Mortgage Loan Originator Laws

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 What Is a Mortgage?

When most people purchase a home, they do not have enough money to pay for the entire property in cash. Instead, they will need to obtain a loan that will finance the property purchase. With a loan, they can buy the home by making monthly payments for several years instead of a one-time payment.

A mortgage (also referred to as a deed of trust) is a type of loan used to purchase or maintain a home, land, or other type of real estate. Mortgages are also used when a homeowner already has a loan on the house but needs to take out a second loan to cover expenses.

The borrower agrees to pay the lender (usually a bank) over time, typically in a series of payments divided into principal and interest. The property then serves as collateral to secure the loan. The mortgage gives the lender the right to take possession of the property if the buyer fails to repay the loan as promised.

A copy of the mortgage is typically filed in the county’s recorder’s office where the property is located.

What Is a Mortgage Lender?

A mortgage lender is a company (often a bank) that loans money in exchange for an interest in residential or commercial real estate. Mortgage lenders also provide other types of loan-related financial products. A mortgage lender is also sometimes referred to as a mortgage banker.

Mortgage bankers often bundle up groups of mortgages and then sell them in bundles to secondary markets and to public and private investors.

What Is Loan Origination?

Loan origination is when a borrower applies for a new loan, and a lender processes that application. Origination generally includes all the steps from taking a loan application up to disbursal of funds (or declining the application).

Loan origination refers to processing applications for many types of loans, including:

  • Mortgage loans
  • Home loans
  • Car loans
  • Business loans
  • Student loans

The loan origination process typically includes the following steps:

  1. Pre-qualification: The borrower provides the lender with information about their income, assets, liabilities, and credit history. The lender compares this information against the lender’s guidelines for approving loans and determines whether the potential borrower is likely to qualify for a loan and what the terms of the loan should be
  2. Application: The borrower fills out an application and submits it along with supporting documents such as pay stubs, W-2 forms, tax returns, and bank statements. The lender will contact credit reporting agencies to verify the borrower’s credit score and credit history.
  3. Processing: Processing refers to the administrative tasks involved in preparing a loan application for review by an underwriter. The processor is responsible for ensuring all required information and documentation is complete and accurate before the application is sent to the underwriter for review.
  4. Underwriting: This step includes a review of the borrower’s creditworthiness and an appraisal of the home (or other property) since it will be used as an assessment of the collateral to secure the loan.
  5. Approval: If the loan is approved, the lender will outline the terms and conditions of the loan, including the interest rate, the monthly payments that will be expected, and the length of the loan.
  6. Closing: Closing is the point at which the borrower formally agrees to the loan terms and signs all of the loan documents, and the lender disburses the funds so that the purchase may go through.

What Is a Mortgage Loan Originator?

A mortgage loan originator (MLO) is an individual or an organization that cooperates with borrowers to finalize a mortgage loan transaction. An MLO may be a:

  • Mortgage broker
  • Mortgage banker
  • Another type of professional

A mortgage loan originator typically works on new mortgages. Accordingly, they are called originators.

However, in some cases, an original mortgage is sold into a secondary mortgage market. These transactions often involve different professionals. Most of the time, mortgage loan origination deals with a first-time mortgage transaction between a lender and a borrower.

What Does a Loan Originator Do?

At their most basic function, a mortgage loan originator is a salesperson. Their task is to promote their mortgage products to clients and interested buyers.

A mortgage loan originator may perform tasks including:

  • Presenting different mortgage options to clients
  • Negotiating mortgage terms
  • Presenting standardized or customized mortgage contract agreements;
  • Researching a client’s financial background and home purchasing history
  • Advising clients if needed
  • Finalizing the mortgage’s approval.

A mortgage loan originator may also engage in other activities, such as light advertising or special presentations. These activities depend on the individual professional’s practice as well as the policies of the company they work for.

What is a Mortgage Origination Fee?

A mortgage origination fee is an upfront fee a lender charges to process a new loan application. Loan origination fees are quoted as a percentage of the total loan, generally between 0.5% and 1% of a mortgage loan.

Are Mortgage Origination Fees Legal?

Generally, mortgage origination fees are acceptable under most state laws, provided that the borrower fully discloses the terms and agrees. Mortgage loan origination fees, however, may become illegal if certain factors are present, including:

  • Overcharging
  • Hidden fees
  • The use of one of the following to secure an origination fee:
    • fraud
    • deceit
    • misrepresentation
    • threats

Moreover, a federal law called the Real Estate Settlement Procedures Act (RESPA) exists. RESPA prohibits lenders from using referral fees or kickbacks, overcharging escrow accounts, failure to respond to consumer complaints, and more.

Violations of RESPA can lead to significant fines imposed by the government, and in some cases, the right to sue is given to the public. For example, the lender or the party who is charging the origination fee may be required to reimburse or compensate the borrower for losses that were caused by a violation.

In a serious case, however, a loan originator or lender responsible for the origination fee violation may face other consequences, including suspension from practice or a loss of their operating license. In addition, criminal charges may be brought, or a class action lawsuit may be filed if multiple customers were affected.

Can I Hold a Mortgage Loan Originator Liable for Losses?

A mortgage loan originator may sometimes be held liable for losses experienced by a mortgage borrower. This may occur if:

  • A loan originator engages in coercion to open or finalize an agreement
  • The loan originator violates ethical or professional conduct standards
  • There was a breach of contract
  • The originator misrepresents information or details that are crucial to the agreement.

A private lawsuit against the mortgage loan originator may be necessary in these cases. This may result in a damages award to resolve the dispute. If the circumstances are particularly egregious, criminal charges may also be filed.

Should I Seek Legal Help for Mortgage Loan Originator Laws?

Yes, it is essential to have the assistance of a mortgage lawyer for any mortgage loan originator issues you may be facing. The laws that govern mortgages and mortgage professionals are technical and vary by state.

Your lawyer can provide guidance through the loan approval process, advise you on your rights and options, and file a lawsuit on your behalf, if necessary. Your lawyer will also represent you when you are required to appear in court.


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