The problem of the computerized loan information system, known as a CLI, is very easy to deal with once it is recognized as a separate problem. The major-problem arises when loans are originated in the real estate office, where the consumer can be exploited and consumer protection is needed.
In contrast to a CLI, a computerized loan-origination system, or CLO, originates loans in real estate offices. Further, their charges to customers are contingent on the provision of a loan - no loan, no charge. In this respect, CLOs follow the practice of mortgage brokers and commissioned loan officers, since customers are extremely reluctant to pay anything if a loan doesn't materialize.
This is why a CLO cannot live with a requirement that fees must be paid before closing. Few consumers would ever be willing to pay the fee in advance without knowing whether they would obtain the loan.
But the rule wouldn't make any sense even if consumers were willing to pay the fee in advance. Once the payment was made, consumers would be locked into the deal in the sense that they would lose the fee if they shopped elsewhere. A more anti-competitive rule Can hardly be imagined.
In short, the rule that payment must be made before closing, while completely appropriate for an information system, is completely inappropriate for an origination system. The rule, indeed, should be viewed as the key to distinguishing the two.
There should not be two sets of rules governing the same loan-origination function based on the legal form of the organization performing the function.
Yet that is exactly what the proposed rules would do. Specifically:
1. A real estate broker-controlled entity that used computers to originate loans in its own office would be required to offer products of multiple lenders, charge the same price to all customers, post this charge prominently, provide lender-neutral displays of loan products, and notify customers that the customer might find better terms somewhere else.
2. A lender-controlled entity that formed a controlled business arrangement with the broker and originated loans in that broker's office using traditional methods would not be subject to any of these requirements.
The incongruity is compounded by the fact that the first entity is much more likely to deliver the technology-based benefits to the consumer that HUD is attempting to encourage than is the second.
From a rule-making perspective, there are several possible approaches to having a single set of rules. Perhaps the most straight-forward is simply to define a CLO in terms of loan originations, and stipulate that any entity that performs those functions is subject to a specified set of requirements, regardless of the business form of organization.
The rule, in other words, would be based on function rather than on the legal form of organization.
The following definition of a CLO would meet this objective:
"A CLO is any entity (regardless of the form of business organization) that originates home loans in or for a real estate brokerage office, in which the broker has a financial interest in the function.
"The loan origination function includes qualifying borrowers to meet the requirements of lenders, aiding a borrower in selecting a loan product, taking a borrower's loan application and delivering it to the lender, and providing required disclosure documents to the borrower.
"A financial interest in the loan-origination function means that the broker receives payments directly from the borrower, or has a financial interest in a business entity that receives such payments."