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;
o
in
response to an inquiry regarding a prequalified offer that a consumer has
received from an institution, collecting only basic identifying information
about the consumer and forwarding the consumer to a mortgage loan originator;
or
o
receiving
information in connection with a modification to the terms of an existing loan
to a borrower as part of the institution’s loss mitigation efforts when the
borrower is reasonably likely to default.
Offering or Negotiating Terms of a Loan
The following examples are meant to illustrate when an employee offers or negotiates the terms of a loan and what does not constitute offering or negotiating the terms of a loan.
Offering or negotiating the terms of a loan includes:
o
presenting
a loan offer to a consumer for acceptance, either verbally or in writing,
including, but not limited to, providing disclosure of the loan terms after
application under the Truth in Lending Act, even if:
o
further
verification of information is necessary;
o
the
offer is conditional;
o
other
individuals must complete the loan process; or
o
only
the rate approved by the institution’s loan approval mechanism function for a
specific loan product is communicated without the authority to negotiate the
rate;
o responding to a consumer’s request for a lower rate or lower points on a pending loan application by presenting the consumer with a revised loan offer, either verbally or in writing, which includes a lower interest rate or lower points than the original offer.
Offering or negotiating terms of a loan does not include solely or in combination:
o
providing
general explanations or descriptions in response to consumer queries regarding
qualification for a specific loan product, such as explaining loan terminology
(i.e., debt-to-income ratio); lending
policies (i.e., the loan-to-value
ratio policy of the institution); or product-related services;
o
in
response to a consumer’s request, informing a consumer of the loan rates that
are publicly available, such as on the institution’s website, for specific
types of loan products without communicating to the consumer whether
qualifications are met for that loan product;
o
collecting
information about a consumer to provide the consumer with information on loan
products for which the consumer generally may qualify, without presenting a
specific loan offer to the consumer for acceptance, either verbally or in
writing;
o
arranging
the loan closing or other aspects of the loan process, including communicating
with a consumer about those arrangements, provided that communication with the
consumer only verifies loan terms already offered or negotiated;
o
providing
a consumer with information unrelated to loan terms, such as the best days of
the month for scheduling loan closings at the institution;
o
making
an underwriting decision about whether the consumer qualifies for a loan;
o
explaining
or describing the steps or process that a consumer would need to take to obtain
a loan offer, including qualifications or criteria that would need to be met
without providing guidance specific to that consumer’s circumstances; or
o communicating on behalf of a mortgage loan originator that a written offer – including disclosures required by the Truth in Lending Act – has been sent to a consumer without providing any details of that offer.
Offering or Negotiating a Loan for Compensation or Gain
The following examples illustrate when an employee does or does not offer or negotiate terms of a loan for compensation or gain:
o offering or negotiating terms of a loan for compensation or gain includes engaging in any of the activities described above as those that are considered as offering or negotiating the terms of a loan in the course of carrying out employment duties, even if the employee does not receive a referral fee or commission or other special compensation for the loan.
o offering or negotiating terms of a loan for compensation or gain does not include engaging in a seller-financed transaction for the employee’s personal property that does not involve the institution.
Jonathan Foxx, Ph.D., MBAChairman & Managing Director
Lenders Compliance Group
[i] 12 CFR § 1007.102. See Secure and
Fair Enforcement for Mortgage Licensing Act of 2008.
[ii] Ibid § 1007.102(b)(2)
[iii] As defined in 12 USC 5102(3)(D)
[iv] See 11 USC 101(53D)
[v] § 1007.102(b)(3)
[vi] § 1007.102(e). For purposes of this article,
the term “loan” refers to a residential mortgage loan.
[vii] § 103(v), Truth in Lending Act, 15 USC
1602(v)
[viii] § 1007.101(c)(2
[ix] See Op. cit. i, The Nationwide
Mortgage Licensing System and Registry or Registry is “a system developed
and maintained by the Conference of State Bank Supervisors and the American
Association of Residential Mortgage Regulators for the state licensing and
registration of state-licensed mortgage loan originators and the registration of
mortgage loan originators pursuant to 12 USC 5107.”
[x] Appendix A to Part 1007 – Examples of
Mortgage Loan Originator Activities
[xi] Idem
