Banking Interpretations

NYSBL 590(g) and Gen. Regs. of BB Part 38


To: Kenneth Bielemeier Mortgage Banking Division

From: Alvin A. Narin Legal Division

Date: February 11, 2005

Subject: [ ]

Issue: Whether [ ], a licensed mortgage banker, that performs various mortgage broker services at the direction of and in the name of licensed mortgage banker and several federally regulated lenders, is required to provide consumers with the disclosures required by Part 38 of the General Regulations of the Banking Board ("Part 38") for mortgage bankers acting in a mortgage brokering capacity.

Recommendation: [ ] should not be required to provide disclosures in its own name in connection with the loan processing services it provides on behalf of mortgage lenders.

Background: During an examination of [ ] a licensed mortgage banker, the Mortgage Banking Division ("MBD") learned that much of [ ] mortgage application and processing work is performed by [ ] at the direction of and in the name of [ ]. Telephone calls to [ ] from applicants are answered in [ ] name by [ ] employees at [ ] offices, the applications are processed by [ ] on behalf of [ ] and closings on [ ] loans are coordinated by [ ] employees.

Subsequently, the Department met with representatives of both [ ] and [ ] and, at the conclusion of the meeting, counsel for [ ] was invited to submit a legal analysis regarding the activities of [ ] and whether such activities required [ ] to provide the disclosures required by Part 38.

In his letter, counsel for [ ] stated that in addition to mortgage lending, [ ] offers loan processing services ("Services") to other mortgage lenders, both licensed mortgage bankers and federally-chartered banks, thrifts and credit unions that he asserts are exempt from the provisions of Article 1 2-D and the applicable regulations.

[ ], provides the Services to the lenders on a "private label basis" in that it will perform the Services at the direction of and in the name of the lender. The Services include the following: 1) loan fulfillment services, such as operation of a customer service center, product counseling, taking applications, credit assessment, underwriting, processing of applications, back-office services and closing services; 2) post-closing and quality control services; and 3) mortgage loan servicing and sub-servicing. The Services may be performed via an internet site, a call center or both, but always in the name of the lender.

In all instances, the lender will conduct the marketing of its own programs and the solicitation of the applicants and all loans will be closed in the name of and funded by the lender. The lender will pay [ ] a fee to perform the Services and the borrower will not make any direct payments for fees to [ ].

Review of the loan documents from a [ ]loan file in which [ ]provided its Services indicates that the only place that [ ] is identified as being involved in the transaction is on the "Mortgage Loan Origination Agreement/Disclosure." In that document, it is disclosed to the borrower that [ ] has been retained by [ ] to provide processing and other services as its contractor to assist [ ] in originating the mortgage. The relationship is described therein as one in which [ ] is acting exclusively in the name of the and on behalf of [ ]. In addition, the disclosure states that any fees received by [ in connection with the loan will be paid directly by [ ] and are included in the rate, points, fees and terms of the loan. In no event shall the compensation received exceed $1,500 and the borrower does not owe any fees to [ ] and will not directly pay any of [ ] compensation.

Banking Law s590(g) defines a mortgage broke to be a person who, "[e]ngages in the business of soliciting, processing, placing or negotiating mortgage loans for others, or offering to solicit, process, place or negotiate mortgage loans for others."

Part 38 §38.3, requires mortgage brokers to provide borrowers with a Pre-Application Disclosure. [ ] argues that although their Services appear to fall within the definition of a mortgage broker because it includes the term
"processing," it is unclear if the Pre-Application Disclosure requirement would apply to it since it is performing the Services on behalf of and in the name of another mortgage lender.

[ ] reasons that since it is providing Services in the name of and under the direction of a mortgage lender, it does not need to disclose its involvement in the transaction since it is not holding itself out to the public as available to help
find, arrange or negotiate a mortgage loan. Accordingly, [ ] states that it would be the responsibility of the lender to comply with all disclosure requirements applicable under state and Federal law. Further, [ ] claims it would create
consumer confusion for [ ] to make disclosures to a borrower in its own name when it is performing services in" the name of the lender. [ ] believes such a confusion would result because [ ] is acting as a processor rather than in the
traditional mortgage broker capacity.

[ ] adds that it is "significant" that Federal law does not require the disclosure by lenders of their service providers or require consumer protection disclosures on such service providers. Counsel for [ ] states that the legislative history of the Real Estate Settlement Procedures Act ("RESPA) indicates that Congress did not intend lenders to disclose to borrowers that a third-party vendor would be performing certain back-office loan origination services, such as processing and underwriting, provided that the third-party vendor does not make referrals or market the lender's services to the public."

Counsel also points to the authorization in the National Bank Act that allows national banks to make loans though agents. Further, the Comptroller's regulations allow national banks to use the services of persons not employed by the bank to originate loans. Therefore, counsel claims that any interpretation of Article 12-D or regulation that would restrict the ability of a national bank to retain [ ] to perform these services would be an impermissible restriction of the lending
activities of a national bank.

In addition, [ ] would be subject to regulation and examination by appropriate Federal regulators since Federal law authorizes examination of third-parties that perform services on behalf of a federally-chartered institution to the
same extent as if the Federally-chartered institution was performing the services itself on its own premises.

[ ] believes that requiring disclosures by and in the name of [ ] would be inherently confusing and potentially misleading to consumers. When [ ] performs these services on behalf of Federally-chartered lenders, New York's interest in ensuring adequate consumer protection and regulation of residential mortgage lending will be satisfied since [ ] will be subject to examination and supervision of federal regulators.

Licensed mortgage bankers are not required to obtain a separate mortgage broker registration in order to engage in brokering activity in New York. However, the mortgage banker must comply with the statutes and regulations applicable to such situations. Given [ ] extensive involvement in a loan transaction, including taking an application, discussing loan terms and conditions with a borrower, processing and recommending an underwriting decision and arranging a loan closing, counsel for [ ] concluded that [ ] would be engaged in activities that are with the definition of a mortgage broker.