A Connecticut Superior Court Judge has reviewed a long-running legal dispute that could define the role loan officers in direct mortgage operations play in originations.
The case, 1st Alliance Lending v. State of Connecticut Department of Banking et al., challenges the latter's allegations that the company gave tasks that should've been handled by licensed loan officers to other employees.
The lender, which has claimed in court documents that
State banking officials alleged that employees known as home loan consultants, who took information from borrowers to prequalify them for financing before selecting a home, should have been licensed.
The lender's central claim is that Connecticut banking regulators have never clearly defined the point in the origination process at which it becomes mandatory to involve a loan officer.
States' oversight of LOs rely on their individual interpretations of the Secure and Fair Enforcement of Mortgage Licensing Act. The legislation defines the loan officer's role, at a high level, as primarily revolving around taking applications for the purposes of offering and negotiating "specific and particular" loan terms to consumers. Regulation H implements the SAFE Act and sets the floor its standards.
1st Alliance has claimed that unlicensed home-loan consultants took enough information for a loan officer to issue a pre-qualification letter early in the process, prior to the borrower shopping for a home. When the purchase and sale agreement for a house came in, a licensed 1st Alliance mortgage-loan officer would take a completely new application, not using or relying on any of the information from the pre-qual.
Then after taking a complete application, the MLO would pass the loan along to a processor. That employee issued a loan estimate (offer of terms) and began preparing the file for underwriting. The MLO would remain involved in the transaction thereafter.
"They've never said what information is enough that it triggers the licensing requirement," said Seth Klein, an attorney at Izard Kindall & Raabe LLP, during a hearing before Connecticut Superior Court Judge John Cordani this week.
The Banking Department, in a supplemental decision related to 1st Alliance last year, said it found in examining company records that "if MLOs did communicate with prospective borrowers, that contact was minimal.
"In addition, as the Final Decision record indicates, the HLCs were supervised by Respondent's sales personnel, not by MLOs or compliance staff. That was a flaw in Respondent's supervisory structure," the department said.
Cordani said he plans to "look at many things," while also making an effort to deliver a decision expeditiously as possible on the lender's court challenge to the Banking Department's decision.
"The facts and the law are before the judge now. We expect he will review them carefully and render a decision," said 1st Alliance founder and former CEO John DiIorio in an interview.
Lenders that have direct or digital mortgage operations and rely on call centers are watching the case closely. These companies operate on particularly thin margins they seek to manage in part by minimizing the presence of highly paid LOs.
1st Alliance has claimed that its business model passed muster in all other states except Connecticut.
Meanwhile,
The CFPB recently agreed to a stipulation that would dismiss allegations of deception or intentional misrepresentation and also drop charges against one of three 1st Alliance executives named, according to court documents.
However, the allegations related to improper licensing of employees remain in that lawsuit, Consumer Financial Protection Bureau v. 1st Alliance Lending LLC et al. That case is pending in Connecticut's U.S. District Court.
