I wrote the entire 14 hour course.

2. Mortgage Brokering/Lending
14-Hour Continuing Education Course
2 0 0 7- 2 0 0 8 E D i t i o n

3. Acknowledgements
Bert Rodgers Schools of Real Estate, Inc. expresses our gratitude and appreciation to the
thousands of Mortgage Professionals who have completed our 14-hour course to fulfill
their continuing education requirements.
We would like to thank the author of this edition, Janine Spiegelman. We recognize her
expertise and appreciate her participation.
We also want the Student Services Department—both the customer contact employees
and those “behind the scenes” processing all the paperwork—to know how much we
appreciate their hard work, day after day, making sure our valued students are satisfied
customers.
And we certainly are grateful to our Publications Department staff. No matter what obsta-
cles you encounter in putting together these editions, you always create a product that,
year after year, our customers say is by far the best in the industry.
Finally, Bert Rodgers Schools would like to thank Julie Wild of Wild Dezign for her typeset-
ting expertise and patience, and Mark Mazzuki of Digital Ink Design Group for his cover
design of this edition and his design of all our marketing materials.
Lori J. Rodgers, President
ii Bert Rodgers Schools of Real Estate, Inc.

4. table of Contents
14-Hour MorTGAGE BroKErING/LENDING
CoNTINuING EDuCATIoN CoursE
FOuNDER w MODULE 1
Bert Rodgers
Florida Mortgage Brokerage and
PRESIDENT
Lori J. Rodgers Lending Act Rules and Regulations | 1
ADMINISTRATIVE VICE
PRESIDENT
William E. Giffard w MODULE 2
DIRECTOR OF OPERATIONS Credit Scores and Credit Scoring | 17
Tom Harner
DIRECTOR OF
INFORMATION SYSTEMS w MODULE 3
Alison M. Harner
DIRECTOR OF FINANCE
Exotic and Nontraditional Mortgages | 23
Aaron Pulone
PROjECT MANAgERS w MODULE 4
Valerie Churchillo
Lisa Lacey Subprime Loans and Prepayment
INSTRuCTOR Penalties | 31
Janine Spiegelman
PROjECT COORDINATORS
Michelle Headley w MODULE 5
Jerry Schmitt Lack of Credit Documentation
PRODuCT SuPPORT MANAgER
Kelli Finnigan
Promotes Mortgage Fraud | 39
STuDENT SERVICES
SuPERVISOR
w MODULE 6
Patti Pasquini
STuDENT SERVICES Updates on Flood and Hazard Insurance | 45
REPRESENTATIVES
Barbara Dolnick
Anthony Fasciano w MODULE 7
Colletta Finnigan
Mark Forsman Affordable Housing | 55
Jenncie Grove
Laraine Jansen
Mary Killoran
w MODULE 8
Shirley Samson
Kayla Smillie New and Updated Fannie Mae/Freddie Mac
Christopher Smith
Roman Vizvary
Appraisal and Property Report Forms | 61
TYPESETTINg
Wild Dezign
PRINTINg Registration/Affidavit Form
Action Printing

5. Author Biography
Janine Spiegelman has been a licensed Florida Mortgage Broker since
1987 and has taught the mortgage pre-licensure course since 1999. She
has worked for the State of Florida, Department of Banking and Finance
as a Financial Examiner/Analyst II. In the mortgage field, she has held
every position possible–processor, closer, underwriter, post closer, mort-
gage broker, and wholesale account executive. She has her own real
estate brokerage and enjoys working with first-time home buyers. Janine is our continuing
education instructor for real estate and mortgage brokering/lending.
Bert Rodgers Schools of Real Estate, Inc. ©2007
All rights reserved, including the right to reproduce this manual or any portion of this manual in any form, or to use it for
teaching purposes without the express written consent of the copyright holder.
This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is
provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service.
If legal advice or other expert assistance is required, the services of a competent professional person should be sought.
Bert Rodgers Schools of Real Estate, Inc. shall not be liable in any way for failure to receive and/or process your
Registration/Affidavit Form within any specific time period. It is your responsibility to ensure that you have complied with
your license renewal requirements in a timely manner.
Bert Rodgers Schools of Real Estate, Inc. recognizes and respects its students’ privacy. Course records are confidential,
and the School does not sell or rent students’ names or other information to any company or organization.
Cover design: Digital Ink Design Group
ISBN: 1-891753-40-1
Printed in the United States of America
iv Bert Rodgers Schools of Real Estate, Inc.

6. MODULE 1
Florida Mortgage brokerage and
Lending act rules and regulations
Learning Objectives
After completing this module, you should be able to:
1. Summarize the changes made to Chapter 494 6. Identify the prohibited practices pursuant to
F.S. effective October 1, 2006. Chapter 494.
2. List the changes to Chapter 69V-40 Florida 7. Explain the purpose for the enactment of the
Administrative Code made through 2004. Florida Fair Lending Act.
3. Summarize the organizational structure of 8. Identify the types of transactions covered by
the Florida Department of Financial Services, the Florida Fair Lending Act.
including the Financial Services Commission 9. Define a high-cost home loan.
and the Office of Financial Regulation. 10. Identify the acts prohibited by the Florida Fair
4. Explain the powers and duties of the Financial Lending Act.
Services Commission and the Office of 11. Identify the disclosure requirements of the
Financial Regulation. Florida Fair Lending Act.
5. Explain the penalties, which could be imposed 12. Explain the enforcement and penalties of any
for a violation of Chapter 494, F.S. violation of the Florida Fair Lending Act.
intrODUctiOn
The Department of Financial Services regulates serves as agency head for the Office of Financial
mortgage broker individuals (MB), mortgage broker- Regulation (OFR or Office) and the Office of
age businesses (MBB), mortgage lenders (ML), and Insurance Regulation (OIR). The commission is
correspondent mortgage lenders (CL) by the use of composed of the governor and Cabinet. The com-
Florida Statutes (F.S.) and the Florida Administrative mission appoints the commissioner of the OFR and
Code (F.A.C.). Chapter 494, F.S., is known as the the commissioner of the OIR. Although both offices
Florida Mortgage Brokerage and Mortgage Lending are administratively housed within the Department
Act Rules and Regulations. Chapter 494 originally of Financial Services, they report directly to the
became effective in October 1991, and several sig- Financial Services Commission, headed by the newly
nificant amendments have been made since 1991. elected Chief Financial Officer, Alex Sink. The Office
Chapter 69V-40 of the Florida Administrative of Financial Regulation has offices located in Miami,
Code (formerly Chapter 3D-40 F.A.C.) is called Fort Lauderdale, West Palm Beach, Tampa, Orlando,
Rules Regulation Mortgage Brokers. Certain minor Jacksonville, Pensacola, and Fort Myers. The regional
changes to Chapter 69V-40 were made effective on offices are primarily responsible for conducting exam-
August 2, 2002, and a few minor amendments were inations to ensure regulatory compliance by financial
made between 2003 and 2004. The purpose of this institutions and financial service companies.
module is to review Florida mortgage brokerage rules
The Office is dedicated to safeguarding the private
and regulations including changes effective October
financial interests of the public by licensing, char-
1, 2006.
tering, examining, and regulating financial institu-
In 2002, legislation placed the regulation of bank- tions and financial service companies in the State
ing, securities, and insurance under two appointed of Florida. The Office strives to protect consumers
officials who are selected by the Financial Services from financial fraud while preserving the integrity
Commission. The Financial Services Commission of Florida’s markets and financial service industries.
© 2007 Bert Rodgers Schools of Real Estate, Inc. 1

7. 2 Module 1
This is the Office’s mission statement found at recent cHanges in FLOriDa statUtes
regULating MOrtgage brOKerage
www.flofr.com/Director/abouttheoffice.htm anD MOrtgage LenDing
This section discusses the more significant changes in
Within the Office are 2 Divisions. The first is the the Florida Statute Chapter 494 regulating mortgage
Division of Financial Institutions. This division brokerage and mortgage lending effective October 1,
licenses, examines, and regulates all state-authorized 2006.
or state-chartered financial institutions to ensure they
operate in a safe and sound manner and in compliance NEW
with applicable statutes and rules. Those institutions Definition
include commercial banks, credit card banks, credit
unions, non-deposit trust companies, savings banks, Control person means an individual, partnership,
savings and loans, and international bank offices. corporation, trust, or other organization that possesses
the power, directly or indirectly, to direct the man-
The second division within the Office is the Division agement or policies of a company, whether through
of Securities and Finance. Within this division are ownership of securities, by contract, or otherwise.
three Bureaus— the Bureau of Financial Regulation; A person is presumed to control a company if, with
the Bureau of Securities Regulation; and the Bureau respect to a particular company, that person:
of Regulatory Review. The Bureau of Finance
Regulation regulates retail installment sales busi- (a) Is a director, general partner, or officer exercising
nesses, consumer finance companies, mortgage bro- executive responsibility or having similar status or
kers and lenders, collection agencies, and money functions;
transmitters. The bureau provides consumer protec- (b) Directly or indirectly may vote 10 percent or more
tion from illegal or improper activities performed by of a class of voting securities or sell or direct the
these companies. The Bureau of Securities Regulation sale of 10 percent or more of a class of voting secu-
protects the public from investment and securities rities; or
fraud. The Bureau of Regulatory Review reviews all
(c) In the case of a partnership, may receive upon dis-
applications for a financial services firm or a securi-
solution or has contributed 10 percent or more of
ties firm, reviews individual applications, and either
the capital (Chapter 494.001(9)(a-c), F.S.).
approves, places licensing restrictions, or denies licen-
sure based upon its findings (See Figure 1.1).
Office of Financial Regulation
Office of Financial regulation Flow chart
Commissioner
Financial Regulation
Chief, Financial Director, Cabinet &
General Counsel Inspector General
Investigations Legislative Affairs
Director of
Deputy Commissioner Auditing
Financial Regulation
Director
Director Director
Division of Financial
Division of Securities Division of Finance
Institutions
Chief, Bank Chief, Bank Chief, Credit Union Chief, Securities Chief, Regulatory Chief, Finance Chief, Money Chief, Regulatory
Regulation District I Regulation District II Regulation Regulation Review Regulation Transmitter Review
Figure 1.1 Source: www.flofr.com/Director/OFRorgchart.pdf

8. Florida Mortgage Brokerage and Lending Act Rules and Regulations
NEW NEW
Powers and Duties of the commission and Mortgage brokerage business branch Offices;
Office Principal Place of business requirements
Allows the Office to require the electronic filing Deleted Chapter 494.0036(3), F.S. and Chapter
of applications, renewals, and fees, unless granted 494.0039(3), F.S. Eliminated from the statute the
a waiver by OFR due to a hardship. Prior to this requirement to display main office, branch office, and
change, the only license type that could file an individual licenses.
application online was a mortgage broker (Chapter
494.0011(2)(6), F.S.). NEW
requirements of Licensees
NEW
Provides that each licensee shall report any change
books, accounts, and records; Maintenance; in the principal broker, principal representative, offi-
examinations by the Office cers, partners, members, joint venturers, directors,
control persons or any individual who is the ultimate
Authorizes the commission to adopt rules for the
equitable owner of 10% or greater interest (Chapter
requirements for the destruction of records main-
494.004(6). F.S.).
tained by licensees after the retention period has
expired ( Chapter 494.0016(4), F.S.). Provides that a change of control whether through
the power to direct management, ownership or oth-
erwise shall require an application to be submitted to
NEW the OFR unless a waiver has been granted (Chapter
Mortgage business schools 494.004(6)(a-d), F.S.).
Requires permitted mortgage business schools to
electronically report to the Office the names of pupils NEW
who have successfully completed required training
courses (Chapter 494.0029(4), F.S.).
administrative Penalties and Fines; License
violations
Authorizes disciplinary action if fees are paid with a bad
NEW check. (Chapters 494.0041(2)(s) and 494.0072(2)(s), F.S.).
Licensure as a Mortgage brokerage business; Provides grounds for disciplinary action when a final
Mortgage broker’s License judgment is entered against an applicant or licensee in
Provides that applications are not deemed received a civil action upon grounds of fraud, embezzlement,
until all required fees are received (Chapters misrepresentation, or deceit (Chapters 494.0041(2)(t)
494.0031(2)(a); 494.0033(2)(c), F.S.). and 494.0072(2)(t), F.S.).
Provides grounds for disciplinary action when action
is taken by other federal and state regulatory organiza-
NEW
tions located in or outside the State of Florida involving
renewal of Mortgage brokerage business securities, insurance, real estate, mortgage brokers and
License or branch Office License lenders, or other related or similar industries (Chapters
The license for a branch office must be renewed in 494.0041(2)(u)1.2. and 494.0072(2)(u)1.2.,F.S.).
conjunction with the renewal of the mortgage broker-
age business license (Chapter 494.0032(1)). NEW
Mortgage Lender’s License requirements;
NEW correspondent Mortgage Lender’s License
Mortgage broker’s License requirements; savings clause; branch Offices
Allows the Office to contract with a third party ven- Provides that applications are not deemed received
dor to administer the mortgage broker test. This will until all required fees are received (Chapters
allow the test to be conducted electronically at mul- 494.0061(2)(b), 494.0062(2)(b), 494.0065(3)(5)(b) and
tiple locations several times a week versus the old 494.0066(2), F.S.).
once a month process at limited locations (Chapter Audited financial statements of all licensed lend-
494.0033(2)(b), F.S.). ers have to be in accordance with United States

9. 4 Module 1
generally accepted accounting principles (Chapters the power to direct management, ownership or oth-
494.0061(2)(c), 494.0062(2)(c) and 494.0065(2)(5)(c), erwise shall require an application to be submitted to
F.S.). the OFR unless a waiver has been granted. (Chapter
494.0067(4)(a-d),F.S).
Provides under certain conditions that existing
principal representatives can be grandfathered in changes between 2002 and 2004 to the rules
without class or testing requirements (Chapters of the Florida administrative code
494.0061(2)(f)(8-9) and 494.0062(2)(f)(11-12) and
494.0065(4)(c)1.2.(10), F.S.). The most significant changes were that the Rules
Regulation Mortgage Brokers were moved from 3D-
40 F.A.C. to a new chapter 69V-40 F.A.C. and all ref-
NEW erences to the Department of Banking and Finance
renewal of Mortgage Lender’s License; were replaced with the Financial Services Commission
branch Office License renewal and the Office of Financial Regulation, depending
Chapter 494.0064(1)(b), F.S. deleted. Eliminated the upon the specific division of responsibility between
requirement to report the continuing education of the departments. See Table 1.1
loan associates when renewing a lender’s license. To access any of the required forms, go to website and
select the appropriate form.
NEW
www.flofr.com/licensing/MBlist.htm
requirements of Licensees Under chapters
494.006-.0077 To access Chapter 494 online, go to www.
Chapter 494.0067(1), F.S. deleted. Eliminated from leg.state.fl.us/Statutes/index.cfm?App_
the statute the requirement to display main and mode=Display_StatuteURL=Ch0494/
branch office licenses. titl0494.htmStatuteYear=2006Title=-
2006-Chapter%20494
Provides that each licensee shall report any change in
the officers, partners, members, joint venturers, direc- To access the Florida Administrative Code,
tors, or control persons. (Chapter 494.0067(4), F.S). Rules 69V-40, go to www.flofr.com/licensing/
RulesStatutes/Rule69V-40.htm
Provides that a change of control whether through
table 1.1 Updates to the rules of the Florida administrative code between 2002 and 2004
books and records 69v-40.170 Amended to substitute the Office of Financial Regulation for
all references to the Department of Banking and Finance.
application Procedure for Mortgage 69v-49.031(1) Provides that all applications for licensure as a mortgage bro-
broker License ker must be filed with the OFR. The address is:
Office of Financial regulation
200 East Gaines Street
Tallahassee, Florida 299-075
69v-40.031(1)(a) The application form for Licensure as a Mortgage Broker
changed to OFr-Mb-101, and is available by mail from the
OFR.
69v-40.031(1)(c) The fee which must accompany the applicant’s fingerprint
card changed from $15.00 to $2.00. In the remainder of
this section, all references to the Department of Banking and
Finance changed to the Office of Financial Regulation.
application Procedure for Mortgage 69v-40.051 All applications for licensure as a mortgage brokerage busi-
brokerage business License ness must now be filed with the OFR. The form that must be
used for this application is OFr-Mb-201, and can be obtained
by mail from the OFR or accessed online at http://www.flofr.
com/licensing/Forms/MBBapp.pdf

10. Florida Mortgage Brokerage and Lending Act Rules and Regulations 5
table 1.1 Updates to the rules of the Florida administrative code between 2002 and 2004
69v-40.051(2) Regarding the fingerprint cards and Biographical Summary, now
provides as follows:
Each ultimate equitable owner of 10% or greater inter-
est, the chief executive officer and each director of an
entity applying for licensure as a mortgage brokerage
business, shall submit a completed fingerprint card
and Biographical Summary, Form OFR-MBB-BIO-1
(revised 10/99), to the Office of Financial Regulation
along with a $2 nonrefundable processing fee. Form
OFR-MBB-BIO-1 is hereby incorporated by reference
and available by mail from the Office of Financial
Regulation, 200 East Gaines Street, Tallahassee, Florida
299-075.
All former references to the Department of Banking and Finance
have been changed in this section to the Office of Financial
Regulation.
application Procedure for change 69v-40.100 All references to the Department of Banking and Finance have
in Ownership or control of saving been changed to the Office of Financial Regulation. The ap-
clause Mortgage Lending plication for Change in Ownership or Control of Saving Clause
Mortgage Lending must use the form OFr-MLst. The form must
be mailed to the Office at the address.
The same changes to the fingerprint card filing and Biographical
Summary that were made to the other license application regula-
tions, (i.e. form OFr-ML-biO-1 and the fee of $2), were also
made to this section.
application Procedure for Mortgage 69v-40.200 The application form for licensure as a mortgage lender changed
Lender License to OFr-ML-222 and is to be mailed to the Office at the address.
Further, the surety bond must be submitted on form OFr-ML-444,
Mortgage Brokerage and Mortgage Lending Act Surety Bond. The
completed fingerprint card and Biographical Summary form OFr-
ML-biO-1, and the nonrefundable, processing fee of $2 must
be submitted to the Office. All references to the Department of
Banking and Finance have been changed to the Office of Finan-
cial Regulation.
Mortgage Lender License, Mortgage 69v-40.205 The form for renewal and reactivation of a mortgage lender
Lender License Pursuant to saving license is OFr-ML-r, and the form for renewal and reactivation of
clause, and branch Office License a mortgage lender license pursuant to saving clause is OFr-ML-
renewal and reactivation rs. The form for branch office renewal is OFr-ML-rb, Mort-
gage Lender and Correspondent Mortgage Lender Branch Office
License Renewal and Reactivation Form. All forms must be filed
with the Office.
application Procedure for correspon- 69v-40.220 Changed the applicable forms, processing fees, and references
dent Mortgage Lender License to the Office of Financial Regulation. The application form for
licensure as a correspondent mortgage lender is OFr-cL-333.
The surety bond form is OFr-ML-444. The fingerprint card and
Biographical Summary form is OFr-cL-biO-1, and the processing
fee is now $23. All forms must be filed with the Office.
correspondent Mortgage Lender 69v-40.225 Changed the applicable forms and references to the Office of
License and branch Office License Financial Regulation. The renewal and reactivation form for
renewal and reactivation correspondent mortgage lender license is form OFr-cL-r. The
surety bond form is OFr-ML-444. The Mortgage Lender and Cor-
respondent Mortgage Lender Branch Office License Renewal and
Reactivation form is OFr-ML-rb. All forms must be filed with the
Office.
application Procedure for Mortgage 69v-40.240 Changed the application form and references to the Office of
Lender or correspondent Mortgage Financial Regulation. The application form for mortgage lender
Lender branch Office License branch office or correspondent mortgage lender branch office
license is OFr-ML-222b. All forms must be filed with the Office.
Principal representative 69v-40.242 Changed the applicable form and references to the Office of
Financial Regulation. The Principal Representative Designation
form is OFr-ML/cL-Pr. All forms must be filed with the Office.
Source: Compiled by author.

11. 6 Module 1
MOrtgage brOKerage License LaW
Chapter 494, F.S., is divided into five parts: Part I, General Provisions (494.001-494.00295); Part II, Mortgage
Brokers (494.003-494.0043); Part III, Mortgage Lenders (494.006-494.0077); Part IV, Florida Fair Lending Act
(494.0078-494.00797); and Part V, Loans Under the Florida Uniform Land Sales Practices Law (494.008).
Part i: generaL PrOvisiOns
(494.001-494.00295)
the Financial services commission • may, at intermittent periods, conduct examinations
As introduced at the beginning of this module, the of any licensee or other person under the provi-
Financial Services Commission serves as agency head sions of 494.001-494.0077 F.S.
for the Office of Financial Regulation (OFR or Office) • may bring action through its own counsel in the
and the Office of Insurance Regulation (OIR). OFR and name and on behalf of the state against any person
OIR are administratively housed within the Depart- who has violated or is about to violate any provi-
ment of Financial Services, headed by the Chief sion of 494.001-494.0077 F.S. or any rule of the
Financial Officer. The Office is responsible for con- commission or order of the Office issued under
ducting financial investigations into allegations of sus- 494.001-494.0077 F.S. to enjoin the person from
pected illegal financial activities within its jurisdiction. continuing in or engaging in any act in furtherance
of the violation.
Powers and Duties of the commission and • has the power to issue and serve upon any person
Office an order to cease and desist and to take corrective
The Office of Financial Regulation is responsible action whenever it has reason to believe the per-
for the administration and enforcement of Chapter son is violating, has violated, or is about to violate
494.001-494.0077, F.S. The Financial Services any provision of 494.001-494.0077 F.S., any rule
Commission may adopt rules pursuant to Chapters or order issued under 494.001-494.0077 F.S., or
120.563(1), F.S and 120.54, F.S to implement any written agreement between the person and the
Chapters 494.001-494.0077, F.S. The Commission Office. All procedural matters relating to issuance
may adopt rules requiring electronic submission of and enforcement of such a cease and desist order
any forms, documents, or fees required by this act if are governed by the Administrative Procedure Act.
such rules reasonably accommodate technological or • has the power to order the refund of any fee
financial hardship. The Commission may prescribe directly or indirectly assessed and charged on a
by rule requirements and procedures for obtaining mortgage loan transaction which is unauthorized
an exemption due to a technological hardship. The or exceeds the maximum fee specifically authorized
Commission may also adopt rules to accept certifica- in 494.001-494.0077 F.S.
tion of compliance with requirements of Chapter 494,
F.S. in lieu of requiring submission of documents. • may prohibit the association by a mortgage broker
The grant or denial of any license under this chapter business, or the employment by a mortgage lender
must be in accordance with Chapter 120.60, F.S. or correspondent mortgage lender, of any person
who has engaged in a pattern of misconduct while
The Office: an associate of a mortgage brokerage business or an
• has the power to issue and to serve subpoenas and employee of a mortgage lender or correspondent
subpoenas duces tecum to compel the attendance of mortgage lender. For the purpose of this subsec-
witnesses and the production of all books, accounts, tion, the term “pattern of misconduct” means
records, and other documents and materials rel- the commission of three or more violations of ss.
evant to an examination or investigation. 494.001-494.0077 or the provisions of Chapter 494
• or its duly authorized representative, has the power in effect prior to October 1, 1991, during any one
to administer oaths and affirmations to any person. year period or any criminal conviction for violating
ss. 494.001-494.0077 or the provisions of Chapter
• may conduct an investigation of any person when- 494 in effect prior to October 1, 1991.
ever the Office has reason to believe, either upon
complaint or otherwise, that any violation of Penalties
494.001-494.0077 F.S. has been committed or is
about to be committed. Chapter 494.0018 provides whoever knowingly vio-

12. Florida Mortgage Brokerage and Lending Act Rules and Regulations 7
lates any provision of Chapters 494.0041(2)(e), (f), or course of business which operates as a fraud
(g); 494.0072 (2)(e), (f), or (g); or 494.0025 (1), (2), upon any person in connection with the pur-
(3), (4), or (5), is guilty of a felony of the third degree, chase or sale of any mortgage loan; or
except that any person convicted of a violation of any (c) To obtain property by fraud, willful misrep-
provision of 494.001-494.0077 F.S., in which viola- resentation of a future act, or false promise.
tion the total value of money and property unlawfully
obtained exceeded $50,000 and there were five or more (5) In any matter within the jurisdiction of the
victims, is guilty of a felony of the first degree. All the Office, to knowingly and willfully falsify, con-
violations are punishable as provided in Chapters ceal, or cover up by a trick, scheme, or device a
775.082 F.S., 775.083 F.S., or 775.084 F.S. Each such material fact, make any false or fraudulent state-
violation constitutes a separate offense. In addition, if ment or representation, or make or use any false
a mortgage transaction is made in violation of any pro- writing or document, knowing the same to con-
vision of Chapters 494.001-494.0077 F.S., the person tain any false or fraudulent statement or entry.
making the transaction and every licensee, director,
or officer who participated in making the transaction (6) To violate 655.922(2) F.S., subject to 494.001-
are jointly and severally liable to every party to the 494.0077 F.S.
transaction in an action for damages incurred by the
party or parties. However, a person is not liable under (7) Who is required to be licensed under ss. 494.006
this section upon showing that such person’s licens- - 494.0077, to fail to report to the Office the
ees, officers, and directors who participated in making failure to meet the net worth requirements of
the transaction, if any, acted in good faith and with- 494.0061 F.S., 494.0062 F.S., or 494.0065 F.S.
out knowledge and, with the exercise of due diligence, within 48 hours after the person’s knowledge of
could not have known of the act committed in viola- such failure or within 48 hours after the person
tion of Chapters 494.001-494.0077, F.S. should have known of such failure.
(8) To pay a fee or commission in any mortgage loan
Prohibited Practices transaction to any person or entity other than a
Chapter 494.0025 F.S. provides that it is unlawful for mortgage brokerage business, mortgage lender,
any person: or correspondent mortgage lender, operating
under an active license, or a person exempt from
(1) To act as a mortgage lender in this state without licensure under this chapter.
a current, active license issued by the Office pur-
suant to 494.006-494.0077, F.S. (9) To record a mortgage brokerage agreement or
any other document, not rendered by a court
(2) To act as a correspondent mortgage lender in
of competent jurisdiction, which purports to
this state without a current, active license issued
by the Office pursuant to 494.006-494.0077, enforce the terms of the mortgage brokerage
F.S. agreement.
(3) To act as a mortgage broker in this state without (10) To use the name or logo of a financial institution,
a current, active license issued by the Office pur- as defined in 655.005(1), F.S., or its affiliates or
suant to 494.003-494.0043, F.S. subsidiaries when marketing or soliciting exist-
ing or prospective customers if such marketing
(4) In any practice or transaction or course of busi-
materials are used without the written consent
ness relating to the sale, purchase, negotiation,
of the financial institution and in a manner that
promotion, advertisement, or hypothecation of
would lead a reasonable person to believe that
mortgage transactions, directly or indirectly:
the material or solicitation originated from, was
(a) To knowingly or willingly employ any device, endorsed by, or is related to or the responsibility
scheme, or artifice to defraud; of the financial institution or its affiliates or sub-
(b) To engage in any transaction, practice, or sidiaries.

13. Module 1
Part ii anD iii: MOrtgage brOKers
anD MOrtgage LenDers
All the relevant changes made to Chapter 494, F.S. were discussed at the beginning of this module. Included here
is a brief recap of the changes to Chapter 494.003-494.0077, F.S.
• Allows the Office to contract with a third party ven- principal representatives can be grandfathered in
dor to administer the mortgage broker test. without class or testing requirements.
• Provides that applications are not deemed received • Eliminates the requirement to display main and
until all required fees are received. Authorizes dis- branch office licenses.
ciplinary action if fees are paid with a bad check. • Eliminates the requirement to display individual
• Provides that each licensee shall report any change mortgage broker licenses.
in the principal broker, principal representative, • Eliminates the requirement to report the continu-
officers, partners, members, joint venturers, direc- ing education of loan “Associates” when renewing
tors, control persons or any individual who is the a lender’s license.
ultimate equitable owner of 10% or greater inter-
est. • Provides grounds for disciplinary action when a
final judgment is entered against an applicant or
• Provides that a change of control whether through licensee in a civil action upon grounds of fraud,
the power to direct management, ownership or oth- embezzlement, misrepresentation, or deceit.
erwise shall require an application to be submitted
to OFR unless a waiver has been granted. • Provides grounds for disciplinary action when
action is taken by other federal and state regula-
• Audited financial statements of all licensed lend- tory organizations located in or outside the State of
ers have to be in accordance with U.S. generally Florida involving securities, insurance, real estate,
accepted accounting principles. and lending activities.
• Provides under certain conditions that existing
Part iv: FLOriDa Fair LenDing act
abUsive MOrtgage LenDing
In 494.0078, F.S. the Florida Legislature found that: ate effectively for conventional mortgages, too many
homeowners find themselves victims of overreach-
“abusive mortgage lending has become a problem ing creditors who provide loans with unnecessarily
in this state even though most high-cost home loans high costs and terms that are unnecessary to secure
do not involve abusive mortgage practices. One of repayment of the loan. The Legislature finds that as
the most common forms of abusive lending is the competition and self-regulation have not eliminated
making of loans that are equity-based rather than the abusive terms from home-secured loans, the
income-based. The financing of points and fees consumer protection provisions of this act are nec-
in these loans provides immediate income to the essary to encourage fair lending.”
originator and encourages creditors to repeatedly
refinance home loans. As long as there is sufficient
equity in the home, an abusive creditor benefits even DeFinitiOns
if the borrower is unable to make the payments and
Chapter 494.0079, F.S. sets forth the following defi-
is forced to refinance. The financing of high points
and fees causes the loss of equity in each refinanc- nitions.
ing and often leads to foreclosure. Affliate: Any company that controls, is controlled by,
Abusive lending has threatened the viability of or is in common control with another company, as set
many communities and caused decreases in home forth in 12 U.S.C. 1841 et seq. and the regulations
ownership. While the marketplace appears to oper- adopted thereunder.

14. Florida Mortgage Brokerage and Lending Act Rules and Regulations 9
Annual percentage rate (APR): The annual percent- (B) the total points and fees payable by the con-
age rate for the loan calculated according to the provi- sumer at or before closing will exceed the
sions of 15 U.S.C. 1606 and the regulations adopted greater of—
thereunder by the Federal Reserve Board. (i) 8 percent of the total loan amount; or
(ii) $547.00, for the year 2007.
Borrower: Any natural person obligated to repay a
(2) (A) After the 2-year period beginning on the
loan, including, but not limited to, a co-borrower, co-
effective date of the regulations promulgated
signor, or guarantor.
under section 155 of the Riegle Community
Bridge loan: A loan with a maturity of less than 18 Development and Regulatory Improvement
months that only requires the payment of interest Act of 1994, and no more frequently than bien-
until such time as the entire unpaid balance is due and nially after the first increase or decrease under
payable. this subparagraph, the Board may by regula-
Commission: The Financial Services Commission. tion increase or decrease the number of per-
centage points specified in paragraph (1)(A),
Office: The Office of Financial Regulation of the if the Board determines that the increase or
commission. decrease is—
Lender: Any person who makes a high-cost home (i) consistent with the consumer protections
loan or acts as a mortgage broker or lender, finance against abusive lending provided by the
company, or retail installment seller with respect to a amendments made by subtitle B of title I
high-cost home loan, but shall not include any entity of the Riegle Community Development
chartered by the United States Congress when engag- and Regulatory Improvement Act of 1994;
ing in secondary market mortgage transactions as an and
assignee or otherwise. (ii) warranted by the need for credit.
(B) An increase or decrease under subparagraph
Residential mortgage transaction: A transaction (A) may not result in the number of percent-
in which a mortgage, deed of trust, purchase money age points referred to in subparagraph (A)
security interest arising under an installment sales being—
contract, or equivalent consensual security interest is (i) less that 8 percentage points; or
created or retained against the consumer’s dwelling to (ii) greater than 12 percentage points.
finance the acquisition or initial construction of such (C) In determining whether to increase or decrease
dwelling. (15 U.S.C.) 1602(w) the number of percentage points referred to
in subparagraph (A), the Board shall consult
HigH-cOst HOMe LOans with representatives of consumers, including
low-income consumers, and lenders.
Definition (3) The amount specified in paragraph (1)(B)(ii) shall
be adjusted annually on January 1 by the annual
The provisions of the Florida Fair Lending Act deal
percentage change in the Consumer Price Index,
primarily with high-cost home loans.
as reported on June 1 of the year preceding such
High-cost home loans are defined by 15 U.S.C. adjustment.
1602(aa), which provides in pertinent part as follows: (4) For purposes of paragraph (1)(B), points and fees
(1) A mortgage referred to in this subsection means a shall include—
consumer credit transaction that is secured by the (A) all items included in the finance charge, except
consumer’s principal dwelling, other than a resi- interest or the time-price differential;
dential mortgage transaction, a reverse mortgage (B) all compensation paid to mortgage brokers;
transaction, or a transaction under an open end (C) each of the charges listed in section1605(e) of
credit plan, if— this title (except an escrow for future payment
(A) the annual percentage rate at consummation of taxes), unless—
of the transaction will exceed by more than 10 (i) the charge is reasonable;
percentage points the yield on Treasury secu- (ii) the creditor receives no direct or indirect
rities having comparable periods of maturity compensation; and
on the fifteenth day of the month immediately (iii) the charge is paid to a third party unaffili-
preceding the month in which the application ated with the creditor; and
for the extension of credit is received by the (D) such other charges as the Board determines to
creditor; or be appropriate.

15. 10 Module 1
PrOHibiteD acts required under the loan are consolidated and
paid in advance from the loan proceeds provided
Chapter 494.00791,F.S. provides for prohibited acts to the borrower.
involving high-cost loans.
(6) Extending Credit Without Regard To The
(1) Prepayment Penalties Payment Ability Of The Borrower
(a) A high-cost home loan may not contain A lender making a high-cost home loan shall not
terms that require a borrower to pay a pre- engage in any pattern or practice of extending
payment penalty for paying all or part of the high-cost home loans to borrowers based upon
loan principal before the date on which the the borrowers’ collateral without regard to the
payment is due. borrowers’ ability to repay the loan, including
(b) Notwithstanding paragraph (a), a lender the borrowers’ current and expected income,
making a high-cost home loan may include current obligations, and employment.
in the loan contract a prepayment fee or
penalty, for up to the first 36 months after (7) Payments To A Home Contractor
the date of consummation of the loan, if: A lender shall not make any payments to a con-
1. The borrower has also been offered a tractor under a home improvement contract
choice of another product without a pre- from amounts of a high-cost home loan other
payment penalty. than:
2. The borrower has been given, at least 3 (a) In the form of an instrument that is payable
business days prior to the loan consum- to the borrower or jointly to the borrower
mation, a written disclosure of the terms and the contractor; or
of the prepayment fee or penalty by the (b) At the election of the borrower by a third-
lender, including the benefit the bor- party escrow agent in accordance with terms
rower will receive for accepting the pre- established in a written agreement signed by
payment fee or penalty through either the borrower, the lender, and the contractor
a reduced interest rate on the loan or prior to the date of payment.
reduced points or fees. (8) Due-On-Demand Clause
A high-cost home loan may not contain a provi-
(2) Default Interest Rate
sion that permits the lender, in its sole discre-
A high-cost home loan may not provide for a
tion, to call or accelerate the indebtedness. This
higher interest rate after default on the loan.
provision does not prohibit acceleration of the
However, this prohibition does not apply to
loan due to the borrower’s failure to abide by
interest rate changes in a variable rate loan oth-
the terms of the loan, or due to fraud or material
erwise consistent with the provisions of the loan
misrepresentation by the consumer in connec-
documents, provided the change in interest rate
tion with the loan.
is not triggered by a default or the acceleration
of the interest rate. (9) Refinancing Within an 18-Month Period
(a) A lender, its affiliate, or an assignee shall not
(3) Balloon Payments
refinance any high-cost home loan to the
A high-cost home loan having a term of less than
same borrower within the first 18 months
10 years may not contain terms under which the
of the loan when the refinancing does not
aggregate amount of the regular periodic pay-
have a reasonable benefit to the borrower
ments would not fully amortize the outstanding
considering all of the circumstances, includ-
principal balance. However, this prohibition
ing, but not limited to, the terms of both the
does not apply when the payment schedule is
new and refinanced loans, the cost of the
adjusted to account for the seasonal or irregular
new loan, and the borrower’s circumstances.
income of the borrower or if the loan is a bridge
(b) A lender or assignee shall not engage in
loan.
acts or practices to evade this requirement,
(4) Negative Amortization including a pattern or practice of arrang-
A high-cost home loan may not contain terms ing for the refinancing of the lender’s or
under which the outstanding principal balance assignee’s own loans by affiliated or unaffili-
will increase at any time over the course of the ated lenders or modifying a loan agreement,
loan because the regular periodic payments do whether or not the existing loan is satisfied
not cover the full amount of the interest due. and replaced by the new loan, and charging
a fee.
(5) Prepaid Payments
A high-cost home loan may not include terms (10) Open-Ended Loans
under which more than two periodic payments A lender shall not make any loan as an open-

16. Florida Mortgage Brokerage and Lending Act Rules and Regulations 11
ended loan in order to evade the provisions of to a borrower in substantially the following
this act unless such open-ended loans meet the form:
definition in 12 C.F.R. s. 226.2(a)(20). If you obtain this high-cost home loan,
the lender will have a mortgage on your
(11) Recommendation of Default home. You could lose your home and any
A lender shall not recommend or encourage money you have put into it if you do not
default on an existing loan or other debt prior meet your obligations under the loan.
Mortgage loan rates and closing costs and
to and in connection with the closing or planned fees vary based on many factors, includ-
closing of a high-cost home loan that refinances ing your particular credit and financial
all or any portion of such existing loan or debt. circumstances, your employment history,
the loan-to-value requested, and the type
(12) Prohibited Door-To-Door Loans of property that will secure your loan. The
A high-cost home loan may not be made as a loan rate and fees could also vary based
direct result of a potential or future lender or upon which lender or broker you select.
its representative offering or selling a high-cost As a borrower, you should shop around
home loan at the residence of a potential bor- and compare loan rates and fees. You
should also consider consulting a quali-
rower without a prearranged appointment with fied independent credit counselor or other
the potential borrower or the expressed invita- experienced financial adviser regarding
tion of the potential borrower. This subsection the rates, fees, and provisions of this mort-
does not apply to mail solicitations that may be gage loan before you proceed. You should
received by the potential borrower. contact the United States Department of
Housing and Urban Development for a
(13) Late Payment Fees list of credit counselors available in your
A lender may not charge a late payment fee for area. You are not required to complete
a high-cost home loan except as provided in this this agreement merely because you have
received these disclosures or have signed
subsection. A late payment fee: a loan application. Borrowing for the
(a) may not be in excess of 5 percent of the purpose of debt consolidation can be an
amount of the payment past due. appropriate financial management tool.
(b) may only be assessed for a payment past due However, if you continue to incur sig-
for 15 days or more. nificant new credit card charges or other
(c) may not be charged more than once with debts after this high-cost home loan is
closed and then experience financial dif-
respect to a single late payment. If a late ficulties, you could lose your home and
payment fee is deducted from a payment any equity you have in it if you do not
made on the loan and such deduction causes meet your mortgage loan obligations.
a subsequent default on a subsequent pay- Remember that property taxes and home-
ment, no late payment fee may be imposed owners’ insurance are your responsibility.
Not all lenders provide escrow services
for such default. If a late payment fee has for these payments. You should ask your
been imposed once with respect to a par- lender about these services. Also, your
ticular late payment, no such fee shall be payments on existing debts contribute to
imposed with respect to any future payment your credit rating. You should not accept
which would have been timely and suffi- any advice to ignore your regular pay-
cient, but for the previous default. ments to your existing creditors.
(14) Modification or Deferral Fees (b) Annual percentage rate
A lender may not charge a borrower any fees A lender making a high-cost home loan shall
or other charges to modify, renew, extend, or disclose:
amend a high-cost home loan or to defer any 1. In the case of a fixed mortgage, the
payment due under the terms of a high-cost annual percentage rate and the amount
home loan on a minimum of one modifica- of the regular monthly payment.
tion, renewal, extension, or deferral per each 12 2. In the case of any other credit transac-
months of the length of the loan. tion, the annual percentage rate, the
amount of the regular monthly payment
and the amount of any balloon payment
HigH-cOst LOan DiscLOsUres permitted under this section, a statement
Chapter 494.00792 F. S. provides: that the interest rate and monthly pay-
(1) In addition to other disclosures required by law ment may increase, and the amount of
and in conspicuous type: the maximum monthly payment based
(a) Notice to borrower. A lender making a upon the maximum interest rate allowed
high-cost home loan shall provide a notice pursuant to law.

17. 12 Module 1
(c) Notice to purchasers and assignees and Office are responsible for the administration and
All high-cost home loans shall contain the enforcement of this act. The Commission may adopt
following notice: rules pursuant to ss. 120.536(1) and 120.54 to imple-
Notice: This is a mortgage subject to the ment this act. The Commission may adopt rules to
provisions of the Florida Fair Lending Act. allow electronic submission of any forms, documents,
Purchasers and assignees of this mortgage or fees required by this act.
could be liable for all claims and defenses
The Office:
with respect to the mortgage which the
borrower could assert against the creditor. • may conduct an investigation of any person when-
ever the Office has reason to believe, upon com-
(2) Timing of Disclosure
plaint or otherwise, that any violation of the act has
(a) The disclosure required by this subsection
shall be given not less than 3 business days occurred.
prior to the consummation of the high-cost • any person having reason to believe that a provision
home loan. of this act has been violated may file a written com-
(b) New disclosures are required when, after plaint with the Office setting forth the details of the
disclosure is made, the lender making the alleged violation.
high-cost home loan changes the terms of
• may conduct examinations of any person to deter-
the extension of credit, including if such
mine compliance with this act.
changes make the original disclosures inac-
curate, unless new disclosures are provided • may bring action through its own counsel in the
that meet the requirements of this section. name and on behalf of the state against any person
(c) A lender may provide new disclosures pur- who has violated or is about to violate any provision
suant to paragraph (b) by telephone, if: of this act or any rule or order issued under the act
1. The change is initiated by the borrower. to enjoin the person from continuing in or engag-
2. At the consummation of the high-cost ing in any act in furtherance of the violation.
home loan:
• in any injunctive proceeding, the court may issue
a. The lender provides the disclosures in
a subpoena or subpoenas duces tecum, requiring the
writing to the borrower.
attendance of any witnesses and the production of
b. The lender and the borrower cer-
any books, accounts, records, and other documents
tify in writing that the new disclosures
were provided by telephone no later and materials that appear necessary to the expedi-
than 3 days prior to the consumma- tious resolution of the application for injunction.
tion of the high-cost home loan. • may issue and serve upon any person an order to
(d) A creditor must disclose to any high-cost cease and desist and to take corrective action when-
home loan borrower the rights of the bor- ever it has reason to believe the person is violating,
rower to rescind the high-cost home loan has violated, or is about to violate any provision
within 3 business days pursuant to 15 U.S.C. of this act, or any written agreement between the
s. 1635(a) and shall provide appropriate person and the Office. All procedural matters relat-
forms for the borrower to exercise his or ing to issuance and enforcement of such cease and
her right to rescission. The notice, forms, desist orders are governed by the Administrative
and provisions thereof must be in accor- Procedure Act.
dance with the requirements of 15 U.S.C. s.
1635(a). • whenever the Office finds a person in violation of
this act, it may enter an order imposing a fine in
an amount not exceeding $5,000 for each count or
regULatiOn OF tHe FLOriDa Fair separate offense, provided that the aggregate fine
LenDing act for all violations of this act that could have been
The Office of Financial Regulation and the Financial asserted at the time of the order imposing the fine
Services Commission are responsible for the adminis- shall not exceed $500,000.
tration and enforcement of The Florida Fair Lending Any violation of this act shall also be deemed to be a
Act. Duties include investigations, examinations, violation of Chapter 494, Chapter 516, Chapter 520,
injunctions, and orders. Chapter 655, Chapter 657, Chapter 658, Chapter 660,
Chapter 663, Chapter 665, or Chapter 667. The com-
Powers and Duties of the commission mission may adopt rules to enforce this subsection.
and Office; investigations; examinations;
injunctions; Orders enforcement of the Florida Fair Lending act
Chapter 494.00795, F.S. provides that the Commission Chapter 494.00796, F.S. provides:

18. Florida Mortgage Brokerage and Lending Act Rules and Regulations 1
(1) Any person or the agent, officer, or other repre- cOncLUsiOn
sentative of any person committing a material vio-
In conclusion, it is important to be aware of current
lation of the provisions of this act shall forfeit the
rules and regulations governing the mortgage lend-
entire interest charged in the high-cost home loan
ing business and the extent to which they affect daily
or contracted to be charged or received, and only practice. These rules and regulations apply to a wide
the principal sum of such high-cost home loan range of topics, including licensure requirements,
can be enforced in any court in this state, either at continuing education requirements, and penalties for
law or in equity. violations of the rules. The Department of Financial
(2) A creditor in a home loan who, when acting in Services is responsible for regulating the activities of
good faith, fails to comply with the provisions of mortgage brokers, mortgage brokerage businesses,
this act shall not be deemed to have violated this mortgage lenders, and correspondent mortgage lend-
act if the creditor establishes that within 60 days ers by the use of Florida Statutes and the Florida
after receiving any notice from the borrower of Administrative Code and, when necessary, for impos-
the compliance failure, which compliance failure ing penalties on licensees found to be in violation.
was not intentional and resulted from a bona fide
error notwithstanding the maintenance of proce- resOUrces
dures reasonably adapted to avoid such errors, the
borrower has been notified of the compliance fail- To access any of the required forms, go to www.flofr.
ure, appropriate restitution has been made to the com/licensing/MBlist.htm and select the appropri-
borrower, and appropriate adjustments are made ate license type.
to the loan. Bona fide errors shall include, but not To access Chapter 494 online, go to
be limited to, clerical, calculation, computer mal- www.leg.state.fl.us/Statutes/index.cfm?App_
function and programming, and printing errors. mode=Display_StatuteURL=Ch0494/titl0494.
An error of legal judgment with respect to a per- h t m S t a t u t e Ye a r = 2 0 0 6 T i t l e = - 2 0 0 6 -
son’s obligations under this section is not a bona Chapter%20494
fide error. To access the Florida Administrative Code, Rules
(3) The remedies provided in this section are cumu- 69V-40, go to www.flofr.com/licensing/Rules
lative. Statutes/Rule69V-40.htm

19. 14 Module 1
MODULe revieW eXercises
Use the exercise questions to review the module material. The answers are found on the bottom of the next page.
1. In Chapter 494, an individual, partnership, corporation, trust, or other organization that possesses the
power to direct the management or policies of a company is referred to as a:
a. joint venturer.
b. control person.
c. principal broker.
d. principal representative.
2. The most significant change to the Rules Regulation Mortgage Brokers by 2004 was the creation of
which new Chapters?
a. 40-69V F.A.C.
b. 96V-40 F.A.C.
c. 69V-40 F.A.C.
d. 3D-40 F.A.C.
3. Which of the following is not a relevant change to Chapter 494 that became effective October 1, 2006?
a. Elimination of the need to display individual, main and branch office licenses.
b. Provision that applications are not deemed received until all required fees are received and authorizes disci-
plinary action if fees are paid with a bad check.
c. Provision that grounds for no disciplinary action when action is taken by other federal and state regulatory
organizations located in or outside the State of Florida involving securities, insurance, real estate, and lending
activities.
d. Allows the Office to contract with a third party vendor to administer the mortgage broker test.
4. Which of the following is not a prohibited act per Chapter 494?
a. To act as a mortgage lender in this state without a current, active license issued by the Office pursuant to
494.006-494.0077, F.S.
b. To record a mortgage brokerage agreement or any other document, rendered by a court of competent jurisdic-
tion, which purports to enforce the terms of the mortgage brokerage agreement.
c. To pay a fee or commission in any mortgage loan transaction to any person or entity other than a mortgage
brokerage business, mortgage lender, or correspondent mortgage lender, operating under an active license, or
a person exempt from licensure under this chapter.
d. In any matter within the jurisdiction of the Office, to knowingly and willfully falsify, conceal, or cover up by a
trick, scheme, or device a material fact, make any false or fraudulent statement or representation, or make or
use any false writing or document, knowing the same to contain any false or fraudulent statement or entry.
5. Audited financial statements of lenders must be prepared according to:
a. U.S. generally accepted accounting principles.
b. U.S. generally accepted auditing principles.
c. U.S. generally accounted accepted principles.
d. audited financials are not required by lenders once licensed.
6. Electronic filing of applications, renewals, and fees can be done by:
a. mortgage brokers.
b. mortgage brokerage businesses.
c. mortgage lenders.
d. all of the above.
Transfer your answers to the space provided on the Answer Sheet.

20. Florida Mortgage Brokerage and Lending Act Rules and Regulations 15
7. A person is presumed to control a company if, with respect to a particular company, that person:
a. is a director, general partner, or officer exercising executive responsibility or having similar status or functions.
b. directly or indirectly may vote 10 percent or more of a class of voting securities or sell or direct the sale of 10
percent or more of a class of voting securities.
c. in the case of a partnership, may receive upon dissolution or has contributed 10 percent or more of the capital.
d. any of the above.
1) b 2) c 3) c 4) b 5) a 6) d 7) d
ANSWERS:
Transfer your answers to the space provided on the Answer Sheet.

21. 16 Module 1

22. MODULE 2
credit scores and
credit scoring
Learning Objectives
After completing this module, you should be able to:
1. Define the terms credit score and credit 3. Discuss what counts in a credit score, what
scoring. can be done to raise a credit score, and how
2. List the consumer’s rights under the Fair Credit to create one through the use of nontraditional
Reporting Act (FCRA) and the Fair and Accurate credit.
Credit Transaction Act (FACT ACT). 4. List the entities that use credit scores as a tool
to evaluate a borrower’s credit worthiness and
how the credit score affects the terms offered.
intrODUctiOn creDit scOres
Making payments on time creates a solid credit rat- When consumers apply for a mortgage loan today,
ing, but it takes time to build. However, getting into the lender is looking for a certain minimum credit
a bad credit situation can happen very quickly by pay- score to make an automated underwriting decision. A
ing accounts late or not at all. If one of the accounts credit score is determined by a complex mathematical
is a mortgage loan, the lender can foreclose on the equation that evaluates the information contained in
property to recover their loss, and the consumer will a consumer’s credit file. Myfico.com defines a credit
no longer have a home. score as:
…a number generated by a statistical model which is
Who Uses credit scores? used to objectively evaluate information that pertains to
The 3 national consumer reporting companies sell making a credit decision.
the information in the report to creditors, insurers,
employers, and other businesses that use it to evalu- credit bureaus
ate applications for credit, insurance, employment, Equifax, Experían, and TransUnion, are national
or renting a home. Since a credit report includes credit reporting agencies that maintain credit reports
information on where the applicant has lived, how in the United States and work independently of each
they pay their bills, and whether they have been sued, other to gather information from businesses and
arrested, or filed for bankruptcy, all types of creditors update consumer credit profiles. Each bureau has
pull credit reports and use credit scoring. a name for the score model they use. Experían uses
the FICO score, created by Fair Isaac and Company.
Mortgage lenders use credit scores to help them Equifax uses the Beacon score model. TransUnion
evaluate a borrower’s request quickly and efficiently uses the Empirica score model.
through automated means. Higher scores normally
mean better interest rate and terms. In fact, the inter- Until 2005, the 3 major credit bureaus only provided
est rate offered is normally directly related to the these scores to lenders. That changed when the Fair
and Accurate Credit and Transaction Act (FACT
credit score.
ACT), effective September 1, 2005 allowed con-
Insurance companies use credit scores to determine sumers to receive once a year, upon request, a free
auto and home owner policy premiums. Car dealers, copy of their credit report. Consumers can always
furniture stores, cell phone service companies, credit receive a free copy of their credit report if they have
card companies, and landlords use credit scores. been denied credit due to information contained in a
© 2007 Bert Rodgers Schools of Real Estate, Inc. 17

23. 1 Module 2
credit bureau within 60 days of being denied credit. rizing disclosure for an employer to access the file
The Equal Credit Opportunity Act (ECOA) requires is required.
that the creditor provide a notice disclosing the rea- • Consumers can limit prescreened offers by opting
son the loan was rejected. The Fair Credit Reporting out.
Act (FRCA) requires the creditor to give the name,
address, and phone number of the consumer report- • Consumers can seek damages from violators.
ing company that supplied the information. • Identity theft victims and active duty military per-
sonnel have additional rights.
www.annualcreditreport.com
www.equifax.com The Federal Trade Commission (FTC) handles
www.experian.com consumer complaints. Their contact information is
www.transunion.com below:
Phone: (877) -FTC-HELP (382-4357)
credit scoring Mail: Federal Trade Commission
This process of evaluating past credit performance CRC-240
to predict future credit performance is called credit Washington, D.C. 20580
scoring. Credit scores for mortgage purposes range
from 300 – 850. Higher credit scores are indicative of Online complaint form: https://rn.ftc.gov/
better credit performance and lower scores indicative pls/dod/wsolcq$.startup?Z_ORG_CODE=
of possible default in the future. Since it is based on PU01
statistics and real data, it is more reliable than sub-
jective methods as it treats each subject objectively.
What counts in a credit score?
Under the ECOA, a credit scoring system may not
use race, sex, marital status, national origin, or reli- When a credit score is provided, 4 reason codes are
gion as factors. The ECOA states that a person cannot also provided to explain the scoring decision. It also
be denied credit or have credit terminated because of gives insight on how the score may be improved.
their age. However, creditors are allowed to use age in Each bureau places different weight on different fac-
a properly designed system but must give equal weight tors. Some look more heavily upon installment loans
to elderly applicants. and others on collections. If a credit report is used
in making a decision to accept or reject a mortgage
consumer credit rights loan, then the customer must be provided a National
Credit Score Disclosure. The National Credit Score
The federal FCRA promotes the accuracy, fairness, Disclosure provides the reason codes that were used
and privacy of information in the files of consumer most heavily in determining the score. See a sample
reporting agencies. Consumer reporting agen- disclosure in Exhibit I.
cies include credit bureaus and specialty agencies.
Specialty agencies include agencies that sell informa- FICO Score. According to FICO, a consumer’s
tion about check writing histories, medical records, credit score is composed of 5 factors each weighted
and rental history records. Consumers’ rights under differently.
the FCRA include: 1. 35% of the FICO score is determined by how the
• Consumers must be told if information in their consumer pays their credit accounts. Late pay-
credit file has been used against them. ments, bankruptcies, and other negative items con-
• Consumers have the right to know what is in their tribute negatively to the score.
file. 2. 30% of the FICO score is determined by how much
is owed on all outstanding accounts, the number of
• Consumers have the right to ask for a credit score. accounts, and how much available credit is being
• Consumers have the right to dispute incomplete or utilized. The more owed, the lower the score.
inaccurate information. 3. 15% of the FICO score is determined by the length
• Consumer reporting agencies must correct or of the credit history. However a short credit history
delete inaccurate, incomplete, or unverifiable infor- with successful financial management will reflect
mation. positively in the score.
• Consumer reporting agencies may not report out- 4. 10% of the FICO score is determined by open-
dated negative information. ing new accounts. Too many inquiries that do not
result in the extension of credit will reflect nega-
• Access to the file is limited to people with a valid tively in the score. Interest rate shopping should be
need. done in a short period of time to minimize lower-
• Written signed disclosure by the consumer autho- ing the score.

24. Credit Scores and Credit Scoring 19
exhibit i: national credit score Disclosure Form
Source: Calyx

25. 20 Module 2
5. 10% of the FICO score comes from having a mix of like a credit card, a car loan, or mortgage are consid-
credit like credit cards, a mortgage, and an install- ered unscoreable at the bureaus. Because of the lack of
ment loan. traditional credit reporting, the model cannot provide
This chart shows how the Fair Isaac Corp. values the a numerical determination. These borrowers may be
various parts of your credit management to determine placed into subprime loans with higher rates and fees
your credit score. because the lender cannot determine the risk associ-
ated with lending to this borrower.
Figure 2.1 What counts in a credit score?
Pay rent build credit
Pay Rent Build Credit, Inc. (PRBC) is a consumer
reporting agency that collects, stores, scores, and
reports bill payment data for permissible purposes
under the FCRA. Their website is devoted to help-
ing people develop credit scores based on alterna-
tive credit. Their philosophy advocates that Payment
Reporting Builds Credit.SM It is the first credit bureau
to give consumers and small businesses the tools to
Source: Fair Isaac Corp., www.myfico.com demonstrate their creditworthiness without the need
to go into debt (www.prbc.com ).
How can a credit score be improved? In addition to receiving payment data from creditors
Credit scores change as new information is reported and financial institutions’ bill payment services, PRBC
in the consumer’s credit file. In order to improve the has partnered with the National Credit Reporting
score, a consumer should consider: Association to verify trade line accounts and up to
• paying bills on time. 3 years worth of prior payments that are reported
directly by consumers to PRBC.
• keeping balances low on credit cards in relation to
available credit. Lenders can purchase a PRBC ReportSM depicting a
• paying down revolving debt. consumer’s bill payment history either on a stand-
alone basis, or merged with Equifax, Experían, and
• applying for new credit only when necessary.
TransUnion credit reports. Each report is accompa-
• if any payments have been missed, get current and nied by a PRBC Bill Payment ScoreSM (BPSSM). PRBC
stay current. Reports and the BPS are used in the absence of, or
The credit file should be checked periodically to be as a supplement to a traditional credit report, to gain
certain there are no errors and to help guard against a more complete and accurate risk assessment of an
identity theft. If an identity thief opens an account in applicant. A PRBC Report may also be used as a
your name and does not pay the bill, the bad credit nontraditional mortgage credit report which exceeds
could be reported under your name. If any of the secondary market standards for documenting cred-
information is incorrect, then under the FCRA, both itworthiness. PRBC does not charge consumers or
the consumer reporting agency and the creditor are small businesses a fee to enroll in the service or to view
responsible for correcting inaccurate or incomplete their own payment data at any time. The main objec-
information. Once the consumer sends written proof tive is to automate the mortgage application process
of the mistake to the credit reporting agency, the for hard-to-score borrowers so they may qualify for
agency has 30 days to investigate the information. better loan products and pricing.
The credit reporting agency must delete the con-
tested information when the agency does not receive a
response from the creditor or if the creditor is out of
vantagescoreSM
business and the information cannot be verified. In 2006, the 3 national repositories introduced the
jointly developed new credit score, VantageScoreSM
Under the FCRA, consumer reporting agencies must designed to simplify and enhance the credit process for
correct or delete unverifiable, inaccurate, or incom- both consumers and credit grantors. VantageScoreSM
plete information within 30 days of notification by the can provide consumers and businesses with a highly
consumer. Negative information or bad credit will be predictive, consistent score that is easy to understand.
reported for 7 years. Bankruptcies and judgments will Scores range from 501 to 990. with higher scores
be reported for 10 years. indicative of lower risk. A type of report card has been
Borrowers who do not have traditional credit accounts created with grades A to F.