DEPARTMENT OF REGULATORY AGENCIES

DIVISION OF REAL ESTATE

MORTGAGE LOAN ORIGINATORS

4CCR 725-3

3-1-1 REASONABLE INQUIRY AND TANGIBLE NET BENEFIT

Pursuant to and in compliance with Title 12, Article 61 and Title 24, Article 4, C.R.S. as amended, notice of proposed rulemaking is hereby given, including notice to the Attorney General of the State of Colorado, and to all persons who have requested to be advised of the intention of the Director of the Colorado Division of Real Estate to promulgate rules.

Section 1.	Authority
Section 2. 	Scope and Purpose
Section 3.	Definitions
Section 4. 	Applicability
Section 5.	3-1-1 Reasonable Inquiry and Tangible Net Benefit 
Section 6. 	Enforcement

Section 1. 	Authority

The statutory basis for this rule, entitled 3-1-1 Reasonable Inquiry and Tangible Net Benefit, is § 12-61-910.3, C.R.S.

The notice proposes to update rule 3-1-1.  

Section 2. 	Scope and Purpose

Section 12-61-904.5, C.R.S., states that mortgage loan originators shall have a duty of good faith and fair dealing in all communications and transactions with a borrower.  Section 12-61-904.5(1)(b), C.R.S., requires mortgage loan originators to make a reasonable inquiry concerning the borrower’s current and prospective income, existing debts and other obligations, and any other information known to the mortgage loan originator and, after making such inquiry, to make his or her best efforts to recommend, broker, or originate a residential mortgage loan that takes into consideration the information submitted by the borrowers.  Additionally, section 12-61-904.5(1)(a), C.R.S., prohibits mortgage loan originators from recommending or inducing borrowers to enter into a transaction that does not have a reasonable, tangible net benefit to the borrower, considering all of the circumstances, including the terms of a loan, the cost of a loan, and the borrower’s circumstances.  After consulting with industry leaders, the Division has learned that there is uncertainty in the marketplace regarding the impact of these new provisions, specific to mortgage products and various documentation types.  Documentation types include, but are not limited to: stated income; no income verification; no income disclosure; no asset verification; and no asset disclosure.  

The mortgage lending community is uncertain if the aforementioned provisions prohibit non-traditional mortgage products and documentation types, since these provisions are new and have not been interpreted by the Division of Real Estate.  This uncertainty could negatively impact the availability of mortgage credit to consumers.  Due to the recent rise in foreclosures, the decline of the subprime market, and the closing of lenders on a national scale, the Division must adopt rules to clarify the new provisions in an effort to limit further reductions in mortgage credit.  The purpose of this rule is to clarify uncertainties regarding reasonable inquiry and reasonable, tangible net benefit. 

Section 3.	Definitions

A. “Uniform Residential Loan Application” shall mean the Freddie Mac Form 65 or the Fannie Mae Form 1003 used in residential loan transactions on properties of four or fewer units.  The Uniform Residential Loan Application forms defined in this rule are those editions of the forms that are current and effective on January 1, 2008 and do not include any later amendments or editions. The forms are available for inspection at the Division of Real Estate at 1560 Broadway, Suite 925, Denver, Colorado, 80202. These forms are posted on the Division of Real Estate’s website at http://www.dora.state.co.us/real-estate/index.htm in the mortgage loan originator section under forms; the form(s) may be examined at any state publications depository library.

Section 4. 	Applicability

This rule applies to mortgage loan originators as that term is defined in § 12-61-902(6), C.R.S. and includes those persons who originate a mortgage, offer to originate a mortgage, act as a mortgage loan originator, or offer to act as a mortgage loan originator.  This rule applies to all individuals required to be licensed pursuant to §§ 12-61-902 and 12-61-903, C.R.S. 

Section 5.	3-1-1 Reasonable Inquiry and Tangible Net Benefit

1.	Section 12-61-904.5(1)(b), C.R.S. does not prohibit specific mortgage products or documentation types.  This provision requires the mortgage loan originator to recommend appropriate products.  

a.	Mortgage loan originators shall only recommend appropriate products after reasonable inquiry has been made in order to understand borrower’s current and prospective financial status.

b.	Reasonable inquiry requires the mortgage loan originator to interview and discuss current and prospective income, including the income’s source and likely continuance, with borrowers, and may not require the mortgage loan originator to verify such income.
  
c.	Mortgage loan originators have a duty to recommend mortgage products based on the information provided by the borrower.  

2.	Mortgage loan originators shall be deemed in compliance with Colorado law, § 12-61-904.5(1)(b), C.R.S., concerning reasonable inquiry, upon interviewing and discussing, with all applicable borrowers, all sections contained in the uniform residential loan application and upon completion of a Tangible Net Benefit Disclosure.  The Tangible Net Benefit Disclosure is posted on the Division of Real Estate’s website at http://www.dora.state.co.us/real-estate/mortgage/MBForms.htm. 

3.	A mortgage loan originator must first make a reasonable inquiry, in order to determine the reasonable, tangible net benefit for a borrower. The reasonable, tangible net benefit standard in § 12-61-904.5(1)(a), C.R.S., is inherently dependent upon the totality of facts and circumstances relating to a specific transaction.  While the refinancing of certain home loans may clearly provide a reasonable, tangible net benefit, others may require closer scrutiny or consideration to determine whether a particular loan provides the requisite benefit to the borrower. 

a.	When determining reasonable, tangible net benefit, there are many considerations mortgage loan originators shall take into account and discuss with prospective borrowers.  If applicable, the required considerations for mortgage loan originators determining the requisite benefit shall include, but are not limited to: 

i.	Lower payments; 
ii.	Condensed amortization schedule; 
iii.	Debt consolidation; 
iv.	Cash out; 
v.	Avoiding foreclosure;
vi.	Negative amortization;
vii.	Balloon payments;
viii.	Variable rates;
ix.	Interest only options;
x.	Prepayment penalties; and 
xi.	Hybrid mortgage products.

4.	The purpose or reason for a purchase or refinance transaction shall be identified by the borrower.  A mortgage loan originator shall require that all borrowers describe, in writing, the reasons they are seeking a mortgage loan, a loan modification or to refinance an existing mortgage loan. 
 
a.	It is the responsibility of the mortgage loan originator to ensure this information is acquired and accurately documented.  

b.	Pursuant to § 12-61-904.5(1), C.R.S., a mortgage loan originator may not have demonstrated a duty of good faith and fair dealing in all communications and transactions with a borrower if it is determined that a mortgage loan originator completed the required purpose or reason for a purchase, loan modification or refinance transaction without consulting the borrower.

5.	The Division developed a suggested disclosure form regarding reasonable, tangible net benefit.  Alternate disclosures are acceptable if they include all information required on the suggested form, as determined by the Director.  

a.	At the time of completing a loan application a mortgage loan originator shall complete a Tangible Net Benefit Disclosure with the borrower(s).  

b.	The Tangible Net Benefit Disclosure shall also be completed with the borrower(s) prior to the borrower(s) signing loan closing documents if the reasonable, tangible net benefit has changed.

c.	Tangible Net Benefit disclosures shall be signed by both the mortgage loan originator and the borrowers.  

6.	Mortgage loan originators shall provide completed disclosure forms to all borrowers within 72 hours of completion.  Furthermore, mortgage loan originators must be able to provide proof to the Director or an authorized representative of the Director that the disclosure forms defined in this rule were in fact provided to the borrower within 72 hours of completion.

7.	Mortgage loan originators shall be presumed compliant with this rule when using the suggested form and when disclosures meet the timelines defined in this rule.

Section 6.	Enforcement

1.	Noncompliance with this rule, whether defined or reasonably implied in the rule, may result in the imposition of any of the sanctions allowable under Colorado law, including, but not limited to:

a.	Revocation;

b.	Refusal to renew a license;

c.	Imposition of fines; and 

d.	Restitution for any financial loss.