What Every Mortgage Lender Should Know about Copyright Infringement?

If you are a mortgage lender, you probably have generated many pieces of advertising for the loan products offered by your company.  Before releasing those ads, you probably spent countless hours on the content, aesthetics, and compliance aspects of the ads.  Everything seemed perfect.  

But, in many cases, your ads probably contain some kind of picture, graphic, or image.  Where did that picture or image come from?  Did you have permission from its owner to use it for commercial purpose?  If not, you may have infringed someone's copyright in and to that picture.  

Mortgage lenders of all sizes are subject to strict federal and state regulations with respect to advertising mortgage loan products.  On the federal side, lenders must comply with the MAP Act, Regulation N, the Truth in Lending Act, Regulation Z, the Fair Credit Report Act, and Regulation V.  At the same time, each state has its own mortgage advertising rules.  Given the severe consequences of a violation of the numerous federal and state rules, and in light of the CFPB's particularized attention on false and misleading mortgage advertising, mortgage lenders tend to spend much time and resources on advertising compliance.
         
The following may generally describe how a lender finalizes a piece of mortgage loan-related adverting.  First, a loan officer or production manager comes up with the desired texts for the ad; second, the compliance officer scrutinizes over the texts for federal and state compliance issues; third, someone with some computer skills "googles" for a visually appealing image and inserts it onto the texts; and finally, the ad gets distributed electronically or in print to the target audience.  Unfortunately, some lenders often neglect another important aspect of their advertising materials - copyright.

Copyright is the exclusive right of the owner of a copyrighted materials (music, literary work, pictures, among others) to produce, distribute, perform, or otherwise use such materials.  Copyright does not protect ideas, concepts, objects, or things; rather, it protects the original or creative expression of the underlying ideas, concepts, objects, or things.  Unlike for patents, the "original" or "creative" threshold required for copyright is low.  This renders most photographs, paintings, images, drawings, and musical notes copyrightable under federal law in the United States.  

Copyright infringement occurs when someone reproduces, displays, performs, or otherwise uses a copyrighted work during the copyright protection period without the permission, authorization, or license of or from the owner.  Unless you display or re-distribute a copyrighted work under some kind of fair use exception, i.e., commentary, criticism, parody, news reporting, or scholarly research, your unauthorized use of a protected work for commercial purposes is likely to constitute copyright infringement, which may be extensive civil damages.

Having reviewed copyright and the infringement thereof, let's think about how a mortgage lender can avoid committing, unwittingly, copyright infringement in making ads.

First, if you need a picture or image to make your ad "pop", conduct some internet searches to get the right look or "feel" for a picture.  But, don't just copy and paste a picture you find out there.  In most case, if not all, the picture you find and like on the internet is copyrighted.  Once you know the right look, you may want to use your own picture with a similar look.  If you don't have it, ask other employees in your company.  If they have a picture you like, obtain permission to use it.

Second,  if you or no one you know has a picture to your liking for a particular ad, think about creating one on your own.  Does your company have an artsy employee who can draw, make, or photograph?  Ask around and you may be surprised.

Third, if none of the above two options works for you and you really would like to use a photo you find on the internet, you may have to find its owner and ask for permission to use.  It may, however, be difficult to find the owner of a picture or image.  If you found the image via a google search, you may first use some technical means to identify the owner.  When that fails, you may want to go to flickr or similar websites to search for particular photos from the registered members of those websites.  It should be fairly easy to get in touch with the owner of one of the photos/images you like on those websites.  Contact the owner for permission to use.      

Fourth, when all of the above fails, you can always commission a graphic artist (a talented kid, an art teacher, etc.) to produce a custom-made image for you.  This may cost a small amount of money, but you know for sure that the image belongs to you because the artist created it for you under the "work for hire" doctrine.  You can re-use it as many times as you would like, without worrying about receiving a cease and desist letter from someone.         

Smaller Community Banks and Credit Unions: Have the Cake and Eat It Too

Smaller community banks and credit unions play a unique role in many Americans' financial lives by providing various financial products with great customer service.  However, these community banks and credit unions often cannot keep a large number of mortgage loans on their books due to a host of reasons, including, without limitation, high compliance costs, overhead costs associated with retaining mortgage loan professionals, risks associated with borrower default, etc.  As such, they often just refer their customers and members to other financial institutions in order to avoid the "headaches" associated with originating mortgage loans.  

However, I believe smaller community banks and credit unions can capitalize on existing customer relationships, originate loans to their customers, yet at the same time manage their costs and risks.  With the right setup and relationships, they can do so by selling their mortgage loans to the secondary market mortgage investors.  To that end, I often advise them of four options with varying degrees of risks, rewards, and costs associated therewith.  Below is a slightly modified email I recently sent to a community bank:

Option 1 – Marketing Services Agreement
With this option, the Bank can refer its customers desiring a mortgage loan to another mortgage company.  To move forward, you will need to select a target mortgage company(ies), enter into a formal marketing services agreement, and implement procedures required under the agreement.   

The benefits of this option include, without limitation: (1) no origination activity is required of the Bank; (2) the Bank receives a certain fixed amount for its bona fide marketing services provided to the mortgage company; and (3) the Bank will not have the compliance duties related to originating mortgage loans. 

The disadvantages associated with this option include, without limitation: (1) the Bank has little to no control over the borrower/customer’s mortgage loan experience with the mortgage company; (2) the Bank may lose the customer(s) due to a perceived lack of financial products, i.e., mortgage loans; and (3) the Bank misses the opportunity to make income from those mortgage loans on a per loan basis. 

Option 2 – Brokering
Under this option, the Bank can process mortgage loan applications made by its customers and make limited income on those loans by brokering such loans to a secondary market wholesale lender.  A brokering relationship typically necessitates a loan brokering agreement, and the Bank will need to hire loan originators and processors. 

The benefits of this option include, without limitation: (1) the Bank can conduct certain origination activities, therefore, will have control over the customer service experience in the loan origination process; (2) the Bank can help its customers with their mortgage loan needs; (3) the Bank can make some income on each loan, i.e., broker compensation and broker fees; (4) the wholesale  lender of the loans will underwrite, close, and fund these loans, and absent fraud or misrepresentation, the wholesale lender should shoulder most of the liability in connection with the loans. 

The disadvantages include, without limitation: (1) because of the QM points and fees limitations, loans with lower principal amounts may fail the QM points and fees test (3%), which may impact the salability of such loans; (2) the Bank will not be able to leverage its own strengths – available funds to close and fund the loans for greater compensation; and (3) originating loans will require the Bank to hire a loan originator and contract/employee processor.  

Option 3 – Mini Correspondent
Under this option, the Bank can close and fund mortgage loans to its customers and earn greater income on such loans.  Becoming a mini correspondent will require the Bank to establish some mortgage lending infrastructure, such as formulating contractual relationships with investors, hiring loan originators and processors, and finding third party vendors (credit reporting, flood cert., loan documents, MERS, etc.) 

The benefits of this option include, without limitation: (1) meeting existing customers’ mortgage needs; (2) closing and funding the loans in the Bank’s name will help the Bank earn greater income (in comparison with brokering) when the loan is sold; (3) the loans will be underwritten by the investors not the Bank, which effectively reduces the Bank’s liability; and (4) the Bank can outsource the closing, funding, and post closing associated with such loans to a third-party provider . 

The disadvantages include, without limitation: (1) the cost associated with hiring loan originators and processors (employee or contract); and (2) the Bank will need to have compliance expertise. 

Option 4 – Full Correspondent
This option will require the Bank to have a complete mortgage team (in house or contract) in order to originate loans, including loan originators, processors, underwriters, closers, and post closers.  The income on each loan is greater than what the Bank could get under the other three options, so will be the cost.  This is probably is not a viable option for the Bank at this time.

For most smaller community banks and credit unions, going the mini correspondent route may be the best choice.

Why the New Appraisal Disclosure (Reg B) is Tricky?

Effective on 1/18/2014, creditors must comply with new rules under Reg B governing appraisals ("Appraisal Rule") in connection with first lien loans secured by a dwelling with an application date of 1/18/2014 or later.

In a nutshell, a creditor must provide the borrowers a disclosure, within three business days after the receipt of a loan application, advising them of their right to receive a copy of all appraisals and other written valuations developed in connection with the loan.  Appendix C, Form 9 provides the following recommended language for the disclosure:

We may order an appraisal to determine the property's value and charge you for this appraisal. We will promptly give you a copy of any appraisal, even if your loan does not close. 

 You can pay for an additional appraisal for your own use at your own cost.

In addition, the creditor must provide a copy of the appraisal/valuation reports to the borrowers promptly upon completion or three business days before closing.

These requirements seem simple and straightforward enough.  What is so tricky about the new Reg B?

1.  Scope of Application
Unlike other federal regulations, for example, Reg Z (TILA), Reg X (RESPA), Reg V (Fair Credit Reporting Act), or the new fearsome QM Rules, the new Appraisal Rule applies broadly to both consumer credit transaction and business-purpose credit transactions.

Notably, the Official Staff Interpretations provides:

14(a)(1) In general.
1. Coverage. Section 1002.14 covers applications for credit to be secured by a first lien on a dwelling, as that term is defined in § 1002.14(b)(2), whether the credit is for a business purpose (for example, a loan to start a business) or a consumer purpose (for example, a loan to purchase a home). [Emphasis added]

In other words, if the borrowers apply for a first-lien loan secured by a dwelling (i.e., 1-4 family residence, including, mobile home, condo, and coop), the requirements under the new Appraisal Rule will be triggered.  Therefore, even if the loan is for a business purpose, for example, to acquire a non-owner occupied, 1-4 family rental/investment property, the Appraisal Rule applies.  Similarly, it applies to a business purpose loan even if the borrower is a business entity, such as a limited liability company.

In terms of scope and applicability, the Appraisal Rule departs from other federal regulations.  Creditors, who lend to business entities or rental property investors, must comply with the Appraisal Rule by providing the early disclosure. (I do note that the broad application of this disclosure requirement is an existing requirement under Reg B.)  

2. Written Valuations
While the industry is familiar with appraisal reports developed by appraisers, less is known, however, about "written valuations".  In Reg B, "valuations" is defined as follows:

any estimate of the value of a dwelling developed in connection with an application for credit.

According to this definition, valuations should cover (refer to this):

• An appraisal report (by an appraisal whether or not licensed or certified) including the appraiser's estimate or opinion of the property’s value;
• A document prepared by the creditor or its agent/contractor that assigns a specific monetary value to the property;
•  A report approved by a GSE for describing  the estimate of the property’s value developed pursuant to the proprietary methodology or mechanism of the GSE;
•  A report generated through an automated valuation model (AVM) to estimate the property’s value;
• A broker price opinion (BPO) prepared by a real estate broker, agent, or sales person to estimate the property’s value.

In some instances, a creditor may compile valuation data, post closing, regarding a property solely for quality control purposes.  Will those valuation data be subject to this rule?  Given the overarching goal of Reg B for preventing discrimination by promoting transparency during the loan origination process, written documentation developed by a creditor after closing for quality control purposes should fall outside the scope of the Appraisal Rule.

Texas Supreme Court Further Clarifies Home Equity Lending

Summary:

In a Supplemental Opinion On Motion for Rehearing dated January 24, 2014, the Supreme Court of Texas ruled that: (1) per diem interest and legitimate discount points are not included in the constitutional 3% fee cap in connection with Texas home equity loans secured by homestead; and (2) a power of attorney can only be used in closing a home equity loan if that power of attorney was properly executed in the office of a title company, an attorney, or of the lender.

Impact:

With this additional ruling from the high court, lenders can now exclude prepaid per diem interest from the 3% fee cap.  "Legitimate" discount points can also be excluded, but the Court did not define what constitutes "legitimate".  The intent of the Court was, probably, to state "bona fide" discount point, which is a concept familiar to the mortgage lending industry.  Like with the exclusion of bona fide discount points in calculating the QM 3%, lenders will likely be required to demonstrate the discounts were in fact bona fide.  It's possible the Court may issue additional clarification on "legitimate discount points", and I will continue to monitor for developments on this.  For lenders that only originate QM loans, they will need to comply with both the Texas 3% fee cap and QM 3% when the Texas home equity loan amount is equal to or greater than $100K. 

In addition, borrowers, who must sign closing documents with the help of a power of attorney, will have to execute a Power of Attorney in the office of an attorney, the lender, or title company.  As a practical matter, title companies that close Texas home equity loans may require evidence, proof, or certification that a Power of Attorney was indeed executed in one of the permitted locations.  To be safe, a lender should not allow an agent/attorney-in-fact to execute Texas home equity loan closing documents unless it is certain that the power of attorney giving authority to the agent was properly executed in the office of a title company, an attorney, or of the lender.