Financial Penalties for Advertising Violations

YOUR QUESTION 

We have been using a marketing company for our advertising. We relied on their compliance to make sure the advertisements met the guidelines. Unfortunately, a banking department just cited us for violations in our advertising. So, we fired the marketing company. Meanwhile, we're stuck. The banking department has asked for all our advertising going back three years!   

My partner hired a lawyer to handle our case. The lawyer reviewed the advertisements from the last three years and informed us that there are many violations in them. It is scary how much money we will need to pay in financial penalties. The lawyer says there could also be remuneration to the borrowers. We don't have the money for all of these violations. We just don't. We may have to close down the company. We're going to meet with the department next week to discuss the situation. 

I need some more guidance. I want to be more prepared for the meeting. I need to know what we're facing in penalties. We have been told that your firm conducts advertising reviews before their publication, so I hope you can enlighten me about what to expect. 

What are the financial and other penalties for violations of mortgage advertisements? 

COMPLIANCE SOLUTIONS 

Advertising & Marketing Compliance Reviews 

Advertising Tune-up 

Advertising Manual 

Please contact us to discuss these solutions!

ANSWER TO YOUR QUESTION 

I am sorry to learn of this happening. This situation is avoidable, yet many companies get caught up in the dragnet of defective advertisements. You can't farm out your liability to marketing companies. Many of them claim to have compliance staff, but in reality, their compliance is sparse, if it exists at all. And forget about the testimonials of their awesome success; for goodness sake, they are marketing companies – what kind of testimonials do you expect them to provide? 

Yes, we provide relatively inexpensive advertising and marketing campaign reviews. We've offered advertising compliance for twenty years. The advertising review is expeditious. We hold the final masters in our extranet, so that clients can access them at any time. Our staff works with the client to ensure the advertisements both meet their marketing goals and comply with regulatory mandates. Some clients have even retained us to review the compliance procedures of their marketing companies.

If you want assistance with advertising compliance, please contact me. Get your company into a reliable advertising compliance program. Forget the bells and whistles. Forget the marketing company route! 

If you are not an expert in advertising compliance, you need compliance support. 

A hefty violation could cost you the company! 

Here's what happens when your advertising compliance is not reliable.

 

Recently, a company was shuttered for alleged deceptive advertising. Its home office was located in California. It was licensed in 30 states and Puerto Rico. In that case, specifically, the mortgage lender allegedly used the names and logos of the VA and FHA in its advertisements, described loan products as part of a "distinctive program offered by the U.S. government," and instructed consumers to call the "VA Interest Rate Reduction Department" at a phone number belonging to the mortgage lender, thus implying that government agencies sent the mailings. The result of this matter was a consent order permanently banning the company from engaging in any mortgage lending activities, or from "otherwise participating in or receiving remuneration from mortgage lending, or assisting others in doing so." In addition, the company, while neither admitting nor denying the allegations, was required to pay a $1 million civil money penalty. 

Fortunately, many compliance departments have a very good understanding of the restrictions on advertising, which are meant to protect consumers from misleading practices and ensure fair access to credit. 

Here is a list of a few basic Acts and regulations. 

Some Acts and Regulations 

Truth in Lending Act (TILA) (Regulation Z) 

TILA requires clear and accurate disclosure of loan terms, including the annual percentage rate (APR), loan amount, loan term, and repayment terms, presented clearly and conspicuously. Certain "trigger terms" (for instance, specific interest rates or monthly payment amounts) require additional disclosures.

Defining “Mortgage Loan Originator”

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 

MLO Tune-up 

Policies and Procedures 

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;

NMLS Exemption for Clerical Employees

QUESTION

We are trying to determine if our clerical employees must register with the NMLS. As a small lender, we believe that NMLS only licenses loan officers because there is an exception for clerical staff. 

Yet, when we read the NMLS website and review the SAFE Act, we get more confused. 

Are clerical employees exempt from having to register with the NMLS? 

And what about management employees doing administrative work – do they need to go through the NMLS? 

ANSWER 

Let’s be clear: the Nationwide Mortgage Licensing System and Registry (“Registry”) does not grant or deny license authority. Make sure you understand the role served by the Registry. 

The Secure and Fair Enforcement for (SAFE) Mortgage License Act[i] requires states to enact individual loan originator licensing requirements, enact by law or regulation a system for licensing and registering loan originators meeting prescribed specifications, and join the Registry. 

The Registry is maintained jointly by the Conference of State Bank Supervisors (CSBS) and the American Association of Residential Mortgage Regulators (AARMR). 

All 50 states adopted the Registry, the record system for non-depository, financial services licensing or registration. It is the official system for companies and individuals seeking to apply for, amend, renew and surrender license authorities managed through the Registry by state or territorial governmental agencies. 

The federal banking agencies jointly enacted a similar system for the registration of individual loan originators on the Registry system for employees of (1) a depository institution, (2) employees of a subsidiary that is owned and controlled by a depository institution and regulated by a federal banking agency, or (3) employees of an institution that the Farm Credit Administration regulates.[ii] 

The Registry establishes protocols for assigning a unique identifier to each registered loan originator that will facilitate electronic tracking.[iii] 

To understand the requirements for administrative and clerical employees, we begin with what tasks such employees perform. It is essential to begin with a description of the tasks (and functions)  rather than specific titles because the tasks are dispositive in determining if an employee must comply with the Registry mandates. 

Administrative or clerical tasks mean the receipt, collection, and distribution of information common for the processing or underwriting of a loan in the mortgage industry and communication with a consumer to obtain information necessary for the processing or underwriting of a residential mortgage loan. 

Usually, when I define the tasks this way, I am asked if loan processors and underwriters fit within the “administrative or clerical” category. 

The answer is, they may, if 

(1) they are W-2 employees of a mortgage broker, mortgage lender, or institution that is regulated by one of the federal banking agencies, 

(2) they are performing their duties at the direction and subject to the supervision of a state licensed or federally registered loan originator, and 

(3) any communications they have with a consumer do not include offering or negotiating loan rates or terms, or counseling consumers about residential mortgage loan rates and terms. 

Another common question is whether an independent contractor must comply with the Registry requirements. Loan processors and underwriters functioning as independent contractors must be state licensed or federally registered as loan originators and assigned a unique identifier.

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director 

Lenders Compliance Group

___________________________
[i] 12 U.S.C. § 5101, et. seq.
[ii] On May 29, 2009, the Federal Banking Agencies (Federal Reserve Board, OCC, OTS, FDIC, NCUA and Farm Credit Administration) issued a joint notice of proposed rulemaking concerning implementation of the SAFE Mortgage Recovery Act. [74 Federal Register No. 109, p. 27386]
[iii] For more information, the CSBS provides https://www.csbs.org/nationwide-multistate-licensing-system

 

SAFE Act Policy Dilemma

QUESTION 

We are a small mortgage broker up in the Pacific Northwest. The banking department here cited us for not having a policy for the SAFE Act. Aside from being blindsided by them, we honestly have no idea what should be in such this policy. 

Your firm has a reputation for having really good policies that the regulators like. So many companies offer policies that it is confusing to choose the best one, and their prices are all over the place and ridiculously high. Some of them will give us policies "free" if we sign up with them for their compliance services. 

I guess we're asking you to tell us what to do. We need to know at least what goes into a SAFE Act policy. I realize you probably sell the policy, but hopefully, you will tell us some of the basics. 

What are some basic features of a good SAFE Act policy? 

ANSWER 

For many years I have railed against companies that provide the one-size-fits-all policies. There are all sorts of deals out there, and it is caveat emptor ("let the buyer beware") all the way! 

I have an old friend who is a high-level regulator. He tells me that his field examiners keep track of policies that are the same from shop to shop but have different company names stated on the policies. 

My term for these policy vendors is Mortgage Policy Mills. And, yes, some companies give out policies as a shill to get the buyer into becoming a client of their other services. Their templated policies are known to regulators, and it's not a good look. 

From the regulator's point of view, when they see the same policy in your shop that they already saw at another shop, it makes them think that you are not serious about implementing the policy guidelines. In some cases, it makes the regulator test to see if you are doing what your policy says you are doing. It is not a smart idea to go in that direction. 

Yes, we have a SAFE Act policy. There are no strings attached. And it is affordable. But the most important thing is that we work with you to ensure it conforms to your business model. Just contact us HERE, and we'll be in touch. 

Under the S.A.F.E. Mortgage Licensing Act (SAFE),[i] institutions that employ one or more mortgage loan originators must adopt and follow written policies and procedures designed to assure compliance with the Nationwide Multistate Licensing System ("NMLS" or "Registry") rules. 

These policies and procedures must be appropriate to the nature, size, complexity, and scope of the mortgage lending activities of the institution and apply only to those employees acting within the scope of their employment at the institution. 

In my view, at a minimum, these policies and procedures must: 

·     Establish a process for identifying which employees must be licensed or registered mortgage loan originators; 

·     Require that all employees who are mortgage loan originators be informed of the licensing and registration requirements of the SAFE Act and the Registry rules and be instructed on how to comply with such requirements and procedures; 

·     Establish procedures to comply with the unique identifier requirements;[ii] 

·     Establish reasonable procedures for confirming the adequacy and accuracy of employee registrations, including updates and renewals, by comparisons with its own records; 

·     Establish reasonable procedures and tracking systems for monitoring compliance with registration and renewal requirements and procedures; 

·     Provide for independent testing for compliance with the Registry rules to be conducted at least annually by institution personnel or by an outside party; 

·     Provide for appropriate action in the case of any employee who fails to comply with the licensing and registration requirements of the SAFE Act, the Registry rules, or the institution's related policies and procedures, including prohibiting such employees from acting as mortgage loan originators or other appropriate disciplinary actions; 

·     Establish a process for reviewing employee criminal history background reports received under the Registry rules, taking appropriate action consistent with applicable federal law and implementing regulations with respect to these reports, and maintaining records of these reports and actions taken regarding applicable employees; 

·     Establish procedures to ensure that any third party with which the institution has arrangements related to mortgage loan origination has policies and procedures to comply with the SAFE Act, including appropriate licensing and/or registration of individuals acting as mortgage loan originators. 

Finally, be sure you have properly defined who is a mortgage loan originator and, therefore, which individuals within your organization must be licensed or registered.

Jonathan Foxx, Ph.D., MBA

Chairman & Managing Director 

Lenders Compliance Group

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[i] 12 CFR § 1007.104 - Policies and Procedures

[ii] See § 1007.105

Online Group’s S.A.F.E Act Violations

QUESTION
In our recent examination, the banking department cited us for S.A.F.E. Act violations. The worst offenders were in our online group. 

The way we’re set up, the online loan officers separate between those who take an application and those who just answer phones and direct the applicants to loan officers. 

It became a licensing issue based on the definition of “taking an application” and whether anyone who spoke to the applicant was licensed in the property’s state. 

Some of the things we now have to do are install a call recording service, monitor all the calls, additional training, quarterly review of all loan officer licenses, complete description of the “hand-off” procedures, and compliance with the S.A.F.E. Act’s definition of originating mortgage loans. 

The biggest problem we face is defining what the banking department calls “mortgage loan originator activities.” We want to revamp the online group, beginning with a new definition. 

What are “mortgage loan originator activities” according to the S.A.F.E. Act?

ANSWER
There are several aspects of your inquiry leading up to the question itself. I have repeatedly said that a financial institution should not go online unless it has the appropriate policies and procedures in place. It appears that your company did exactly what I have argued against doing! I understand the need to get into online sales, but it should not be at the expense of courting regulatory violations. 

If you had come to us to build an online platform, we would have had you work with our checklist and document review that guide you in establishing an online sales group. We would be interacting every step of the way until you launch the platform. 

Such requirements would include not only the items you mention but also many more features that standardize and stabilize the interaction with consumers and ensure federal and, where applicable, state banking law compliance. 

Our firm already has the policies and procedures to conform to your business model. There are several necessary policy documents. But that’s just one feature of the build. 

You need periodic call calibration. Call calibration, which we offer, is an oversight process to monitor, rate, and report on call compliance by listening to recorded calls. Ideally, this should be done by a compliance professional. 

There are numerous disclosure requirements, both oral and written. 

And the threat of being trapped in a licensing violation is real. We have worked with clients that fell into multistate licensing violations and paid millions of dollars in civil monetary penalties. When you say “hand-off procedures,” I say be careful! 

And, most important, you need to understand what constitutes “mortgage loan originator activities” as defined by the S.A.F.E. Act (“Act”),[i] whose implementing Regulation H describes specific requirements for S.A.F.E. Act-compliant state mortgage loan originator licenses and the Nationwide Mortgage Licensing System and Registry.[ii] 

To answer your question, I will treat three fundamental elements that constitute mortgage loan originator activities. The three components are (1) taking an application, (2) offering or negotiating loan terms, and (3) compensation or gain for rendering such services. 

These are not all the possible scenarios but about as comprehensive as I can provide in the space available for this article. If you want more information, please get in touch with me HERE. 

I will base my response on an appendix to the Act.[iii] This appendix is best understood as providing possible examples to aid in understanding activities that would cause an individual to fall within or outside the definition of a mortgage loan originator. Even then, they illustrate only the issue described and do not illustrate any other issues that may arise. 

Let’s begin by describing a residential mortgage loan as 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[iv] or residential real estate upon which is constructed or intended to be constructed a dwelling.[v] 

And, broadly, a loan application is a request, in any form, for an offer (or a response to a solicitation of an offer) of residential mortgage loan terms, and the information about the borrower or prospective borrower that is customary or necessary in a decision on whether to make such an offer. I know this language seems legalistic – and I guess I can’t help myself! – but in this case, every single word counts. Read it again! 

Taking an Application 

The act of taking a residential mortgage loan application means receipt by an individual for the purpose of facilitating a decision whether to extend an offer of loan terms to a borrower or prospective borrower.[vi]

Here are some examples of taking or not taking an application. 

An individual “takes a residential mortgage loan application” even if the individual: 

·    Has received the borrower or prospective borrower’s request or information indirectly, which means an individual takes an application whether they receive it “directly or indirectly” from the borrower or prospective borrower.[vii] It also means that an individual who offers or negotiates residential mortgage loan terms for compensation or gain cannot avoid licensing requirements simply by having another person physically receive the application from the prospective borrower and then pass the application to the individual; 

·    Is not responsible for verifying information. The fact that an individual who takes application information from a borrower or prospective borrower is not responsible for verifying that information – for example, the individual is a mortgage broker who collects and sends that information to a lender – does not mean that the individual is not taking an application; 

·    Only inputs the information into an online application or other automated system; or 

·    Is not involved in the approval of the loan, including determining whether the consumer qualifies for the loan. Similar to an individual who is not responsible for verification, an individual can still “take a residential mortgage loan application” even if they are not ultimately responsible for approving the loan. For instance, a mortgage broker can take a residential mortgage loan application even though it is passed on to a lender to decide whether the borrower qualifies for the loan and the ultimate loan approval. 

An individual does not take a loan application merely because the individual performs any of the following actions: 

·    Receives a loan application through the mail and forwards it, without review, to loan approval personnel. The Bureau interpreted the term “takes a residential mortgage loan application” to exclude an individual whose only role with respect to the application is physically handling a completed application form or transmitting a completed form to a lender on behalf of a borrower or prospective borrower.[viii] 

·    Assists a borrower or prospective borrower who is filling out an application by explaining the contents of the application and where particular borrower information is to be provided on the application; 

·    Generally describes for a borrower or prospective borrower the loan application process without a discussion of particular loan products; or 

·    In response to an inquiry regarding a prequalified offer that a borrower or prospective borrower has received from a lender, collects only basic identifying information about the borrower or prospective borrower on behalf of that lender. 

Offering or Negotiating Terms of a Loan 

The following examples illustrate when an individual offers or negotiates terms of a loan[ix] and, conversely, what does not constitute an offering or negotiating terms of a loan: 

Offering or negotiating the terms of a loan includes: 

·    Presenting for consideration by a borrower or prospective borrower particular loan terms, whether verbally, in writing, or otherwise, even if:

o   Further verification of information is necessary;

o   The offer is conditional;

o   Other individuals must complete the loan process;

o   The individual lacks authority to negotiate the interest rate or other loan terms; or

o   The individual lacks the authority to bind the person that is the source of the prospective financing. 

·    Communicating directly or indirectly with a borrower or prospective borrower to reach a mutual understanding about prospective residential mortgage loan terms, including responding to a borrower or prospective borrower’s request for a different rate or different fees on a pending loan application by presenting to the borrower or prospective borrower a revised loan offer, even if a mutual understanding is not subsequently achieved. 

Offering or negotiating terms of a loan does not include any of the following activities: 

·    Providing general explanations or descriptions in response to consumer queries, such as explaining loan terminology (i.e., debt-to-income ratio) or lending policies (i.e., the loan-to-value ratio policy of the lender), or describing product-related services; 

·    Arranging the loan closing or other aspects of the loan process, including by communicating with a borrower or prospective borrower about those arrangements, provided that any communication that includes a discussion about loan terms only verifies terms already agreed to by the borrower or prospective borrower; 

·    Providing a borrower or prospective borrower with information unrelated to loan terms, such as the best days of the month for scheduling loan closings at the bank; 

·    Making an underwriting decision about whether the borrower or prospective borrower qualifies for a loan; 

·    Explaining or describing the steps that a borrower or prospective borrower would need to take to obtain a loan offer, including providing general guidance about qualifications or criteria that would need to be met that is not specific to that borrower or prospective borrower’s circumstances; 

·    Communicating on behalf of a mortgage loan originator that a written offer has been sent to a borrower or prospective borrower without providing any details of that offer; or 

·    Offering or negotiating loan terms solely through a third-party licensed loan originator, so long as the non-licensed individual does not represent to the public that they can or will perform covered activities and does not communicate with the borrower or potential borrower. 

Examples:

-    A seller who provides financing to a purchaser of a dwelling owned by that seller where the offer and negotiation of loan terms with the borrower or prospective borrower are conducted exclusively by a third-party licensed loan originator.

-    An individual who works solely for a lender, when the individual offers loan terms exclusively to third-party licensed loan originators and not to borrowers or potential borrowers. 

Compensation or Gain 

An individual acts “for compensation or gain”[x] if the individual receives or expects to receive, in connection with the individual’s activities, anything of value, including, but not limited to, payment of a salary, bonus, or commission. 

Note: The concept “anything of value” is interpreted broadly and is not limited only to payments contingent upon the closing of a loan. 

An individual does not act “for compensation or gain” if the individual acts as a volunteer without receiving or expecting to receive anything of value in connection with the individual’s activities. 

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
Lenders Compliance Group
_____________________________
[i] 12 CFR Part 1008 – S.A.F.E. Mortgage Licensing Act – State Compliance and Bureau Registration System (Regulation H)
[ii] Regulation H was issued by the Consumer Financial Protection Bureau to implement the Secure and Fair Enforcement for Mortgage Licensing Act of 2008, title V of the Housing and Economic Recovery Act of 2008 (S.A.F.E. Act) (Pub. L. 110-289, 122 Stat. 2654, 12 U.S.C. 5101 et seq.)
[iii] See Appendix A to Part 1008
[iv] As defined in section 103(w) of the Truth in Lending Act
[v] Ibid, as defined
[vi] See § 1008.103(c)(1)
[vii] Ibid
[viii] This interpretation is consistent with the definition of “loan originator” in section 1503(3) of the S.A.F.E. Act.
[ix] See § 1008.103(c)(2)
[x] See § 1008.103(c)(2)(ii)

Transitioning Loan Officer as Employee

QUESTION

A while back Jonathan Foxx discussed the transitioning of loan officers. He wrote about how to handle the licensing issues so that new loan officers can get to work. The questioner asked about transferring loan officers from their bank registration to become licensed loan officers. My question also deals with transitioning. Is a transitioning loan officer an employee?

ANSWER

Click Transitioning Loan Officer Licensing to read the post we published on November 7, 2019. I continue to see employers struggling with the issue of how best to effectuate the transitioning of a loan officer.

Indeed, it was in November 2019 that the CFPB issued an interpretive rule to construe an ambiguity regarding certain non-licensed loan originators. The Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 (EGRRCP Act) made it easier for loan originators to move from one employer to another, by giving a registered or state-licensed loan originator temporary authority to act as a loan originator in a different state if he or she:

• Has not had an application for a loan originator license denied or a loan originator license revoked or suspended;
• Has not been subjected to or served with a cease and desist order;
• Has not been convicted of a misdemeanor or felony that would preclude licensing in the new state;
• Has submitted an application to be a state-licensed loan originator in the new state; and,
• If applicable, was registered in the NMLSR as a loan originator during the 1-year period preceding the filing of the new application.

The statute separately addresses registered loan originators and state-licensed loan originators.

Regulation Z imposes training requirements on loan originator organizations for “each of its individual loan originator employees who

• is not required to be licensed, and
• is not licensed as a loan originator….”

This language, which the CFPB adopted before the EGRRCP Act existed, is ambiguous regarding whether the individual loan originators it references include loan originators with temporary authority under the EGRRCP Act. Accordingly, on November 19, 2019, the CFPB adopted an interpretive rule to address the ambiguity.

In its interpretive rule, the CFPB took the position that, although the language is ambiguous, the Bureau believes the most appropriate interpretation of Regulation Z is that the regulation does not refer to a loan originator with temporary authority under the EGRRCP Act, because a loan originator with temporary authority does not satisfy the first condition in Regulation Z § 1026.36(f)(3)—“is not required to be licensed.”

That is, to point a fine point on it, 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.

The CFPB issued its interpretation as an interpretive rule to further ensure that TILA § 130(f) offers a safe harbor to loan originator organizations that act in conformity with the interpretive rule. [84 FR 63791 (Nov. 19, 2019)] The Bureau plans to incorporate the interpretive rule into Regulation Z.

Jonathan Foxx
Chairman & Managing Director
Lenders Compliance Group

Loan Officer Transfers: Screening and Training Requirements

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.

The CFPB issued its interpretation as an interpretive rule, published in the Federal Register, so Truth-in-Lending Act § 130(f) offers a safe harbor to loan originator organizations that act in conformity with the interpretive rule. The CFPB plans to incorporate the interpretive rule into Regulation Z. [See 84 Federal Register 63791 (Nov. 19, 2019)]

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

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.