DEPARTMENT OF REGULATORY AGENCIES

DIVISION OF REAL ESTATE

Emergency Rule

Reasonable Inquiry and Tangible Net Benefit

Section 1.	Authority
Section 2. 	Scope and Purpose
Section 3.	Definitions
Section 4. 	Applicability
Section 5.	Rules Regarding Mortgage Broker Requirements
Section 6. 	Effective Date

Section 1. 	Authority

The Director of the Division of Real Estate adopts the following emergency rule, entitled Reasonable Inquiry and Tangible Net Benefit, according to her authority as found in §§ 12-61-910.3 and 24-4-103(6), C.R.S.

Section 2. 	Scope and Purpose

The Director finds that immediate adoption of this rule is imperatively necessary for the preservation of public health, safety or welfare and that compliance with the rulemaking requirements of § 24-4-103, C.R.S., would be contrary to public interest.

Section 12-61-904.5, C.R.S., states that mortgage brokers 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 brokers 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 broker 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 brokers 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 tangible net benefit. 

Without the immediate adoption of this emergency rule, the public’s interest is not served.  Wherefore, the Director of the Division of Real Estate, pursuant to § 24-4-103(6), C.R.S. has an obvious and stated need to adopt this rule.

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 September 4, 2007 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 broker section under forms; the form(s) may be examined at any state publications depository library.

Section 4. 	Applicability

This emergency rule governs individuals who broker a mortgage or act as a mortgage broker pursuant to §§ 12-61-902(2) and (5), C.R.S.

Section 5.	Rules Regarding Reasonable Inquiry and Tangible Net Benefit

Mortgage Broker – 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 broker to recommend appropriate products.  

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

2.	Mortgage brokers 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 broker 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 brokers shall take into account and discuss with prospective borrowers.  If applicable, the required considerations for mortgage brokers 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 broker shall require that all borrowers describe, in writing, the reasons they are seeking a mortgage loan or to refinance an existing mortgage loan. 
 
a.	It is the responsibility of the mortgage broker to ensure this information is acquired and accurately documented.  

b.	Pursuant to § 12-61-904.5(1), C.R.S., a mortgage broker 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 broker completes the required purpose or reason for a purchase 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 broker shall provide a Tangible Net Benefit disclosure to the borrower.  

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 broker and the primary borrower.  

d.	Mortgage brokers shall be presumed compliant with this rule when using the suggested form and when disclosures meet the timelines defined in this emergency rule.

Section 6.	Effective Date

This emergency rule is effective December 4 through and including December 31, 2007.