I have been considering writing this article for a long time.

I’ve heard the term grey area all my life, but it really all started when I began working in the compliance department of the mortgage industry. When I began dealing with licensing, compliance, and other legal issues relating to the mortgage industry, I would always hear, “Well that’s a grey area, so we can go ahead and do it.” I was sort of unsure about moving forward into that grey area because it seemed black and white to me.

So…What is a grey area then if the law should be black and white? Grey areas are created by 4 different related issues.
1. Un-enforced Areas
2. Different Regulatory Agencies and Company Policies
3. Misunderstanding or Lack of Knowledge; and
4. Unclear or Contradictory Laws

I’ll go through each of these for you, give some examples, and then my opinion (for all it’s worth).

Un-enforced Areas

An un-enforced area in the law is exactly what you think it is. A law was written down, but no one ever decided to do anything if someone broke the law.

A good example of this in the mortgage industry is the law prohibiting loan officers from being paid 1099. The IRS put out a ruling quite a few years ago requiring that all loan officers (and the IRS defined loan officers fairly well) were required to be paid as w-2 employees. They put out this ruling but never decided to enforce it. Even if you get caught by the IRS, which is highly unlikely because everyone is doing it, you will only be required to show them that you are now changing everyone to w-2. There will never be a retroactive decision forcing you to fix the past payroll, and there will never be any fines. Thus, no enforcement.

Is it alright to do business in this “grey area” because you won’t get caught?. Is it right to do business like this because everyone else is doing it that way? The law says no. In fact the law is very black and white in this area, but many people would consider it a “grey area.” I would not. If something is clearly black and white, whether it is going to limit your company, you should always follow the law. This type of “grey area” is not a really a grey area, but a black area that should be avoided.

Different Regulatory Agencies and Company Policies

Different Regulatory Agencies regulate the mortgage industry. In fact, if you’re doing business in all 50 states and D.C., you’re probably regulated by over 60 mortgage regulatory agencies alone. That doesn’t mention the DOL, IRS, Secretary of States, counties, and cities to name a few.

As a mortgage company, you will have to create policies and procedures to deal with all of the laws and regulations issued by the states and federal government. For the most part, you will be able to satisfy each state’s law and develop the companies policies and procedures to do so. But some times, you will have to make companies policies that are nationwide because you would be very restricted if you had to make a different policy for each state.

A good example of this is that every state has different regulations regarding the disclosure requirements on the Good Faith Estimate (GFE). Some states will require that the fees on the initial GFE are close enough to the final fees to be considered disclosed in good faith. Other states will only require you to redisclose prior to final docs if the fees change on the GFE from the time of initial disclosure to the time of final docs.

What do you do in this case? Do you set different policies for each state? That would be impossible. So you could consider it a “grey area,” and just set your policy on the liberal side. You could just redisclose prior to final docs or even at final docs, and then if you get caught just pay the fines or pay back the borrowers.

My opinion is to always set your policies on the conservative side. This is a “grey area” created by too many laws and not enough time to monitor all of them, but remaining on the conservative side, you will prevent yourself from accidentally falling into the black.

Misunderstanding or Lack of Knowledge

This one is fairly obvious. This type of grey area is created by a lack of understanding or knowledge about what the law really says. Whenever you hear someone say, “I was told that this is how you do it,” you can probably assume that they aren’t sure about the topic themselves. I say it a lot myself, so I’m definitely not pointing fingers, but in this fast paced world of the mortgage industry, we often don’t have the time to research the topic, how we know we should.

A good example of this is an Account Executive that was over at my office the other day. He began to tell me that for the last 3 years all of our branches were using the corporate address when they submitted loans to his company. When I explained to him that we would need to change that, he insisted that it was perfectly legal, and that it would cause to much trouble to change. His reasoning for the legality of this was that “other brokers are using their companies corporate office and not obtaining branch licenses.” He also told me that this was how he was taught to do it. I eventually found out that he considered this a grey area, because if he actually added all of our branches, it would limit the number of brokers you could solicit for his company.

The only thing to do when there is a lack of understanding or knowledge is to continue to increase your understanding of the law and to always be working towards making your company more compliant. Instead of considering these grey areas, because they are often misunderstood, we need to dig deep for the truth and then make an honest decision based on what we know to be true.

Unclear or Contradictory Laws

This is what we usually hear from people when they consider something a “grey area.” I have said it myself many times. Unfortunately after years of experience, I have discovered that 90% of the times I said this, the law was perfectly clear, but I wasn’t. However, the law does contradict itself, and it does quite often. In these cases we usually use case law or audit/examination results to get a clearer picture of what the law is teaching.

A good example of this is the pre-payment restrictions on junior lien loans under the Consumer Loan License. Some may argue with me, but when I read the follow excerpt, I see it restricting pre-payment penalties if the APR is over 12%.

Prepayment penalty. A licensee may not collect a prepayment penalty on the following loans:
(a) Any nonmortgage loan made at rates authorized by the act; or
(b) Any junior lien mortgage loan made at rates authorized by the act; or
(c) Any loan made by a licensee that is not a “creditor” under DIDMCA.

My interpretation of this was that rates authorized by the act were any rates over 12%. Elsewhere in the regulations, it states that the act authorizes rates over 12%. Interestingly, though, the consensus was that pre-payment penalties were restricted on junior lien loans no matter the interest rate. This could be an example of companies being conservative, because it would be a costly issue to be wrong on and find out in an audit by the state, but it is what it is.

There are contradictions and unclear statements in the law, but we should do our best to interpret them based on their intention. Remaining conservative is always a recommended. But just a reminder, when you see an apparent contradiction, it is often just a lack of understanding. I have found out the hard way many times myself.


So whose decision is it when it comes to any of these “grey areas?” Is it the compliance manager’s decision, is it the sales manager’s decision, or is it the owner’s decision? The answer is obvious. It is the owner or officers decision. Often the decisions in these areas are really difficult to make, and if we don’t agree with the owner’s decisions, we need to place our objections, but ultimately their decision stands. If you’re the owner of a mortgage company, you should carefully listen to your compliance staff because they are usually doing their best to keep you out of trouble.

Final note…If you’re company is riding in the “grey” too much, you may need to decide to keep your integrity and move on to another job. I’ve had to make this decision before. It is always the best decision.