On June 1, 2009, the Federal financial institution regulatory agencies, including the Office of Thrift Supervision, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the National Credit Union Administration, and the Farm Credit Administration, jointly issued a Notice of Proposed Rulemaking to Implement the Secure and Fair Enforcement for Mortgage Licensing Act (the Proposed Rule). The SAFE Act requires that each state adopt legislation to implement the provisions of the Act with respect to state-licensed loan originators (see discussion of state licensing requirements in the May edition of Basis Points) and further requires that the Federal Agencies “develop and maintain a system for registering employees…as registered loan originators with the Nationwide Mortgage Licensing System and Registry.” The Proposed Rule intends to establish the registration requirements with respect to certain employees of Agency-regulated institutions to implement the SAFE Act and invites comments on such requirements. Comments to the Proposed Rule must be submitted by July 9, 2009.
The Proposed Rule requires employees of Agency-regulated institutions who act as mortgage loan originators to register with the Nationwide Mortgage Licensing System and Registry (the “NMLS”). Under the Proposed Rule a mortgage loan originator means an individual who both takes a residential mortgage loan application and who offers or negotiates terms of a residential mortgage loan for compensation or gain. Similar to state-licensed loan originators, the term mortgage loan originator does not include individuals who perform purely administrative or clerical tasks, such as collecting information for the processing or underwriting of a mortgage loan, as well as, individuals who only perform real estate brokerage activities, as defined in the SAFE Act, and individuals or entities solely involved in extensions of credit related to timeshare plans.
The Appendix includes examples of what activities constitute and do not constitute taking a loan application or offering or negotiating terms of a loan. Notably, while the examples are not intended to be all inclusive, none address the issue of whether loss mitigation activities fall within the meaning of mortgage loan originator. Generally, where the relation between taking an application and offering or negotiating loan terms is conjunctive, as it is in the definition of mortgage loan originator, then loss mitigation functions are presumed as being outside the scope of the SAFE Act. However, the Federal Agencies seemingly consider loss mitigation activities, at least as to loan modifications and loan assumptions, as falling within the meaning of mortgage loan originator because the Federal Agencies invite comments on whether they should consider excluding “individuals who modify existing residential mortgage loans” and separately, “individuals who engage in approving loan assumptions.”
In contrast to state-licensed loan originators, the Proposed Rule, under the authority of the SAFE Act, provides de minimis exceptions to the registration requirements for employees of Agency-regulated institutions. Specifically, if during the preceding 12 months, an employee of an Agency-regulated institution acts as a mortgage loan originator in no more than five residential mortgage loan transactions and provided that the employing Agency-regulated institution has originated 25 or fewer residential mortgage loan transactions during the same period, then the employee is not required to register with, or obtain a unique identifier in, the NMLS. Among the other differences from state-licensed loan originators, the Proposed Rule acknowledges that the NMLS is not presently configured to accept registrations from mortgage loan originators, and therefore, the Proposed Rule does not establish a date certain for the completion of the initial registration of mortgage loan originators. Instead, the required deadline is set as a period not to exceed 180 days after the NMLS has been modified to accept registrations from mortgage loan originators. Further, the Federal Agencies observe that completing the necessary modifications to the NMLS is not a simple task, and notwithstanding that they and the Conference of State Bank Supervisors, who maintain the NMLS, have made “substantial progress” in resolving many of hurdles in the process, the Federal Agencies anticipate that the NMLS will not be functional to register mortgage loan originators until after a final rule to implement the SAFE Act has been adopted.
Among the issues that have not been resolved are the types of information a mortgage loan originator must submit to the NMLS. The Proposed Rule requires the submission of an employee’s fingerprints and gives a laundry list of personal history and experience information that employees are required to submit to the NMLS, but only to the extent that such information is collected by the NMLS. As one would expect, the list includes general personal identification information such as the employee’s name, home address, social security number, gender, and place of birth, as well as, general background information, such as the employee’s financial services employment history, financial disclosures concerning, among other things, past bankruptcies and unsatisfied liens or judgments. Also, as expected, the required information includes past criminal convictions, relevant civil judgments, and actions by state or federal regulators against the employee, including the denial, suspension, or revocation of a license to engage in a financial services-related activity, which is a phrase that is conspicuously undefined in the Proposed Rule. Additionally, some less intuitive information that may be required by the NMLS is the disclosure of, among other things, “customer-initiated financial services-related arbitration or civil actions against the employee that required action, including settlement” and voluntary or involuntary employment terminations resulting from allegations accusing the employee of violating a statute, regulation, or industry standard of conduct; fraud, dishonesty; theft; or the wrongful taking of property[…].”
The reason for all of this information for registration is not readily apparent because unlike a state-licensed loan originator, who must meet certain standards for licensing, no such standards are obligated for mortgage loan originators because the Federal Agencies do not otherwise license or provide other authorization for individual employees of Agency-regulated institutions to engage in mortgage loan origination activities. Consequently, the tacit recommendation to each Agency-regulated institution is presumably to consider such information for the threshold requirement of employment -- even though the Proposed Rule by its own terms would not exclude from registration the most villainous employee.
A provision not required under the SAFE Act, but included in the Proposed Rule, is the requirement that each Agency-regulated institution adopt and follow written policies and procedures to assure compliance with the registration requirements. Specifically, those policies and procedures must include, at a minimum, a process to identify which employees must register as mortgage loan originators and instructions to those employees on how to register. The written policies must also include “reasonable procedures” for confirming the adequacy and accuracy of the employees’ registrations (i.e., the laundry list items described previously) and monitoring compliance, including the independent testing of compliance by bank personnel or an outside party. Further, each Agency-regulated institution must have policies and procedures providing for appropriate action for employees that fail to register and a process to review and take appropriate action with respect to criminal history background reports.
The Proposed Rule also requires each Agency-regulated institution to make available to the public the unique identifier for each of its registered mortgage loan originators and requires the mortgage loan originators to provide their unique identifier to a consumer upon the consumer’s request, before taking an application and offering or negotiating loan terms, and in the mortgage loan originators initial written communication with a consumer.
In whole, the Agency-regulated institutions are likely to be breathing a collective sigh of relief, as the burden of complying with the requirements of the Proposed Rule pales in comparison to the burdens on their state-licensed loan originator counterparts, who find themselves facing a flurry of state legislative activity to pass individual SAFE Act laws, each of which may have different licensing requirements, including pre-licensing education requirements, which in some states, like Utah, are as much as 60 hours. However, as previously mentioned, there remains work to be done on the proposal and the NMLS. Hopefully, the comment period will allow the Federal Agencies to further define the registration requirements, including, among other things, what constitutes an employee and whether persons involved in loss mitigation activities should be excluded from the definition of mortgage loan originator. Finally, Agency-regulated institutions may want some affirmative guidance in the final rule on the potential penalties for their failure to comply, including the enforceability of a residential mortgage loan originated by a mortgage loan originator, who has either not registered or failed to register by not having fully and accurately disclosed the required personal and background information.
Dana Frederick Clarke, is a partner in the California office of Hudson Cook, LLP. Basis Points readers can reach Dana at 310-349-8433 or by email at dclarke@hudco.com.