Net Branch Licensing & Compliance

The session was one of many held at the group’s annual conference.

Licensing and predatory lending are some of the trends that Carteret Mortgage, the nation’s second largest mortgage broker and a company whose corporate philosophy emphasizes working from home, has gleaned from regulatory oversight, Weinstein said.

Carteret is not a net branch, he said. Net branch is a dirty word for regulatory purposes, he declared. Weinstein said state and federal regulators hear the term and think, “illegal operation.”

In fact, Illinois regulators, seeing an ad for Carteret placed in the “net branch” section of an industry newspaper, called the company and said it was going to shut it down for running a net branch, Weinstein said. He said the company bills itself on its Web site as the “net branch solution.”

In the past, Weinstein said, regulators weren’t keen on licensing. A mortgage broker could have one license for an entire state for all of its loan officers.

But that is no longer the case.

Weinstein mentioned a company that flunked regulatory scrutiny and then went out of business because it had too few licenses for too many brokers.

In one state, he said, the company had 100 officers for one license while in another, the state’s top regulator, new to the position, decided to personally visit the mortgage brokers that he would be regulating. The regulator was appalled when his personal visit to the company, whose stock was traded on the stock market, revealed that the address was actually a private post office box located in a shopping mall. The company had been doing millions of dollars of loans in the state, Weinstein said.

A traditional mortgage broker with a couple of shops should get a license for each shop, Weinstein said. But a growing company must consider how cost-effective each state is, and he warned that state laws can be contradictory with one state allowing what another state might forbid.

Audience member Paul Byer, the operations manager for Florida-based Transcontinental Lending Group Inc., said his company has 200 branches in 16 states. “We are licensed. It’s a nightmare. You almost have to have someone doing nothing but studying state licensing and reading on a daily basis because the laws change every day,” he said.

Another audience member, based in New York, said regulators in the Empire state are particularly tough. If a company does not have a branch license in a location, the banking department will make it refund every loan that was made from that location, he said. And the regulators come and visit you, Weinstein added. The audience member said that his company has begun putting branch licenses in realtor offices because they are originating so many loans out of such locations.

The location has to be licensed, Weinstein said.

In addition, more states are requiring originator licensing.

Regulators want loan officers to be more intelligent, Weinstein said, so they are requiring a certain baseline of education — individual licenses and continuing education classes. He said Carteret sends e-mail reminders when continuing education requirements have to be met.

And if a producing loan officer has not completed the continuing education requirement Carteret takes the “drastic” step of reversing the commission, he said. Hitting law-breaking loan officers in the pocketbook is the most effective means of fighting the problem, he said.

Weinstein also suggested pre-closing audits to ensure the branch and loan officer are properly licensed, noting his company uses Encompass to perform the task. Two audience members volunteered that they also use the program and that they both started the procedure within the last year.

Under some state laws, an originator can only work for one mortgage company at a time. Weinstein said one way to catch such “double dippers” is to call the loan officer on the phone and fire them if they answer with the name of another company.

In one instance, a Carteret loan officer quit without telling them, opened up another mortgage company in the same location and, because Carteret still had a license in the location, Carteret was fined by the state. After that experience, Carteret started its own “roving audits” to combat the practice, he said.

Branches should be visited by company supervisors as regulators are incredulous when they find out that a loan officer has worked for a company for a number of years and has not been visited at the branch by the company.

Other net branch pitfalls include the prohibition of maintaining a checking account by a local branch, mandatory corporate leases and employment versus contractor arrangements, Weinstein said. Major bills such as for utilities and the telephone have to be paid by the corporate office, he said. Branches can’t operate under two different names. For example, “Joe Blow Mortgage” doing business as Carteret Mortgage is not allowed under many of the anti-net branching laws.

Weinstein also said that he and the regulators “went round and round” on the question of whether or not a loan officer’s home has to be licensed if a loan officer works from home. His company solved the issue by keeping the original file in the main office and by allowing the loan officer to take a copy of the file home.

But over the course of time with multiple copies of files cropping up, the eventual solution employed by the company was to use the internet and scanning technology to make the file accessible through computers and the internet. Something many people don’t know, Weinstein said, is that many states require that the place where you scan the file has to be licensed. Also, the location of the company’s computer servers has to be a licensed branch.

Carteret also turned to computers and the Web, specifically Encompass, to handle the problem of making changes in disclosures widely and instantaneously available in companies that have several branches.

Weinstein said Carteret also uses Encompass to keep the company from running afoul of state predatory lending laws. Carteret developed a predatory lending program that scrubs the transaction to determine how many points were charged, whether the right disclosures were used and if the loan officer is properly licensed. A centralized database loan origination system is the best way to make such an evaluation as seeing the loan after it has closed is too expensive, he observed.

Lisa D. Burden is a legal analyst for MortgageDaily.com and holds a law degree from the University of Maryland. She is currently a freelance journalist who previously wrote for Institutional Investor publications and the Baltimore Daily Record.