The Texas Department of Savings and Mortgage Lending (SML) is the regulatory agency in charge of overseeing financial institutions in Texas, including all residential mortgage loan originators (RMLOs). It recently published a 141-page document describing its proposed changes to mortgage loan regulations, which include reorganizing the Finance Code Chapters and creating a new chapter tailored to RMLOs. These are some of the most important things to know about the proposed changes to the Texas mortgage loan regulations and how they may impact those looking to obtain or originate a residential mortgage loan.
Why Is the Texas SML Updating Its Mortgage Loan Rules?
The Texas SML is updating its mortgage loan rules as part of a routine and mandatory review process required by state law. In Texas, all state agencies are required to review their rules every four years to remain relevant and effective. Thus, it is now time for the Texas SML to review its mortgage regulations as a part of its designated review cycle. This process provides an opportunity to address any changes in the mortgage industry or regulatory landscape that may have occurred since the last review.
When Will the New Changes Come Into Effect?
The Texas SML has prepared a comprehensive document outlining all proposed rule changes and additions. The draft is scheduled to be presented to the Finance Commission of Texas at its meeting on August 16, 2024. During this meeting, the SML will seek approval to publish the proposed changes, which will then be followed by a period for public comment. The Texas SML is also accepting informal pre-written comments until July 12, 2024. This process allows stakeholders, including industry professionals, consumer advocates, and members of the public, to review the proposed changes and provide feedback.
Following the public comment period, the Finance Commission will reconvene on October 25, 2024, to consider adopting the rules in their final form. Thus, the new changes will come into effect at the end of 2024 if they are finalized and adopted during the October 25 meeting.
Chapter Changes
As a routine review, most of the changes will simply update and streamline information. Current Chapters 78 to 81 will be repealed and replaced with Chapters 56 to 59. A new Chapter 55 will be created to regulate RMLOs, modeled after the current Chapter 81. Here is a summary of the proposed changes, chapter by chapter:
Chapter 78 Concerning Wrap Mortgage Loans
The current content of Chapter 78 would be relocated to a new Chapter 59. This relocation does not introduce significant new regulations but rather reorganizes the existing content. Chapter 59 covers definitions and regulations related to wrap mortgage loans, including:
- Disclosure requirements for wrap lenders
- Closing procedures
- Borrower rights and responsibilities
- Lender and servicer requirements
- The commissioner’s authority for supervision and enforcement
- Rules on record-keeping, handling of borrower funds, and the use of third-party servicers
Chapter 79 Concerning Residential Mortgage Loan Servicers
Similarly those in Chapter 78, the proposed change primarily involves relocating the existing rules concerning residential mortgage loan servicers from Chapter 79 to a new Chapter 58. This relocation does not introduce significant new laws but reorganizes the existing content for better accessibility.
Chapter 58 will cover:
- Definitions related to residential mortgage loan servicing
- Registration requirements for mortgage servicers
- Duties and responsibilities of servicers
- Required disclosures to borrowers
- Rules for handling borrower funds
- Requirements for maintaining records
- The commissioner’s authority for examinations and investigations
- Enforcement procedures
Chapter 80 Concerning Residential Mortgage Loan Companies
The proposal involves relocating the rules for residential mortgage loan companies from Chapter 80 to a new Chapter 56. This relocation also includes some changes and additions:
- General provisions: The new chapter introduces updated definitions and clarifies key terms related to mortgage companies. It establishes formatting requirements for notices and guidelines for electronic delivery and signature of documents.
- Licensing: The licensing process has been updated, with new requirements for applications and renewals. The chapter introduces a “conditional license” concept, allowing the commissioner to approve licenses with minor deficiencies. It also clarifies sponsorship requirements for originators and introduces new rules for license surrender.
- Required disclosures: The mortgage banker disclosure form has been revised, requiring the originator’s signature and condensing the complaint notice. Website disclosure requirements have also been updated, and correspondence must now include the company’s web address.
- Conditional pre-qualification and conditional approval letters: The rule now explicitly requires the individual originator to issue and sign these letters.
- Advertising: New rules allow for more flexibility in social media advertising and introduce guidelines for using team names in advertisements. Website addresses must now be included in all advertisements.
- Books and records: The Mortgage Transaction Log now requires additional data points. A new Loan Processing and Underwriting Log is required for third-party services. The section also introduces new requirements for home equity loans and lines of credit.
- Reportable incidents: This new section requires mortgage companies to report incidents that present material risks to the company’s operations, such as data breaches or loss of funding sources.
- Supervision and enforcement: This section clarifies updated procedures for examinations, investigations, and enforcement actions. It introduces new rules for corrective actions and handling of unclaimed funds. It also clarifies the appeal process and hearing procedures.
Chapter 81 Concerning Mortgage Bankers and Residential Mortgage Loan Originators
The draft proposes relocating the content on mortgage bankers and residential mortgage loan originators from Chapter 81 to a new Chapter 57. It also proposes significant updates to these regulations, including:
- General provisions: This section introduces revised definitions and key terms related to mortgage bankers. It lays out new formatting requirements for notices and provides guidelines for electronic delivery and document signatures. The chapter also includes updated rules for the computation of time and the enforceability of liens.
- Registration: This section includes updated requirements for applications and renewals. The chapter introduces a new concept of conditional registration approval, allowing the commissioner to approve registrations with minor deficiencies that can be resolved within a specified timeframe. It also clarifies sponsorship requirements for originators and introduces new rules for registration surrender.
- Required disclosures: The mortgage banker disclosure form has been updated. Website disclosure requirements have been modified, and all correspondence must now include the mortgage banker’s website address.
- Conditional pre-qualification and conditional approval letters: The rules now explicitly state that the individual originator must issue and sign these letters, formalizing an already existing practice.
- Advertising: The advertising rules have been updated to provide more flexibility for social media advertising. New guidelines for using team names in advertisements have been introduced, and all advertisements must now include the company’s website address.
- Books and records: The Mortgage Transaction Log requirements have been expanded with additional data points. Third-party services now require a new Loan Processing and Underwriting Log. The section also introduces new record-keeping requirements for specific loan types.
- Reportable incidents: This new section establishes requirements for reporting significant incidents that could materially affect the mortgage banker’s operations.
- Supervision and enforcement: Outlines a tiered system of penalties for non-compliance, ranging from fines to license revocation. It also introduces a new mediation process for disputes between mortgage bankers and regulators.
New Chapter 55 Concerning Residential Mortgage Loan Originators
One of the biggest changes to the Texas SML mortgage loan laws includes the addition of Chapter 55, which includes regulations for RMLOs. The new Chapter 55 is largely modeled after the current Chapter 81 (proposed to change to Chapter 57) and includes the following:
- Licensing requirements: This section clarifies when a license is required, including specific scenarios that constitute acting as an originator. It also clarifies the process for obtaining and maintaining a license through the Nationwide Multistate Licensing System & Registry (NMLS).
- Education and examination: Specifies pre-licensing education requirements and how they are recognized across jurisdictions, including continuing education requirements for license renewal.
- Background checks: This section establishes procedures for criminal background and credit history checks and explains how prior criminal history affects eligibility for licensing.
- Duties and responsibilities: Defines required disclosures to mortgage applicants and standards for conditional pre-qualification and approval letters.
- Ethical standards: Expands on what constitutes fraudulent, misleading, or deceptive practices, clarifying rules on sharing or splitting origination fees with applicants.
- Advertising: Updates advertising requirements, including social media use and rules for using team names and logos in advertisements.
- Record-keeping: Outlines specific records originators must maintain, including loan files and correspondence.
- Sponsorship: Clarifies rules for sponsorship by mortgage companies or mortgage bankers.
- Remote work: Introduces guidelines for originators working remotely.
- Disciplinary actions and appeals: This section provides the procedures for investigations, hearings, and appeals and specifies timelines for appealing various types of regulatory decisions.
- Military service members: Adds provisions for licensing of military service members, veterans, and spouses.
Changes Concerning General Provisions
The latest revisions to the Texas SML regulations introduce a set of general provisions applicable to regulated entities, focusing on improving transparency and standardization. These include:
- Formatting standards: Establishes new guidelines for the format of disclosures issued by regulated entities to ensure consistency.
- Electronic processes: Introduces rules for the electronic submission and signing of disclosures, facilitating more efficient communication.
- Deadline calculations: Defines how deadlines, calculated in calendar days, should be computed to avoid ambiguity and ensure compliance.
Changes Concerning Licensing and Registration
The proposed draft includes changes to the licensing and registration rules to provide clearer guidelines. These changes aim to streamline processes and improve understanding for residential mortgage loan originators and applicants. Some of the most important updates are:
- Licensing requirements: Clear criteria defining when a license or registration is required.
- Application process: Detailed steps for applying for a license or registration.
- Temporary authority requirements: Specifications for the temporary authority granted to individual residential mortgage loan originators.
- Conditional licensing: Conditions under which a conditional license may be issued.
- License surrender: Guidelines on when and how a license or registration may be surrendered.
- Sponsorship specifications: Detailed requirements for sponsorship of residential mortgage loan originators.
Changes Concerning Duties and Responsibilities
The proposed SML updates introduce extensive clarifications and new requirements regarding the duties and responsibilities of residential mortgage loan originators and applicants. These modifications are designed to make sure that loan originators are more closely monitored and held to higher standards. The revisions include:
- Disclosure requirements: Updated requirements for what disclosures a regulated entity must make, including revisions to certain disclosure forms mandated by the rules.
- Fraudulent practices: Clear definitions of actions considered fraudulent, misleading, or deceptive, particularly concerning the use of trigger leads by mortgage companies, bankers, or individual loan originators.
- Advertising guidelines: Specific clarifications on advertising, including the use of team names by mortgage entities and loan originators to ensure transparency and avoid misleading consumers.
- Record-keeping standards: Detailed requirements for the maintenance of books and records, emphasizing the need for keeping accurate transaction logs and records related to specific types of loans such as home equity and wrap mortgage loans.
- Mortgage reporting: Enhanced guidelines for mortgage call reports filed by entities, including the mandatory use of the State-Specific Supplemental Form to provide additional data.
- Incident reporting: Introduction of mandates for reporting significant operational incidents, such as data breaches, to the SML, ensuring timely and adequate responses to potential threats.
Changes Concerning Compliance and Enforcement
The SML draft includes changes about compliance and enforcement, revamping the supervisory and enforcement frameworks to better oversee residential mortgage loan originators. These changes seek to improve the efficiency in handling examinations, investigations, and enforcement actions. The goal is to streamline processes and ensure consistency across different jurisdictions.
Some of the most important updates to the compliance and enforcement rules include:
- Examination protocols: Updated examination requirements mandate the use of the State Examination System and establish the authority to accept and utilize examinations conducted by other states accredited by the Conference of State Bank Supervisors (CSBS).
- Investigation guidelines: Detailed requirements for investigations conducted by the SML, especially those originating from consumer complaints, to ensure thorough and fair handling.
- Confidentiality in investigations: Clarifications on what information remains confidential during examinations, investigations, or inspections, including any corrective actions taken by a regulated entity in such contexts.
- Corrective actions: Guidelines on the types of corrective measures the SML may direct a regulated entity to undertake following an examination, investigation, or inspection. This includes directives for the payment of refunds to consumers.
- Handling of unclaimed funds: Clear guidelines on the management of unclaimed funds to prevent mismanagement and ensure rightful distribution.
- Appeal deadlines: Specified deadlines for filing appeals against enforcement actions to provide a clear timeframe for regulated entities to respond.
- Adjudicative hearing requirements: Enhanced clarity on the requirements related to adjudicative hearings, ensuring due process and transparency in the resolution of disputes.
FAQs About the Texas Mortgage Loan Changes
Here are some of the most frequently asked questions about the new changes the Texas SML is proposing for mortgage loan regulations.
How Will These Changes Affect Current Mortgage Loans?
Existing Texas mortgage loans will not be directly affected by these regulatory changes. The new rules primarily impact new loans and the operations of mortgage professionals. However, those considering refinancing or taking out a new mortgage may notice changes in disclosure forms, advertising practices, and the information provided during the application process.
What Is the State Examination System?
The State Examination System is an online platform developed for state regulators to conduct examinations of financial institutions. It is designed to streamline the examination process and allow for more efficient information-sharing between different state regulatory bodies. Once the new rules are implemented, this system will be used to examine mortgage companies and originators in Texas.
How Do the New Rules Address Remote Work for Mortgage Professionals?
The new rules allow mortgage company employees and sponsored originators to work remotely, provided certain conditions are met. These conditions include maintaining appropriate data safeguards, implementing risk-based monitoring processes, securing consumer information, and ensuring accessibility of records to regulators.
Companies must keep physical consumer records at licensed offices, secure electronic records accessible from remote locations, and provide training on maintaining consumer privacy. Written procedures must be adopted and followed for compliance with these requirements. This comprehensive approach aims to enable remote work while protecting consumer information and maintaining regulatory oversight, reflecting the industry’s evolving work practices while prioritizing security and compliance.
What Are Trigger Leads and Why Are They Mentioned in the New Regulations?
Trigger leads are consumer reports generated when a person applies for credit, which can be sold to other lenders for marketing purposes. The new regulations clarify what constitutes fraudulent, misleading, or deceptive practices regarding the use of trigger leads by mortgage companies, bankers, or individual loan originators. Trigger leads seek to protect consumers from potentially predatory marketing practices.
How Will the New Reportable Incidents Requirement Affect Mortgage Companies?
The new requirement for reporting reportable incidents means that mortgage companies and bankers will need to notify the Texas SML about significant events that could impact their operations. This includes data breaches, loss of funding sources, or other material risks. This requirement aims to improve regulatory oversight and early detection of potential issues in the mortgage industry.
Morris & Dewett does not practice this specific area of law or handle any cases involving mortgages or loans. The information provided in this blog is intended for public interest and informational purposes only.
