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Thursday, November 7, 2019

Transitioning Loan Officer Licensing

QUESTION
We are a mortgage lender that is hiring a large group of loan officers from a bank. The transition includes handling their licensing requirements. Of course, the loan officers want to continue to take applications, but their state licensing has been taking a lot of time and causing a lot of concerns. We need to know how to handle this licensing issue so that our new loan officers can get to work. What can we do to transfer the loan officers from their bank registration to become licensed loan officers?

ANSWER
Your question comes at an opportune time. I’m going to give you a new acronym – as if the mortgage community needs yet another acronym. 

Here it goes: “EGRRCPA!” 

I have not met anyone yet who has figured out how to provide a phonetic rendering, but maybe some pronunciation will gain traction eventually.

EGRRCPA stands for the Economic Growth, Regulatory Relief, and Consumer Protection Act. Let’s keep the acronym “EGRRCPA” for the sake of this brief response. It became law on May 24, 2018.

Section 106 of the EGRRCPA is designed to reduce the barriers for mortgage loan originators (“MLOs”) who are licensed in one state to temporarily work in another state while waiting for licensing approval in the new state, and, for our purposes, specifically also grants MLOs a grace period to complete the necessary licensing, when they move from a depository institution (where loan officers do not need to be state licensed) to a nondepository institution (where they do need to be state licensed). The EGRRCPA amended the SAFE Act (viz., Secure and Fair Enforcement for Mortgage Licensing Act). Fortuitously, apropos the timeliness of your question, these amendments are effective in just a few days, on November 24, 2019.

The CFPB published frequently asked questions and answers about these changes. In any event, the CFPB takes the position that these questions and answers are not meant to be a substitute for Regulation G (SAFE Act – Residential MLOs) and Regulation H (SAFE Act – State Compliance and Bureau Registration).

My response is necessarily limited, but we do offer the SAFE Tune-up, which is an inexpensive mini-audit that provides substantive guidance in handling SAFE compliance. Order the SAFE Tune-up HERE.

I am glad to provide a short and sweet audit checklist for general compliance with the SAFE Act, which you can use in your compliance self-assessments. Request the checklist HERE and we’ll send you a copy!

Let’s turn our attention to the EGRRCPA and the transitioning of MLOs.

For the purpose of providing a response to your question, there are two categories of loan officers that pertain under the SAFE act: state-licensed loan originators and loan originators with temporary authority. 
  • State-licensed loan originators are individuals who are not employees of a covered financial institution (in general, employees of non-depository institutions). These MLOs must obtain and annually maintain a valid loan originator license from a state and obtain registration with the NMLSR system, which generally is accomplished through the licensing process. Since state law implements the SAFE Act’s requirement to obtain a loan originator license in a state, these individuals should check with their state to determine the full set of state law requirements for obtaining a loan originator license. 
  • Loan originators with temporary authority, as of November 24, 2019, are certain MLOs who have temporary authority to act as loan originators in a state for a limited period while applying for a state loan originator license in that state. But not all loan originators are eligible for temporary authority: temporary authority applies to loan originators who were previously registered or state-licensed for a certain period before applying for a new state license. Additionally, loan originators are eligible for temporary authority only if they have applied for a license in the new state, employed by a state-licensed mortgage company in the new state, and satisfy certain criminal and professional history requirements described in the SAFE Act.

Beginning on November 24, 2019, an MLO who satisfies the Loan Originator with Temporary Authority eligibility criteria may act as a loan originator in a state where the loan originator has submitted an application for a state loan originator license, regardless of whether the state has amended its SAFE Act implementing law to reflect the EGRRCPA amendments. Be sure to implement fine-tuned, onboarding procedures to ensure compliance with the individual MLO’s filing requirements!

With respect to the state transitional licensing availability under SAFE, in 2012 the CFPB issued Bulletin 2012-05 on state transitional licenses in response to several inquiries it received regarding whether states may, consistent with the SAFE Act, permit a level of state reciprocity when granting state loan originator licenses. The Bureau explained that, under Regulation H, “a state must require and find, at a minimum, that an individual” has met certain standards before granting an individual a state loan originator license. 

However, the Bureau opined that where a state is considering a licensing application from an individual who already holds a valid loan originator license from another state, the regulation does not limit the extent to which a new state may consider or rely upon the prior state’s findings when determining an individual’s eligibility under its particular licensing laws. The Bulletin also noted that the individual needs to meet a net worth or surety bond requirements, or pay into a state fund, as required by the state.

Provided that the individual meets the requirements, and the state accepts that the loan originator meets all of the applicable standards, the SAFE Act permits transitional licensing in this limited sense.

However, take note, state transitional licenses are not available in every situation. The Bulletin explained that states are not permitted to provide transitional licenses to Registered Loan Originators (who are not also State-Licensed Loan Originators) applying for a state loan originator license. Furthermore, not all states offer transitional licenses.

A loan originator applying for a state license must follow the application procedures established by the state, and generally must wait to begin acting as a loan originator until the state grants the application, including transitional license situations. Loan originators who are eligible for temporary authority may act as a loan originator in the application state while the state is considering the application.

So, does the EGRRCPA impact the status of the state transitional license under the SAFE Act? Put simply, No!

The EGRRCPA amendments to the SAFE Act do not affect the permissibility of transitional licensing under the SAFE Act and Regulation H, as set forth in Bulletin 2012-05. The EGRRCPA amendments do not impact the ability of a state to consider or rely on a prior state’s findings when considering a State-Licensed Loan Originator’s license application, as discussed in the Bulletin.

But, the EGRRCPA amendments establish temporary authority, which provides a way for eligible loan originators who have applied for a new state loan originator license to act as a loan originator in the application state while the state considers the application.

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
Lenders Compliance Group