What are the Bonding Requirements for Mortgage Loan Originators in Arizona?

The new Arizona loan officer licensing laws that ensure compliance with the SAFE Act have led to some confusion regarding the bonding requirements.

An applicant for an original loan originator’s license in Arizona shall have done the following:

ARS 6-991.03.B.4. Deposited with the superintendent a bond executed by the applicant’s employer as principal and a surety company licensed to do business in this state as a surety pursuant to section 6-903 or 6-943.

or

ARS 6-991.03.B.6. Paid an amount to be determined by the superintendent for deposit in the mortgage recovery fund established pursuant to section 6-991.09 or deposited with the superintendent a bond executed by the applicant’s employer as principal and a surety company licensed to do business in this state for the benefit of any person aggrieved by any act, representation, transaction or conduct of a licensed loan originator that violates this title or the rules adopted pursuant to this title. Notwithstanding section 6-903 or 6-943, the amount of the bond shall be in an amount of not less than two hundred thousand dollars. Loan originators working under the employer bond described in this paragraph do not have to contribute to the mortgage recovery fund.

So, what it is saying is that if you are a licensed loan officer in Arizona, you have to either work for a company that holds a bond of at least 200,000 for its employees, or you personally have to contribute a specified amount to the mortgage recovery fund.  This amount is provided as part of your mortgage license application or annual renewal process.

A common misconception is that the individual loan officer has to obtain a bond.  Again, this is not the case.  The bond is held by the loan officer’s employer.

My experience is that most companies are not opting to obtain the bond and are requiring their employees to contribute to the mortgage recovery fund.

What is the Purpose of the Mortgage Recovery Fund?

ARS 6-991.09.H. The fund is liable to pay only for damages arising out of a transaction in which the defendant licensee performed acts for which a loan originator license was required or when the defendant licensee engaged in fraud or misrepresentation and the aggrieved person was harmed due to reliance on the defendant’s licensed status.

As it says, the mortgage recovery fund is established to compensate victims of fraud or misrepresentation carried out by an Arizona licensed loan officer.  It isn’t E&O insurance.

If you have questions about any of the new Arizona Mortgage Loan Originator licensing requirements, feel free to contact me.  I’ve had the good fortune of teaching the required Arizona SAFE Act education courses many times for the Arizona School of Real Estate & Business in my spare time while I’m not managing our branch of Academy Mortgage in Mesa, contributing to various mortgage blogs or learning lessons on SEO, business and life from Justin McHood.

Steve Lines

Arizona Mortgage Loan Originator Prohibited Acts

As many people are aware, as of July 1st, all mortgage loan officers in Arizona will fall under the supervision (licensing and regulation) of the Arizona Department of Financial Institutions (DFI) in order to ensure compliance with the SAFE Act.

The SAFE Act enhances consumer protection, and reduces fraud, by requiring all mortgage loan originators to be either state-licensed or federally registered. Under the SAFE Act, all Arizona mortgage loan originators must comply with the Mortgage Loan Originator licensing process that meets certain standards through the Nationwide Mortgage Licensing System & Registry (NMLS).

One benefit of the SAFE Act is that if the Arizona DFI now has the power to revoke the license of any Arizona mortgage loan originator if they are found to have acted in a manner that is contrary to public interest and / or broken the law. If a mortgage loan originator has their license revoked, they will not be eligible to obtain a license again in any state. As such, it is essential that every Arizona mortgage loan originator as familiar with the prohibited acts specified in Arizona lending law. Provided below are the new statutes pertaining to the prohibited acts of mortgage loan originators in Arizona and <<my simpler interpretation>>.

A.R.S. §§ 6-991.02. Prohibited acts

Beginning July 1, 2010:

1. A loan originator acting on the loan originator’s own behalf shall not accept any monies or documents in connection with an application for a mortgage loan.

<<You can’t do your own loan.>>

2. An individual is not entitled to receive compensation in connection with arranging for or negotiating a mortgage loan if the individual is not licensed pursuant to this chapter. An individual who is not specifically exempted from licensure pursuant to this article shall not engage in the business of a loan originator with respect to any dwelling in this state without first obtaining and maintaining annually a license pursuant to this article. Each licensed loan originator must register with and maintain a valid unique identifier issued by the nationwide mortgage licensing system and registry established by the secure and fair enforcement for mortgage licensing act of 2008 (P.L. 110-289; 122 Stat. 2810; 12 United States Code sections 5101 through 5116) or its successor.

<<If you don’t have a license through DFI and you are not registered through NMLS, you can not originate a loan in Arizona.>>

3. A loan originator acting on the loan originator’s own behalf shall not advertise, display, distribute, broadcast or televise, or cause or permit to be advertised, displayed, distributed, broadcast or televised, in any manner, any solicitation of mortgage business.

<<A loan officer can not advertise in his or her name only.  All advertisements must include the name of the loan officer’s employing company.  For example, if I were advertising as “The Steve Lines Team” I would have to change it to “The Steve Lines Team at Academy Mortgage”.>>

4. A loan originator shall not make, negotiate or offer to make or negotiate for compensation, either directly or indirectly, a loan that is either:

(a) Less than the minimum amount that the loan originator’s employer is allowed to make.

(b) Not secured by a mortgage or deed of trust or other lien interest in real property unless employed by a consumer lender.

<<The legal minimum loan amount in Arizona differs for a mortgage broker ($5,000) and mortgage banker ($10,000).>>

5. A loan originator who is employed by a mortgage broker or mortgage banker to act in the capacity of the mortgage broker or mortgage banker shall not be employed concurrently by any other mortgage broker or mortgage banker.

<<As of July 1st, 2010, a loan officer can no longer work for more than one company at the same time – even with written permission from both companies.>>

6. A loan originator shall not collect compensation for rendering services as a real estate broker or real estate salesperson licensed pursuant to title 32, chapter 20 unless both of the following apply:

(a) The loan originator is licensed pursuant to title 32, chapter 20.

(b) The employing mortgage broker or mortgage banker has disclosed to the person from whom the compensation is collected at the time a mortgage loan application is received that the loan originator is receiving compensation both for mortgage broker or mortgage banker services, if applicable, and for real estate broker or real estate salesperson services.

<<If a loan officer is going to earn a real estate commission, he or she must be a licensed real estate agent through the Arizona Department of Real Estate AND must disclose the dual-compensation arrangement at the time of application.>>

7. A loan originator shall not accept any assignment of the borrower’s wages or salary in connection with activities governed by this article.

<<Self-explanatory>>

8. A loan originator shall not receive or disburse monies in servicing or arranging a mortgage loan.

<<A loan officer can not service a loan.>>

9. A loan originator shall not make a false promise or misrepresentation or conceal an essential or material fact in the course of the mortgage broker or mortgage banker business.

<<A loan officer can not commit fraud.>>

10. A loan originator shall not fail to truthfully account for the monies belonging to a party to a mortgage loan transaction or fail to disburse monies in accordance with the employing mortgage broker or mortgage banker agreements.

<<For example, I had a loan officer who worked for me once … until I found out that he was having his borrowers write personal checks to him for appraisals and earnest money deposits and he was pocketing the money.>>

11. A loan originator shall not engage in illegal or improper business practices.

<<Self-explanatory>>

12. A loan originator shall not require a person seeking a loan secured by real property to obtain property insurance coverage in an amount that exceeds the replacement cost of the improvements as established by the property insurer.

<<Property insurance coverage is based on replacement cost, not appraised value or purchase price.>>

13. A loan originator shall not originate a mortgage loan unless employed by a mortgage broker, mortgage banker or consumer lender.

<<Even if a loan officer is licensed through DFI and registered with NMLS, he or she can not originate a loan if he or she is not employed.>>

14. A loan originator shall not advertise for or solicit mortgage business in any manner without all of the following:

(a) The name and license number as issued on the employing mortgage broker’s, mortgage banker’s or consumer lender’s principal place of business license.

<<Note that it says the license number of the lender’s principal place of business – not the branch license (if they work in a branch location vs. the original licensed location).>>

(b) Approval of the employing mortgage broker, mortgage banker or consumer lender.

<<A loan officer must have his or her employer’s permission before distributing or publishing an advertisement. The DFI requires that the employing broker or banker keep a copy of all advertisements and provide them when audited.  It should be noted that this includes loan officer websites.>>

(c) The unique identifier the loan originator maintains with the nationwide mortgage licensing system and registry established by the secure and fair enforcement for mortgage licensing act of 2008 (P.L. 110-289; 122 Stat. 2810; 12 United States Code sections 5101 through 5116) or its successor.

<<All advertisements must have the loan officer’s unique identifier as issued by NMLS.>>

15. On request, a loan originator shall make available to the superintendent the books and records relating to the loan originator’s operations. The superintendent may have access to the books and records and interview the officers, principals, employees, independent contractors, agents and customers of the loan originator concerning their business. In connection with a request pursuant to this paragraph, a person may not knowingly withhold, abstract, remove, mutilate, destroy or secrete any books, records or other information.

<<DFI can audit a loan officer’s personal files and a loan officer can not destroy or hide the requested information.>>

16. A loan processor or underwriter who is an independent contractor may not engage in the activities of a loan processor or underwriter unless the loan processor or underwriter obtains and maintains a license pursuant to section 6-991.03. Each independent contractor loan processor or underwriter licensed as a loan originator must have and maintain a valid unique identifier.

<<If a person is in the business of being an independent-contract processor or underwriter, they must be licensed as a loan originator and be registered with NMLS.  Why?  DFI needs to have record of you in their system in order to supervise you.>>

17. An individual engaging solely in loan processor or underwriter activities shall not represent to the public through advertising or other means of communicating that the individual can or will perform any of the activities of a loan originator.

<<If you are in the business of being an independent-contract processor or underwriter, you can not advertise or express that you can originate loans. Why? You have to be employed by a mortgage broker, banker or consumer lender (see 13.)  Also, if you are a processor or underwriter that is employed by a banker or broker, you can not advertise or tell people that you can originate a loan.  If you do, you fall under the Arizona definition of a mortgage loan originator. >>

Arizona law specifies that if a mortgage loan originator is found to be in violation of any of these rules, DFI can fine them $5000.00 per occurrence (every day in violation is considered a separate occurrence) and / or revoke their license. Further, they can be found guilty of a class 6 felony. As such, Arizona loan officers must be familiar with the above prohibited acts in order to ensure that they are acting in the public’s interest and to protect their ability to work in the profession.

Steve Lines is a Branch Manager for Academy Mortgage specializing in AZ FHA loans and is a AZDRE-authorized instructor teaching at the Arizona School of Real Estate and Business, an NMLS-approved course provider.