Mortgage brokers doing business in Texas are now required to be licensed due to recent legislation known as the Mortgage Broker License Act (the "Act"). The substantive text of the legislation is located in Chapter 156 of the Texas Finance Code. The Act is effective September 1, 1999, but licensing is not required until January 1, 2000.

The Act requires any person acting in the capacity of a mortgage broker, engaging in the business of a mortgage broker, or advertising as such, to be licensed, except for certain enumerated exemptions. Under the Act, loan officers acting for the benefit of a mortgage broker must also be licensed, sponsored by a licensed mortgage broker and acting for that sponsoring mortgage broker, or must be exempt. The Texas Savings and Loan Commissioner (the "Commissioner") shall have authority to promulgate and enforce rules to ensure compliance with the Act. After consultation with the office of the Commissioner, it appears that the rules shall be sent to the Texas Register for publishing by September 20,1999. These regulations will also be available on the Commissioner’s website located at www.tsld.state.tx.us.

The enacted legislation establishes the qualifications necessary for licensing, continuing education requirements, and financial requirements for mortgage brokers. The Act specifically exempts "the following entities or an employee of any of the following entities provided the employee is acting for the benefit of the employer": banks, savings institutions, credit unions, licensed insurance companies, and mortgage bankers. Mortgage bankers are defined as those persons who are (i) approved or authorized by HUD as a mortgagee with direct endorsement underwriting authority, (ii) approved sellers or servicers of Fannie Mae, (iii) approved sellers or servicers of the Federal Home Loan Mortgage Association ("Freddie Mac"), or (iv) approved issuers for the Governmental National Mortgage Association ("GNMA"). However, exempt persons and entities must be concerned that the mortgage brokers with which they do business are licensed and in good standing.

A person required to be licensed under the Act as a mortgage broker must be one "who receives an application from a prospective borrower for the purposes of making a mortgage loan (defined as first lien on one-to-four family residential property) from that person’s own funds or from the funds of another person". This definition, as well as the definition for a loan officer, does not include loan processors or persons performing clerical functions such as delivering a loan application to a mortgage broker or mortgage banker or gathering information relating to a mortgage loan application.

To become licensed as a mortgage broker, a person must make application in writing and under oath as prescribed by the Commissioner. The applicant must satisfy the following requirements:

Similarly, the application for licensing for loan officers of mortgage brokers requires the following:

Upon receipt of application, a criminal background check will be conducted for both mortgage broker and loan officer applicants.

If the Commissioner is sufficiently satisfied that all requirements under the Act are met, a license shall be issued and shall be valid for two years. All licenses must be renewed on or before the expiration date. A license shall be renewed if the person (i) pays a renewal fee not to exceed $375 for mortgage brokers and a renewal fee not to exceed $175 for loan officers, and a recovery fund fee, (ii) has not been convicted of a felony directly related to the occupation of a mortgage broker or loan officer as applicable, and has (iii) either attended fifteen hours of continuing education courses approved by the Commissioner, or is an active, licensed real estate broker, real estate salesperson, attorney, or local recording agent, insurance solicitor, or insurance agent.

Pursuant to the Act, a mortgage broker may conduct business as a corporation, partnership, or any other business entity, or as an independent contractor for such entities. The Commissioner must be notified in writing of any corporate name, partnership name, assumed name, or any other name through which the mortgage broker acts, prior to a mortgage broker conducting business as one of these entities. The business entity itself is not required to be separately licensed. However, all persons within the business entity acting as mortgage brokers or loan officers must be licensed.

In the event of change of address, the Commissioner must be notified for the new license certificate to be issued so the mortgage broker may conduct business at the new location. The license certificate must be displayed prominently in the office of the mortgage broker. If the mortgage broker maintains more than one place of business, each additional place of business must obtain from the Commissioner a branch office license to be displayed.

The loan officer must also prominently display his/her loan officer license certificate in the mortgage broker’s office in which he/she primarily conducts business. Since a loan officer may only be sponsored by and act on behalf of one mortgage broker, the Commissioner must be notified of the termination of a loan officer’s sponsorship and the loan officer’s license must be returned to the Commissioner. The loan officer license then becomes inactive until the loan officer is sponsored by another mortgage broker.

Upon receipt of the mortgage loan application, the mortgage broker must provide a disclosure describing the nature of the relationship between the applicant and the broker, the duties owed the applicant by the broker, and the broker’s compensation. A standard disclosure form has been promulgated by the Commissioner and will be available in both the Texas Register and at the Commissioner’s website along with the regulations.

A mortgage broker may charge and receive certain fees from a mortgage loan applicant prior to completion of the services to be performed. Those fees are for the services of obtaining a credit report, appraisal of real estate, processing of the application, taking of the application, automated underwriting, courier, issuing a loan commitment, or locking in an interest rate. To charge a fee for locking in an interest rate, there must be a written agreement executed by the mortgage broker and applicant. The agreement must state whether the fee is refundable, and if so, how the applicant may obtain the refund.

After funding of the mortgage loan has occurred, the mortgage broker or loan officer owes no further duty or obligation to the applicant and is considered to have completed all services in relation to the mortgage loan of that applicant. However, the mortgage broker or loan officer is still subject to liability for any violation of the Act or rule adopted under the Act, violation of any agreement with the applicant or lender under the Act, or violation of any state or federal law.

A person licensed is subject to administrative penalties for violation of the Act or a rule or order adopted under the Act. The penalty may not exceed $2,500 for each violation and each day the violation continues is considered a separate violation. Additionally, the Commissioner may take disciplinary action against a licensed person upon a finding that such person has committed any one of many violations as enumerated in Section 156.303(a) of the Act. These violations include, but are not limited to, (i) "obtaining a license by false or fraudulent representation or made a misrepresentation in an application for a license", (ii) publishing an advertisement regarding the mortgage broker’s business which is misleading, likely to deceive, creates a misleading impression, fails to identify as a mortgage broker or loan officer the person causing the advertisement to be published, or violates federal or state law, and (iii) paying compensation to a person not licensed or exempt under this Act for services which a license would be required.

If necessary, the Commissioner may issue without notice or hearing an order to cease and desist if the Commissioner has reasonable cause to believe that the licensed person is about to violate the Act. If a person violates a cease and desist order and after notice, the Commissioner may impose an administrative penalty of up to $1,000 for each day of the continuing violation.

Pursuant to the Act, any person acting as a mortgage broker or loan officer who is not licensed nor exempt, commits a Class B misdemeanor. Any subsequent conviction is a Class A misdemeanor. The receipt of money, or the equivalent of money, by a person acting as a mortgage broker or loan officer without a license, makes that person "liable for damages in an amount that is not less than the amount of the fee or profit received and not to exceed three times the amount of the fee or profit received, as may be determined by the court". Further, any mortgage applicant damaged by a violation under this Act may bring suit for actual monetary damages and attorney’s fees and court costs.

The Commissioner shall also establish a Mortgage Broker Recovery Fund (the "Fund") pursuant to the Act to provide reimbursement to any aggrieved applicant whose judgment debtor lacks sufficient assets to satisfy the applicant’s judgment. At license application and renewal, each mortgage broker and loan officer shall pay a $20 fee to be deposited in the Fund. If, at the end of the calendar year of 2010, the balance of the Fund is less than $500,000, then each mortgage broker shall pay the lesser of $10 or a pro rata share necessary to increase the Fund to $1,000,000.

The reimbursement from the Fund to aggrieved persons is only as to a violation of certain enumerated acts. A person’s recovery from the Fund is limited to actual, out-of-pocket damages, reasonable attorney’s fees, and court costs. The Commissioner may revoke the license of any mortgage broker or loan officer who causes reimbursement from the Fund for a court judgment against such person. The statute of limitations for collecting from the Fund is two years from the date on which the cause of action accrues.

If you have any questions or for further information about the Act, please contact one of our attorneys.