QUESTION
The banking department claims that our “mortgage loan officer” category is incorrectly defined. As a result, they think we are not licensing MLOs who should be licensed, leading to us originating unlicensed loans. Now, they are auditing our loans for licensing violations.
Our attorney believes that our policy clearly states how we define an MLO. However, she is concerned that we do not provide examples of the activities and services offered by Mortgage Loan Originators.
We are in the process of preparing our defense but need some assistance in coming up with examples of MLO activities that the examiners will accept. They are currently auditing us, so we would appreciate your prioritizing our questions. Thanks for your commitment to us all!
What is the definition of a Mortgage Loan Originator?
What are some examples of MLO activities?
COMPLIANCE SOLUTION
ANSWER
You have asked questions about the term Mortgage Loan Originator (“MLO”), a term that has been defined and redefined, construed and misconstrued, litigated and relitigated, embedded in and cross-referenced among several foundational regulations, and, to some extent, continues to be elucidated and attenuated ad nauseum.
If your organization employs one or more mortgage loan originators, you must adopt and follow written policies and procedures designed to assure compliance. These policies and procedures must be appropriate to the nature, size, complexity, and scope of the financial institution's mortgage lending activities and apply only to those employees acting within the scope of their employment.
If you have not recently done a deep dive into the written policy document, contact us, and we’ll get it done. Better yet, ask us to provide an MLO Tune-up, one of our pioneering Compliance Tune-ups. Banking departments expect you to perform such self-assessment reviews.
I will give you a brief tour and promptly provide some examples.
S.A.F.E. ACT AND REGULATION G
Let’s go first to the S.A.F.E. Act, implemented through Regulation G,[i] which defines a mortgage loan originator and which individuals within your organization must be registered (banks) or licensed (non-banks).
This definition states that an MLO is an individual who:
· Takes a residential mortgage loan application and
· Offers or negotiates terms of a residential mortgage loan for compensation or gain.
However, like many things in regulatory compliance, it is often not what a definition includes but what it excludes that counts! I don’t care what title you give a person because what the person does matters most, not what title he happens to hold.
So, here are activities that are excluded[ii] from the MLO category:
1. An individual who performs purely administrative or clerical tasks on behalf of an individual who is an MLO under the broad definition above;
2. An individual who only performs real estate brokerage activities[iii] and is licensed or registered as a real estate broker under applicable State law, unless the individual is compensated by a lender, a mortgage broker, or other mortgage loan originator or by any agent of such lender, mortgage broker, or other mortgage loan originator, and meets the definition of mortgage loan originator in the above definition; or
3. An individual or entity solely involved in extensions of credit related to timeshare plans, as that term.[iv]
Now, we are often asked if administrative and clerical tasks are excluded. If you can demonstrate purely “administrative or clerical tasks,”[v] as I’ve outlined above, then, for purposes of exclusion, it is necessary to explicate the “tasks” that would be considered administrative and clerical.
In that context, “administrative or clerical” generally means the receipt, collection, and distribution of information common for the processing or underwriting of a loan in the residential mortgage industry and communication with a consumer to obtain information necessary for the processing or underwriting of a residential mortgage loan.
I use the term “residential mortgage loan” to mean[vi] any loan primarily for personal, family, or household use that is secured by a mortgage, deed of trust, or other equivalent consensual security interest on a dwelling (as defined in the Truth in Lending Act,[vii] or residential real estate upon which is constructed or intended to be constructed a dwelling, and includes:
· Refinancings;
· Reverse mortgages;
· Home equity lines of credit; and
· Other first and additional lien loans that meet the qualifications listed in this definition.
In short, virtually any consumer loan secured by a dwelling falls under this definition, meaning employees who originate these loans must be registered or licensed as MLOs.
DE MINIMIS EXCEPTION
Another question that usually comes up regards the so-called “de minimis exception.” Some people think that de minimis means “at a minimum.” But that is not the case. The term is Latin for “at least.” Generally, in the context of regulatory compliance, de minimis action is slight, minor, nearly trivial, or even insignificant. What constitutes de minimis is codified in applicable regulations not only in mortgage banking but also in a wide spectrum of regulations.
From a regulatory point of view, there is a de minimis exception[viii] from registration and licensing requirements for individuals who originate very few mortgage loans during the year. Under this exception, the registration and licensing requirements do not apply to an employee who has never been registered or licensed through the Nationwide Mortgage Licensing System and Registry or Registry[ix] (“Registry”) as a mortgage loan originator if, during the past 12 months, the employee acted as a mortgage loan originator for five or fewer residential mortgage loans.
However, before engaging in mortgage loan origination activity that exceeds the five-loan exception limit, the employee must register or license via the Registry under the rules. In addition, institutions are prohibited from engaging in any act or practice to evade the limits of the de minimis exception.
Also, once employees are registered or licensed, they cannot go back and rely on the de minimis exception even if their originations fall below the five-loan threshold. The de minimis exception only applies to employees who have never been registered or licensed.
You have asked for some examples of MLO activities. Please keep in mind that my answer is not meant to be comprehensive. The examples I offer are suggestive and generally illustrative. If you are unsure about activities performed by your MLOs, you should contact us or consult a competent compliance professional.
SOME EXAMPLES OF MLO ACTIVITIES
To help clarify the definition of mortgage loan originator and aid in the understanding of activities that would cause an employee to fall within or outside the definition of mortgage loan originator, the S.A.F.E. Act provides Appendix A,[x] which provides examples illustrating the application of the definition of an MLO.
As the Appendix makes abundantly clear, these examples are “not all-inclusive and illustrate only the issue described and do not illustrate any other issues that may arise under the rules.”[xi]
Taking a Loan Application
The following examples illustrate when an employee takes or does not take a loan application.
Taking an application includes:
· Receiving information provided in connection with a request for a loan to be used to determine whether the consumer qualifies for a loan, even if the employee:
o
has
received the consumer’s information indirectly to make an offer or negotiate a
loan;
o
is
not responsible for verifying information;
o
is
inputting information into an online application or other automated system on
behalf of the consumer; or
o
is
not engaged in approving the loan, including determining whether the consumer
qualifies for the loan.
Taking an application does not include:
· Any of the following activities performed solely or in combination:
o
contacting
a consumer to verify the information in the loan application by obtaining
documentation, such as tax returns or payroll receipts;
o
receiving
a loan application through the mail and forwarding it, without review, to loan
approval personnel;
o
assisting
a consumer who is filling out an application by clarifying what type of
information is necessary for the application or otherwise explaining the
qualifications or criteria necessary to obtain a loan product;
o describing the steps that a consumer would need to take to provide information to be used to determine whether the consumer qualifies for a loan or otherwise explaining the loan application process;
