Synopsis: Duty of Care

Filed under: HR 3915, Mortgage Industry Legislation, S.2452 — admin @ 12:26 am

For many years now, there have been quakes and tremors in the mortgage industry over the words “duty of care,” “fiduciary” and “agent” as they relate to legislative and regulatory language. Why do the matter? Specifically, they matter because they define the context of the relationship between the originator and the borrower. This context establishes the legal recourse that the borrower has against the originator, as defined by the nature of their relationship.

There are three standards at issue, with the least restrictive being:

• HR 3915: Federal Duty of Care: The originator maintains a federal “duty of care.” This means that both the “duty of care” standard under legal precedent must be met, as well as the conditions laid out within HR 3915. Under the lesser standard of a federal duty of care, the originator is expected to take all reasonable precautions to not be negligent in their dealings with the consumer. Under HR 3915, the federal duty of care specifically excludes the terms “agent” and “fiduciary” from the definition of the relationship.

duty of care

• n. a requirement that a person act toward others and the public with the watchfulness, attention, caution and prudence that a reasonable person in the circumstances would use. If a person’s actions do not meet this standard of care, then the acts are considered negligent, and any damages resulting may be claimed in a lawsuit for negligence.

Requirements to satisfy “Federal Duty of Care” under HR 3915

1. Licensing and registration for all originators, as applicable under State or Federal law, referencing new standards and definitions under Subtitle A.

Notable clauses:

• a. National Mortgage Licensing System: The Nationwide Mortgage Licensing System will streamline the licensing process for both regulatory agencies and the mortgage industry by providing a centralized and standardized system for mortgage licensing. The NMLS initiative was begun by state mortgage regulators in 2004 in response to the increased volume and variety of residential mortgage originators and the need to address these changes with modern tools and authorities. The NMLS was created by the Conference of State Bank Supervisors (CSBS) and the American Association of Residential Mortgage Regulators (AARMR). It is owned and operated by the State Regulatory Registry LLC (SRR), a wholly owned subsidiary of CSBS. The system has been built and maintained by the Financial Industry Regulatory Authority (FINRA), who operates similar systems in the securities industry.
• b. Requirement that all originators and loan documentation are must demonstrate the originator’s original and unique identifier number.
• c. Clarification of Supervised and Independent processors and underwriters: whereby only Independent processors and underwriters are required to obtain licensing and registration

2. Suitability – a concept borrowed from the securities industry which demands the broker have a reasonable expectation that the recommendation of an investment is suitable to the client. In making the assessment for securities, the broker must consider risk tolerance, other holdings, objectives, financial needs etc… Under this legislation, the suitability is tailored to address three areas:

• a. Net tangible benefit
• b. Ability to repay
• c. No predatory characteristics outlined within

3. Compliance

• a. Full, timely and accurate compliance with all disclosure requirements
• b. Certifying lender’s compliance to mortgage origination requirements

Next installment: Fiduciary vs. Agent