By Dennis Doss
An “advance fee” is money collected by a loan originator from a loan applicant before a loan has been closed. Due to unscrupulous originators that took advance fees and then failed to procure promised loans, the mortgage law generally disfavors advance compensation.
We have three types of mortgage origination licenses in California. Each one treats the topic of advance fees a little differently.
Department of Real Estate (“DRE’). Starting in 1958 California clamped down on advance fee arrangements by passing Business and Professions Code Section 10085 and thereafter the DRE published Regulations 2970 and 2972. The rules require a broker to submit his or her advance fee agreement, accounting format and any advertising and promotional materials to the DRE for review. They go over them with a fine-toothed comb and very few if any are approved. They do permit the collection of an appraisal and credit report fee in advance, provided they are either paid directly to the vendor or deposited into the broker’s trust account and paid from there. Since most brokers abhor the handling of trust funds, having the applicant pay the appraiser directly and collecting the credit report fee at loan closing is the most common and recommended practice.
California Finance Lender. One of the two lending licenses administered by the Department of Financial Protection and Innovation (“DFPI”) is the California Lender’s License. You will see an earlier Doss Guide describing the features of the CFL license and how it compares to a DRE license. As to consumer loans, the DFPI prohibits advance fees by CFL lenders. Financial Code Section 22300. As to non-consumer loans (business purpose loans) the same prohibition does not apply. Nevertheless, expect administrative sanctions if the DFPI receives complaints that business purpose licensees are collecting advance fees but not providing promised loans.
Residential Mortgage Lenders. Many residential mortgage bankers opt for the California Residential Mortgage Lender license (“RML”) also administered by the DFPI. The license is limited to residential lending and carries with it a $250,000 audited net worth requirement. The RML statutes and DFPI rules do not prohibit the payment of an “application fee” in addition to direct vendor costs like credit and appraisal. However, if the licensee will act as broker rather than a direct lender in the transaction it must obtain the DFPI’s approval to a form of brokerage agreement calling for an “application fee.” Financial Code Section 50701.
Bottom Line: Avoid advance fees. You are better served with a good Agreement to Procure (brokerage agreement) if you want contractual assurances you will be paid. If there are expenses, have the borrower pay them directly. If you need travel expenses, have the borrower book and pay for the travel for you. A good upfront agreement with the borrower gives you the exclusive right to represent him or her to obtain a loan within certain parameters. If the borrower is lured elsewhere or flakes out on you, you can take the borrower to court or arbitration to collect your out of pocket costs and loan commission.
This article is intended as educational material not legal advice. Consult a knowledgeable lawyer before implementing any of the ideas in this article.