Our bank partners with a third-party originator that refinances home mortgage loans. We underwrite these refinancings and purchase the loans from the third-party after the closing. Do we need to complete a “Tangible Net Benefit Form” when purchasing these loans, even though we are not considered the lender when the loan closes? Because we prepare closing documents on behalf of the third-party originator, should we be completing the “Tangible Net Benefit Form” for them? Also, would we be violating any law or regulation if we refinance a mortgage without completing a “Tangible Net Benefit Form” to remove a borrower due to a divorce? If this occurs, would we be protected if we keep the divorce decree on file to show that the refinance was justified?

Because the Illinois Fairness in Lending Act applies to any entity that “assists” with a refinancing, we recommend working with your third-party originator to ensure that their refinancings result in a tangible net benefit to the borrower if you will be assisting in the refinancings and receiving related fees.

The Illinois Fairness in Lending Act prohibits Illinois financial institutions from engaging in the practice of “loan flipping,” meaning “to assist a person in refinancing a loan secured by the person’s principal residence for the primary purpose of receiving fees related to the refinancing” if the refinancing will result in no tangible benefit to the borrower. Because your institution will be assisting borrowers in refinancing by underwriting their loans and preparing closing documents, we believe that you could be violating this prohibition if you receive fees related to the refinancing when it does not result in a tangible net benefit to the borrowers. As stated in FFIEC guidance, banks “cannot outsource the responsibility for complying with laws and regulations” to a third party. Consequently, we recommend working with your third-party originator to ensure that a tangible net benefit analysis is completed and documented, either by your institution or the third-party originator, to avoid violating the prohibition on loan flipping at the time of refinancing.

When purchasing loans that result from the refinancing of an existing loan pursuant to a divorce decree, we recommend retaining the divorce decree to document your compliance with any applicable tangible net benefit requirements. While there is no express requirement that you prepare a “Tangible Net Benefit Form” on behalf of your third-party originator, we recommend working with them and outlining procedures to ensure a tangible net benefit analysis is completed and documented to comply with the Illinois Fairness in Lending Act (as well as the Illinois High Risk Home Loan Act and Regulation Z, when refinancing a high risk or high-cost mortgage loan).

Also, we have linked to sample tangible net benefit forms we found online, which reference the removal or buyout of a co-borrower from title — with court order or evidence that the co-borrower no longer resides at the property — as a possible borrower benefit.

For resources related to our guidance, please see:

Illinois Fairness in Lending Act, 815 ILCS 120/3 (“No financial institution, in connection with or in contemplation of any loan to any person, may: . . . (e) Engage in equity stripping or loan flipping.”)

Illinois Fairness in Lending Act, 815 ILCS 120/2(e) (“‘Loan flipping’ means to assist a person in refinancing a loan secured by the person’s principal residence for the primary purpose of receiving fees related to the refinancing when (i) the refinancing of the loan results in no tangible benefit to the person and (ii) at the time the loan is made, the financial institution does not reasonably believe that the refinancing of the loan will result in a tangible benefit to the person.”)

Illinois Fairness in Lending Act, 815 ILCS 120/2(a) (“‘Financial Institution’ means any bank, credit union, insurance company, mortgage banking company, savings bank, savings and loan association, or other residential mortgage lender which operates or has a place of business in this State.”)

FFIEC, Uniform Interagency Consumer Compliance Rating System, 81 Fed. Reg. 79473, 79478 (November 14, 2016) (“While an institution’s management may make the business decision to outsource some or all of the operational aspects of a product or service, the institution cannot outsource the responsibility for complying with laws and regulations or managing the risks associated with third-party relationships.”)

Regulation Z, 12 CFR 1026.34(a)(3) (“Within one year of having extended a high-cost mortgage, a creditor shall not refinance any high-cost mortgage to the same consumer into another high-cost mortgage, unless the refinancing is in the consumer’s interest.”)

Illinois High Risk Home Loan Act, 815 ILCS 137/45 (“No lender shall refinance any high risk home loan where such refinancing charges additional points and fees within a 12-month period after the original loan agreement was signed, unless the refinancing results in a tangible net benefit to the borrower.”)

Tangible Net Benefit Worksheet (“The borrower will receive the following described tangible, net benefit(s) through a refinancing of an existing loan (please check every benefit that applies): . . . Payoff of a Contract for Deed OR Refinance of a lease option OR Removal OR buyout of co-borrower from title with court order or evidence that the co-borrower no longer resides at the property.”)

Multi-State Borrower Benefit Worksheet (“The borrower will receive the following described benefit(s) (one minimum, but check all that apply): . . . Payoff of a contract for deed or refinance of a lease option or removal or buyout of co-borrower from title (with court order or evidence that the co-borrower no longer resides at the property).”)