When it comes to loan originations, advanced fees are frowned upon by regulatory
agencies. An advanced fee is a payment collected before a loan closes,
and it isn’t always an acceptable way to do business. In the run-up
to the mortgage crisis of 2008, some mortgage companies used this process
to pad commissions or soak borrowers for junk fees, regardless if their
loans were approved or not. Since the early 60’s, California law
has restricted the use of advanced fee agreements, except in certain circumstances.
California offers three different types of mortgage licenses to originators.
Each license has a slightly different approach to handling advanced fees.
Below is an explanation how each license varies with regards to advanced fees.
CALIFORNIA FINANCE LENDER LICENSE
Under CFL Financial Code Section 22300, lenders are prohibited from taking
any payment until a loan is “made.” However, the same restriction
does not apply to non-consumer loans. Business loans are exempt from the
law, and charging upfront fees is acceptable.
BUREAU OF REAL ESTATE LICENSE
In California, it is acceptable to receive advanced fees as long as they
go to pay for an appraisal or other third-party service, such as a credit
report. It is generally accepted that as long as the fee is paid directly
to the vendor, it is legal. However, the Business and Professions Code
Section 10085, requires that most advanced fees be documented on an advanced
fee agreement to be submitted to the BRE for approval. Under 10085, a
violation of the rules and regulations regarding advanced fees can constitute
grounds for disciplinary actions, including sanctions, and or criminal
proceedings. In our experience, it is almost impossible to get the BRE
to approve of these advance fee agreements due to the BRE’s distaste for them.
RESIDENTIAL MORTGAGE LENDER LICENSE
As with the CFL license, the Residential Mortgage Lender License (RML)
is regulated by the Department of Business Oversight. Obtaining a license
requires that the applicant is an approved lender or servicer of a federally
administered loan guarantee program, such as Fannie Mae, FHA, or VA. The
applicant is also required to have a “tangible net worth”
of at least $250,000. Licenses are issued and maintained by the Nationwide
Mortgage Licensing System (NMLS). Advanced fees, such as an application
fee, credit report fee, and appraisal fee are allowed under an RML license,
although the licensee must obtain DBO approval for a brokerage agreement
if collecting fees as a broker rather than a direct lender.
Should You Do It?
If you have a CFL license for non-consumer loans,
YES you should. You’re taking the risk and it is NOT prohibited by law.
Otherwise, if you are a BRE licensee, it is near impossible to get an
advance fee agreement approved by the BRE and you are better off not submitting
one. Also, as noted above, CFL licenses for consumer loans are prohibited.
If you choose not to charge advance fees (or can’t), then you can
be protected by Brokerage Agreement (also called an Agreement to Procure
a Loan). We have drafted several of these agreements and we can assist
you with them. These contracts allow you to charge fees and collect them
in Court should the borrower not pay them.
Call us to assist you with compliant Advance Fee documents and Agreements
to Procure Loans. As the largest law firm to private lenders, we have
seen it all and can help you structure these transactions.
Contact Geraci Law Firm at (949) 298-8050 today, or contact
Anthony Geraci directly for more information.