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101 LOAN OFFICER DUTIES Loan Officer shall determine his or her

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101
LOAN OFFICER DUTIES

Loan Officer shall determine his or her hours or work. Loan Officer is not required to work any specific
number of hours per week and any time off including weekends and vacation, will solely be at the Loan
Officer’s discretion. In addition to the solicitation of mortgage loans, Loan Officer shall attend weekly
sales meetings and shall perform all other duties assigned by the Company including, without limitation,
the following:

      Take information from the prospective borrower and complete the loan application form;



      Analyze the prospective borrower’s income and debt and pre-quality the prospective borrower to
      determine the maximum mortgage amount that the prospective borrower can afford;

      Educate the prospective borrower in the home buying and financing process, advising the
      borrower about the different types of loan products available, and demonstrating how closing
      costs and monthly payments could vary under each product;



      Maintain regular contact with the borrower, realtors and the Company between the time of the
      application and closing to apprise them of the status of the application and gather any additional
      information as needed;

      Collect financial information (tax returns, bank statements) and other related documents that are
      part of the application process;



      Order appraisals when required by the Company;

      Order in file credit report, when required by the Company;



      Determine whether the property is located in a flood area, where required by the Company;

      Maintain regular contact with the borrower, realtors, lender, between application and closing to
      apprise them of the status of the application and gather any additional information as needed; and



      Attend the closing of the mortgage loan, if requested by the company.

In no event and under no circumstances shall Loan Officer be paid any amount greater than the
reasonable value of the services rendered.




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102
COMPENSATION OF LOAN OFFICER

      In consideration of the services to be performed pursuant to this Agreement, Loan Officer will
      receive a commission. It is understood that as a sales representative, Loan Officer is not entitled
      to any extra compensation for overtime hours or any compensation other than that expressly set
      forth in this Agreement.

-

      Commissions are due and payable when the mortgage loan is funded. Garden State shall pay
      Commissions to Loan Officer once a month on the 15th for all loans that closed the previous
      month and funded by the 10th of the current month.

      Loan Officer shall be paid as a W-2 employee, and Garden State shall make deductions for
      Federal Taxes, State Taxes, Social Security, State Unemployment Insurance and other deductions
      are required by State or Federal law, or as agreed.



      Garden State is not required under this Agreement to give any draws or make any advances
      against future commissions to Loan Officer. However, if the company does advance draws to a
      Loan Officer, all commissions will be first offset by draws payable to Loan Officer.



201
FEDERAL REGULATION AND
ENFORCEMENT

The following federal agencies enforce the various laws that govern the mortgage lending process:

FEDERAL TRADE COMMISSION – The Federal Trade Commission (FTC) is charged with
enforcement of the Equal Credit Opportunity Act, the Fair credit Reporting Act and the Federal Truth in
Lending Act. The Federal Trade Commission litigates offenders on behalf of consumers and tracks
fraud, false and misleading advertising and malfeasance claims filed by consumers.

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT – The Department of Housing and
Urban Development (HUD) is charged with enforcement of the Real Estate Settlement Procedures Act,
as well as, enforcement of programs available through the Federal Housing Administration (FHA).

OFFICE OF THRIFT SUPERVISION – The office of Thrift Supervision (OTS) has oversight
responsibilities for thrifts and savings and loan associations.




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202
THE EQUAL CREDIT OPPORTUNITY ACT – REGULATION
B
The Equal Credit Opportunity Act was enacted by Congress in 1968 as Title VII of the Consumer Credit
Protection Act. The goal of ECOA is to eliminate discrimination in the evaluation of an applicant’s
credit worthiness while preserving the lender’s right to make judgments based upon other credit related
criteria. The ECOA is enforced by HUD and the Department of Justice. ECOA prohibits discrimination
in all forms of credit in any aspect of the credit process including the following:

      Advertising;
      Application forms and procedures;
      Standards of credit worthiness;
      Record keeping;
      Information gathering and dissemination;
      Credit investigation;
      Credit terms;
      Credit denial, modification, and revocation; and/or
      Collection procedures.



ECOA expressly forbids discrimination based on: race, color, religion, national origin, sex, age, marital
status; receipt of public assistance benefits or the applicant’s exercise of any of his or her rights under
the Consumer Credit Protection Act.

GOVERNMENT MONITORING INFORMATION – Page four of the Uniform Residential Loan
Application Fannie Mae Form 1003, requires you to complete certain information about the applicant’s
sex and race. This information is used to monitor compliance with the ECOA and is reported to the
federal government under another law, The Home Mortgage Disclosure Act (HMDA). You must
complete the government monitoring section of the loan application even if the borrower refuses to
disclose his or her race when the application is taken face to face. There are only two things on the
application that the borrower is not required to disclose; his or her age and sex.

APPLICATION DEFINED – The Equal Credit Opportunity Act. (ECOA) defines “application” to mean
an oral or written request for an extension of credit that is made in accordance with the procedures
established by a creditor for the type of credit requested. The key to determining whether an application
has been received by a lender is not the form in which it is submitted, but rather the lender’s willingness
to make a credit decision based on the information received from the consumer, in whatever form.

PRE-APPROVALS – A pre-qualification or pre-approval request may be treated as an inquiry when the
lender only provides general information about loan terms and the application process and the maximum
qualifying loan amount of the consumer making the request. If however, the lender obtains specific
information on the borrower or the property and communicates a denial to the consumer based upon this
preliminary evaluation, it is an application subject to the disclosure requirements imposed under ECOA.

NOTIFICATION REQUIREMENTS – ECOA regulations require lenders to notify applicants of what
action has been taken on their applications. The lender is required to notify the borrower of an



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incomplete application within 30 days after receiving the incomplete application. Notification on a
complete application is made within 30 days; unless the lender has offered alternative terms that the
applicant has not accepted. In these cases the notification is made within 90 days of such an offer.

JOINT ACCOUNTS – ECOA requires creditors to report, in response to requests for credit information,
the participation of both husband and wife on accounts jointly held by the.

ADVERSE ACTION – “Adverse action” as defined under ECOA means:

      a refusal to grant credit in substantially the amount or on substantially the terms requested in any
      application unless the lender makes a counter offer and the applicant uses or expressly accepts the
      credit offered;

      a termination of a credit account or a change in account terms that is unfavorable to the borrower
      unless the termination or change affects all or a substantial portion of a class of the lender’s credit
      accounts; or

3. a refusal to increase the amount of credit available to an applicant who has applied for an increase.

ADVERSE ACTION NOTICE – When adverse action is taken on an application for credit or on an
existing credit account other than business credit and incidental credit, the notification of the credit
denial is written and must contain the following information:

      A statement of the action taken;
      The name and address of the creditor;
      The ECOA notice as prescribed under the Act and either;
      A statement of specific reasons for the action taken or a disclosure that if the applicant requests a
      statement of specific reasons within 60 days after the creditor notifies the applicant of adverse
      action, the creditor will provide the specific reasons within 30 days after receiving the applicant’s
      request.



APPRAISAL REPORT TO APPLICANTS – The Federal Deposit Insurance Corporation Improvement
Act of 1991 amended ECOA to require lenders to provide applicants with a copy of the appraisal report
if requested in writing by the applicant when the loan applied for is secured by residential real estate.
This requirement was enacted because of the perception that some appraisers routinely undervalued
residences located in geographic areas containing groups protected from discrimination by ECOA.

PENALTIES – A lender who fails to comply with ECOA is liable for the actual damages sustained by
the applicant, all costs of the action and punitive damages in an amount not to exceed $10,000 in an
individual action or $500,000 or one percent of the bank’s net worth in a class action suit.



203

THE REAL ESTATE SETTLEMENT PROCEDURES ACT – REGULATION X

OVERVIEW – RESPA became effective in June 20, 1975 and was designed to provide borrowers with



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pertinent and timely disclosures regarding the nature and costs of the real estate settlement process.
HUD is the federal agency primarily responsible for the enforcement of RESPA. The purpose of
RESPA is:


      Given more advanced disclosure of settlement costs;



      Eliminate kickbacks or referral fees that tend to increase the costs of settlement;

      Reduce the amount of money placed in escrow for real estate taxes and insurance;



      Promote significant reform and modernization of local record keeping of land title information
      and;

      Advise consumers regarding the transfer, sale or assignment or mortgage servicing.



GOOD FAITH ESTIMATE – A Good Faith Estimate of Settlement Charges (GFE) and HUD Booklet is
provided to a loan applicant within three days of application. The GFE uses the same numbering
sequence as provided on the HUD-1 Settlement Statement the borrower is issued at closing by the
lender. It is extremely important that the GFE be as accurate as possible to make certain the borrower is
made fully aware of the total costs associated with the mortgage financing.

HUB BOOKLET – The HUD Booklet is divided into two parts. The first part describes the settlement
process and the nature of settlement charges with suggested questions an applicant might ask the lender.
The second part is an item-by-item explanation of settlement services and costs with sample forms and
worksheets and an explanation of how to read the HUD-1 Settlement Statement.

HUD-1 AND HUD-1A SETTLEMENT STATEMENT – The Uniform Settlement Statement (HUD-1 or
HUD1A) is used in every settlement involving a federally related mortgage loan. The settlement agent
is responsible for completing the form. The completed HUD-1 sets forth on the statement all charges to
be paid by a borrower and the seller of the property in connection with the settlement, except charges
that are not imposed by the lender and which the borrower or seller contract to pay for separately outside
of the settlement. The HUD-1A can be used in place of the HUD-1 for refinance transactions where
there are no seller charges. A sample of the HUD-1 is provided in the HUD booklet and is discussed in
detail in the Section entitled, “Closing Documents.”

CONTROLLED BUSINESS RELATIONS – RESPA defines a “controlled business relationship” as an
arrangement in which a lender or any other person requires or affirmatively influences the use of a
settlement services provider with which the lender or other person has an affiliate relationship or in
which the lender or other person has direct arrangement referral does not constitute a RESPA violation
if:

      The person making the referral provides to each person whose settlement business is referred a
      written disclosure that:




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            describes the nature of the person’s relationship with the settlement services provider
            (including and explanation of the ownership and financial interest), and
            provides an estimate of the charge or range of charges generally made by the provider,
            using the same terminology for charges and services as contained in the HUD-1.
            the disclosure is on a separate piece of paper and is provided:
                   no later than the time of referral, or
                   where a lender requires use of a settlement services provider, at the time of loan
                   application, or
                   where a lender makes the referral, concurrently with provisions of the good faith
                   estimate, or
                   when an attorney or law firm requires a client to use a particular title insurance agent,
                   no later than the time the attorney or law firm is engaged by the client.

      The lender or other person making a referral has not required use by any person of a particular
      settlement services provider except that:



      a lender may require a buyer, borrower or seller to pay for the services of an attorney, credit
      reporting agency or real estate appraiser chosen by the lender to represent its interest in real estate
      transaction, and

      an attorney or law firm, as part of representing a client in a real estate transaction, may arrange for
      issuance of title insurance policy for a client either directly as agent for the title insurer or through
      a separate corporate title insurance agency operated as an adjunct to the attorney’s or law firm’s
      practice.



AND

      The only thing of value received from the controlled business arrangement, other than payments
      permissible under RESPA, is a bona fide return on an ownership interest or franchise relationship,
      which can include dividends, business loans and capital or equity contributions.



SERVICING DISCLOSURE STATEMENT – RESPA also requires lenders to provide a Servicing
Disclosure Statement at application on federally related loans that reflects the likelihood that the
servicing of the mortgage will be transferred after origination. The statement contains a percentage,
rounded to the nearest 25 percent, of loans made by the lender during the three (3) most recent calendar
years for which the servicing is assigned, sold or transferred. If the lender does not service loans a
statement of the effect can be used in place of the three-year history. A mortgage broker closing a loan
as part of a table-funding is considered a transferor servicer and the funding investor is the
corresponding transferee servicer. As such, the mortgage broker is required to make the Servicing
Disclosure Statement using the “we do not service mortgage loans” optional language if applicable.

FEDERALLY RELATED MORTGAGE LOANS – For purposes of the Act, a federally related




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mortgage loan would include any loan, (other than temporary financing such as a construction loan)
which is secured by a first or subordinate lien on residential real property designed principally for the
occupancy of one to four families. This would include any such secured loan; the proceeds of which are
used to prepay or pay off an existing loan secured by the same property; and made in whole or in part by
any lender the deposits or accounts or which are insured by any agency of the federal government,
insured or guaranteed by the federal government, is intended to be sold to a secondary market agency or
lender who sells to one of these agencies or a creditor. A “creditor” is defined under the Consumer
Credit Protection Act as someone who makes or invests in residential real estate loans aggregating more
than $1 million per year.

SAFE HARBOR RULE – HUD interprets RESPA to prohibit the payment of a fee for the mere taking
of a loan application and has provided clarification regarding services that are performed to collect
broker fees for origination service. HUD established thirteen distinct services, in addition to the taking
of a loan application as a basis for determining whether a fee is earned by a broker, lender or loan officer
employee as itemized below.

      Taking information from the borrower and filling out the application;



      Analyzing the prospective borrower’s income and debt and pre-qualifying the prospective
      borrower to determine the maximum mortgage that he or she can afford;

      Educating the prospective borrower in the home buying and financing process, advising the
      borrower about the different types of loan products available and demonstrating how closing costs
      and monthly payments would vary under each product;



      Collecting financial information (tax returns, bank statements, etc.) and other related documents
      that are part of the application process;

      Initiating/ordering VOE’s (verification of employment) and VOD’s (verification of deposits);



      Initiating/ordering requests for mortgage and other loan verifications;

      Initiating/ordering inspection or engineering reports;
      Providing disclosure (truth in lending, good faith estimates, others) to the borrower:



      Assisting the borrower in understanding and clearing credit problems;

      Maintaining regular contact with the borrower, realtor, lender, between application and closing to
      apprise them of the status of the application and to gather any additional information as needed:




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      Ordering legal documents;

      Determining whether the property was located in a flood zone or ordering such service; and



      Participating in the loan closing.

The loan officer must take the loan application, provide at least five (5) additional services from the list
of 13 above and the fee paid to the loan officer must reasonably relate to the market value of the services
performed.

RETENTION PERIOD – The lender must retain signed acknowledgments from borrowers confirming
their receipt of the required disclosures for a minimum period of five (5) years after the date of loan
settlement, unless the lender sells and transfers its servicing rights. In these cases, the acknowledgments
transfer to the new servicer as part of the loan file.

STATUTORY REQUIREMENTS FOR GOOD FAITH ESTIMATE – Under Chapter 494 of the
Florida Mortgage brokerage and Lending Act and Regulations, the licensee must provide a good faith
estimate of costs for services or products that may be incurred or expended on behalf of the borrower in
arranging the loan. These costs are estimated at application based upon the best information available at
the time. The mortgage brokerage fee is itemized on the GFE. These charges are discussed in detail in
the section entitled “Settlement Costs.”

204
REGULATION Z OF THE FEDERAL TRUTH IN LENDING ACT

OVERVIEW – Any person who makes two (2) or more mortgage loans on residential properties within
a given twelve month period or one loan involving a mortgage broker is subject to the requirements of
the Federal Truth in Lending Act (TILA) and as such must make the required disclosures to the
borrower as specified under the act. The Federal Trade Commission and HUD are primarily responsible
for the enforcement of TILA. The Truth in Lending Act requires lenders to inform customers of all
direct and indirect costs, terms and conditions of their credit arrangements clearly, conspicuously and in
writing using specific terminology, as outlined in the Act. The lender is required to disclose the terms
and cost of credit before the applicant becomes contractually liable for the loan. The disclosures are
made in writing and in a form that the applicant can keep. The disclosures are clear and conspicuous,
grouped together, and segregated from everything else. When disclosing interest rate information by
telephone, the lender must use the term “annual percentage rate.” This allows the consumer to compare
various loan offerings on an equal basis. Two key terms of the Truth in Lending Act are “finance
charge” and “annual percentage rate” as defined below.

Finance Charge – Generally the finance charge includes any charge payable by the borrower that is
imposed by the lender as a condition of the loan. These items are considered finance charges: interest,
service, transaction or activity charges, origination and discount points paid by the borrower, assumption
fees, finder’s fees or similar fees, mortgage insurance premiums, premiums or charges for credit life,
accident, health, or loss of income insurance unless the borrower is notified that the insurance policies
are not required and premiums or other charges for hazard and/or flood insurance unless a clear and
specific written statement is provided to the borrower stating that he or she has the right to select the
provider of such coverage. Borrower paid mortgage broker fees, including fees paid directly to the
broker, or to the lender for delivery to the broker, are always included in the Finance Charge, whether




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the fees are paid in cash or financed by the loan. Excluded from this definition would be fees for such
services as title, survey, document preparation, appraisal, credit report, and if itemized and disclosed,
taxes and fees prescribed by law paid to public officials for perfecting a security interest.

Annual Percentage Rate (APR) – The annual percentage rate is defined as the cost of financing
expressed on an annualized basis. The APR is usually higher than the note rate and is based upon the
amount financed; not the loan amount. The “amount financed” represents the loan amount minus the
finance charges. The Amount Financed has a direct correlation to the Finance Charge.

TILA ADVERTISING REQUIREMENTS – The advertising provisions of the TILA apply to both
advertisements for open-end and closed-end credit. The advertising provisions apply regardless of the
medium used. Radio, television and print advertising, pamphlets, letters and other marketing material
distributed directly by lenders would all fall under TILA. The terms “finance charge” and “annual
percentage rate” must appear more prominently than any other words appearing in the Regulation Z
Disclosure. This rule does not apply to advertisements. However, when starting a simple interest rate in
an advertisement, the rate may not be more conspicuous than the Annual Percentage Rate, which must
also be stated.

An advertisement for closed-end credit may state only those terms that the lender actually will make
available. If an advertisement states the applicable interest rate, the rate is stated as the annual
percentage rate; if the stated rate is variable, the advertisement must state that the rate may increase. In
addition, if the advertisement states any of:

      The amount or percentage of any downpayment in accredit sale transaction under which the seller
      is financing the sale; or
      The number of payments; or
      The period of repayments; or
      The amount of a payment; or
      The amount of any finance charge.



Then the advertisement must also state all of the following:

      The amount or percentage of the down payment in the credit sale transaction; and



      The terms of repayment. This requirement may be satisfied by stating either the number and
      amount of the payments or by providing an example of all terms of a typical similar type of loan.
      For ARMs, a lender may assume that the initial rate will stay fixed for the loan term. If a
      discounted initial rate is offered, lenders must include both the discounted rate and the fully-
      indexed rate applicable after the discount period; and

      The annual percentage rate, using that term, or the abbreviation “APR”; and



      If the interest rate may increase, a statement of that fact.




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ARM DISCLOSURES – Three types of additional disclosures are required for adjustable rate mortgages
under TILA. The first type is the booklet titled “Consumer Handbook on Adjustable Rate
Mortgages,”(CHARM) which is published by the Federal Reserve Board and the Federal Home Loan
Bank Board. This disclosure is provided on the earlier of the application date or before the consumer
pays a non-refundable fee. If an application is provided to a consumer by a third party, such as a
mortgage broker, that is not the agent of the lender, the disclosure is provided within three (3) business
days from the lender’s receipt of the application. The second type of disclosure is a loan program
description for each variable rate loan in which the consumer expresses an interest. This disclosure is
provided at the same time as the Consumer Handbook. The third type of disclosure is a notice that is
provided at least once a year in which an interest rate adjustment occurs without a corresponding change
in the payment and at least 25 but not more than 120 days before the due date of payment that has been
adjusted.


205
FAIR CREDIT REPORTING ACT

The Fair Credit Reporting Act was enacted in 1970 and is intended to ensure the accuracy and
confidentiality of credit reports on consumers. The Act is enforced by the Federal Trade Commission
and applies to both consumer reporting agencies, such as credit bureaus, and to users of consumer credit
information, such as lenders. The Act defines the various types of credit reports, the credit reporting
agencies actions when verifying credit information and the length of time derogatory information may
remain in the consumer’s credit file. It also has provisions allowing consumers to be permitted access to
their personal credit records and given an opportunity to correct inaccurate data.

CONSUMER REPORTS – Consumer reports are used in most mortgage transactions to determine the
borrower’s overall creditworthiness. A “consumer report” as defined under the Act means any written,
oral or other communication of information that meets all of the following requirements:

      The report is provided by a consumer reporting agency. A “consumer reporting agency” is
      defined as any person or company that, for fees or on a cooperative nonprofit basis, regularly
      engages in assembling or evaluating information for the purpose of providing such information to
      third parties. A lender that reports credit information to a credit bureau with respect to consumers
      to whom it has extended credit would not be considered a consumer reporting agency;



      The information in the report relates to a consumer’s credit worthiness, credit standing, credit
      capacity, character, general reputation, personal characteristics or mode of living; and

      The information in the report is used or expected to be used or collected for: (a) the purpose of
      establishing the consumer’s eligibility for credit or insurance to be use primarily for personal,
      family or household purposes; (b) employment purposed.



A credit-reporting agency may provide a consumer report only in the following situations:

      If order to do so by a court;




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      If requested to do so by the consumer to whom the report relates, but only in accordance with the
      written instructions from the consumer;

      To any person (such as lender) that the agency has reason to believe: (i) intends to use the report
      in connection with the main, review or collection of a loan involving the consumer: (ii) intends to
      use the report for employment purposes (iii) intends to use the report in connection with the
      underwriting (i.e., deciding whether to provide) of insurance involving the consumer; (iv) intends
      to use the report in determining whether the consumer is eligible for a license or other benefits
      granted by a federal, state or local government body, but only if the governmental body is required
      by law to consider an applicant’s financial responsibility or financial status; or (v) has any
      legitimate business need for the report in connection with a business transaction with the
      consumer; or



      If requested by a governmental agency, a consumer reporting agency may provide the name,
      address, former addresses, places of employment and former places of employment of a
      consumer, but not any other information about the consumer.

DURATION OF DEROGATORY INFORMATION – None of the following information may be
included in a consumer report unless the report is to be used in connection with the provision of a loan
or life insurance polity or in connection with employment of the consumer:

Bankruptcies                 10 years form the date of entry of the order of relief or the date of
adjudication

Suits and Judgments           7 years from the date of entry or until the governing statue of limitations
has expired, whichever is longer

Paid Tax Liens               7 years from the date of payment or until the governing statue of
limitations has expired, whichever is longer

Collections/Charge-offs       7 years

Criminal or related           7 years from the date of disposition, release, or parole

Other Adverse Items          7 years

LENDER LIABILITY - When a lender denies an application for credit to be used for personal, family or
household purposes or increases the charge for such credit already extended to a consumer because of
information contained in a consumer report, the lender must disclose this fact and provide the name and
address of the consumer reporting agency that provided the report. The disclosures required under the
Act are normally provided in the “adverse action notice” required under the Equal Credit Opportunity
Act. When the denial is based upon information received from a source other than a credit-reporting
agency, the lender must inform the consumer of the denial or increase in charge. This information may
also be provided in the adverse action notice. The use of credit risk scores has increased significantly
over recent years. These consumer credit scoring systems weigh positive and negative factors appearing
in a consumer credit report to arrive at an overall credit score. The Federal Trade Commission has ruled




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that credit bureaus must, upon a consumer’s request, disclose credit “risk scores” provided by the credit
bureaus to lenders when a credit report on a consumer applicant is sought.

INDIVIDUAL ACCOUNTS – When co-borrowers have obtained credit individually, the credit bureau
should make separate inquiries concerning each co-borrower. One report may combine the data from
separate reports on each of the co-borrowers if the combined report clearly meets the same criteria met
by each of the separate reports. This normally would occur in the case of a married couple.

CREDIT INQUIRIES – All inquiries about the borrower that the credit bureau received within the 90
days prior to the credit report are reflected.

PUBLIC RECORDS – The report should include all information about a borrower’s credit history that is
in public records. It should also disclose any bankruptcies, judgments, foreclosures or tax liens in
accordance with the Fair Credit Reporting Act. When researching public records, the credit bureau
should use at least two of the following sources:

      National repositories of accumulated credit records;
      Direct searches by its own employees of court records; or
      Record searches made by firms that specialize in searching public records.



206
THE HOME MORTGAGE DISCLOSURE ACT – REGULATION C

The Home Mortgage Disclosure Act. (HMDA) requires lenders to report information on loan
applications to the federal government by March 31 of each calendar year. The federal government
compiles this information and a report is then issued to the lending institution that is maintained in its
principal branch office and made available to customers upon request. The report reflects the
government monitoring information provided on the Uniform Residential Loan Application and other
pertinent data regarding the credit decision and the borrower’s eligibility for the mortgage requested
base upon income, credit, geographic location of the property, etc. A mortgage banker that made at least
100 home purchase loans during the preceding calendar year is subject to HMDA reporting
requirements.


207

THE HOME OWNERS PROTECTION ACT OF 1998

 The Homeowners Protection Act of 1998, which became effective in 1999, establishes rules for automatic termination
and borrower cancellation of private mortgage insurance on home mortgages. For home mortgages signed on or after
July 29, 1999, private mortgage insurance must (with certain exceptions) be terminated automatically when the
borrower reaches 22 percent equity in the home based on the original property value, if the mortgage payments are
current. Private mortgage insurance also can be cancelled when the borrower requests it (with certain exceptions)
when the borrower reaches 20 percent equity in his or her home based on the original property value, if the mortgage
payments are current. For mortgages signed prior to July 29, 1999, the borrower can ask to have the private
mortgage insurance cancelled once the borrower exceeds 20 percent equity in his or her own home. But, federal law
does not require the lender or mortgage servicer to cancel the insurance.




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208

THE NATIONAL FLOOD INSURANCE PROTECTION ACT

Congress authorized the National Flood Insurance Program (NFIP) through the National Flood
Insurance Act. Of 1968. This law made flood insurance available to owners of improved real estate or
mobile homes in participating communities. The Federal Emergency Management Agency (FEMA)
administers the NFIP. The Flood Disaster Protection Act of 1973 made the purchase of flood insurance
mandatory for all properties located in a flood hazard area. Flood Insurance Rate Maps (FIRM) are used
to establish the flood hazard areas where properties are located. The National Flood Insurance Reform
Act enacted in 1994 placed additional responsibility for maintaining flood insurance on lenders and its
servicers including mandatory escrow requirements for flood insurance. Under the reforms, flood
insurance must be obtained at closing and maintained over the life of the loan. The flood hazard areas
are: a, AO, A1-A30, AE, AR AR/AO, AR/A1-A30, AR/AE, AR/AH, AR/A99, A99, AH, VO V1-V30,
VE, V, M or E. ”A” means susceptible to flooding, while “v’ means also susceptible to wave velocity
associated with storms.

301

LENDER’S COST OF FUNDS




PAR PRICING – The cost of funds available to lenders and investors impact wholesale and retail rates
to a very high degree. It is also important to understand what the lender/investor plans to do with the
loan it acquires in order to determine the lowest possible pricing for your borrower. Par pricing
represents the rates of interest established by the lender based upon its cost of funds and current market
conditions. The borrower is not required to pay discount points to reduce the effective rate or interest
nor will the broker receive a premium directly from the lender for a higher than market rate of interest.

SOURCE OF FUNDS – Banks, savings and loans and credit unions can borrow federal funds from the
Federal Reserve Bank and the Federal Home Loan Bank at extremely low rates. Therefore, institutional
lenders such as these have the lowest possible cost of funds and can offer the lowest possible rates.
Correspondent lenders typically table-fund transactions using funds received from the ultimate lenders
typically table-fund transactions using funds received from the ultimate investor. Many mortgage
lenders use commercial lines of credit called warehouse lines to fund mortgage transactions. Warehouse
lines are typically tied to the prime rate plus a margin as pre-determined by the warehouse lender.
Mortgage lenders using warehouse lines of credit typically have a higher cost of funds than a bank and
the retail and wholesale rates they publish will be higher than a bank can offer.

SECURITIZATION AND SALE – Some lenders make loans with the intent of selling the loan after
origination. Lenders who sell loans to Fannie Mae, Freddie Mac or Ginnie Mae are conforming
lenders. Lenders who originate loans outside of Fannie Mae and Freddie Mac guidelines are non-
conforming lenders. The price that the lender is likely to obtain on the sale of the loan is also an
important pricing consideration. Investors typically pay higher prices for loans with higher than market
yields. Lenders can also elect to pool the loans they originate and offer bonds backed by these
mortgages called “mortgage backed securities.” Wall street determines the rating for the bond, AAA
being the best rating. Non-conforming loans are also securitized, however, the ratings assigned to these
bonds reflect the increased risk to investors. Many sub-prime bonds are rated BBB. Wall street also
determines the price at which the bonds are traded. Pricing takes into consideration the yield on the
underlying mortgage, the rate at which the underlying mortgages will payoff and other specific




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characteristics of the underlying loans.

PREPAYMENT PENALTIES – Prepayment penalties are designed to offset the lender’s loss of interest
and/or servicing revenue resulting from an early payoff of the mortgage balance. Prepayment penalties
are also called time price differentials. Sub-prime securities are extremely dependant upon prepayment
penalties because credit impaired borrowers can typically cure their credit situations within 12 to 24
months. Prepayment penalties help ensure that bondholders will receive the yield on the underlying
mortgages for at least 12 to 60 months. Prepayment penalties have also come under increased scrutiny
as a result of abusive lending practices. Many lenders no longer charge prepayment penalties or more
than 3 years. Proposed changes to the Real Estate Settlement Procedures Act would require lenders to
offer consumers pricing with and without prepayment penalties so that the impact of the prepayment
penalty is clearly delineated.

302
DISCOUNT POINTS

Discount points must have a direct correlation to the interest rate charged to consumers. One discount
point represents one percent of the loan amount and generally correlates to a minimum reduction in
interest rate of .125%. If you charge the borrower discount points to lower the interest rate, it is
important to document in the file the interest rate prior to payment of the discount. This will ensure that
in the event of an audit the auditor can determine the impact of the discount on the rate of interest
charged to the borrower. Rate locks should also reflect any discount points paid so that the interest rate
and discount are guaranteed.

303
YIELD SPREAD PREMIUMS

Wholesale lenders typically offer some form of tiered pricing arrangement to approved brokers and
lenders. Pricing usually involves a variety of interest rate scenarios including discounted rates, as well
as, payments made directly to brokers for higher than market interest rates. These back points are called
yield-spread premiums. The borrower actually pays the yield-spread premium over the life of the loan
through the higher interest rate. Failure to properly disclose these lender payments has given rise to a
number of lawsuits and regulatory complaints. As a result, the payment of yield spread premiums has
been contested over recent years. HUD issued a statement of clarification regarding the payment of
yield spread premiums to brokers in 1999. HUD’s recently proposed changes to the Real Estate
Settlement Procedures go even further defining yield-spread premiums as lender payments to borrowers
rather than to brokers. If Garden State Mortgage® brokers or table funds loans you must reflect the
yield spread premium on the Lender Pre-application Disclosure, Mortgage Brokerage Agreement and/or
Good Faith Estimate. If you don’t know what the yield spread premium will be in advance, disclose it
as a range between 1 to 3 points. Brokers, as defined by HUD, are currently required to report yield
spread premiums under federal, as well as, state law. Lenders who fund loans with its own funds are not
required to report yield spread premiums realized on secondary market transactions because the
government feels there is no reliable method to pre-determine pricing at the point of sale. Following is
an example of tiered wholesale pricing.




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401
TYPE OF CREDIT REPORT

There are several types of credit reports as indicated below.

RESIDENTIAL MORTGAGE CREDIT REPORT – When this form of report is ordered the credit
reporting agency must verify and update all accounts with credit balances or remove the credit reference
until updated information is obtained. The RMCR provides detailed accounts of a borrower’s credit,
employment, and residence history and references credit related items appearing in the public records.
The credit-reporting agency should obtain public record information from at least two of the following
source:

      National repositories of accumulated credit records
      Direct searches by its own employees of court records
      Searches made by firms that specialize in searching public records.



The credit reporting agency that compiles the report should have contacted at least two national
repositories of accumulated credit records for each locality where the borrower lived during the seven
years prior to the mortgage application. The report lists the names of the national data repositories used
by the credit bureau. It shows the dates that accounts were last updated with creditors and any inquiries
made by the consumer within the past 90 days. The report should provide at least a seven-year history
of residency and the following information for each listed debt:




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      Creditor name
      Date the account was opened
      Amount of the highest credit
      Current status of the account
      Required monthly payment amount (installment debts)
      Unpaid balance of account
      A history of payments



IN-FILE CREDIT REPORTS – Most sub-prime lenders accept in-file credit reports rather than
Residential Mortgage Credit Reports prepared by credit reporting agencies. In most cases, a dual or tri-
merged report is required. A dual merged in-file report is derived from credit information provided by
two out of the three major credit repositories. A tri-merged report contains raw data maintained by all
three repositories merged into a single report. Because the data provided has not been confirmed, in-file
reports frequently contain duplicate records and other erroneous information. You must identify
duplicate accounts and inaccuracies so that you have the best information available on the borrower and
can accurately calculate the total obligations used for qualification purposes.

NON-TRADITIONAL CREDIT HISTORIES – You can develop a non-traditional credit history for
borrowers who do not normally use credit and have no credit history on record. Analyze the borrower’s
records for paying rent, utility charges and personal property taxes. By evaluating other sources of
credit or services for which the borrower has a regular financial obligation, the borrower’s credit
worthiness can be documented. A credit-reporting agency can also verify non-traditional credit
references and prepare a RMCR with the results of their investigation.

INVESTIGATIVE CONSUMER REPORTS – This form of report provides detailed information about
the consumer based upon interview with neighbors and acquaintances about the borrower’s lifestyle,
character and reputation. Insurance companies and employers typically use this form of report. The
credit-reporting agency must notify a consumer whenever an investigative consumer report is ordered.
The notice explains the consumer his or her right to request certain information about the report from the
company who requested the report. The sources of the information need not be revealed under the
FCRA.

BUSINESS CREDIT REPORTS – Business credit reports are typically used to confirm the debts of a
business that is a legal entity, such as a corporation or partnership. The credit-reporting agency confirms
information on the business and business debts in much the same manner as they do for consumers on
the RMCR. The credit-reporting agency must confirm and update all debts before they appear on the
report. Business credit reports can be helpful in determining the duration of ownership for self-
employed borrowers.

402
CREDIT REPOSITORIES
There are three major credit repositories in the United States as follows:

Equifax                          Experian                             TransUnion
Credit Information Services       National Consumer Assistance Center    National Disclosure
Center
PO Box 740256                    PO Box 2104                                 PO Box 1000
Atlanta, GA 30374-0256           Allen, TX 75013-2104                        Chester, PA 19022




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Phone: 1-800-685-1111          Phone: 1-888-397-3742                     Phone:1-800-888-4213

REPORTING CODES




403
CREDIT SCORES

The use of credit risk scores has increased significantly over recent years. These consumer credit
scoring systems weigh positive and negative factors appearing on a consumer credit report to arrive at an
overall credit score. The Federal Trade Commission has ruled that credit bureaus must, upon a
consumer’s request, disclose credit “risk scores’ provided by the credit bureaus to lenders when a credit
report on a consumer applicant is sought. Following is a table with the adverse action codes used by the
three major credit repositories to calculate credit scores:




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How Scores are Weighted
How Credit Bureaus Weigh your Credit:

  1. 35% is based on Payment history, collections and public records.

The more recent, the more negative the effect. The more derogatory, the more negative the effect.
Weight given to derogatory information includes serious delinquency, charge-off, repossession,
foreclosure and bankruptcy. How many accounts show no late payments. A good track record on most
of your credit accounts will increase your credit score.

  2. 30% is based on outstanding balances being carried on accounts.

The ideal scenario is keeping your balances below 50%. It is always better to spread your outstanding
balances over a few cards than just one. Get letters from creditors stating balances, and don’t pay off
balances while 30 days late as between the time that it is reported, credit bureaus might not update.

  3. 15% is based on you length of Credit History.

The rule of thumb is to hold onto your old credit cards, even if the rate is not great. The longer the
history, the better it is viewed.

  4. 10% is based on Types of Credit.

A good mixture is best. A mortgage account (raises the score); 3 to 5 revolving credit cards is optimal;
equity lines of credit are treated as credit cards when the amount is low (so make sure your equity line
should be at least $40M)




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  5. 10% is based on Inquiries

Inquiries can cost between 2 and 50 points on a score. Personal, promotional and account review
inquiries do not count. If multiple mortgage inquiries are within a 14-day window, they count as one
inquiry in total. Insurance inquiries do not count.

404
RESOLVING ERRORS AND DEPUTES

FILING DISPUTES – Under the FCRA both the credit reporting agency (CRA) and creditors reporting
information to the CRA have responsibility for correcting inaccurate or incomplete information in the
report. To obtain corrections, a consumer needs to send a written dispute letter. When a consumer
disputes information in his or her credit file, the credit reporting agency is required to investigate the
items in question usually within 30 days. After the creditor is notified by the CRA that information
provided is in dispute, the creditor must investigate, review all relevant information provided and report
the results of the investigation to the CRA.

NOTIFICATION OF ERRORS – If the creditor finds the disputed information is inaccurate, it must
notify all three national repositories so that they can correct the information in the consumer’s credit
file. In addition, the consumer has the right to request that the CRA notify all companies to whom the
erroneous information was provided in the past six months. Jobs applicants can have a corrected copy
of their credit report sent to anyone who received a copy during the past two years for employment
purposes.

DISPUTE RESOLUTION- When the investigation is completed, the CRA must give the consumer the
written results of the investigation and free copy of his or her credit report if the dispute results in a
change. If an item is changed or removed, the credit reporting agency cannot put the disputed
information back in your file unless the information provider verified its accuracy and completeness,
and the credit reporting agency gives the consumer the name, address, and phone number of the
creditor. Disputed information that cannot be verified must be deleted from the consumer’s credit file.
If the creditor’s investigation does not resolve the dispute, consumers can request that their dispute
statements be reflected in their credit files and reflected on future reports.


                              (COMMERCIAL LENDING)

501
SAMPLE COMMERCIAL UNDERWRITING ANALYSIS
A key Business Associate has just listed a 10-unit apartment building.
They have a potential buyer that needs financing.

Calculating DSCR
Property Profile: Number of Units – 10, Monthly Schedule Rent - $800 per apartment



                       Gross Annual Income                            $ 96,000
            (Less) Vacancy & Collection Loss                   7%      ($ 6,720)

               Effective Gross Income (EGI)                              $             89,280




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           (Less) Annual Operating Expenses                   35%       ($ 33,600)
                  (Less) Maintenance Reserve                  3%       ($ 2,880)
                    Total Expenses & Reserve                 45%                      ( $ 36,480)
                                   Cash Flow $                                         52,800
          Estimated Capitalization (CAP Rate)                  8%
                             Estimated Value                                           $ 660,000

       Estimated Loan Amount @ 80% LTV                                                  $ 528,000
Annual Debt Service @ 30 Year Am., 6.6% Rate                                             $ 40,433
        Debt Service Coverage Ratio (DSCR)                                                  1.31
               DSCR=Cash Flow/Debt Service



Garden State Mortgage Commercial Program

      Multi-family, mix-use, retail, office, and light industrial
      Loan Amounts: $200,000 to $3,000,000
      Max LTV: 80% on Multi-family, 75% on retail, office, and industrial
      Full doc up to 80%, Stated up to 75%
      Min Credit Score: 600 full doc, 650 stated (no wage earners)
      3, 5, 7, and 10 year fixed; amortized for 30 years. 2 year fixed coming soon!
      Adjustable every 6 months after initial fixed term
      Up to 2% rebate
      www.gardenstatemortgage.com


502                                   (COMMERCIAL LENDING)

        MULTIFAMILY 5+ UNITS
        Traditional, Multifamily residential complexes located in both city and suburban markets.


        MIXED - USE
Properties that integrate and combine residential spaces with other uses, including retail and office.


        OFFICE
Office loans cover buildings with single or multiple office tenants. Office properties may be located
both in central business districts and suburban areas.
         RETAIL (Usually Residential)
         Properties with a mix of tenants that meet the convenience needs of neighborhood residents,
including video stores, grocery, and financial service companies.


        LIGHT-INDUSTRIAL
Single-or multi-tenanted spaces used for warehouse, manufacturing, distribution, or research and




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development.

Trade Group Web Sites

      www.namb.org                         National Associated of Mortgage Brokers
      www.mbaa.org                         Mortgage Bankers Association
      www.ccim.com                         CCIM Institute
      www.reforum.com                      Real Estate Forum
      www.crenews.com                      Commercial Real Estate Direct
      www.appraisalinstitue.org             Appraisal Institute

Trade Magazines

      Mortgage Banking
      National Housing News
      Western Housing News
      Mortgage Originator
      Banker & Tradesman – The Commercial Record
      Scotsman Guide – Commercial

Keys to Commercial Lending Success

      “Vanilla” properties
      Good property condition and location
      Understanding how property income is derived using Cash Flow, NOI, and DSCR
           Cash flow = gross rents – vacancy & collection allowance – property expenses
           Debt service coverage ratio (DSCR) = cash flow/dept service
                  Ability to document property income
                  Manage client’s expectations of time and information debt to different process
                  Always educate yourself – be a student of the INDUSTRY
                  Know the competition




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