The Licensing, Regulation and Ethics Requirements for Mortgage Loan Officers

By JIM SMITH, Realtor

In a recent column, I described the legal and ethical obligations that come with working in real estate, particularly as a Realtor. The mortgage lending industry has a similar obligation to protect consumers from unethical and fraudulent practices. Both industries are regulated by the Colorado Division of Real Estate, but the mortgage industry is subject to additional regulation on the federal level.

I spoke with one of my preferred mortgage brokers, Jaxzann Riggsowner of The Mortgage Network, to learn more about the subject. Here’s what I learned.

There are four main sources of mortgage financing for home buyers — credit unions, banks, mortgage companies and mortgage brokers. While there are many differences between each, the most significant is the additional training and regulation that mortgage  brokers must go through. Whereas “loan officers” or “loan originators” working at a bank or credit union are not required to be licensed, all mortgage brokers must be licensed at both a national and state level.

Registration and licensing (which are different) is completed through the Nationwide Mortgage Licensing System (NMLS), created in January 2008 in response to the housing market crisis occurring at the time. The Secure and Fair Enforcement for Mortgage Licensing (SAFE) Act, enacted in June 2008, further mandated licensing by prohibiting individuals from originating loans without obtaining and maintaining their status as a licensed mortgage loan originator (MLO) through the NMLS, unless employed by a depository bank or institution such as Wells Fargo, Chase, Bank of America, to name just a few. All individuals originating mortgage loans must register with NMLS and obtain a unique identifier (NMLS number, which allows monitoring of performance), but not all “loan officers” must be licensed. While mortgage brokers must be licensed, loan originators working for banks are not required to complete the additional licensing and testing that mortgage brokers must go through. 

Before applying for a license, potential mortgage brokers must complete twenty hours of pre-licensing education, which consists of training on Federal laws and regulations, ethics, and general mortgage origination basics. Many states, including Colorado, require additional state-specific training.

After a prospective MLO has completed his or her pre-licensing education and passed the SAFE test with a score of 75% or higher, they are required to submit their credit report and their fingerprints for a criminal background check.  Only then can applicants apply for a license.  Once the individual has obtained their federal license, he or she is required to take additional classes to obtain their Colorado license, and there are annual continuing education requirements on both the state and federal level.

Another great benefit to working with mortgage brokers is that they must legally disclose all fees upfront, including how much they will be compensated for their services. By contrast, banks are not held to this same standard. Banks are not required to disclose how their loan officers are compensated.

The most important “take away” from this discussion is that it benefits the consumer to shop for a mortgage. In addition to the loan costs, ask your potential lender about their education, experience and licensing status. When working with buyers, I always recommend working with a mortgage broker for the reasons mentioned above. I recommend calling Jaxzann at 303-990-2992.

Do You Think a Big Down Payment Is Needed to Buy a Home? Think CHFA.

One of the most enduring misconceptions among home buyers is that a large down payment — typically 20% — is required in order to buy a home.  Nothing could be further from the truth.

FHA loans only require a 3.5% down payment, although they come with a mortgage insurance requirement which lasts for the life of the loan. Because of that, you’ll need to refinance with a conventional loan once you exceed 20% equity in your new home.

Conventional (non-FHA) loans don’t necessarily require a 20% down payment either. To compete with FHA loans, there are lenders who require as little as 3% down payment, often without mortgage insurance. If they do require mortgage insurance, it can be eliminated once your equity rises to 22%, although that requires a new appraisal, which can cost $400 or more.

Best of all, however, the Colorado Housing & Finance Authority (CHFA, pronounced “Chaffa) can get you into a home with as little as $1,000 out of pocket cost. CHFA loans have income limits, but they are reasonable, up to $120,100 in the metro area. Their website is super helpful and easy to navigate at www.chfainfo.com.

At that website you’ll learn the complete process involved in getting approved for a CHFA loan. One of the first steps is to take a free buyer education class that covers every aspect of the home buying process as well as ownership responsibilities after closing.

CHFA loans are only obtained through mortgage lenders, not from CHFA directly, and Golden Real Estate can connect you with a CHFA-approved lender. 

If you’re a veteran with an honorable discharge, you are eligible for 100% financing, but there’s a funding fee.  That fee, however, is waived if you have a service related disability. Even if it isn’t waived, the fee can be included in the mortgage so that you can literally close on a VA loan with zero money out of pocket. Earnest money submitted is refunded to you at closing! We can also connect you with a VA-approved lender.

Let’s Separate Fact From Fiction Regarding Credit Scores & Home Mortgages

By JIM SMITH, Realtor

The ink may barely be dry on your 2020 financial resolutions, and already there is great news for those of you who have resolved to become first time homeowners or to increase your real estate holdings in 2020. Both the National Association of Realtors and the Mortgage Bankers Association predict that interest rates will remain at record lows (at or below 4.0%) for most of 2020. 

Of course, interest rates directly affect your home buying power, and you are probably aware that credit scores also directly impact the interest rates offered to you by mortgage lenders. What we don’t always know, however, are the specific actions that will hurt or improve our credit scores. 

So, let’s separate fact from fiction. I thank Jaxzann Riggs of The Mortgage Network for helping me with debunking the following fictions.

Fiction: Shopping for a mortgage lender and allowing more than one lender to review your credit report will hurt your credit score.

Not true. When multiple inquiries appear on your report from mortgage lenders, the scoring models assume that you are shopping for a home loan. Most scoring models consider inquiries from mortgage lenders that occur within a 15 to 45-day period to be one inquiry, having little or no impact on your score. Regularly monitoring your own credit score online prior to applying for a home loan is an effective way to identify any errors contained in your credit file and to obtain a sense of the score that lenders will be using when preparing credit offers for you. It is important to note however, that there are in excess of 20 different scoring models and that online “consumer” reports typically have a higher score than your mortgage lender sees when pulling a “tri-merged residential mortgage” report. Most lenders are willing to start the prequalifying process with a copy of your online report but will require their own report prior to issuing a preliminary loan commitment which is normally required at the time that you write an offer to purchase a property.

Fiction: Opening a new credit card account will increase your score.

The average age of your open accounts impacts your score, and since opening one or more new accounts brings the average age of your total credit profile down, opening new accounts is normally not wise. The exception to this is the prospective first-time buyer who has little or no credit. Obtaining a retail or major credit card helps to build credit “depth.”

Fiction: Carrying a balance helps to boost your score.

Maintaining a balance on your cards does not improve your score, it simply costs you more in interest fees. Utilization of available credit is an important factor in determining your score. If you are unable to pay your credit cards in full each month, keeping the balance on the card below 30% of the credit limit is best. Another strategy to improve “utilization” is to request that your card issuer increase your credit limit. By increasing your available credit line but not your balance, you instantly lower your utilization.

Fiction: Closing accounts that you don’t use will boost your score.

Rather than closing a high interest rate card that you no longer use, request that the creditor reduce the rate and/or occasionally use and then promptly repay the card in full. Closing accounts reduces the overage credit available to you, which negatively impacts both “utilization” and “duration” of your credit profile.

    Questions? Just call Jaxzann Riggs of The Mortgage Network at 303-990-2992.

Real Estate Buyers & Sellers Have Become Prime Targets of Cyber Criminals

A couple weeks ago, Jaxzann Riggs (right) of The Mortgage Network was the guest speaker at our weekly office meeting, educating us on the important subject of cyber security.  Here are some of the things we learned from her.

As we move into an increasingly digital age, cyber crime is rapidly becoming a major part of fraud. In fact, the Federal Bureau of Investigation’s Internet Crime Complaint Center estimates that there was an 11-fold increase in real estate email phishing scams between 2015 and 2017. Moreover, 2018 saw a 166% increase in the amount of money lost to real estate wire fraud compared to 2017.  As these crimes become more and more prevalent, what can you do to ensure that you do not become a victim?

Cyber crime can take many different forms, but one of the most common is something referred to as EAC, or “email account compromise.” The FBI estimated that this type of fraud accounted for $1.2 billion in losses in 2018—just under half of all reported losses for 2018. In real estate transactions, this typically occurs as wire fraud. There are many different variations of this scam, but the basic idea is the same: just before closing, a borrower receives an email with instructions from what appears to be their title agent/lender/Realtor, informing them that their closing funds should be wired to a different account. The information about their property is correct; the name on the email signature is identical to the person the borrower had previously been communicating with. The borrower, having no reason not to believe the request, sends the money to the new account. In reality, however, a criminal has hacked or spoofed the email address—meaning that the funds meant to be sent to the title company for closing have now wound up in the fraudster’s account. Although there are occasionally “success” stories of money being recovered, oftentimes, the money is gone for good.

If you are going to be involved in a real estate transaction, an easy step you can take to protect yourself is to create a physical list of phone numbers for those involved in your transaction: this can include lenders, Realtors, title agents and more. If you receive a change in wiring instructions, you should always call the sender to verify that the instructions are real. If the instructions came via email, do not refer to the phone number listed in the email signature or reply to the email— if it is a fraudulent email address, your reply will divert back to the criminal, and it will almost certainly contain a fraudulent phone number that does the same. Because phone numbers can easily be spoofed to appear as a different number, do not immediately assume a phone call you receive with a change in wiring instructions is legitimate, either: before wiring anything to a different location, you should always call back the number on your list to verify that the instructions are real. Although this may seem tedious and repetitive, as the old adage goes, it is always better to be safe than sorry.

Unfortunately, even when taking steps to protect yourself, wire fraud does happen. If you realize that you have fallen victim to a wiring fraud scheme, the first thing to do is immediately contact your bank and ask them to attempt a wire recall. Criminals will often have the funds transferred into a bank account in the U.S. before transferring them to a foreign account. If the money has not left the United States, there is a much higher chance your bank can stop the transfer and that the money can be recovered. Be sure to contact your local FBI and Attorney General in addition to filing a report with the FBI’s Internet Crime Complaint Center at www.ic3.gov.

Though wire fraud is scary, the best thing you can do is stay aware and prepared. By working with a trusted professional and taking precautions, you can minimize your risk. Are you looking for more tips on staying safe in our digital world?  Give Jaxzann Riggs a call at 303-320-3400.