The Overworked Originator and the Undisclosed Fee
You are the compliance officer at a mid-sized mortgage lender. A loan originator, Jane, has been with the company for six months. She consistently exceeds her sales targets. During a routine audit, you discover that on three recent loans, Jane collected a $500 'processing fee' from borrowers in cash and did not disclose it on the Loan Estimate or Closing Disclosure. The fee was not listed in the company's fee schedule. Jane claims she was overwhelmed and forgot to include it. The borrowers have not complained. The loans have closed and been sold to investors. The company's policy requires all fees to be disclosed and prohibits cash payments. Jane's manager, who is also a top producer, urges you not to report the issue because it would hurt team morale and Jane's career. What do you do?
1. Identify the federal laws and regulations that Jane's actions violated, and explain the potential consequences for Jane and the company.
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Jane's collection of an undisclosed cash fee violates several federal laws:
- Truth in Lending Act (TILA) / Regulation Z: Requires all finance charges, including fees like processing fees, to be disclosed on the Loan Estimate and Closing Disclosure. Undisclosed fees constitute a TILA violation. The company could be liable for actual damages, statutory damages, and attorney's fees. The borrowers could rescind the loan if it were a refinance or home equity loan (though not for purchase loans).
- Real Estate Settlement Procedures Act (RESPA) / Regulation X: Prohibits unearned fees and requires disclosure of settlement charges on the HUD-1 or Closing Disclosure. The $500 fee may be an unearned fee if no service was provided. RESPA violations can lead to treble damages and fines.
- Fraud: Collecting a fee under false pretenses could be considered fraud, especially if Jane misrepresented the fee's purpose.
- Company Policy: Violates internal policy, which is a basis for disciplinary action.
Consequences:
- For Jane: Termination, potential criminal charges for fraud, and reporting to the NMLS for regulatory action (possible license suspension or revocation).
- For the Company: Regulatory fines, lawsuits from borrowers, reputational damage, and potential loss of licenses. The company may also be liable for Jane's actions under respondeat superior.
The manager's suggestion to cover up the issue would compound the violation and could be considered obstruction. As compliance officer, I must report the violation to senior management and ensure corrective action, including reimbursing borrowers and implementing controls to prevent recurrence.
2. What steps should you take immediately to address the situation, and how should you handle the manager's request?
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Immediate steps:
- Document the findings: Preserve evidence of the undisclosed fees, including any receipts or logs.
- Escalate to senior management and legal counsel: Inform them of the violations and the manager's request to conceal. This protects the company and ensures proper handling.
- Reimburse borrowers: Refund the $500 fees to the affected borrowers and provide corrected disclosures if possible. Even though loans were sold, the company may still be liable.
- Review Jane's other loans: Conduct a broader audit to see if this is a pattern.
- Disciplinary action: Follow company policy, which likely includes termination for theft and disclosure violations. Report to NMLS as required.
- Implement controls: Strengthen fee disclosure procedures, prohibit cash payments, and provide additional training.
Handling the manager:
- Politely but firmly explain that concealing the violation is illegal and against company policy. Remind the manager of the company's whistleblower protections and the legal risks of retaliation.
- If the manager persists, report the manager's conduct to HR or senior management as well. The manager's request to cover up could be a violation of the company's ethics code and potentially laws against obstruction.
- Document the conversation and any retaliation.