to the score. file. 2. 30% of the FICO score is determined by how much is owed on all outstanding accounts, the number of• Consumers have the right to ask for a credit score. accounts, and how much available credit is being• Consumers have the right to dispute incomplete or utilized. The more owed, the lower the score. inaccurate information. 3. 15% of the FICO score is determined by the length• Consumer reporting agencies must correct or of the credit history. However a short credit history delete inaccurate, incomplete, or unverifiable infor- with successful financial management will reflect mation. positively in the score.• Consumer reporting agencies may not report out- 4. 10% of the FICO score is determined by open- dated negative information. ing new accounts. Too many inquiries that do not result in the extension of credit will reflect nega-• Access to the file is limited to people with a valid tively in the score. Interest rate shopping should be need. done in a short period of time to minimize lower-• Written signed disclosure by the consumer autho- ing the score.
  23. 23. Credit Scores and Credit Scoring 19 exhibit i: national credit score Disclosure FormSource: Calyx
  24. 24. 20 Module 25. 10% of the FICO score comes from having a mix of like a credit card, a car loan, or mortgage are consid- credit like credit cards, a mortgage, and an install- ered unscoreable at the bureaus. Because of the lack of ment loan. traditional credit reporting, the model cannot provideThis chart shows how the Fair Isaac Corp. values the a numerical determination. These borrowers may bevarious parts of your credit management to determine placed into subprime loans with higher rates and feesyour credit score. because the lender cannot determine the risk associ- ated with lending to this borrower. Figure 2.1 What counts in a credit score? Pay rent build credit Pay Rent Build Credit, Inc. (PRBC) is a consumer reporting agency that collects, stores, scores, and reports bill payment data for permissible purposes under the FCRA. Their website is devoted to help- ing people develop credit scores based on alterna- tive credit. Their philosophy advocates that Payment Reporting Builds Credit.SM It is the first credit bureau to give consumers and small businesses the tools toSource: Fair Isaac Corp., www.myfico.com demonstrate their creditworthiness without the need to go into debt (www.prbc.com ).How can a credit score be improved? In addition to receiving payment data from creditorsCredit scores change as new information is reported and financial institutions’ bill payment services, PRBCin the consumer’s credit file. In order to improve the has partnered with the National Credit Reportingscore, a consumer should consider: Association to verify trade line accounts and up to• paying bills on time. 3 years worth of prior payments that are reported directly by consumers to PRBC.• keeping balances low on credit cards in relation to available credit. Lenders can purchase a PRBC ReportSM depicting a• paying down revolving debt. consumer’s bill payment history either on a stand- alone basis, or merged with Equifax, Experían, and• applying for new credit only when necessary. TransUnion credit reports. Each report is accompa-• if any payments have been missed, get current and nied by a PRBC Bill Payment ScoreSM (BPSSM). PRBC stay current. Reports and the BPS are used in the absence of, orThe credit file should be checked periodically to be as a supplement to a traditional credit report, to gaincertain there are no errors and to help guard against a more complete and accurate risk assessment of anidentity theft. If an identity thief opens an account in applicant. A PRBC Report may also be used as ayour name and does not pay the bill, the bad credit nontraditional mortgage credit report which exceedscould be reported under your name. If any of the secondary market standards for documenting cred-information is incorrect, then under the FCRA, both itworthiness. PRBC does not charge consumers orthe consumer reporting agency and the creditor are small businesses a fee to enroll in the service or to viewresponsible for correcting inaccurate or incomplete their own payment data at any time. The main objec-information. Once the consumer sends written proof tive is to automate the mortgage application processof the mistake to the credit reporting agency, the for hard-to-score borrowers so they may qualify foragency has 30 days to investigate the information. better loan products and pricing.The credit reporting agency must delete the con-tested information when the agency does not receive aresponse from the creditor or if the creditor is out of vantagescoreSMbusiness and the information cannot be verified. In 2006, the 3 national repositories introduced the jointly developed new credit score, VantageScoreSMUnder the FCRA, consumer reporting agencies must designed to simplify and enhance the credit process forcorrect or delete unverifiable, inaccurate, or incom- both consumers and credit grantors. VantageScoreSMplete information within 30 days of notification by the can provide consumers and businesses with a highlyconsumer. Negative information or bad credit will be predictive, consistent score that is easy to understand.reported for 7 years. Bankruptcies and judgments will Scores range from 501 to 990. with higher scoresbe reported for 10 years. indicative of lower risk. A type of report card has beenBorrowers who do not have traditional credit accounts created with grades A to F.

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