I'm new to compliance. My bank has a person (works for another lending company) working in an office in the bank. She takes ALL loan apps; processes all the ones that she can sell in the secondary market, and hands the rest to my bank for processing and originating. Sometimes the credit report has been ordered by her company (not the bank)and is given to us. This whole process makes me VERY uneasy. I'm trying to deal with it a little at a time. First of all, should we be using a credit report addressed to someone else? Secondly, how do I address the fact that no one at my bank takes a loan app; yet we originate the loans?

What is your bank's relationship with this other lending company? Are you affiliates or do you have a written agreement that spells out the arrangement, any payment, responsibilities?

We need to know those things to be able to answer your questions.

There is no formal relationship with this other lending personnel (except that she is a former employee). There are no written agreements-----it is a "give and take" relationship. She is well-known in the community, so knows a lot of people. The applicants that qualify are processed through her company and sold on the secondary market. Those that can't be sold are handed over to us for originating and holding in our portfolio.

Need a little clarification: this person takes all loans aps of people who think they are applying to your bank?

Ignoring the fact that she is sitting in your office space, she is acting as a broker and there is not necessarily anything wrong with that provided that the firm is licensed as a broker (assuming your state requires that - most do).

Is the bank paying for these broker services?

It is common for a broker to order the credit bureau, take the application, make disclosures (including required broker disclosures), etc. and in return for that get a fee from the lender.

The payment must be for work actually done, not just for a referral.

The use of office space adds another dimension which can be okay under RESPA as long as she does real work and it is not a sham to pay referral fees. That doesn't sound like an issue.

Given that she is using bank space, working on bank premises, you really need to discuss this with legal counsel and have a documented contractual relationship..who does what, how much payment is and what you are paying her for, how the space is paid for, the bank's expectations including fair lending expectations, what the underwriting terms are that the bank will accept, and so forth.

At a minimum this relationship must be formalized. You should review this situation with legal counsel as soon as possible.

Yes, her firm is licensed as a broker. We pay no fees to her. What she gets out of the relationship is office space for her, her secretary (her mom), and her assistant (her sister). She pays all of their wages. She takes the app (including analyzing income, collecting financial information, and education of the types of loans available); and sometimes orders the credit report and appraisal. She helps them with credit issues and stays in contact with the customer until the loan is funded. I don't believe there is a broker disclosure. Anything else I need to think about or check on? I will certainly get legal counsel. It just seemed a little too weird.

Sounds like a huge kickback issue. Free office space based on referral of business. I see Section 8 issues all the way........

You didn't mention who gives the early disclosures. I mention this because it still seems an applicant may think they are dealing with the bank instead of a broker. (Is the HUD-1 properly reflecting the fees paid to the broker?)