“2011 Rhode Island Banking Legislation”
Rhode Island Governor Lincoln Chafee signed Chapter 145 An Act Relating to Financial Institutions (the Act) into law on June 29, 2011.
James H. Hahn
Rhode Island Governor Lincoln Chafee signed Chapter 145 “An Act Relating to Financial Institutions” (the “Act”) into law on June 29, 2011. The Act became effective immediately. The Act makes changes to the state’s financial institutions' examination statute to allow the sharing of otherwise confidential and privileged information with the Conference of State Bank Supervisors (“CSBS”). The Act also eliminates the requirement that mortgage loan originators maintain a minimum net worth in addition to providing a minimum surety bond to qualify for licensing in Rhode Island. Maintenance of a surety bond in accordance with regulations to be promulgated by the Rhode Island Department of Business Regulation (the “DBR”) will now suffice without compliance with the more onerous minimum net worth requirements.
The Rhode Island law requiring the disclosure to borrowers of nonrefundable loan fees was also amended, effective June 13, 2011, bringing Rhode Island General Laws § 34-23-6 into line with revisions to the Real Estate Settlement Procedures Act (“RESPA”) and its related regulations governing the information that can be included in good faith estimates (“GFE’s).
Confidentiality and Privileged Status for Information Obtained by the DBR and Sharing with the CSBS
The Act amends Section 19-4-3 of Rhode Island law to provide for the confidential treatment of information obtained by the DBR in the course of a DBR examination or investigation. Changes to Section 19-4-3 make clear that such information is confidential and privileged, is not subject to the Rhode Island Access to Public Records law, is not subject to subpoena, and is not subject to discovery or admissible as evidence in any private civil action. These same protections are provided for documentation and information in the possession of the CSBS. The DBR is, however, free to utilize the information in the furtherance of any legal or regulatory action brought by the Division. The Director of and employees of the DBR may not be permitted to testify in any private civil action concerning the information referred to in Section 19-4-3.
The sharing of information by the DBR (including material that is privileged and confidential) with other state, federal and international regulatory agencies, with the federal deposit insuring agencies, with the CSBS, and with state, federal and international law enforcement authorities is permitted, provided the recipient agrees to maintain the confidentiality and privileged status of the information. The recipient must verify in writing that it has the legal authority to maintain the required confidentiality. The DBR has similar obligations to maintain confidentiality and privileged status with respect to information and documentation it receives from other regulatory and law enforcement agencies.
Copies of Examination Reports and Notice of Response Deadlines
The Act amends Section 19-14-23(d) by including a requirement that the DBR “promptly following the examination” provide the examined lender or loan broker licensee with a written report of examination and a notice requiring the recipient to file written response to the examination report within 30 days of receipt. A more extensive response period may be specified by the DBR.
Licensing Requirements for Mortgage Loan Originators Lending on Property Outside of Rhode Island
A new subsection added to Section 19-14.10-4 of Rhode Island law by the Act makes it clear that a mortgage loan originator who only originates loans secured by real property that is not located in Rhode Island is not required to obtain a Rhode Island mortgage loan originator’s license, provided that the Rhode Island office in which the mortgage loan originator works is a “qualified location.” Thus, mortgage lender and loan broker licensees based in Rhode Island and providing loan origination services for borrowers whose dwellings are either constructed or intended to be constructed outside of Rhode Island may properly structure their operations so that mortgage loan originators engaged solely in non-Rhode Island transactions need not obtain Rhode Island mortgage loan originator licenses even though based in Rhode Island. A “qualified location” is a location licensed by Rhode Island that serves as the primary place of employment for at least one Rhode Island licensed mortgage loan originator. The non-Rhode Island loan originators who work out of the Rhode Island “qualified location” must be licensed as required by the applicable state or states for the mortgage loans they are originating.
Minimum Net Worth and Surety Bond Requirements
All references to “minimum net worth” requirements for mortgage loan originators have been removed from the applicable Rhode Island statute. Rhode Island now follows the majority of other states where a minimum net worth is required for the lender and loan broker licensees, while mortgage loan originator employees are not required to maintain a minimum net worth. With respect to the surety bond requirement, a Rhode Island mortgage loan originator must “maintain” a surety bond, which means that an originator who is employed by a licensed lender or loan broker may utilize the employer’s surety bond to fulfill this requirement, so long as the employer’s surety bond is increased to a higher amount to provide sufficient coverage. The DBR is required to promulgate regulations implementing the surety bond requirement within 120 days of the effective date of the amended law. The new regulations are expected in October 2011.
Rhode Island Disclosure Regarding Nonrefundability of Loan FeesReturn
Rhode Island amended Section 34-23-6, effective June 13, 2011, to remove the requirement that the lender or loan broker give the borrower an itemization of non-refundable loan fees and charges to be imposed in connection with a mortgage loan. This Section applies to mortgage loans secured by 1- to 4-family residential properties, and its main focus continues to ensure that loan originators, lenders and loan brokers give borrowers the following written disclosure:
“Notice regarding nonrefundability of loan fees: You have received a good faith estimate of fees and charges showing the loan fees and similar charges you are likely to pay to obtain this loan. As provided in section 34-23-6, none of these or other fees and charges will be refunded in the event the loan is prepaid in whole or in part.”
The amendment removes a requirement that previously caused a compliance conundrum among Rhode Island loan originators, lenders and loan brokers. Prior to amendment, Section 34-23-6 contained this statement: “The disclosure, which may be in the form of a good faith estimate under the federal real estate procedures act, shall contain an itemization of such fees and charges”. The regulations under RESPA, more commonly known as the “RESPA Rule”, were amended effective January 1, 2010. One of the key requirements of the amended RESPA Rule prohibits an itemization of fees in the good faith estimate (the “GFE”) document. This RESPA Rule prohibition against itemization of loan fees in the GFE directly contravened the language in the Rhode Island statute, which required the Rhode Island nonrefundability disclosure to include an itemization of loan fees. Loan originators, lenders and loan brokers who are attempting to comply with the RESPA Rule and Section 34-23-6 are no longer faced with trying to comply with these conflicting regulations and laws.