Arizona MLO Law and Regulations Supplement

Transcription

1 This chapter reviews laws in the State of Arizona related to consumer protection that affect the mortgage industry in general and mortgage loan originators specifically. It introduces the Arizona Department of Financial Institutions and describes the scope of its authority. It also discusses specific Arizona law related to the licensing, activities of mortgage bankers, brokers, and mortgage loan originators, with a focus on compliance. By the end of this chapter, you will be able to: Describe the regulatory authority of the Department of Financial Institutions. Recognize the legal definition of key mortgage industry terms. Define qualifications for applying for and maintaining a license. Identify grounds for denying a license. Describe compliance regulations for mortgage industry licensees. Identify prohibited conduct and practices. Describe regulations related to advertising. Discuss disclosure obligations of mortgage licensees. Identify disciplinary action that may be taken against licensees. Compare the purpose and legal effects of mortgages and trust deeds. Describe the obligations of a loan originator to a borrower. Page 1 of 80

2 Table of Contents Arizona Department of Financial Institutions...6 Supervised Industries...7 Superintendent...7 Consumer Affairs Division...8 Arizona Law and Regulation...8 Key Definitions...9 A.R.S : Mortgage Brokers...9 A.R.S : Mortgage Bankers...10 A.R.S : Commercial Mortgage Bankers...10 A.R.S : Loan Originators...11 A.A.C. R : Department of Financial Institutions...13 Mortgage Loan Originator Licensure...17 Arizona Loan Originator License...17 Exemptions...18 License Qualifications...18 Prelicensing Education...19 Written Test...19 National Component...20 Arizona State Component...20 Arizona State Test Component Reference List...21 Loan Originator Examination Committee...21 Application Requirements...21 MU-4 Form...22 Incomplete Applications...22 Surety Bonds...23 Fees...23 Issuance of Licenses...23 License Denial...24 License Maintenance...25 Continuing Education...25 Renewal Fees...25 Failure to Meet Renewal Requirements...26 Inactive Status...26 Employer Obligations...26 Mortgage Broker and Banker Licensing...27 Mortgage Broker License...27 Requirements...29 Mortgage Banker License...29 Exemptions...29 Requirements...31 Conversion to Mortgage Broker License...31 Commercial Mortgage Banker License...32 Exemptions...32 Requirements...33 Applications...33 Fees...34 Other Required Documentation...34 General License Conditions...34 Advertising...35 Responsible Individual (RI)...35 Replacing an RI...35 RI Continuing Education...36 Page 2 of 80

3 Place of Business...37 Branch Office...37 Change of Address...37 Surety Bonds and the Arizona Mortgage Recovery Fund...38 Surety Bond...38 Mortgage Recovery Fund...38 Funds...38 Liability...39 Service of Summons...39 Filing a Claim...39 Pursuit of Other Assets...40 Insufficient Funds...40 Notice of Claim...41 Application Deficiencies...41 Investigation and Decision Timeframe...42 Notice of Approval or Denial...42 Appeal...42 Subrogation of Rights...43 Waiver of Rights...44 Prohibited Acts...45 Loan Originator Prohibited Acts...45 Mortgage Broker Prohibited Acts...47 Mortgage Banker Prohibited Acts...48 Requirement to Supervise...50 Authorizations to Complete Blank Spaces...50 Noncompliance...50 Accounting and Record Keeping...51 Maintaining Records...51 Mortgage Broker Record Maintenance...51 Mortgage Banker Record Maintenance...52 Mortgage Broker Record Keeping Requirements...52 Other Records...54 Mortgage Broker Accounting Practices...55 Mortgage Banker Accounting Practices...55 Escrow of Taxes and Other Monies...56 Compliance with Federal Law...56 Disclosure to Private Investors...56 Disclosure Statement...57 Disciplinary Action...58 Violations...58 Investigations...58 Penalties...59 Civil Penalties...59 Cease and Desist Orders...60 Hearings...61 Notice of Hearing...61 Answer to Notice of Hearing...61 Stays...62 Intervention...62 Rehearing...62 Causes for Granting Rehearing...63 Exceptions to Rehearing Option...63 Consent Agreements...64 Page 3 of 80

4 Finance Instruments Review...65 Documents...65 Mortgages...65 Deeds of Trust...65 Liens...66 Satisfaction...66 Expiration...66 Payoff Demands...66 Foreclosure Overview...67 Judicial Foreclosure...67 Non-Judicial Foreclosure...68 Prohibition on Balloon Payments...70 Obligations of a Loan Originator...71 Professional Code of Ethics...71 Arizona Consumer Fraud Act...72 Residential Mortgage Fraud...72 Case Studies...74 Scenario 1: Frank...74 Scenario 2: John...75 Scenario 3: Judy...76 Glossary...77 Page 4 of 80

5 Page 5 of 80 SAFE Mortgage Loan Originator Test Arizona State Component Content Outline 50 scored test questions; 10 unscored test questions I. Arizona Department of Financial Institutions (5%) A. Regulatory authority B. Department structure C. Responsibilities and limitations II. State Law and Regulation Definitions (10%) A. ARS B. ARS C. ARS D. ARS E. AAC R F. Liens and encumbrances III. License Law and Regulation (20%) A. Persons required to be licensed 1. In state 2. Out of state (non resident) 3. Exemptions B. Licensee qualifications and application process 1. Financial responsibility (surety bond, net worth, or recovery fund) 2. Background check and fingerprints (criminal check; credit report) 3. Pre-licensing education and experience 4. Testing and retesting C. Grounds for denying license 1. Criminal convictions 2. Previous revocation 3. Prohibition D. License maintenance 1. Continuing education 2. Personal information updates and required notifications 3. Renewal 4. Record keeping and reporting 5. Suspension and reinstatement IV. Compliance (50%) A. Prohibited conduct and practices B. Required conduct C. Fees and charges D. Disclosures and agreements E. Advertising V. Disciplinary Action (10%) A. Notifications, hearings, and appeals B. Suspension, revocation, and rescission of licenses C. Penalties/fines D. Civil and criminal liability VI. Arizona Unique State Test Areas (5%) A. General purposes and legal effects of mortgages, deeds of trust, and security agreements 1. Documents 2. Foreclosure processes 3. Liens B. Principles of real estate lending C. Obligations between principal and agent (loan originator)

6 Arizona Department of Financial Institutions The Arizona Department of Financial Institutions is statutorily charged with the licensing, supervision, and regulation of state chartered financial institutions and enterprises. The responsibility is twofold: Ensuring the safety and soundness of state chartered financial entities Compliance with applicable state and federal laws The Department also reviews complaints that are filed by consumers against licensed entities when violations of state law or rules have been alleged, directing appropriate remedial action if the violations are substantiated. The Department serves approximately 3,600 entities licensed to conduct business in the state, as well as Arizona citizens who receive services from these companies. The Department s regulatory authority was established by the Legislature and is codified in Arizona Revised Statutes, Title 6 Banks and Financial Institutions, Chapter 1 State Banking Department. Page 6 of 80

7 Supervised Industries Industries that are examined and supervised by the AzDFI include: Advance Fee Loan Brokers Banks (State Chartered) Collection Agencies Commercial Mortgage Bankers Consumer Lenders Credit Unions (State Chartered) Debt Management Companies Deferred Presentment Companies Escrow Agents Money Transmitters Mortgage Bankers Mortgage Brokers and Loan Originators Motor Vehicle Dealers Premium Finance Companies Sales Finance Companies Savings and Loan Associations Trust Companies Trust Divisions (of State Chartered Institutions) The Arizona Department of Financial Institutions does not regulate federally chartered national banks, credit unions, and savings banks. Superintendent The chief officer of the Department is known as the Superintendent. As described in Arizona Revised Statutes Section 6-111, the Superintendent is appointed by the Governor, subject to Senate confirmation, and holds office for four years. Section indicates that the Superintendent has the authority to: Exercise all powers that are necessary for the administration and enforcement of the laws and rules relating to financial institutions and enterprises. Adopt rules that are necessary or appropriate to administer, enforce, and accomplish the purposes of the state law related to banks and financial institutions. Require appropriate records, documents, information, and reports from any financial institution or enterprise. Establish application and renewal fees. Conduct examinations and investigations to determine whether any person has engaged in, is engaging in, or is about to engage in any act, practice, or transaction which constitutes an unsafe or unsound practice or is a violation of any law or rule applicable to persons subject to the jurisdiction of the Superintendent. Under the Department s supervision, if an enterprise is operated in such a fashion as to present a significant risk to consumers, the Superintendent must take appropriate action to correct the condition, which could include petitioning the Maricopa County Superior Court to place the enterprise in receivership. The most common reason an enterprise is placed in receivership is insolvency arising from the misappropriation of customer funds held in trust. The Superintendent is the licensing authority for AzDFI supervised industries. Therefore, the Superintendent is tasked with cooperating with other regulatory agencies and professional associations to promote the efficient, safe, and sound operation and regulation of interstate banking activities. The law also gives the Superintendent the authority to participate in the Nationwide Mortgage Licensing System and Registry (NMLS) that was established by the SAFE Act. Page 7 of 80

8 Consumer Affairs Division The Consumer Affairs Division of the Arizona Department of Financial Institutions is the primary contact for both the public and for licensees for questions about state laws, rules, regulations, and other authoritative guidance related to the regulated industries. It is also the Division that is responsible for investigating complaints filed against: Individuals who are suspected of engaging in unlicensed activities. Individuals and entities who are licensed and regulated by the AzDFI. The Consumer Affairs Division has broad authority to impose administrative sanctions and even further prosecution when appropriate. Arizona Law and Regulation Legislatures are the branches of government that have primary responsibility for passing laws and, as such, are the dominant source of new laws. Statutory law refers to laws called statutes or acts adopted by a legislative body. The laws passed by the Arizona State Legislature are compiled in the Arizona Revised Statutes, which is abbreviated as A.R.S. The law is organized into titles, then chapters, then articles. For example, the authorities and powers given by the Legislature to the Department of Financial Institutions are found in Title 6 Banks and Financial Institutions; Chapter 1 State Banking Department; Article 3 Powers and Duties. Specific sections of the law within a particular title often designated with the symbol are then numbered somewhat sequentially, starting with the title number, followed by the chapter. So, for example, Superintendent s Powers is from Chapter 1 of Title 6. As an administrative agency, the Department of Financial Institutions is part of the Executive branch. Regulations issued by state agencies have the force of law, and anyone who fails to comply with a regulation will face penalties. In Arizona, the regulations that govern state agencies, boards, and commissions are compiled in the Arizona Administrative Code, which is abbreviated as A.A.C. It too is organized into titles and chapters. The majority of the laws and regulations that are of significance to a mortgage loan originator are compiled in the following titles and chapters: A.R.S. Title 6 Banks and Financial Institutions; Chapter 9 Mortgage Brokers, Mortgage Bankers, and Loan Originators A.A.C. Title 20 Commerce, Financial Institutions, and Insurance; Chapter 4 Department of Financial Institutions However, mortgage loan originators must be familiar with many other laws and regulations in Arizona, for example, those related to property, taxes, and state administrative procedures to name a few, as well as federal and local law. Arizona Revised Statutes may be accessed online from the Arizona State Legislature s website: Arizona Administrative Code may be accessed online from the Arizona Secretary of State s website: Page 8 of 80

9 Key Definitions Understanding terms and concepts as defined in Arizona law is critical. For clarity, many chapters in the A.R.S. and A.A.C. include definitions of those key terms referenced. Before continuing, you should be familiar with how Arizona law defines the following terms: A.R.S : Mortgage Brokers Affiliate An entity which directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with the entity specified. Commercial Mortgage Broker A person who for compensation or in the expectation of compensation either directly or indirectly makes, negotiates, or offers to make or negotiate a commercial mortgage loan. Commercial Mortgage Loan A loan that is directly or indirectly secured by a mortgage or deed of trust or any lien interest on commercial property and that is created with the consent of the owner of the commercial property. Commercial Property Real property that is not a residential dwelling of one to four units. Compensation Anything of value or any benefit, including points, commissions, bonuses, referral fees, loan origination fees, and other similar fees but excluding periodic interest resulting from the application of the note rate of interest to the outstanding principal balance remaining unpaid from time to time. Continuing Education Unit A 50-minute period of time in a continuing education course that relates to the mortgage industry or to mortgage transactions, including courses taken to maintain recognized industry designations. Investor A person who lends or invests money in mortgage loans. License A license issued under this article. Licensee A person licensed under this article. Mortgage Broker A person who is not exempt under Section and who for compensation or in the expectation of compensation either directly or indirectly makes, negotiates, or offers to make or negotiate a mortgage loan. Mortgage Loan A loan secured by a mortgage or deed of trust or any lien interest on real estate located in this state created with the consent of the owner of the real estate. Mortgage Loan Closing The day by which all documents relating to the mortgage loan have been executed and recorded and all monies have been accounted for under the terms of the escrow instructions. Residential Mortgage Loan A mortgage loan that has security in the form of a residential dwelling of one to four units. Page 9 of 80

10 A.R.S : Mortgage Bankers Additional terms not defined in the previous section: Mortgage Banker A person who is not exempt under Section and who for compensation or in the expectation of compensation either directly or indirectly makes, negotiates, or offers to make or negotiate a mortgage banking loan or a mortgage loan. Mortgage Banking Loan A loan which is funded exclusively from the mortgage banker's own resources, which is directly or indirectly secured by a mortgage or deed of trust or any lien interest on real estate located in this state and which is created with the consent of the owner of the real property. For the purposes of this paragraph, "own resources" means any of the following: Cash, corporate capital, warehouse credit lines at commercial banks, savings banks or savings and loan associations, or other sources that are liability items on the mortgage banker's financial statements for which its assets are pledged. Correspondent contracts between the mortgage banker and a bank, savings bank, trust company, savings and loan association, credit union, profit sharing or pension trust, consumer lender, or insurance company. The mortgage banker's affiliates' cash, corporate capital, warehouse credit lines at commercial banks, or other sources that are liability items on the affiliates' financial statements for which the affiliates' assets are pledged. Mortgage Banking Loan Closing The day by which all documents relating to the mortgage banking loan or mortgage loan have been executed and recorded and all monies have been accounted for. Mortgage Loan Any loan, other than a mortgage banking loan, secured by a mortgage or deed of trust or any lien interest on real estate located in this state and created with the consent of the owner of the real estate. A.R.S : Commercial Mortgage Bankers Additional terms not defined in the previous sections: Commercial Mortgage Banker A person who engages in the following: Originating commercial mortgage loans. Servicing commercial mortgage loans. Either directly or indirectly making, negotiating, or offering to make or negotiate commercial mortgage loans. Commercial Mortgage Loan Closing The day by which all documents relating to the commercial mortgage loan have been executed and recorded and all monies have been accounted for under the terms of the escrow instructions. Institutional Investor A person who in the regular course of business makes commercial mortgage loans of more than $250,000 that are funded exclusively from the institutional investor's own resources. Page 10 of 80

11 Investor A person who directly or indirectly provides monies to a commercial mortgage banker that are, or are intended to be, used to make a loan, and any person who purchases a loan, or any interest in a loan, from a commercial mortgage banker or in a transaction that has been directly or indirectly arranged or negotiated by a commercial mortgage banker. Own Resources Any of the following: Cash, corporate capital, warehouse credit lines at commercial banks, savings banks or savings and loan associations, or other sources that are liability items on the person's financial statements. Correspondent contracts between the commercial mortgage banker and an institutional investor, bank, savings bank, trust company, savings and loan association, credit union, profit sharing or pension trust, consumer lender, or insurance company. The person's affiliates' cash, corporate capital, warehouse credit lines at commercial banks, or other sources that are liability items on the affiliates' financial statements for which the affiliates' assets are pledged. Servicing Commercial Mortgage Loans Collecting payments at a location in this state on commercial mortgage loans, including: Principal. Interest. Trust items such as hazard insurance premiums, taxes, and various reserves on an obligation under the terms of the obligation. Operational procedures covering accounting, bookkeeping, insurance, tax records, loan payment follow-up, delinquency loan follow-up, loan analysis, and property valuation. A.R.S : Loan Originators Additional terms not defined in the previous sections: Clerical or Support Duties Duties subsequent to the receipt of a residential mortgage loan application, including both of the following: The receipt, collection, distribution, and analysis of information common for the processing or underwriting of a residential mortgage loan. The communication with a consumer to obtain the information necessary for the processing or underwriting of a loan if the communication does not include offering or negotiating loan rates or terms or counseling consumers about residential mortgage loan rates or terms. Consumer Lender A person that advertises to make or procure, solicits or holds itself out to make or procure, or makes or procures consumer lender loans to consumers in this state (definition found in Chapter 5 of Title 6). Depository Institution has the same meaning prescribed in the Federal Deposit Insurance Act and includes credit unions. Page 11 of 80

12 Federal Banking Agency The board of governors of the Federal Reserve System, the Comptroller of the Currency, the Director of the Office of Thrift Supervision, the National Credit Union Administration, or the Federal Deposit Insurance Corporation. Immediate Family Member A spouse, child, sibling, parent, grandparent, grandchild, stepparent, stepchild, or stepsibling whether related by adoption or blood. Judgment Either: A final judgment in a court of competent jurisdiction. A criminal restitution order issued pursuant to United States Code. An arbitration award that includes findings of fact and conclusions of law that has been confirmed and reduced to judgment pursuant to U.S. Code and that was rendered according to the rules of the American arbitration association or another recognized arbitration body. Judgment Debtor Any defendant under this article who is the subject of a judgment. Loan Originator A natural person who for compensation or gain or in the expectation of compensation or gain does any of the following: Takes a residential mortgage loan application. Offers or negotiates terms of a residential mortgage loan. On behalf of a borrower, negotiates with a lender or note holder to obtain a temporary or permanent modification in an existing residential mortgage loan agreement. This definition does not include: An individual engaged solely as a loan processor or underwriter except as provided below. A person who only performs real estate brokerage activities and who is licensed in accordance with ARS Title 32, Chapter 20, unless the person is compensated by a lender, a mortgage broker, or any other loan originator or by an agent of the lender, mortgage broker, or other loan originator. A person solely involved in extensions of credit relating to a timeshare plan as defined in United States Code. A person who makes five or fewer mortgage loans per calendar year. A person who takes back a purchase money mortgage in connection with the sale of residential real estate. An employer making a mortgage loan to an employee. Loan Processor or Underwriter An individual who performs clerical or support duties as an employee at the direction of and subject to the supervision and instruction of a person who is licensed or who is exempt from licensure under Article 1 or 2 of this Chapter. Mortgage Loan or Residential Mortgage Loan A loan for personal family or household use that is secured by a mortgage, deed of trust or other equivalent consensual security interest on a dwelling, as defined in the Truth in Lending Act or residential real estate on which a dwelling is constructed or intended to be constructed. Page 12 of 80

13 Real Estate Brokerage Activity Any activity that involves offering or providing real estate brokerage services to the public, including: Acting as a real estate salesperson or real estate broker for a buyer, seller, lessor, or lessee of real property. Bringing together parties interested in the sale, purchase, lease, rental, or exchange of real property. Negotiating on behalf of any party any portion of a contract relating to the sale, purchase, lease, rental, or exchange of real property other than in connection with providing financing with respect to any transaction. Engaging in any activity for which a person is required to be licensed as a real estate salesperson or real estate broker under Title 32, Chapter 20. Offering to engage in any activity or act in any capacity described above. Registered Loan Originator Any individual who is both of the following: A loan originator who is registered with and maintains a unique identifier through the Nationwide Mortgage Licensing System and Registry established by the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 or its successor. An employee of one of the following: o A depository institution. o A subsidiary that is owned and controlled by a depository institution and regulated by a federal banking agency. o An institution regulated by the farm credit administration. Residential Mortgage Loan Servicer Any person who does either of the following: On behalf of the note holder, collects or receives payments, including payments of principal, interest, escrow monies, and other monies due, on obligations due and owing to the note holder pursuant to a residential mortgage loan. When the borrower is in default or in foreseeable likelihood of default, works on behalf of the note holder with the borrower to modify the obligations either temporarily or permanently in order to avoid foreclosure or otherwise to finalize collection through the foreclosure process. Residential Real Estate Any property that is located in this state and on which a dwelling is constructed or intended to be constructed. Unique Identifier The number assigned to the loan originator by the Nationwide Mortgage Licensing System and Registry or its successor or as the term is used under the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 or its successor. A.A.C. R : Department of Financial Institutions Selected terms not defined in the previous sections: Active Management Directing a licensee s activities by a responsible individual, who: Is knowledgeable about the licensee s Arizona activities; Supervises compliance with: Page 13 of 80

14 o The laws enforced by the Department of Financial Institutions as they relate to the licensee, and o Other applicable laws and rules; and Has sufficient authority to ensure compliance. Branch Office Any location within or outside Arizona, including a personal residence, but not including a licensee s principal place of business in Arizona, where the licensee holds out to the public that the licensee acts as a licensee. Compensation In applying that term s definition in A.R.S , 6-941, and 6-971, anything received in advance, after repayment, or at any time during a loan s life. This subsection expressly excludes the following items from those definitions of compensation: Charges or fees customarily received after a loan s closing including prepayment penalties, termination fees, reinvestment fees, late fees, default interest, transfer fees, impound account interest and fees, extension fees, and modification fees. However, extension fees and modification fees are compensation if the lender advances additional funds or increases the credit limit on an open-end mortgage as part of the extension or modification; Out-of-pocket expenses paid to independent third parties including appraisal fees, credit report fees, legal fees, document preparation fees, title insurance premiums, recording, filing, and statutory fees, collection fees, servicing fees, escrow fees, and trustee s fees; Insurance commissions; Contingent or additional interest, including interest based on net operating income; or Equity participation. Cushion Funds that a servicer or lender may require a borrower to pay into an escrow or impound account before the borrower s periodic payments are available in the account to cover unanticipated disbursements. For further discussion of permissible cushion, review provisions of RESPA/Regulation X. Directly or Indirectly Makes, Negotiates, or Offers to Make or Negotiate means: Providing consulting or advisory services in connection with a mortgage loan transaction, mortgage banking loan transaction, or commercial mortgage loan transaction; o To an investor, concerning the location or identity of potential borrowers, regardless of whether the person providing consulting or advisory services directly contacts any potential borrowers; or o To a borrower, concerning the location or identity of potential investors or lenders; or Providing assistance in preparing an application for a mortgage loan transaction, mortgage banking loan transaction, or commercial mortgage banking loan transaction, regardless of whether the person providing assistance directly contacts any potential investor or lender; and Processing a loan; Page 14 of 80

15 But does not include: Providing clerical, mechanical, or word processing services to prepare papers or documents associated with a mortgage loan transaction, mortgage banking loan transaction, or commercial mortgage banking loan transaction; Purchasing, selling, negotiating to purchase or sell, or offering to purchase or sell a mortgage loan, mortgage banking loan, or commercial mortgage banking loan already funded (which is considered a secondary market transaction); Making, negotiating, or offering to make additional advances on an existing open-ended mortgage loan, mortgage banking loan, or commercial mortgage loan including revolving credit lines; Modifying, renewing, or replacing a mortgage loan, a mortgage banking loan, or a commercial mortgage loan already funded, if the parties to and security for the loan are the same as the original loan immediately before the modification, renewal, or replacement, and if no additional funds are advanced and no increase is made in the credit limit on an openended loan. Replacing a loan means making a new loan simultaneously with terminating an existing loan. Mortgage loan modifications may be conducted only by licensed mortgage bankers or mortgage brokers. Electronic Record A record that is created, generated, sent, communicated, received, or stored by electronic means. Employee A natural person who has an employment relationship with a licensee that is acknowledged by both the person and the licensee, and: The person is entitled to payment, or is paid, by the licensee; The licensee withholds and remits, or is liable for withholding and remitting, payroll deductions for all applicable federal and state payroll taxes; The licensee has the right to hire and fire the employee and the employee s assistants; The licensee directs the methods and procedures for performing the employee s job; The licensee supervises the employee s business conduct and the employee s compliance with applicable laws and rules. Engaged in the Business of Making Mortgage Loans or Mortgage Banking Loans means the direct or indirect making of a total of more than five mortgage banking loans or mortgage loans, or both in a calendar year. Each loan counts only once as of its closing date. A person is not engaged in the business of making mortgage loans or mortgage banking loans if the person makes loans solely in commercial finance transactions in which no more than 35% of the aggregate value of all security taken by the investor on the closing date is a lien, or liens, on real property. Generally Accepted Accounting Principles has the meaning used by the Financial Accounting Standards Board or the American Institute of Certified Public Accountants. Holds Out to the Public as used in this Section s definition of branch office means advertising or otherwise informing the public that mortgage banking loans, commercial mortgage loans, or mortgage loans are made or negotiated at a location. Holds out to the public includes listing a location on business cards, stationery, brochures, rate lists, or other promotional items. Holds Page 15 of 80

16 out to the public does not include a clearly identified home or mobile telephone number on a business card or stationery. Loan Processing Obtaining a loan application s supporting documents for use in underwriting. Person A natural person or any legal or commercial entity including a corporation, business trust, estate, trust, partnership, limited partnership, joint venture, association, limited liability company, limited liability partnership, or limited liability limited partnership. Reasonable Investigation of the Background as that term is used in A.R.S , 6-943, or means a licensee, at a minimum: Collects and reviews all the documents authorized by the Immigration Reform and Control Act of 1986, 8 U.S.C. 1324a; Obtains a completed Employment Eligibility Verification (Form I-9); Obtains a completed and signed employment application; Obtains a signed statement attesting to all of an applicant s felony convictions, including detailed information regarding each conviction; Consults with the applicant s most recent or next most recent employer, if any; Inquires regarding the applicant s qualifications and competence for the position; If for a loan officer, loan originator, loan processor, branch manager, supervisor, or similar position, obtains a current credit report from a credit reporting agency; and Investigates further if any information received in the above inquiries raises questions as to the applicant s honesty, truthfulness, integrity, or competence. An inquiry is sufficient after two attempts to contact a person, including at least one written inquiry. Page 16 of 80

17 Mortgage Loan Originator Licensure The Secure and Fair Enforcement Mortgage Licensing Act, more commonly known as the SAFE Act, is a key component of the Housing and Economic Recovery Act of 2008 (Pub. L , 122 Stat. 2654), commonly known as HERA. The SAFE Act is designed to enhance consumer protection and reduce fraud by requiring states to establish national minimum standards for training for mortgage loan originators (MLOs), including prelicensing and annual continuing education. To meet its objectives, the SAFE Act requires all residential MLOs to be either state-licensed or federally registered. Only MLOs employed by a federally insured depository institution or any credit union or an owned and controlled subsidiary that is federally supervised may be registered. All others must be state-licensed. The Arizona Legislature responded to this directive by passing HB 2143, which was signed into law by the Governor in July, 2009, and went into effect in October, This is codified in Arizona Revised Statutes, Title 6, Chapter 9, Article 4. While the SAFE Act references mortgage loan originators or MLOs, Arizona law uses the term loan originator. The Arizona Department of Financial Institutions (AzDFI) accepts applications for licenses and registrations through the Nationwide Mortgage Licensing System & Registry (NMLS). The NMLS is responsible for providing a centralized and standardized system for mortgage licensing that accommodates both the regulatory agencies and the mortgage industry. It is the Arizona Department of Financial Institutions, however, that has the authority to establish requirements for issuing licenses and registrations. Every licensed mortgage lender and mortgage loan originator, and every registered mortgage broker and mortgage loan servicer, must have a unique NMLS identification number. Arizona Loan Originator License Each individual originating any residential mortgage loan and/or acting as a mortgage loan originator according to Arizona Revised Statutes needs to be separately licensed and employed by a mortgage banker, mortgage broker, or consumer lender. A loan originator may only be employed by one entity/company. Dual employment of a mortgage loan originator is prohibited. Recall that A.R.S defines a loan originator as a natural person who for compensation or gain or in the expectation of compensation or gain takes a residential mortgage loan application, offers or negotiates terms of a residential mortgage loan, or who, on behalf of a borrower, negotiates with a lender or note holder to obtain a temporary or permanent modification in an existing residential mortgage loan agreement. Again, NMLS refers to this license category as a mortgage loan originator or MLO. Page 17 of 80

18 Exemptions According to A.R.S , the legal definition of licensed loan originator does not apply to the following: Registered loan originators An individual who offers or negotiates terms of a residential mortgage loan secured by a dwelling that served as the individual's residence A person who is a responsible individual, described as a resident of this state who is in active management of the activities of the licensee as a licensed mortgage broker or licensed commercial mortgage broker An employee of a commercial mortgage banker licensed under Arizona law An employee of a person licensed under Arizona if the licensee affirms in writing to the Superintendent that the licensee will not originate or negotiate a mortgage loan that has security in the form of a residential dwelling of one to four units A person who, as seller of real property, receives one or more mortgages or deeds of trust as security for a purchase money obligation A licensed attorney who negotiates the terms of a residential mortgage loan on behalf of a client as an ancillary matter to the attorney's representation of the client, unless the attorney is compensated by a lender, a mortgage broker, or any other loan originator, or by any agent of the lender, mortgage broker, or other loan originator An individual who offers to negotiate terms of a residential mortgage loan with or on behalf of the individual's immediate family member and who does not otherwise engage in the business of a loan originator A manufactured home retailer and its employees if performing only clerical or support duties in connection with the sale or lease of a manufactured home and the manufactured home retailer and its employees receive no compensation or other gain from a mortgage banker or a mortgage broker for the performance of the clerical or support duties An individual who is employed by a residential mortgage loan servicer if the individual is involved solely in loss mitigation efforts, unless the United States Department of Housing and Urban Development determines that the SAFE Act of 2008 requires the individual to be licensed as a mortgage loan originator An employee or the person who is the responsible individual of a financial institution who is licensed under Arizona law if the responsible individual certifies in writing to the Superintendent that the employee or the responsible individual, or both the employee and the responsible individual, will only originate commercial mortgage loans License Qualifications A.R.S sets forth the requirements for loan originator licensure. As of July 1, 2010, a natural person may not act as a loan originator unless licensed under this article. Also, as of July 1, 2010, the Superintendent will not grant a loan originator license to a person, other than a natural person. Page 18 of 80

19 Applicants are required to meet the prelicensing education and testing requirements defined by the SAFE Act and by the State of Arizona prior to applying for a loan originator license, which include: Prelicensing education Passing a test Providing required documentation Meeting required financial obligations Paying required fees Licensees must also complete annual continuing education in order to maintain their licenses. Prelicensing Education Anyone applying for a mortgage loan originator is required to complete at least 20 hours of education with an NMLS-approved program that includes the following: Three hours of federal law and regulations Three hours of ethics, including instruction on fraud, consumer protection, and fair lending issues Two hours of training related to lending standards for the nontraditional mortgage loan marketplace, which is defined by the SAFE Act as anything other than a fixed rate, 30-year mortgage Four hours of applicable Arizona law and regulations Eight hours of elective courses related to the mortgage industry Employers of an applicant can provide a prelicensing education program approved by the NMLS. Prelicensing education programs may be offered in a classroom, online, or by other means approved by the NMLS. Written Test Each applicant for an original loan originator license, before issuance of the license, must take and pass an examination given under the supervision of the AzDFI or its designee within one year of applying for licensure. The test is comprised of two components: a National Component and an Arizona State Component. Applicants must pass each component with a score of 75% or higher. An applicant may retake a test three consecutive times, but must wait at least 30 days after the preceding test. After failing three consecutive tests, an applicant must wait at least six months before taking the test again. All examinations shall be given, conducted, and graded in a fair and impartial manner and without unfair discrimination between individuals examined. The committee or the Department's designee shall inform the applicant of the result of the examination within 30 days of the examination. The Superintendent may determine the fee for each examination. The Superintendent may contract for the examination for the licensing of applicants. If the Superintendent contracts for Page 19 of 80

20 the examination, the fee for examination for licenses is payable directly to the contractor by the applicant for examination. National Component The National Component consists of 90 scored questions and 10 unscored questions developed by the NMLS and administered by a test provider approved by the NMLS based upon reasonable standards. A qualified written test adequately measures the applicant's knowledge and comprehension in appropriate subject areas, including: Ethics Federal law and regulation pertaining to mortgage origination The loan origination process, including nontraditional mortgage products Federal law and regulation related to fraud, consumer protection, and fair lending issues Arizona State Component The state component consists of 55 scored questions and 10 unscored questions. In addition to testing the applicant s knowledge and comprehension of relevant state law, the examination must reasonably examine the applicant's knowledge of all of the following, as specified in A.R.S : 1. The obligations between principal and agent 2. The applicable canons of business ethics 3. This article and the rules adopted under A.R.S. Title 6, Chapter 9, Article 4 4. The arithmetical computations common to mortgage brokerage 5. The principles of real estate lending 6. The general purposes and legal effect of mortgages, deeds of trust, and security agreements 7. The terms and conditions of conforming and nonconforming residential mortgage products 8. The principles of appraisal independence The examination is subject to the Superintendent's approval. Page 20 of 80

21 Arizona State Test Component Reference List A number of references and resources are used to develop the Arizona State Component of the SAFE Mortgage Loan Originator Test. The following list is intended to be used as a guide to help candidates prepare for the test component; however, it is not intended to be an all-inclusive list. A.R.S. Title 6, Chapter 1 A.R.S. Title 6, Chapter 9, Article 1 A.R.S. Title 6, Chapter 9, Article 2 A.R.S. Title 6, Chapter 9, Article 3 A.R.S. Title 6, Chapter 9, Article 4 A.R.S. Title 11, Chapter 8 A.R.S. Title 12, Chapter 5 A.R.S. Title 32, Chapter 20, Article 4 A.R.S. Title 33, Chapter 9, Article 3 A.R.S. Title 33, Chapter 16 A.R.S. Title 33, Chapter 6 A.R.S. Title 33, Chapter 6.1 A.R.S. Title 41, Chapter 6 A.R.S. Title 42, Chapter 15, Article 5 A.R.S. Title 42, Chapter 17, Article 4 A.R.S. Title 42, Chapter 18, Article 2 A.R.S. Title 48, Chapter 4, Article 2 A.A.C Title 18, Chapter 8 Arizona Association of Realtors Purchase Agreement "Arizona Construction Law" Author: Francis J. Buzz Slaving, Jr., November 1982 A.A.C. Title 20, Chapter 4 The Real Estate Dictionary 4th edition, Financial Publishing Co. Loan Originator Examination Committee The Superintendent has the authority under A.R.S to establish a loan originator examination committee whose purpose it is to establish and periodically update standards for passing an examination for loan originators. The committee shall consist of five members appointed by the Superintendent, four of which must be mortgage broker licensees and shall be appointed from nominations submitted by other mortgage broker licensees. The remaining member must be an employee of the Department of Financial Institutions. The members will serve a two-year term and will elect a chairperson. Licensees who serve as members of the committee shall not receive compensation. Application Requirements An applicant for a mortgage loan originator license must furnish the following personal information to the NMLS and the Superintendent: Fingerprints for submission to the Federal Bureau of Investigation and any governmental agency or entity authorized to receive such information for a state, national, and international criminal history background check Page 21 of 80

22 A Tri-merge credit report dated not more than 30 days prior to submitting an application through NMLS. Applicants should also provide AzDFI with an explanation for any derogatory information. Any other pertinent information required by the Superintendent, including: o Arizona Statement Of Citizenship And Alien Status For State Public Benefits o Clear copy of driver s license or other state or government photo ID A.R.S indicates that the Superintendent will grant or deny a license within 120 days after receiving the completed application and fees. The Superintendent shall establish a process for loan originators to challenge information that the Superintendent enters into the Nationwide Mortgage Licensing System and Registry. MU-4 Form To apply for a loan originator license, an applicant must file Form MU4 through the NMLS. There are no exemptions. This form can be submitted directly by the applicant or by the applicant s employer. While someone can apply for a mortgage loan originator license prior to being employed, the license will not become active until that person is employed by a licensed mortgage banker, mortgage broker, or consumer lender. After the MU4 is submitted, the company must submit a sponsorship request to the regulator before the individual MU4 license will be approved. The NMLS provides educational workshops on completing forms and using the NMLS via moderated conference calls and webinars available through their website: Incomplete Applications Applicants will be notified through NMLS if their application is incomplete. Applicants will have a 60-day window to submit the missing documents and/or to correct their MU4 record before the application is considered withdrawn. Applicants who have applications withdrawn must: Reinitiate the process, Repay applicable fees, and Resubmit all documents to restart the process. This time limit will not apply to FBI fingerprint and criminal background checks until it is available through NMLS. Page 22 of 80

23 Surety Bonds A.R.S requires that every mortgage loan originator be covered under a surety bond or the recovery fund. Satisfaction of this requirement can be met by one of the following: The mortgage loan originator must pay $100 into the Mortgage Recovery Fund at time of application. The employer may provide evidence of a surety bond executed by a surety company licensed to do business in Arizona as a surety in an amount of not less than $200,000. This is in addition to the bond that the employer is required to have for its mortgage broker or mortgage banker license. The purpose of both a surety bond and the Recovery Fund is for the benefit of any person aggrieved by any act, representation, transaction, or conduct of a licensed loan originator that violates applicable Arizona statutes or regulations. Fees A non-refundable application fee of $350 must accompany each application for an original loan originator license before the AzDFI will review the application. The fee should be in the form of a check payable to the Arizona Department of Financial Institutions. Once the license is approved, prior to issuance, the candidate will be issued an invoice for a $ licensing fee. Note that licenses issued after March 31 will have a pro-rated license fee based on the quarter their license is issued. At the Superintendent's discretion, application fees may be waived if the applicant is a housing counselor certified by the United States Department of Housing and Urban Development and employed by a nonprofit agency. In addition, there is a non-refundable NMLS processing fee of $30 collected through NMLS and a fee of $39 required to conduct a federal criminal background check. Arizona s loan originator licensing law, in , provides for the establishment of a financial services fund from the collected fees. The Superintendent is tasked with administering this fund for the supervision and regulation of loan originators. Issuance of Licenses On determining that an applicant is qualified and has paid the required fees, the Superintendent will issue a loan originator's license to the applicant evidenced by a continuous certificate within 120 days of receiving a completed application and fees, as per A.R.S AzDFI will forward the mortgage loan originator s license to the employing mortgage broker, mortgage banker, or consumer lender once the following has occurred: AzDFI has received a Sponsorship request through NMLS if the mortgage loan originator is employed by a mortgage broker or mortgage banker. AzDFI has received a written notice that the employer has hired the mortgage loan originator if the mortgage loan originator is employed by a licensed consumer lender. The notice shall contain a request for the mortgage loan originator s license and shall be dated, signed by an officer or other person authorized by the employer, and notarized. Page 23 of 80

24 Licenses are issued for a one-year period. A license is not transferable or assignable. Note that A.R.S indicates that when a licensed mortgage broker employs loan originators, the mortgage broker is also required to: Conduct a reasonable investigation of the background, honesty, truthfulness, integrity, and competency of the employee before hiring. Keep a record of the investigation for not less than two years after terminating the employee. A licensed employing mortgage broker is liable for any damage caused by any of the licensee's employees while acting as an employee. License Denial A.R.S gives the Superintendent the authority to deny the license of any applicant or suspend or revoke the license of a licensee if the Superintendent finds that the applicant or licensee: Is not a person of honesty, truthfulness, or good character. Does not have the financial responsibility, experience, or competence to adequately serve the public or to warrant the belief that the applicant or licensee will act lawfully, honestly, and fairly pursuant to Arizona law. Has violated any law, rule, or order. Has been convicted of a felony during the seven-year period immediately preceding the date of the application. Has been convicted of any crime of breach of trust or dishonesty, fraud, or money laundering at any time preceding the date of application. Has had a final judgment entered against the applicant or licensee in a civil action on grounds of fraud, deceit, or misrepresentation, and the conduct on which the judgment is based indicates that it would be contrary to the interest of the public to permit the person to be licensed. Has had an administrative agency of Arizona, the federal government, or any other state or territory of the United States enter an order against the applicant or licensee involving fraud, deceit, or misrepresentation, and the facts relating to the order indicate that it would be contrary to the interest of the public to permit the person to be licensed. Has made a material misstatement or suppressed or withheld information on the application for a license or any document required to be filed with the Superintendent. Has had a loan originator license, consumer lender license, mortgage broker license, or mortgage banker license revoked or denied in Arizona or any other state. If a licensee or applicant under this article is indicted or informed against for forgery, embezzlement, obtaining money under false pretenses, extortion, criminal conspiracy to defraud, or a similar offense, and a certified copy of the indictment or information or other proper evidence of the indictment or information is filed with the Superintendent, the Superintendent may suspend the license or refuse to grant a license to an applicant pending trial on the indictment. Page 24 of 80