General Industry Letters
Mortgage Banking Letters
Employees with Felony Criminal Records, Hazard Insurance, Unlicensed Branch Offices, and Yield Spread Premiums
August 12, 2003
To the Institution Addressed:
Re: Employees with Felony Criminal Records, Hazard Insurance, Unlicensed Branch Offices, and Yield Spread Premiums
This letter addresses four areas of regulatory importance within the residential mortgage industry. The Banking Department (“Department”) views these areas with the utmost concern and strongly recommends that each licensee and registrant undertake a comprehensive review of its policies and procedures to ensure that it is in full compliance with regard to the matters discussed below.Employees with Felony Criminal Records
Through a variety of sources the Department has become aware of a number of individuals with felony convictions working in the residential mortgage industry. It is the policy of the Banking Department to keep individuals who have been convicted of financial crimes and/or mortgage fraud out of this industry. Specifically, pursuant to sections 592.2 and 592-a.2 of the New York State Banking Law, the Superintendent can refuse to issue a license or registration to an applicant if any person who is a director, officer, partner, agent, employee or substantial shareholder has been convicted of one of the listed felonies. Under section 595.1(b) of the Banking Law, the Superintendent can revoke any existing license or registration on the basis of any fact or condition, which, had it existed at the time of the original application, would have warranted the Superintendent in refusing to originally issue such license or registration. The employment of an individual with one or more of the listed felony charges is such a fact or condition.
Individuals who have been convicted of other felony charges may be able to work in the residential mortgage industry. However, the licensee or registrant should inform the Department of each such individual, the crime for which he or she was convicted, when the conviction occurred and the specific procedures that the licensee or registrant has implemented to ensure that this individual is properly supervised. Failure to do so may result in a hearing in which the Department will seek the revocation of the mortgage banking license or the mortgage broker registration.
The Department will review each of these instances on a case-by-case basis and inform the licensee or registrant of any concerns. Irrespective of any Department concerns, it remains the responsibility of the licensee or registrant, as employer, to properly supervise the individual. Moreover, it should be emphasized that the licensee or registrant is responsible for any misdeeds of the employee.
The legislature has recently passed a bill, effective January 1, 2004, that will broaden the applicability of the above-cited sections so as to include consultants within the provisions of sections 592.2 and 592-a.2. The Department will be issuing for public comment an implementing regulation that will among other things define the term ”consultant”.Limitation on Excess Insurance and Required Disclosures
Part 38.9 (a) of the General Regulations of the Banking Board requires that no mortgage banker or exempt organization may require any mortgagor to obtain a hazard insurance policy in excess of the replacement cost of the improvements on the property as a condition for the granting of a mortgage loan. The Department has learned of an increasing number of instances in which borrowers are being required to obtain an insurance policy in an amount greater than replacement cost as a condition of granting the loan. Such actions are in violation of Part 38 and will subject the licensee to appropriate regulatory actions.
Unlicensed Branch Offices
We have been finding, both though information supplied by others in the industry and our examination process, a number of branch offices that have been established and are operating without Departmental approval. In some instances, no application for a branch office has been filed. In other instances, the application, which has been filed, has not yet been approved. Such branch offices are operating illegally. Accordingly, the licensee or registrant involved will be subject to a fine of no less than $5,000 and will be required to refund to consumers all fees from loans generated at each unlicensed location.
The process to obtain branch office approval is simple and the application takes only a short period of time to process and approve provided all of the required information is supplied. Information regarding the application process may be found on the Department’s website at www.banking.state.ny.us or by calling 212-709-5470.
Yield Spread Premiums
Our examination process has shown with increasing frequency the failure of mortgage brokers to disclose the existence of a yield spread premium to borrowers on either the good faith estimate or the Part 38 broker fee agreement. When the exact dollar amount of a yield spread premium is not known, it is permissible under Part 38 of the General Regulations to disclose a reasonable range to the borrower, provided that the range is based on the broker’s experience as to the usual amount of this premium. The Department believes that the failure to disclose the yield spread premium or a reasonable range is an abusive lending practice. Accordingly, when the failure to properly disclose the existence of a yield spread premium is found, the Department requires the refund of the entire undisclosed premium to the borrower. A pattern of such failure to disclose yield spread premiums may result in substantial fines, refunds and/or a hearing for the revocation of the mortgage broker registration.
Once again, I would like to emphasize the importance of these issues and of having policies, procedures and systems designed to ensure continuous compliance with laws and regulations. Should you have any questions regarding any of the above topics, please do not hesitate to contact the undersigned at 212-709-5540.
Very truly yours,
Deputy Superintendent of Banks