In its recent proposed rules on computerized loan-origination networks, known as CLOs, the Department of Housing and Urban Development sets out to define a checklist of CLO characteristics that would "maximize the potential consumer benefits from this developing technology and protect consumers."
A CLO having all these characteristics would become a "qualified CLO" for which "borrower payments would be permitted without further RESPA scrutiny."
In general, I believe that HUD has done a credible job, and certainly a conscientious one. HUD recognized that it was handicapped by not knowing much about what was going on in the marketplace. The old CLOs are dead or dying, and the new ones are just beginning to emerge, so HUD was appropriately tentative in its judgments.
HUD inadvertently proposed two sets of rules governing loan originations in real estate offices: one with comprehensive consumer protections that would apply to a business arrangement that offers advanced technology and major consumer benefits; and one with no consumer protections that would apply to a business arrangement that provides few if any consumer benefits.
Clearly this was not HUD's intention - it is the inadvertent consequence of developing rules for CLOs and rules for controlled business arrangements in parallel fashion, as if they had nothing to do with each other.
The consumer-interest safeguards that HUD has carefully delineated for "qualified CLOs" (and perhaps others that go even further) should apply to any entity originating loans out of real estate offices.
Time-honored usage and practice clearly connote that a CLO operates through real estate offices. At a minimum, this function includes using computers to do all of the following:
* Qualifying the borrower.
* Having some facility for lender/product selection.
* Taking the loan application and delivering it to the lender.
* Providing required disclosure documents to the borrower.
Most of the entities in the marketplace that have referred to themselves as CLOs, whatever their other differences, have had these basic features.
However, HUD defines a CLO as an information system that includes at most only the first two of the functions listed above:
"CLO system means a computerized system that:
* Provides to prospective borrowers information regarding the rates and terms of ... mortgage loans.
* Collects, assembles, and transmits information concerning the borrower, the property, and other information.
* Based on the data transmitted, responds to the borrower with detailed information, including... loan terms, rates, and payment schedules for various loan products that would be available."
HUD has actually defined a CLI -- a computerized loan information system. HUD's list includes nothing on loan originations.
While the definition given here is clearly a CLI rather than a CLO, it is not a useful definition of a CLI, because it is operationally too specific.
For example, consider an entity that offers brokers the functionality to offer their customers the capacity to search a data base of loan offerings from lenders, select one for which they qualify, and submit an application to that lender. Since the broker is not involved in the loan application process, this clearly should be viewed as a CLI. However, it does not correspond to HUD's definition.
Since the purpose of defining a CLI is to take it out of RESPA, the definition should be very broad and general, with the major focus on what it is not: a loan-origination entity. I would propose the following:
"A CLI is any entity that delivers loan information by computer within a real estate office, which is not directly connected with the provision of a loan, and if charged to customers is paid for before and outside of closing."
This should be sufficient to remove CLIs from RESPA. The requirement that the fee be paid before and outside of closing is an absolute guarantee that the CLI could not be used to cloak a CLO, since (for reasons I will explain later) no CLO can operate under that restriction.
The various consumer protection features that HUD has specified for its proposed "qualified CLO" are simply not needed for a CLI. There is not enough at stake, and consumers are not going to be seriously misled in the information market. To require that a CLI be multilender, for example, would be ludicrous, since even the most naive consumer would not pay for information on a single lender.
GHR Systems Inc. developed Mars, a computerized loan-origination system.
