QUESTION
Our General
Counsel has put a brake on letting new transferring loan officers originate
loans until they first have screening and training completed. Now our sales
department is in an uproar about this decision.
I am
in the sales group and we met with the General Counsel and the Compliance Manager,
but they would not budge. They say we have to get the screening and training
out of the way first even if we are transferring our licenses.
This
is causing a massive slow down, as we just brought on a large group of LOs who
are stuck in this “Screening and Training” limbo.
So, we
want to know, do we have to jump over yet another hurdle and go through this procedure to originate loans, even
when we already have our licenses in the transfer process?
ANSWER
I
will gladly shed light on the issue. Dodd-Frank added Truth-in-Lending Act §
129B(b)(1), which imposed new requirements for loan originators, including the
requirement for them to be qualified. The CFPB implemented this requirement in
Regulation Z § 1026.36(f)(3), which generally requires a loan originator
organization that employs an individual loan originator who is not licensed and
is not required to be licensed to:
(1) complete certain screenings (i.e., criminal background, credit report, and background information from the NMLSR) of that individual before permitting the individual to act as a loan originator on a consumer credit transaction secured by a dwelling; and
(2) provide periodic training.
The CFPB
considered the SAFE Act’s preexisting screening and training requirements when
it added these requirements. The Economic Growth, Regulatory Relief, and
Consumer Protection Act (EGRRCP Act) of 2018, which became effective on November
24, 2019, permits certain individuals who previously were registered or
state-licensed for at least one year pursuant to the SAFE Act to act as a loan
originator in a state if they have applied for a loan originator license in the
state.
Eligible loan originators include those who are employed by a
state-licensed mortgage company, have applied for a license in a new state,
were previously registered or licensed in a different state for at least one
year before applying for the new license, and satisfy certain criminal and
adverse professional history criteria.
But, please relax. Assuming the LOs are qualified, they may act as loan originators under the
temporary authority given them by the EGRRCP Act, while the new state processes
their license applications.
Here’s where your General Counsel and Compliance Manager should explore the issue
in more depth. The issue arises because Regulation Z imposes screening and
training requirements on loan originator organizations for
“each of its individual loan originator employees who [1] is not required to be licensed and [2] is not licensed as a loan originator….”
This language, which the CFPB adopted before the EGRRCP Act
existed, seems ambiguous regarding whether the individual loan originators it
references include loan originators with temporary authority under the EGRRCP
Act.
Although the language may be ambiguous, the CFPB believes the
most appropriate interpretation of Regulation Z is that it does not refer to a
loan originator with temporary authority, because a loan originator with
temporary authority does not satisfy the first condition in Regulation Z §
1026.36(f)(3), to wit, “is not required to be licensed.” A loan originator with
temporary authority is not an “individual loan originator employee who is not
required to be licensed….” He or she is an employee who is required to be
licensed, although the employee can act as a loan originator while seeking the
required license.
It should be emphasized, however, that your compliance department must conduct due diligence that confirms that a transferring loan officer in fact
meets the requirements for acting with temporary authority rather than simply
relying on the LO’s word.
Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
Lenders Compliance Group
