Colorado Rules

24 Sep Colorado Rules

Posted at 12:10h in Compliance Alerts by

Our July 27, 2009 Memorandum discussed Colorado House Bill 1085, effective August 5, 2009, which enacted the Mortgage Loan Originator Licensing Act (the “Act”), conforming Colorado law to the federal Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (the “S.A.F.E. Act”).   The Colorado Division of Real Estate (the “Division”) has recently adopted rules related to mortgage loan originator licensing to implement the Act.  The rules, which are effective September 30, 2009, apply to mortgage loan originators and include those persons who originate a mortgage, offer to originate a mortgage, act as mortgage loan originator, or offer to act as a mortgage loan originator.  If you have any questions concerning this Memorandum, please contact Laura LaRaia.

 

1-2-2 Surety Bond Requirements for Mortgage Loan Originators and 1-3-1 Errors and Omissions Insurance for Mortgage Loan Originators

 

These rules define surety bond and errors and omissions insurance requirements for mortgage loan originators.

 

Mortgage loan originators are deemed compliant with the surety bond requirement if their surety bond meets the requirements defined in one of the following three options:

  • Option 1 – Mortgage loan originators, at a minimum, may acquire and maintain an individual surety bond if:

o                The surety bond is in the amount of $250,000;

o                The surety bond conforms to all relevant Colorado statutory requirements;

o                The surety bond is exclusive to covering acts contemplated under currentColorado mortgage loan originator licensing laws;

o      The surety bond is not applicable to any conduct or transactions outside of the jurisdiction of the Director of the Division (the “Director”); and

o      The surety bond is identical to the individual surety bond form developed and approved by the Director.

o                                                                                                          Option 2 – Mortgage loan originators who are employees or exclusive agents for companies with less than 20 individuals who are required to be licensed pursuant to the Act and who do not work for more than one company, may operate under the companies’ surety bond if the surety bond meets the following criteria:

o      The surety bond is in the amount of $100,000;

o      The surety bond conforms to all relevant Colorado statutory requirements;

o      The surety bond is exclusive to covering acts of all of the company’s W-2 employees or exclusive agents contemplated under current Colorado mortgage loan originator licensing laws; and

o      The surety bond is identical to the company surety bond form developed and approved by the Director.

  • Option 3 – Mortgage loan originators who are W-2 employees or exclusive agents for companies with 20 or more individuals who are required to be licensed pursuant to the Act and who do not work for more than one company, at a minimum, may operate under the companies’ surety bond if the surety bond meets the following criteria:

o      The surety bond is in the amount of $200,000;

o      The surety bond conforms to all relevant Colorado statutory requirements;

o      The surety bond is exclusive to covering acts of all of the company’s W-2 employees or exclusive agents contemplated under current Colorado mortgage loan originator licensing laws; and

o      The surety bond is identical to the company surety bond form developed and approved by the Director.

 

Acceptable surety bond forms may be found on the Division’s website athttp://www.dora.state.co.us/real-estate/applications/mortgagebroker/index.htm.

 

Mortgage loan originators are deemed compliant with the errors and omissions insurance requirement if their errors and omissions insurance meets the requirements defined in one of the following three options:

  • Option 1 – Mortgage loan originators, at a minimum, may acquire and maintain individual errors and omissions insurance in their own name with the following terms of coverage:
    • The contract and policy conform to all relevant Colorado statutory requirements;
    • Coverage includes all acts for which a mortgage loan originator license is required, except those illegal, fraudulent, or other acts which are normally excluded from coverage;
    • Coverage must encompass all types of transactions conducted by the mortgage loan originator and must be in the individual mortgage loan originator’s name;
    • Coverage is for not less than $100,000 for each licensed individual per covered claim, with an annual aggregate limit of not less than $300,000 per licensed individual; and
    • Coverage contains a deductible no greater than $1,000 or a deductible no greater than $20,000 for policies insuring primarily reverse mortgage transactions;
  • Option 2 – Mortgage loan originators who are employees or exclusive agents for companies with less than 20 individuals who are required to be licensed pursuant to the Act and who do not work for more than one company, at a minimum, may operate under the companies’ errors and omissions insurance policy if the policy meets the following terms of coverage:
    • The contract and policy conform to all relevant Colorado statutory requirements;
    • Coverage includes all acts for which a mortgage loan originator license is required, except those illegal, fraudulent, or other acts which are normally excluded from coverage;
    • Coverage must include all activities contemplated under current Coloradomortgage loan originator licensing laws and states this in the policy;
    • Coverage must encompass all types of transactions conducted by all of the mortgage loan originators employed at the company or by all mortgage loan originators who are exclusive agents of the company;
    • Coverage is for not less than $1 million per covered claim, with annual aggregate limit of  not less than $2 million that is exclusive to Colorado consumers; and
    • Coverage contains a deductible no greater than $50,000;
  • Option 3 – Mortgage loan originators who are W-2 employees or exclusive agents for companies with 20 or more employees and who do not work for more than one company, at a minimum, may operate under the companies’ errors and omissions policy if the policy meets the following terms of coverage:
    • The contract and policy conform to all relevant Colorado statutory requirements;
    • Coverage includes all acts for which a mortgage loan originator license is required, except those illegal, fraudulent, or other acts which are normally excluded from coverage;
    • Coverage must include all activities contemplated under current Coloradomortgage loan originator licensing laws and states this in the policy;
    • Coverage must encompass all types of transactions conducted by all of the mortgage loan originators employed at the company;
    • Coverage is for not less than $1 million per covered claim, with annual aggregate limit of  not less than $4 million that is exclusive to Colorado consumers; and
    • Coverage contains a deductible no greater than $100,000.

 

Regarding company errors and omissions policies, the company must provide the Director or an authorized representative of the Director with any and all requested errors and omissions insurance policies relevant to this rule or the Act and must verify and provide adequate proof regarding the timeline of employment for each individual operating under such company policy. The company’s failure to provide such information will result in noncompliance with the errors and omissions insurance requirement for individual licensees operating under such a company policy.

 

For information regarding errors and omissions insurance providers, visit the Division’s website at http://www.dora.state.co.us/real-estate/index.htm.

 

The Director has created the Mortgage Loan Originator Licensing Update Form to ensure surety bond and errors and omissions insurance information is clearly and concisely disclosed.   This form must be used and may be found on the Division website atwww.dora.state.co.us/real-estate/mortgage/MBForms.htm.

 

Mortgage loan originators must forward this form by mail or personal delivery to:

 

Division of Real Estate – Attn: Mortgage Loan Originator Licensing Department

1560 Broadway,

Suite 925

Denver, CO 80202

 

Mortgage loan originators may update all the licensing information electronically.  They may access their information through the following website:https://eservices.psiexams.com/index_login.jsp.  After entering their password and username, mortgage loan originators may update all information without any fees or costs.

 

Applicants for licensure, renewal, and reinstatement must comply with these rules and the Act in a manner prescribed by the Director.  Any licensee who fails to obtain and maintain a surety bond or errors and omissions coverage or fails to provide proof of continuous coverage for the surety bond or errors and omissions insurance will be subject to disciplinary action.

 

1-5-1 Mortgage Loan Originator License Inactivation and Reactivation

 

If a mortgage loan originator license is inactivated by the Director or an authorized representative of the Director for one or any combination of the following reasons, the mortgage loan originator must pay an administrative fee determined by the Director in order to reactivate his or her license because the mortgage loan originator has failed or is failing to:

  • Comply with the surety bond requirements of the Act or any rule of the Director that directly or indirectly addresses surety bond requirements;
  • Comply with the errors or omissions insurance requirement in the Act or any rule of the Director that directly or indirectly addresses errors and omissions insurance requirements;
  • Maintain current contact information, surety bond information, or errors and omissions insurance information as required by the Act or by any rule of the Director that directly or indirectly addresses such requirements;
  • Respond to an investigation or examination;
  • Comply with any of the education or testing requirements set forth in the Act or in any rule of the Director that directly or indirectly addresses education or testing requirements; or
  • Register with and provide all required information to the Nationwide Mortgage Licensing System and Registry (the “NMLSR”).

 

Individuals who have an inactive license are prohibited from practicing as a mortgage loan originator and from engaging in any mortgage related activities, which require licensure pursuant to the Act, Director rule, or as prescribed by Director position statement.

 

In order for an inactive mortgage loan originator license to be reactivated, the individual seeking reactivation must provide the Division with proof of full compliance with mortgage loan originator license law.  All administrative fees will be collected in the form of a money order or a cashier’s check.

 

The Director has created the Mortgage Loan Originator License Reactivation Form.  The form may be found on the Division website at http://www.dora.state.co.us/real-estate/mortgage/MBForms.htm.

 

3-1-1 Reasonable Inquiry and Tangible Net Benefit

 

The purpose of this rule is to clarify uncertainties regarding reasonable inquiry and reasonable, tangible net benefit.

 

“Uniform Residential Loan Application” means the Freddie Mac Form 65 or the Fannie Mae Form 1003 used in residential loan transactions on properties of four or fewer units.  The Uniform Residential Loan Application forms defined in this rule are the editions of the forms that are current and effective on January 1, 2008, and do not include any later amendments or editions.  The forms are available for inspection at the Division of Real Estate, on the Division’s website at http://www.dora.state.co.us/real-estate/index.htm in the mortgage loan originator section under forms, and at any state publications depository library.

 

The Act does not prohibit specific mortgage products or documentation types.  This rule requires the mortgage loan originator to recommend appropriate products.

 

Mortgage loan originators must only recommend appropriate products after reasonable inquiry has been made in order to understand the borrower’s current and prospective financial status.  Reasonable inquiry requires the mortgage loan originator to interview and discuss current and prospective income, including the income’s source and likely continuance, with borrowers, and may not require the mortgage loan originator to verify such income. Mortgage loan originators have a duty to recommend mortgage products based on the information provided by the borrower.

 

Mortgage loan originators are deemed compliant with the Act, concerning reasonable inquiry, upon interviewing and discussing, with all applicable borrowers, all sections contained in the Uniform Residential Loan Application and upon completion of a Tangible Net Benefit Disclosure.  The Tangible Net Benefit Disclosure may be found on the Division website athttp://www.dora.state.co.us/real-estate/mortgage/MBForms.htm.  Alternate disclosures are acceptable if they include all information required on the suggested form.

 

A mortgage loan originator must make a reasonable inquiry, in order to determine the reasonable, tangible net benefit for a borrower.  The reasonable, tangible net benefit standard is inherently dependent upon the totality of the facts and circumstances relating to a specific transaction.

 

When determining reasonable, tangible net benefit, considerations that mortgage loan originators must take into account and discuss them with the borrower, include, but are not limited to:

  • Lower payments;
  • Condensed amortization schedule;
  • Debt consolidation;
  • Cash out;
  • Avoiding foreclosure;
  • Negative amortization;
  • Balloon payments;
  • Variable rates;
  • Interest only options;
  • Prepayment penalties; and
  • Hybrid mortgage products.

 

The purpose or reason for a purchase or refinance transaction must be identified by the borrower.  A mortgage loan originator must require that all borrowers describe, in writing, the reasons they are seeking a mortgage loan, a loan modification, or to refinance an existing mortgage loan.  It is the mortgage loan originator’s responsibility to make sure that the information is acquired and accurately documented.

 

A mortgage loan originator may  not have demonstrated a duty of good faith and fair dealing in all communications and transactions with a borrower if it is determined that a mortgage loan originator completed the required purpose or reason for a purchase, loan modification, or refinance without consulting the borrower.

 

At the time of completing a loan application, a mortgage loan originator must complete a Tangible Net Benefit Disclosure with the borrower.  The Disclosure must also be completed with the borrower prior to the borrower signing loan-closing documents if the reasonable, tangible net benefit has changed.  Tangible Net Benefit disclosures must be signed by both the mortgage loan originator and the borrower.

 

Mortgage loan originators must provide completed disclosure forms to all borrowers within 72 hours of completion.  Mortgage loan originators must also be able to provide proof to the Director or an authorized representative of the Director that the disclosure forms were provided to the borrower within 72 hours of completion.

 

Mortgage loan originators are presumed compliant when using the suggested form and when disclosures meet the timelines defined in this rule.

 

5-1-2 Mortgage Loan Originator Disclosures

 

The purpose of this rule is to ensure that the disclosures provided for in the Act are met and that borrowers are provided with accurate and clear disclosures regarding their mortgage loan transactions.

 

Definitions

“Rate” means the teaser rate, payment rate, or interest rate used to determine a borrower’s monthly payment or deferred interest specific to reverse mortgage transactions.

 

“Teaser rate” means a temporary and often low introductory rate on an adjustable rate mortgage.

 

“Payment rent” means the rate used to determine a borrower’s monthly payment.

 

“Interest rate” means the rate used to calculate a borrower’s monthly interest payment.

 

“Payment Type” means principal and interest, interest only, or negative amortization.

 

“Fixed term” means the length of time a teaser rate, payment rate, or interest rate is fixed and will not adjust.

 

“Index” means the index for an adjustable rate mortgage.

 

“Initial Adjustment Cap” means the limit on how much the interest or payment rate can change at the first adjustment period.

 

“Life Cap” means the limit on how much the interest or payment rate can change over the life of the loan.

 

“Front End Compensation” means the limit on how much the total compensation charged to the borrower that insures to the benefit of the mortgage loan originator and mortgage company for which the mortgage loan originator is an officer, partner, member, contractor, independent contractor, exclusive agent, or employee.

 

“Back End Compensation” means the total compensation paid by the funding lender that insures to the benefit of the mortgage loan originator and the mortgage company for which the mortgage loan originator is an officer, partner, member, contractor, independent contractor, exclusive agent, or employee.

 

Specific disclosures must be provided within 3 business days after receipt of a loan application or any moneys from a borrower.  The Director has determined that the Truth-in-Lending Disclosure form and the Good Faith Estimate Disclosure form may be used to comply with this rule.

 

The Truth-in-Lending Disclosure and the Good Faith Estimate Disclosure must be disclosed:

  • Within 3 business days after receipt of a loan application or any moneys from a borrower;
  • If, after the initial written disclosure is provided, a mortgage loan originator enters into a lock-in agreement, within 3 business days thereafter, including Saturdays, and prior to the borrower signing loan closing documents; and
  • If, after a mortgage loan originator enters into a lock-in agreement, the APR increases from the APR disclosed earlier by more than 1/8 of one percentage point, within 3 business days of such change and prior to the borrower signing loan closing documents.

 

A mortgage loan originator must not charge any fee that insures to the benefit of the mortgage loan originator and the mortgage company for which he or she is an officer, partner, member, exclusive agent, contractor, independent contractor, or employee if the fee exceeds the fee disclosed on the Good Faith Estimate Disclosure unless:

  • The need to charge the fee was not reasonably foreseeable at the time the written disclosure was provided; and
  • The mortgage loan originator has provided to the borrower, no less than 3 business days prior to the signing of the loan closing documents, a clear and written explanation of the fee and the reason for charging a fee exceeding that which was previously disclosed.

 

Mortgage loan originators must also disclose the amount of any commission or other compensation to be paid to the mortgage loan originator, including the manner in which the commission or other compensation is calculated and the relationship of the commission or other compensation to the cost of the loan received by the borrower.  Mortgage loan originators must disclose to the borrower all of the front end and back end compensation for the transaction.  Annual salaries need not be disclosed.

 

Mortgage loan originators may only disclose a range of compensation when the dollar amount of compensation cannot be determined.  The range must be disclosed in a dollar amount and the range must not exceed one percentage point of the loan for the total compensation of the transaction.  Mortgage loan originators are deemed compliant if the actual compensation is less than amount disclosed to the borrower.

 

The Director has created the Colorado Compensation Disclosure Form to ensure this information is clearly and concisely disclosed.  The form may be found on the Division’s website at http://www.dora.state.co.us/real-estate/mortgage/MBForms.htm.  Mortgage loan originators must use this form or an alternate form, if the alternate form clearly includes all information required on the suggested form.

 

The compensation disclosure must be completed and disclosed in the same time periods required for the Truth-in-Lending Disclosure and the Good Faith Estimate Disclosure.

 

A mortgage loan originator must provide a written lock-in disclosure, if applicable.  The lock-in disclosure must contain the costs, terms, duration, and conditions of a lock-in agreement and whether a lock-in agreement has been entered, whether the lock-in agreement is guaranteed by the mortgage loan originator or lender, and, if a lock-in agreement has not been entered, disclosure in a form acceptable to the Director that the disclosed interest rate and terms are subject to change.  Mortgage loan originators must disclose whether and under what conditions any lock-in fees are refundable to the borrower.

 

The Director has created the Colorado Lock-in Disclosure Form to ensure this information is clearly and concisely disclosed.  The form may be found on the Division’s website athttp://www.dora.state.co.us/real-estate/mortgage/MBForms.htm.  Mortgage loan originators must use this form or an alternate form, if the alternate form clearly includes all information required on the suggested form.

 

This form or an alternate form must be used when disclosing lock-in agreements, or when the mortgage loan originator has not entered into a lock-in agreement, to borrowers on residential mortgage loan transactions.

 

Mortgage loan originators must disclose the amount of the teaser rate, payment rate, or interest rate and also disclose the type of rate.

 

When disclosing the payment type, mortgage loan originators must define if the payment type is a negative amortization payment, interest only payment, or principal and interest payment.  When disclosing the index, mortgage loan originators must include the type and amount of the index at the time the disclosure is completed.

 

When disclosing prepayment penalties, mortgage loan originators must include:

  • Whether or not a prepayment penalty is included;
  • The length of the prepayment penalty; and
  • The cost of the prepayment penalty.  Mortgage loan originators must include the dollar amount of the penalty at the time the disclosure is completed.

 

If the mortgage loan originator is completing the lock-in disclosure form for a mortgage product with multiple payment options, all payment options must be separately and clearly disclosed on the second page of the lock-in disclosure.

 

The lock-in agreement disclosure must be completed and disclosed:

  • Within 3 business days after receipt of a loan application or any moneys from a borrower;
  • If, after the initial written disclosure is provided, a mortgage loan originator enters into a lock-in agreement, within 3 business days thereafter, including Saturdays, and prior to the borrower signing loan closing documents, the mortgage loan originator must deliver or send by first class mail the written lock-in disclosure to the borrower; and
  • If, after a mortgage loan originator enters into a lock-in agreement, the APR increases from the APR disclosed earlier by more than 1/8 of one percentage point, within 3 business days of such change and prior to the borrower signing loan closing documents.

 

Individuals who originate a mortgage or act as a mortgage loan originator must keep records of the required disclosures, for a period of 4 years, for the purposes of inspection by the Director or authorized representative of the Director.  All documents must be kept in a secure environment.  Electronic storage is acceptable as long as the information is accessible and kept in a secure environment.

 

The company for whom the mortgage loan originator is an officer, partner, contractor, independent contractor, member, exclusive agent, or an employee may provide the requested documents to the Director.  However, the mortgage loan originator is responsible for compliance with the Director’s request and is subject to disciplinary action if the company fails or refuses to provide the requested documentation.

 

Mortgage loan originators must provide completed disclosure forms to all borrowers within 72 hours of completion.  Mortgage loan originators must also be able to provide proof to the Director or an authorized representative of the Director that the disclosure forms were provided to the borrower within 72 hours of completion.

 

7-1-1 Dual Status Disclosure

 

The purpose of this rule is to clearly notify mortgage loan originators that their dual status as a real estate broker and a mortgage loan originator must be disclosed to the borrower.

 

A mortgage loan originator must not as a loan originator in any transaction in which the mortgage loan originator acts or has acted as a real estate broker or salesperson or another person doing business under the same licensed real estate broker acts or has acted as a real estate broker or salesperson, unless the mortgage loan originator first makes a full and fair disclosure to the borrower of all material features of the loan product and all facts material to the transaction, in addition to any other disclosures required by law.  Additionally, the mortgage loan originator must maintain his or her mortgage loan originator business activities and mortgage loan originator business records separate and apart from the real estate broker activities.

 

The Director prohibits individuals from acting as a mortgage loan originator and real estate broker or real estate salesperson, on the same transaction, unless they comply with this rule. The Director has determined that dual status is a material fact to real estate transactions and must be disclosed to the borrower.

 

The Director has created the Colorado Dual Status Disclosure Form to ensure that this information is clearly and concisely disclosed.  This disclosure may be found on the Division website at http://www.dora.state.co.us/real-estate/mortgage/MBForms.htm.  Mortgage loan originators must use this form or an alternate form, if the alternate form clearly includes all information required on the suggested form.

 

The Colorado Dual Status Disclosure form must be completed and disclosed within 3 business days after receipt of a loan application or any money from a borrower.  Persons who originate a mortgage, offer to originate a mortgage, act as a mortgage loan originator, or offer to act as a mortgage loan originator must maintain the Colorado Dual Status Disclosure Form for a period of 4 years.

 

Mortgage loan originators must provide completed disclosure forms to all borrowers within 72 hours of completion.  Mortgage loan originators must also be able to provide proof to the Director or an authorized representative of the Director that the disclosure forms were provided to the borrower within 72 hours of completion.

 

 

 

8-1-1 Mortgage Loan Originator Advertising

 

The purpose of this rule is to ensure that individuals who originate a mortgage or act as a mortgage loan originator are familiar with all current regulations that address advertising, including the advertising of nontraditional mortgage products.

 

Definitions

“Interest Only Mortgage Loan” means a nontraditional mortgage product on which, for a specified number of years the borrower is required to pay only the interest due on the loan, during which time, the rate may fluctuate or may be fixed.  After the interest only period, the rate may be fixed or fluctuate, based on the prescribed index, and payments include both the principal and interest.

 

“Nontraditional Mortgage” means any mortgage product other a 30-year fixed rate mortgage.

 

“Payment Option Arm” means a nontraditional adjustable rate mortgage that allows the borrower to choose from a number of different payment options.  For example, each month, the borrower may chose a minimum payment option based on a “start” or introductory interest rate, an interest only payment option based on the fully indexed rate, or a fully amortizing principal and interest payment option based on a 15 year or 30 year loan term, plus any required escrow payments.  The minimum payment option can be less than the interest accruing on the loan, resulting in negative amortization.  After a specified number of years, or if the loan reaches a certain negative amortization cap, the required monthly payment amount is recast to require payments that will fully amortize the outstanding balance over the remaining loan term.

 

“Reduced Documentation” means a loan feature that is commonly referred to as “low doc/no doc,” “no income/no asset,” “stated income,” or “stated assets.”  For mortgage loans with this feature, an institution sets reduced or minimal documentation standards to substantiate the borrower’s income and assets.

 

“Simultaneous Second Lien Loan” means a lending arrangement where either a closed end second lien or a home equity line of credit is originated simultaneously with the first lien mortgage loan, typically in lieu of a higher down payment.

 

An “advertisement” is any commercial message that promotes consumer credit. “Advertisements” may appear:

  • In newspapers, magazines, leaflets, flyers, catalogs, direct mail literature, or other printed material;
  • On radio, television, or a public address system;
  • On an inside or outside sign or display, or a window display;
  • In point-of-sale literature, price tags, signs, and billboards; or
  • Online, such as on the Internet.

 

“Annual Percentage Rate” (“APR”) means the charge for credit, stated as a percentage, and expressed as annualized rate as defined by TILA.

 

“Closed-end credit” includes all consumer credit that does not fit the definition of open-end credit.  Closed-end credit consists of both sales credit and loans.  In a typical closed-end credit transaction, credit is advanced for a specific time period, and the “amount financed,” “finance charge,” and “schedule of payments” are agreed upon by the lender and the customer.

 

“Consumer credit” may be either closed-end or open-end credit.  It is credit that is extended primarily for personal, family, or household purposes.  It excludes business and agricultural loans and loans exceeding $25,000 that are not secured by real property or a dwelling.  It also must be extended by a “creditor.”

 

“Credit sale” is a transaction in which the seller is also the creditor, at least initially.  Often, the seller-creditor will later assign the installment sales contract to another entity, such as a finance company or a bank.

 

“Creditor” is a person or organization that regularly extends consumer credit for which a finance charge is required or that is repayable in more than 4 installments even without a finance charge, and to whom the obligation is initially payable – for example, the finance company, bank, automobile dealer, or other lender identified on the face of the credit agreement.  A person or organization is considered to extend credit “regularly,” if it has extended credit more than 25 times during the preceding year or more than 5 times for transactions secured by dwellings.

 

“Downpayment” is an amount paid to reduce the cash price of goods or services purchased in a credit sale transaction.  The value of a trade-in is included in the downpayment.  It can include a “pick-up” or deferred downpayment that is not subject to a finance charge and is due no later than the second regularly scheduled payment.  The downpayment does not include any prepaid finance charges such as points.

 

“Finance Charge” is the dollar amount charged for credit.  It includes interest and other costs, such as service charges, transaction charges, buyer’s points, loan fees, and mortgage insurance.  It also includes the premiums for credit life, accident, and health insurance, if required, and for property insurance, unless the buyer may select the insurer.

 

“Terms of Repayment” generally refers to the payment schedule, including the number, timing, and amount of the payments, including any final “balloon” payment, scheduled to pay a debt.

 

Mortgage loan originators must comply with all advertising provisions, regulations, and official staff commentary of TILA (Regulation Z).

 

Mortgage loan originators may review TILA on the Division’s website athttp://www.dora.state.co.us/real-estate/index.htm.

 

Individuals who originate a mortgage or act as a mortgage loan originator may advertise only credit terms that are actually available to the consumer.  “Bait and switch” credit or promotions are not allowed.  An advertisement may not state that a specific installment payment or a specific downpayment can be arranged unless the creditor is prepared to make those arrangements.  However, mortgage loan originators may advertise terms that will be offered only for a limited time or terms that will become available at a known future date.

 

If mortgage loan originators advertise closed-end credit with a “triggering term,” they must disclose other major terms, including the APR.  This ensures that all of the important terms of a credit plan, not just the attractive ones, appear in an ad.  The triggering terms for closed-end credit are:

  • The amount of the downpayment expressed as either a percentage or a dollar amount, in a “credit sale” transaction;
  • The amount of any payment expressed as either a percentage or a dollar amount;
  • The number of payments or the period of repayment; and
  • The amount of any finance charge.

 

Some statements about credit terms are too general to trigger additional disclosures. Examples of terms that do not trigger the required disclosures are:

  • No downpayment;
  • Easy monthly payments;
  • Loans available at 5% below our standard APR;
  • Low downpayment accepted;
  • Pay weekly;
  • Terms to fit your budget; or
  • Financing available.

 

General statements, such as “takes years to pay” or “no closing costs,” do not trigger further disclosures because they do not state or suggest the period of repayment or downpayment cost.  The more specific the statement, the more likely it is to trigger additional disclosures.

 

If a mortgage loan originator’s ad for closed-end credit uses a triggering term, it must also include the following information:

  • The amount or percentage of the downpayment;
  • The terms of the repayment; and
  • The APR.  If the APR may be increased after consummation of the credit transaction that must also be stated.

 

If the ad shows the finance charge as a rate, that rate must be stated as an “APR.”  The ad must state the APR, even if it is the same as the simple interest rate.  Disclosure of the APRmust be disclosed as clearly and conspicuously as any interest rate in the advertisement.  If a mortgage loan originator wants to show only a rate, and the APR is stated in the ad, no other credit information need be included.

 

If the ad shows the finance charge as a rate, it must be stated as an “annual percentage rate,” using that term or the abbreviation “APR.”  The APR must be stated accurately regardless of whether it is the same as the simple interest rate.  As long as the APR is stated, the ad can state a simple interest rate, a period interest rate, or both.  However, the interest rate must not be more conspicuous than the APR.

 

Ads for variable-rate credit must state that the rate may increase or that it is subject to change, but need not explain how changes will be made.

 

There are special rules for loan ads in which the seller or third party “buys down” the interest rate during the early years of the loan:

  • The mortgage loan originator must determine the accurate APR.
    • The mortgage loan originator must ascertain whether the lower rates are stated as part of the credit contract between the consumer and the creditor.
    • If the lower rates are part of the credit contract, the buydown should be taken into account in calculating the APR for the ad.
    • However, if the lower rates are not part of the credit contract, the APR should not reflect the buydown.
  • If the interest rates in the buydown are not part of the credit agreement between the consumer and the lender, the mortgage loan originator may still show the reduced interest rates in the ad.  In such a case, the ad must include all of the rates, the limited terms to which they apply, and the APR for the loan.
    • If this information is shown in the ad, the effect of a buydown on the monthly payments can also be shown without triggering other disclosures.

 

There are special rules similar to the buydown rules for advertising a discounted variable rate:

  • An ad for this type of plan can show the simple interest rate during the discounted period, as long as it also shows the APR.  However, in contrast to buydowns, the ad need not show the simple interest rate applicable after the discount period.
  • As in buydowns, the APR in discounted plans is a composite figure that must take into account the interest rates that are known at closing.
  • An ad for a discounted variable-rate loan, like an ad for a buydown, may show the effect of the discount on the payment schedule during the discount period without triggering other disclosures.

 

There are special rules for the advertisement of negative amortization loans.  The following information must be provided in ads for these loans:

  • The “effective” or “payment” rate;
  • The term of the reduced payments;
  • The “note rate” at which interest is actually accruing; and
  • The APR.

 

The APR must take into account the interest for which the consumer is liable, even though it is not paid by the consumer during the period of reduced payments.  This type of financing could be advertised as effective first-year rate of only 1.5 percent.  Interest being charged at 10.5 percent.  10.75 percent APR.

 

In contrast to an ad for a buydown or a discounted variable rate, an ad for an “effective” or “payment” rate may not show the monthly payments without triggering the other disclosures.  However, the range of payments can be reflected without showing all of the intermediate payment amounts.

 

In addition to the information about the interest rate and APR, an ad for a “payment rate” could state for example:

  • Payments begin at $557.92 for the first year, ranging to $800.96 in years six through the remainder of the loan term.

 

If a mortgage loan originator advertises a mortgage in which the payments vary because payments include mortgage insurance premiums payable monthly or annually or the loan has a “graduated payment” feature, the ad must show all the different payments required during the life of the loan.  These ads must state:

  • The number and timing of payments;
  • The largest and smallest amounts; and
  • The fact that the other payments will vary between those amounts.

 

When an ad promotes a variable-rate loan that is not a “discount” or a “buydown” and has no other special features, the ad contains triggering terms that require disclosure of the “terms of repayment,” which includes the payment amounts.  To comply with the law, the mortgage loan originator only needs to disclose one payment amount.

 

When an ad that requires disclosure of the payment schedule promotes a discounted variable-rate loan, rather than a variable rate plan with no special features, the advertised payment schedule must show all payment amounts that can be determined before the start of the loan.

  • If the discounted rate is applicable for only one year, the ad should show a payment for the first year based on the reduced interest rate in effect for that year.
  • If the interest rate is then subject to annual increases, the ad must show a second payment amount based on the interest rate that would have been in effect at the start of the loan, except for the discount feature of the loan.

 

If the reduced rate plan has limits or “caps” on the amount that the interest rate or payments may increase in any year, the payment schedule must also reflect the effects of those caps.

 

All advertisements must have at least one responsible individual who is accountable.  If a mortgage loan originator license is applicable, ads must contain the license number for the responsible mortgage loan originator.  If a mortgage loan originator license is not applicable, then the responsible party must be identified by name in each ad.

 

All advertisements must clearly and conspicuously provide the following information:

  • Mortgage company name;
  • License number or name of the responsible party;
  • Business address of the mortgage company; and
  • Business phone number.

 

All mortgage loan originator advertisements must include the following statement: Check the license status of your mortgage loan originator at http://www.dora.state.co.us/real-estate/index.htm.

 

Advertisements containing an interest rate, payment rate, teaser rate, or annual percentage rate must be reasonably available on the day of the advertisement or the day the advertisement is received.  Advertisements containing an interest rate, payment rate, teaser rate, or annual percentage rate must include all material terms and conditions specific to the rates advertised.  Material terms and conditions include, but are not limited to:

  • Credit score;
  • Debt to income ratios;
  • Loan to value; and
  • Occupancy type.

 

Advertisements promoting nontraditional mortgage products must clearly demonstrate the type of product advertised.

 

Sanctions for Noncompliance with the Rules

 

All of the rules discussed in this memorandum provide the following sanctions for a mortgage loan originator’s failure to comply with the law.  The sanctions include, but are not limited to:

  • Revocation;
  • Refusal to renew a license;
  • Imposition of fines; and
  • Restitution for any financial loss.

 

The mortgage loan originator disclosure forms referenced throughout the Memorandum were attached to our July 27, 2009 Memorandum.