Earlier this year, the Colorado legislature passed legislation (HB 07-1322 and SB 07-216) that, among other things, impose an affirmative duty of good faith and fair dealing by mortgage brokers with borrowers, including, without limitation, the duty (a) to make a "reasonable inquiry" into a borrower's current and prospective financial condition based on information submitted by the borrower, and (b) to not recommend or induce a borrower into a loan transaction that does not have a "reasonable, tangible net benefit" to the borrower.  These duties are codified in new C.R.S. Section 12-61-904.5.  In order to "clarify uncertainties regarding reasonable inquiry and tangible net benefit" requirements in the new law, the Colorado Director of the Division of Real Estate has adopted an emergency rule (a copy of which is available here).  The emergency rule became effective on September 4, 2007.  The emergency rule should be read in its entirely.  This article will highlight some of the more interesting and important provisions of the emergency rule. Reasonable Inquiry

• The emergency rule makes clear that the "reasonable inquiry" requirement of the new law does not prohibit specific mortgage products or documentation types.
• In order to understand the borrower's current and prospective financial status, a mortgage broker is required to interview and discuss the borrower's current and prospective income, including its source and likely continuance.
• Based on the information provided by the borrower, the mortgage broker is required to recommend "appropriate" mortgage products only.
• Interestingly, reasonable inquiry "may not require the mortgage broker to verify such income."  It is unclear from the rule when reasonable inquiry might compel a mortgage broker to verify further the information provided by the borrower.
• Finally, a mortgage broker will be deemed to have complied with the reasonable inquiry requirement if the mortgage broker has interviewed and discussed with all borrowers all sections of the Uniform Residential Loan Application (URLA) (Fannie Mae 1003/Freddie Mac 65) and completed a tangible net benefit disclosure form.  A copy of the tangible net benefit disclosure developed by the Division of Real Estate is available here.

Reasonable, Tangible Net Benefit

• The emergency rule notes that the reasonable tangible net benefit standard "is inherently dependent upon the totality of facts and circumstances relating to a specific transaction." 
• The following considerations should be taken into account and discussed with borrowers to the extent applicable: lower payments; condensed amortization schedule; debt consolidation; cash out; avoiding foreclosure; negative amortization; balloon payments; variable rates; interest only options; prepayment penalties; and hybrid mortgage products.
• The purpose or reason for the loan must be identified in writing by the borrower, and it is the mortgage broker's responsibility to ensure that this information is obtained and accurately documented after consulting with the borrower.
• Mortgage brokers are presumed to be in compliance with the emergency rule when they use the tangible net benefit disclosure developed by Division of Real Estate (alternate forms are acceptable provided they include all the information on the suggested form).
• The tangible net benefit disclosure must be provided by the mortgage broker at the time the loan application is completed and again prior to signing loan closing documents, and must be signed by both the mortgage broker and the primary borrower.

The tangible net benefit disclosure developed by the Division of Real Estate will appear in DocMagic's initial and closing packages.  If you have any questions concerning the disclosure, please email DocMagic's Compliance Department.