After years of trying, the Pennsylvania General Assembly has finally managed to update and improve Pennsylvania’s Mortgage Bankers and Brokers Act, 63 P.S. § 456.01, et seq. ("MBBA"). On December 21, 1998, Pennsylvania Governor Ridge signed Senate Bill 94 (P/N 2252) (now known as Act 131) which will impact Pennsylvania residential mortgage lenders and brokers other than banks and similar financial institutions (the "MBBA Amendments"). The MBBA Amendments take effect in 60 days.
New Licensing Category: Loan Correspondent. Prior to the MBBA Amendments, the MBBA required licensing for only "mortgage bankers" and "mortgage brokers." Now, additional licensing categories have been created to reflect the changing nature of the residential mortgage lending industry. The first new licensing category is for "loan correspondents." A "loan correspondent" is defined as an individual or entity that originates and closes residential mortgage loans in its own name using funds provided by a "wholesale table funder," and simultaneously assigns the loans to the "wholesale table funder." (The definition of "wholesale table funder," a new term added to the MBBA by the MBBA Amendments, is discussed below.) A "loan correspondent" is not permitted to "service" mortgage loans, which means that the loan correspondent cannot receive payments, handle collections or field post-closing customer inquiries.
This new licensing category is directed at the many small and medium-sized lending organizations which do not consider themselves "mortgage brokers" because they originate loans in their own name. These smaller lenders do not operate as full service mortgage bankers since all of their loans are "table-funded" and immediately sold.
The new loan correspondent license will require an applicant to maintain a bond in the amount of $100,000 that "shall run to the Commonwealth of Pennsylvania and shall be for the use of the Commonwealth and any person or persons who obtain a judgment against the loan correspondent for failure to carry out the terms of any provision for which advance fees are paid." The MBBA Amendments define "advance fees" to include any fee paid before or during processing of the loan except a fee for a credit report, a title report or a property appraisal.
In addition to maintaining a bond, the loan correspondent must demonstrate a minimum "tangible net worth" of $100,000. The MBBA Amendments add a definition of this term which details how "tangible net worth" is to be computed. Persons previously authorized to act as mortgage bankers or brokers who apply for a loan correspondent license within 90 days of the effective date of the MBBA Amendments may be licensed for one year with a minimum tangible net worth of $50,000. The following year that amount would go up to $75,000, and the year after it would reach $100,000.
A significant advantage exists for small mortgage bankers that obtain a loan correspondent license. By utilizing the new loan correspondent licensing category, a licensee can avoid the stringent requirements of a mortgage banker’s license, including demonstration of a $1 million mortgage funding capability, a minimum tangible net worth of $250,000 and meeting the approval criteria of one of the federally related housing finance entities such as the Federal National Mortgage Association.
New Licensing Category: Limited Mortgage Broker. The second new licensing category created by the MBBA Amendments is for a "limited mortgage broker," defined as an "individual" who negotiates or places "nonpurchase money loans" for others. Thus, if an individual broker limits its activity to first lien equity loans and refinancings, such individual can obtain a limited mortgage broker license provided he or she operates from one location, maintains no branch offices and collects no "advance fees." Except for the education requirement discussed below, there are no other limited mortgage broker licensing requirements.
Presumably, this new licensing category will help individuals such as financial planners, stock brokers and others that have occasion to broker first lien mortgage loans as a component of their primary business. Such individuals and their organizations would otherwise be burdened with the mortgage broker licensing and office requirements.
Wholesale Table Funders. The MBBA Amendments do not create a new licensing category for "wholesale table funders." Instead, the MBBA Amendments create a definition of the term "wholesale table funder," a term which is needed to help define the new "loan correspondent" licensing category described above. A "wholesale table funder" is defined as a licensed mortgage banker or entity exempt from licensing under the MBBA that limits its activity to "table funding" loans originated by "loan correspondents." A "wholesale table funder" that is a foreign corporation is exempt from the requirement that it maintain an office in Pennsylvania, and this change is welcome news to national lenders.
We understand that, in implementing the MBBA Amendments, the Pennsylvania Department of Banking (the "Department") may treat a "wholesale table funder" as a new licensing category. The Department is also developing the procedure a mortgage banker must follow to elect to become a wholesale table funder. It is the Department’s hope that by enabling out-of-state wholesale table funders to operate in Pennsylvania without an office, the MBBA Amendments will result in more loan funds becoming available to Pennsylvania consumers.
Narrowing of Exemptions. Previously, the MBBA permitted entities to engage in the residential mortgage loan business without a license if they limited themselves to less than 12 mortgage loans in a calendar year in Pennsylvania. Now, this exemption is much narrower. The MBBA Amendments expressly define the first mortgage loan business to include an entity that makes more than 2 first mortgage loans per year and narrow the licensing exemption to entities that make less than 3 loans per year that are not otherwise deemed to be engaged in the first mortgage loan business.
In addition, the MBBA Amendments confirm that affiliates and subsidiaries of any bank or savings association, whether that bank is chartered in Pennsylvania or elsewhere, are partially exempt from MBBA licensing. As was the case prior to the MBBA Amendments, such subsidiaries or affiliates remain subject to certain of the substantive requirements of the MBBA. In addition, the MBBA Amendments require exempt subsidiaries and affiliates of financial institutions to be "registered with the department." This codifies what had been the Department’s informal position.
The MBBA Amendments also add two licensing exemptions, one for employers making loans to their employees as an employment benefit and another for non-profit corporations making mortgage loans to "promote home ownership or improvements for the disadvantaged."
"Wet Funds" Controversy. The MBBA previously limited the method of disbursement of funds on any first mortgage loan, including open-end home equity lines of credit. The disbursement limits applied to loans made by MBBA licensees and to loans made by partially exempt bank subsidiaries and affiliates. Disbursement could only be made by cash, electronic fund transfer, certified check or cashier’s check, a limitation which was functionally unworkable in many types of first lien loans.
The MBBA Amendments remedy this difficulty by limiting the disbursement restrictions to situations where the proceeds are disbursed by the licensee to a closing agent. For home equity lines of credit, reverse mortgages and other loans not involving a closing agent, disbursement may be handled as agreed by the parties.
New Lock-In Disclosure. The MBBA Amendments for the first time require that lock-in agreements be in writing. The MBBA Amendments define a "lock-in agreement" to be a guarantee until a specified date of the availability of a specified interest rate or specified formula by which the interest rate and/or number of points will be determined. A lock-in agreement must contain the expiration date, any interest rate locked in, any points locked in, any commitment fee locked in and any lock-in fee.
License Application Process. The MBBA Amendments make several important changes to the application process. Applicants will now be required to demonstrate that they have developed policies and procedures to handle customer inquiries and grievances "promptly and fairly." The MBBA Amendments also relax the time limit within which an application will be processed, by stating that the 60-day time limit begins to run after "a complete" application is received. Thus, submission of merely the application form will not start the processing clock. Instead, all required supporting material must be submitted to trigger the start of the 60-day processing period.
The MBA Amendments include several new provisions which empower the Department to more closely examine and scrutinize participants in the residential mortgage lending industry. First, regarding the processing of an application, the Department is specifically directed by the MBBA Amendments to conduct such investigation as it deems necessary to determine that the applicant and its officers, directors and principals are of good character and ethical reputation. Second, the MBBA Amendments authorize the Department to deny the issuance of a license due to the conviction of the applicant or any person who is a director, officer, partner, agent, employee or owner of 10% or more of the applicant. Third, the Department can deny a license or "otherwise restrict a license" if it finds that within two years prior to or from the date of application, the applicant or any such person associated with the licensee has had a different license denied or suspended or revoked or is the subject of an order of the Department suspending such a license or "has violated or failed to comply with any provision of [the MBBA] or any rule or order of the department."
New Education Requirement. The MBBA Amendments introduce for the first time a mandatory continuing education requirement. To maintain a license as a mortgage banker, a loan correspondent or a mortgage broker license, at least one person from each licensed office must attend a minimum of six hours of continuing education per year. For a limited mortgage broker’s license, this requirement is reduced to at least two hours per year. The Department has three years from the effective date of the MBBA Amendments to delineate the precise educational requirements, and we understand that it may be close to the end of the three year period when the education requirements are actually established by the Department.
Record-Keeping Outside Pennsylvania. The MBBA Amendments clarify that when the Department grants permission for records to be kept at a location outside of Pennsylvania, the cost of examination, including travel costs, are to be borne by the licensee. The MBBA Amendments also provide the Department with authority to revoke permission for such out of state record keeping for "good cause in the interest of consumer protection for Commonwealth borrowers."
Advertising. The MBBA Amendments require that all advertisements include language indicating that the licensee is licensed by the Department. Licensees will need to adjust their broadcast and print ads accordingly.
Property Insurance. The MBBA Amendments address the evidence of insurance which may be required in connection with a loan, a topic not previously mentioned in the MBBA. Evidence of insurance may be provided by "a policy or binder or a copy of either." This language would appear to provide flexibility for borrowers and insurers who previously may have encountered lender requirements that an actual policy be delivered.
Mortgage Broker Limitations. The MBBA Amendments confirm existing limits on the actions of a mortgage broker or limited mortgage broker. Such entities cannot offer commitments in their own name, service mortgage loans or enter into lock-in agreements except on behalf of the lender.
The bond requirement to which mortgage broker licensees are subject has been changed to narrow the bond coverage. Before, a bond was required for the benefit of any person injured by a wrongful act, default or misrepresentation of the mortgage broker. The MBBA Amendments now limit the use of the bond to a mortgage broker’s "failure to carry out the terms of any provision for which advance fees are paid." This would seem to address situations where fees are paid at or near the time of loan application and a loan is not delivered according to the terms contemplated or even at all. Presumably, the more limited exposure under the new language of the MBBA bond requirement will reduce the cost of a bond. Also, the MBBA Amendments remove the option which mortgage broker licensees previously had of depositing $100,000 in securities in lieu of obtaining a bond. Instead, the only remaining alternative to posting a bond is not to accept advance fees.
Strengthened Enforcement Powers. The MBBA Amendments expressly give the Department, for the first time, authority to issue cease and desist orders, notices of fines and related orders. In addition, the MBBA Amendments expand the Department’s ability to revoke or refuse to renew any license by adding additional statutory justifications for such action. Such action can now be taken upon insolvency, evidence of fraud or conviction of a misdemeanor or felony, for filing of a false application, for failure to keep records and for "demonstrated negligence or incompetence in performing any act for which the licensee is required to hold a license under [the MBBA]."
Conclusion. The MBBA Amendments, which have been long awaited by both the Department and the residential mortgage industry, modernize the existing licensing statute. The industry will now be awaiting regulations from the Department that address the educational requirements and other issues raised by the MBBA Amendments. Our Harrisburg office partner Franklin Kury, who heads our Pennsylvania Government Relations Group, together with the authors, can assist lenders and brokers in obtaining further MBBA amendments helpful to the industry and in providing comments to the Department on proposed regulations. In general, it is hoped that the Department’s strengthened enforcement powers together with the new educational requirements will help remove disreputable players from the industry and improve the reputation of the mortgage lending industry throughout the Commonwealth of Pennsylvania.