1/3/08

Margaret Camp Portfolio Manager/Senior Counsel, Wolters Kluwer Financial Services

The Colorado Division of Real Estate (“Division”) has certainly been busy in the last few months, promulgating a number of emergency rules governing mortgage brokers in the state of Colorado. These rules implement the revised Mortgage Broker Licensing Act, Colo. Rev. Stat. §12-61-901 through 12-61-915 (the “Act”), which requires mortgage brokers, effective January 1, 2008, to be licensed in Colorado. Currently, mortgage brokers are only required to be registered with the Division.

The emergency rules cover the following topics applicable to mortgage brokers:  prepayment penalties, reasonable inquiry and tangible net benefit, request for information for investigations, errors and omissions insurance, mortgage broker contracts and disclosures, compensation disclosures, lock-in disclosures, and the mortgage broker temporary license permitted under the Act.

All of these rules directly impact the day-to-day operations of Colorado mortgage brokers. For purposes of this article, we will cover the mortgage broker’s duty to respond and provide requested documents for investigations (effective November 29, 2007) and prepayment penalties (effective December 14, 2007).

Mortgage Broker’s Duty to Respond and Provide Requested Documents for Investigations

Mortgage Broker’s Duty to Respond and Provide Requested Documents for Investigations, 4 Colo. Code Regs. 725-3 §1 through 5 [uncodified], governs how mortgage brokers must respond to Division document requests during an investigation. Mortgage brokers who violate this duty are subject to disciplinary action and are subject to fines.

The rule requires mortgage brokers to respond and provide documents requested by the Director.

The response from the person must contain the following:

1. If requested in the notification letter, a complete and specific answer to the factual recitations, allegations, or averments made in the complaint filed against a registrant or licensee under the Act, whether made by a member of the public or on the Director’s own motion or by an authorized representative of the Director;
2. A complete and specific response to all questions, allegations, or averments presented in the notification letter;
3. Any documents or records requested in the notification letter; and
4. Any further information relative to the complaint that the registrant or licensee believes to be relevant or material to the matters addressed in the notification letter.

A person is subject to disciplinary action and fines, if such person has in connection with an investigation:

1. Negligently made any false statement;  
2. Knowingly and willfully made any omission of material fact; or  
3. Submitted information to the Division in an attempt to deceive any person.

Prepayment Penalties

Prepayment Penalties, 4 CCR 725-3, Sections 1 through 6 [uncodified], are the rules governing prepayment penalties. Mortgage brokers who recommend or induce a borrower into a transaction that contains a prepayment penalty which extends past the adjustment date for any type of adjustable rate mortgage is presumed to have violated their duty of good faith and fair dealing that is required by §12-61-904.5 of the Act. This prohibition includes, but is not limited to:

1. Prepayment penalties that extend past the adjustment date of any teaser rate, interest rate, or payment rate used to calculate a borrower’s monthly mortgage payment; and 
2. Prepayment penalties that extend past the adjustment date of any like tool or instrument, similar to the teaser rate, payment rate or interest rate, used to calculate a borrower’s monthly mortgage payment.

Individuals who violate these rules are subject to disciplinary action pursuant to §12-61-905 of the Act. Disciplinary action includes, but is not limited to:

1. License revocation; 
2. Refusal to renew a license; 
3. Fines; and 
4. Restitution for any financial loss.

Keeping up with all of these new requirements can be a challenging but necessary task. We recommend keeping a close eye on the Division’s activities as the Division is likely to pass more broker rules in the near future. 

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