Mortgage Exam Guidance
What licenses are covered by the Mortgage Licensing Act (MLA)?
The Department of Banking and Securities issues Mortgage Lender, Mortgage Broker, Mortgage Loan Correspondent, Mortgage Loan Originator and Mortgage Consumer Discount Company licenses. The definitions of and criteria for obtaining these licenses are set forth at length in the MLA (PDF here
). A potential applicant may contact the Non-Depository Licensing Office
for general guidance, but it is the responsibility of the potential applicant to obtain the proper license(s).
How is a license application submitted?
The department uses a secure web-based national registration system called NMLS
. All applicants complete an electronic application for a license through NMLS.
How is an application processed?
The department reviews the information submitted by the applicant through NMLS
before issuing, or refusing to issue, a license to the applicant. Once a completed application is received, it may take anywhere between a few weeks to a few months to issue a license depending on the circumstances of the applicant. Applicants may not engage in the mortgage loan business until the department issues the proper license.
Does the license expire?
Licenses automatically expire on December 31 if the license is not renewed in a timely fashion. Licensees complete the renewal process through NMLS
. If a license expires and the licensee still engages in the mortgage loan business, the licensee will be held responsible for all mortgage activity which occurs while unlicensed. The department may fine the licensee for the unlicensed activity, even if the license is eventually renewed.
Why is an examination conducted?
In conducting an examination, the department is looking to see whether the licensed institution is in compliance with the Mortgage Licensing Act
(MLA) and related laws. The MLA sets forth criteria for which the Department is specifically responsible for overseeing.
What topics does the examination address?
The examiner will address the following topics, at a minimum, when conducting an examination in order to ascertain whether a licensed institution is compliant with the MLA and related statements of policy, regulations, and other rules:
- General Compliance with the MLA and Licensing Review.
- Determination of Net Branching Activities.
- Statement of Policy Review.
- Targeted Mortgage Originator Review.
- Determination of Responsible Management.
- Financial Analysis.
- Real Estate Settlement Procedures Act (RESPA).
- Equal Credit Opportunity Act (ECOA).
- Regulation Z: Truth In Lending Act (TILA).
- Fair Credit Reporting Act (FCRA).
- Gramm-Leach-Bliley Act (GLBA).
- Home Mortgage Disclosure Act (HMDA).
- Homeowners Protection Act (HPA).
- Applicable Flood Insurance Laws and Rules.
- Fact Act-Red Flag Rules.
- Annual Percentage Rate Calculations.
- Affiliate Company review.
- Compliance with Regulation Chapter 46. Proper Conduct of Lending and Brokering in the Mortgage Loan Business.
- Compliance with the Loan Interest and Protection Law – Act 6.
Additional guides will be used for examination on a case-by-case basis such as:
Who conducts a mortgage licensee examination?
The Department of Banking and Securities’ Bureau of Non-Depository Examinations performs examinations of non-depository licensees of the Department. The Bureau employs examiners who have the qualifications and experience to conduct thorough examinations in a professional manner.
What is expected during the course of an examination?
In a typical on-site examination, the Department examiner calls and schedules the examination in advance as a courtesy. After the scheduling phone call, the examiner will provide questionnaires, records requests, and additional information requests to the licensee in advance of the examination to allow the licensee time to prepare. Upon arrival at the institution, most if not all information and records requested should be ready and available for review by the examiner. In most cases, the examiner will do the following during an on-site examination:
- Request access to the tools necessary to conduct the exam. These tools include the following:
- An adequate workspace. The workspace needs enough table room for the examiner to spread out the documents being reviewed.
- An electrical outlet. The outlet will preferably be located at the examiner’s workspace because the examiner needs the power for a laptop.
- A photocopier. The photocopier access is needed in the event that the examiner needs to make photocopies of any of the documents being reviewed.
- A place to secure items. The secure place needs to accommodate the examiner’s belongings as well as the institution’s files.
- Hold a meeting with the institution’s management to get an understanding of its operations.
- Request the names of, and access to, the people who can provide the required materials and information.
- Request a loan sample. The loan sample size will depend on the unique requirements of each examination based on complexity of the company, number of complaints, targeted investigations and other factors. There is no limit as to how many contracts the examiner may request.
- Hold an exit meeting with the institution’s management to summarize and review any issues and answer any questions that arose during the examination. The institution will be requested to sign a form verifying that an exit meeting took place.
- Require the institution’s management to sign an agreement which will set forth any corrective actions for the institution to take and the deadline by which those corrective actions must be completed.
The examiner’s goal is to determine if any violation or issue exists, to conclude whether that violation or issue was singular or systemic and to accomplish all corrective action during the examination when possible.
The process for off-site examinations is very similar to those for on-site examinations. The primary difference is that all information must be provided to our physical office located in Harrisburg. Because of the sensitive nature of the documents, the institution should deliver all information to the Department in an electronic format including physically shipping a flash drive, DVD, or hard drive with all the information encrypted and password protected.
What records are requested for the examination?
The examiner may request additional and more specific records during the examination, but in general the following will be requested:
- Loan volume analysis (much like the Mortgage Call Report).
- Loan logs broken down by disposition (brokered, funded, cancelled, etc.).
- Financial statements current to within 60 days of the examination date, containing all asset, liability, and capital accounts with audited financial statements for the past three calendar years.
- List of all brokers or lenders submitting applications to the licensee.
- List of all entities to which the licensee submitted applications during the current year.
- List of entities to whom you sold and from whom you purchased either consumer discount or secondary mortgage loans.
- List of mortgage originators who have are or have been employed and supervised by you over the past 4 years. Provide compensation agreement for each along with payroll records and a business card.
- Confirmation of surety bond coverage and confirmation that bond premium has been paid.
- Confirmation of fidelity bond in accordance with Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”) guidelines.
- Confirmation of completion of required continuing education credits for those applicable.
- Copies of all advertising materials.
- Current business plan.
- Company organizational chart that includes executive officers, department heads, and all employees with titles.
Corporate structure chart including holding company, affiliates, and subordinate organizations. Provide a summary of the business function for each.
- Company policies, procedures, and manuals including advertising, hiring and termination, employee training, customer complaint, fraud prevention, identity theft prevention, quality assurance, compliance, internal audit, external audit, Gramm-Leach-Bliley, Ability to Repay, etc.
- List of consumer complaints.
- Documentation on any litigation or lawsuits.
- Correspondence files for HUD, Veterans Affairs, Fannie Mae, Freddie Mac or warehouse lenders.
- Line of credit agreement for mortgage funding and confirmation that the line remains in place.
- Loan file documentation includes but is not limited to:
- Promissory note or other document evidencing the borrower’s indebtedness.
- Mortgage or similar instrument/document creating a lien on real or personal property taken as
security for the loan.
- Policies or certificates for any insurance products sold to borrowers.
- Appraisal and property search.
- Individual ledger card or other form of record which shows all installment payments made by the
borrower and all other charges and credits to the borrower’s account.
- Borrower’s application for a loan and any correspondence including collection letters.
- Pre-Approval Letter (if applicable)
- Change of Circumstances Documentation
- Desktop Underwriting Findings
- HUD-1 closing statement signed by the borrowers to indicate the date, amount, and receipt of all
- Initial and re-disclosed Good Faith Estimate of costs.
- Documentation accounting for any refund of application or third party fees.
- Copy of credit report.
- Third party fee receipts.
- Copy of title insurance policies.
- Copy of mortgage assignment.
- Copy of loan commitment(s).
- Copy of lock-in agreements.
- Initial escrow account statement.
- Loan Servicing Transfer Disclosure.
- Controlled Business Arrangement, if any.
- Right of Rescission.
- Satisfaction piece for paid off mortgage loans.
- Paystubs and W2 statements.
- Form 4506-T.
- Verification of employment.
- Verification of deposit/bank statements.
- Sales agreement.
- Initial and final Truth in Lending disclosure.
- Privacy statement.
- ECOA disclosure.
- USA Patriot Act Disclosure.
- Denial letters for turndowns.
- Anti-Steering disclosure.
- All other applicable disclosures and documents that are relevant to the terms of the consumer loan.
When is an examination conducted?
The Department may conduct any examination at its discretion. At the present time, the Department routinely examines 20% of the mortgage licensees each year. In addition, the Department conducts risk-based examinations and examinations based on consumer complaints as needed.
A Department examiner will call in advance of an examination to notify the institution of the scheduled examination date. Although it is not required to do so, the Department will attempt to accommodate previously scheduled obligations of the institution when possible in order to not interfere with the institution’s ability to conduct business.
In some cases, the Department may conduct an examination during normal business hours without prior scheduling. In this event, the examiner will attempt to not interfere with the licensee’s normal business practices.
How are the examination costs invoiced?
For either on-site or off-site examinations, once the Department processes the internal examination report, it will send an invoice to the institution’s management. The invoice will reflect:
- The amount due to the Department for the costs of the examination calculated at a rate of $508 per examiner per day only, with no fees related to travel, expenses, or incidental expenses being included in the invoice; and
- The due date for the invoice to be paid to the Department. An institution’s failure to pay the invoice by the due date may result in additional fees and the filing of compliance actions related to the institution’s license.
Why does the Compliance Office contact an institution?
The Compliance Office of the Department will contact an institution when an issue comes to its attention through a consumer complaint, a finding in an examination, a finding in an investigation, a licensing issue, etc. The Compliance Office contacts the institution in order to clarify the issue and to attempt to work with the institution to correct any problem as quickly as possible.
How is a compliance issue resolved?
A compliance issue can be resolved in many ways. Issues can be resolved through methods such as an explanation of the problem through a phone call, a required plan of action with follow-up reports back to the Compliance Office, a signed consent agreement with the inclusion of fines or any other method the Department deems appropriate.
What happens if a resolution is not reached?
The Department makes every effort to resolve a compliance issue in the best possible manner. However, if a resolution cannot be reached, the Compliance Office will issue a formal enforcement action, such as a cease and desist order, to address the issue.
Disclaimer: This information is presented as guidance to licensees regarding the usual manner in which the Department of Banking and Securities conducts licensing, examination and compliance matters. No legal rights, benefits or defenses are created by the posting of this guidance. The Department is permitted to conduct examinations in the manner it deems fit and may alter its approach on a case by case basis. This information in no way binds the Department to any specific procedure.