Carolyn Goldman


The Importance of Selecting an
Appropriate Responsible Individual

List of Factors to Consider

The Responsible Individual function is required by Arizona statute.[1]  See A.R.S. § 6-943(F).  Accordingly, the Responsible Individual function was created by, and is required by, the Arizona Legislature.  Its requirements are delineated in Arizona statutes enacted by the Arizona Legislature and by regulations promulgated by the Arizona Department of Financial Institutions (AZDFI).[2]  The Responsible Individual must have certain experience in the mortgage industry and an acceptable background and must be an Arizona resident.

A finding by the AZDFI that a mortgage licensee has not complied with the laws and rules governing the Responsible Individual can result in assessment of a civil money penalty and other administrative action and can be the basis for an Administrative Proceeding prosecuted by the Arizona Attorney General’s Office.  Therefore, the Responsible Individual function is significant and important and the person selected to perform this function should be chosen accordingly.

The Responsible Individual must be:

(1)     a “bona fide” W-2 employee of the licensee; [3]  and

(2)     in “active management” of the licensee. [4]

“Active management” is defined as:

R20-4-102. Definitions

 [D]irecting a licensee’s activities by a responsible individual, who:

1.       Is knowledgeable about the licensee’s Arizona activities;

2.       Supervises compliance with:

(a)     The laws enforced by the Banking Department as they relate to the licensee, and

(b)     Other applicable laws and rules [5]; and

3.       Has sufficient authority to ensure compliance.

(emphasis added).

As part of the “active management” requirement, the Responsible Individual (“RI”) must handle examinations by the Arizona Department of Financial Institutions (“AZDFI”), and as a result, must be privy to confidential and sensitive documents and information.  Moreover, the RI must be knowledgeable about the applicable statutes and regulations which are defined to include the Truth in Lending statutes, and Regulation Z, and the Real Estate Settlement Procedures act, and Regulation X, and of course, the TRID/Know Before You Owe Rule, as well as applicable Arizona statutes and rules.

Based upon the foregoing, the following matters should be considered in connection with selecting an appropriate Responsible Individual:

1. The Responsible Individual Must be Knowledgeable about the Real Estate Settlement Procedures Act (RESPA) and Regulation X, and the Truth in Lending Laws (TILA) and Regulation Z, Including the TRID/Know Before You Owe Rule, as Well as Applicable Arizona Statutes and Regulations.

Pursuant to the “active management” requirement described above, the Responsible Individual must be knowledgeable about the “applicable” laws and rules.  In case there were any doubt, TILA and RESPA and their corresponding federal regulations, Regulation Z and Regulation X are made specifically “applicable” by A.R.S. § 6-946(E) and therefore, the Responsible Individual must be knowledgeable about these statutes and regulations including the TRID/Know Before You Owe Rule.  It is important to know if the potential RI is knowledgeable about these statutes and regulations, as well as the applicable Arizona statutes and regulations.  It is also important to know if the person can discuss these laws and rules intelligently with an examiner should the RI receive a unanticipated telephone inquiry from an examiner and during a formal examination.

2. The Responsible Individual Must be Privy to Sensitive and Confidential Information Including Financial Information. 

Pursuant to the “active management” requirement described above, the Responsible Individual must be knowledgeable about the mortgage company’s business.   The Responsible Individual must be involved in the examination process and in the transmission and review of financial statements, tax returns, personnel files, W-2s, payroll records, bank records, the general ledger and loan files.  It is important to consider whether the potential RI can be trusted with this confidential and sensitive information.

3. The Responsible Individual Must be a Bona Fide W-2 Employee and Therefore an Individual, Not an Entity.  Be Wary of Companies Offering RIs for Hire and Websites Touting What “We” Do.

Would the Potential Responsible Individual be “Splitting” Part of the W-2 Compensation with Others or Paying “Kickbacks”?

Is the Potential RI Transparent about His or Her Identity?  Is the Potential RI Transparent about His or Her Background, Credentials and Experience?

Arizona law requires that the Responsible Individual be a bona fide W-2 employee of the licensee (or, in the alternative, an officer, director, member, partner or trustee of the licensee).  See A.R.S. § 6-943(F).  Therefore, of course, the Responsible Individual must be an individual.  Accordingly, the Responsible Individual cannot be an entity and a entity cannot be hired for this function.  As a result, be wary of vendors offering to provide a Responsible Individual.  Furthermore, be wary of websites which describe hiring “us” or what “we” do.

It is important to know whether the proposed Responsible Individual would be sharing the W-2 compensation with others, who or which are not bona fide W-2 employees of the licensee, such as referral sources, and is the fee splitting or other “kickback” arrangement a violation of law.  With whom is the mortgage company asked to contract regarding the Responsible Individual?  At issue is the bona fides of the employment relationship between the Responsible Individual and the mortgage company.

It is important to consider if there is transparency as to the identity of the individual who is the proposed Responsible Individual.  Alternatively, is the identity of person not disclosed in websites for some reason?

Furthermore, does the potential RI have a website, LinkedIn page or other means to convey his credentials, background and experience?  If not, why?  If so, the website, LinkedIn page or other medium should be carefully examined.  Are they literate or illiterate and is the person an appropriate choice as a licensee’s representative to interact with, and communicate with, the AZDFI?

In summary, be wary of websites, and vendors, which do not provide even the name of the individual who would act as the Responsible Individual, much less that person’s background, experience and credentials and “kickback” or “income sharing” schemes.

4. How Long Has the Potential RI Been Providing the Responsible Individual Service?  How Many AZDFI Examinations Has the Person Handled? Is the Potential RI Knowledgeable about AZDFI Interpretations of Laws and Rules and AZDFI Policies?

When interacting with a regulator over a period of time, important information is gleaned as to the regulator’s interpretations of laws and rules and the regulator’s policies.  This knowledge is particularly important in complying with the laws, rules and policies enforced by the regulator to ensure successful examinations.

It is important to evaluate whether the potential RI can advise the mortgage company of the issues which the AZDFI will review for enforcement during an examination.  It is important to know the number of AZDFI examinations the potential RI has handled.

It is important to know if the potential RI has been providing this service for many years, a few years, less than a year or only a few months.

5.  Does the Potential RI Use His Home as the Mortgage Company’s Principal Arizona Office?

Would the potential RI use his residence as the mortgage company’s principal Arizona office?  If so, the AZDFI examiners would come to the home to conduct examinations.  What impression of the mortgage company does this give the AZDFI examiner at the outset of the examination?

6. Is the Potential RI a Licensed Arizona Attorney and Does His or Her Background, Experience, Credentials, other Professional Work and Professional Activities Contribute to the Services to be Provided?

7. Is the Potential RI Capable of Providing Guidance as to the Applicable Arizona Laws and Rules and Answering Questions Regarding Them?

One of the primary functions of the Responsible Individual is to provide advice regarding the Arizona statutes and regulations applicable to mortgage companies.   Certainly, being a licensed Arizona attorney enhances the ability to perform this function.  Additional professional practice, involvement in attorney and mortgage professional associations, appointment by the AZDFI to committees to review and revise professional tests, presenting to other attorneys on mortgage related topics enhance knowledge and reputation and add value to the services provided.

8.  Does the Potential RI Originate Mortgage Loans or Otherwise Compete with the Mortgage Licensee’s Business?

9. Does the Potential RI Require the Mortgage Company to Commit to a Contract and a Time Period for Services or Is the RI Confident that the Mortgage Company Will be Happy with the Services Provided so that Commitment to a Time Period Is Not Required?

10.  On What Basis Does a Mortgage Company Retain Attorneys and other Vendors and Is Cost the only Consideration?

When retaining attorneys to advise regarding the TRID/Know Before You Owe Rule, HMDA, a CFPB investigation or litigation, should the mortgage company retain the attorney who charges the lowest possible fee?  Similarly, should a mortgage company retain a person to perform the Responsible Individual function and provide guidance regarding Arizona laws and rules based upon whether the person charges the lowest possible fee, even if that means hiring a non-lawyer, or a lawyer without demonstrated knowledge in the field and who does not publicly disclose his or her background, experience or credentials?

In addition, does the potential RI charge additional fees for services such as handling examinations, providing guidance regarding Arizona laws and rules, for additional licenses, such as trade name licenses or for other matters?

11.  Arizona Recognizes the Torts of “Negligent Referral” and “Negligent Hiring.”

Arizona courts recognize the torts of negligent referral and negligent hiring.  Therefore, care should be taken in connection with both the decision as to whom to hire, as well as whom to refer, as a Responsible Individual.

In connection with liability for negligent referral, consideration should be given in particular to whether the potential RI is knowledgeable regarding TILA, RESPA, Regulation Z and Regulation X, including the TRID/Know Before You Rule and the applicable Arizona statutes and regulations and whether the person is trustworthy to receive the client’s confidential and sensitive financial data and other records, as well as the other issues discussed herein.

[1] There are four (4) Arizona mortgage license types:  (1) mortgage banker; (2) mortgage broker; (3) commercial mortgage banker; and (4) commercial mortgage broker.  Generally, citations contained in this website refer to the statutes governing mortgage banker licensees, A.R.S. § 6-941 et seq.

[2] A.R.S. § 6-101 et seq.; R20-4-101 et seq.

[3] A.R.S. § 6-943(F) and AZDFI policy.

[4] The mortgage licensee must allow the Responsible Individual to be in “active management” of its business as required by Arizona statutes.   See A.R.S. § 6-943(F).

[5] A.R.S. § 6-946(E) defines “other applicable laws and rules” to include the “Truth in Lending” laws, and Regulation Z, the Real Estate Settlement Procedures Act (RESPA) and Regulation X, including the TRID/Know Before You Owe Rule.