Insights

In late July, the Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Office of Thrift Supervision, Farm Credit Administration, and National Credit Union Administration (Federal Banking Agencies) issued the Registration of Mortgage Loan Originators Final Rule (Final Rule). The Final Rule implements the registration requirements for residential mortgage loan originators employed by national and state banks, savings associations, Farm Credit System institutions, credit unions, and subsidiaries of depository institutions (Institutions), imposed by the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act).

The question at the top of everyone’s list due to the myriad and new rules and regulations coming out – when does this go into effect? The Final Rule takes effect on October 1, 2010, but the Federal Banking Agencies anticipate that the NMLSR will not be ready to accept Federal registrations before January 28, 2011. The Federal Banking Agencies intend to publish an announcement of when the NMLSR will be ready to accept registrations and plan to give employees of depository institutions and their subsidiaries 180 days after that date to register and obtain their unique identifiers. On August 25, 2010, the OCC issued Bulletin 2010-33, which stated that national banks needed to establish policies and procedures by the October 1, 2010, deadline but are not required to comply with the registration requirement at this time. The OCC indicated that, in light of the transfer of authority under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), the OCC might not have jurisdiction to administer the Final Rule if the NMLSR is not ready by the transfer date (not announced as of the writing of this article). If the OCC still has jurisdiction when the registry begins accepting federal registrations, the OCC will announce that date in advance and notify national banks and their residential mortgage loan originator employees that they will then have 180 days to comply with the Final Rule’s initial registration requirements.

The next question is who needs to register. In the Supplementary Information to the Final Rule, the Agencies explain that because the definition of a depository institution in the Federal Deposit Insurance Act, which is adopted in the SAFE Act, does not include bank or savings association holding companies or their non-depository subsidiaries, the holding companies and their non-depository subsidiaries who act as mortgage loan originators are not covered by the Federal registration requirement. Instead, they must comply with state licensing requirements.

Mortgage loan originators employed by depository institutions and their subsidiaries do not need to be licensed by the state but do need to be registered as mortgage loan originators only if the employees both take applications and offer or negotiate the terms of a mortgage loan. The Federal Banking Agencies included an Appendix to the Final Rule to clarify when an employee takes an application and when an employee offers or negotiates the terms of a mortgage loan.

Taking an application. The Appendix includes examples to illustrate when an employee takes, or does not take, a loan application. For example, 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 has received the consumer’s information indirectly in order to make an offer or negotiate a loan. In contrast, taking a loan application does not include 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 or 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. Also excluded from “taking an application” is receiving information in connection with a modification to the terms of an existing loan to a borrower as part of loss mitigation efforts when the borrower is reasonably likely to default (an important clarification for servicing operations).

Offering or negotiating terms of a loan. The Appendix also includes examples to illustrate when an employee offers or negotiates terms of a loan, and conversely, what does not constitute offering or negotiating terms of a loan. Offering or negotiating the terms of a loan includes, among other things, presenting a loan offer to a consumer for acceptance, either verbally or in writing, including, but not limited to, providing a disclosure of the loan terms after application under the Truth in Lending Act, even if:

(A) Further verification of information is necessary;

(B) The offer is conditional;

(C) Other individuals must complete the loan process; or

(D) Only the rate approved by the bank’s loan approval mechanism function for a specific loan product is communicated without authority to negotiate the rate.

Although the Federal Agencies have stated that both prongs of the two-part test for acting as a mortgage loan originator must be met to trigger the registration requirement, the Agencies’ list of examples of who is taking a mortgage loan application is very broad -- an employee may “take” an application even if the employee has received the consumer’s information indirectly in order to make an offer or negotiate terms of a mortgage loan. An employee may receive the consumer’s information indirectly, for example, through another employee, a broker, or an automated system. Although several employees may be involved in taking the application and evaluating the application, there will be at least one that both” takes” the application and offers or negotiates in the transaction. As a result, at least one person in the transaction will need to be registered as a mortgage loan originator – that person will be the person who offers or negotiates the terms of the loan.

The Final Rule requires registered mortgage loan originators to submit certain information to the Nationwide Mortgage Licensing System and Registry (NMLSR). The Federal Agencies have eliminated some of the proposed disclosures that employees of depository institutions and their subsidiaries will be required to provide to the NMLSR. Personal identifying information, fingerprints, financial services-related employment history for the preceding 10 years, among other things, will still be required. However, the proposed requirements to provide a financial history, employment termination information, information on pending matters, and a broad disclosure of any felony and misdemeanor convictions have been eliminated. Disclosure will be required of any criminal convictions involving dishonesty, breach of trust, or money laundering; similarly, civil judicial actions against the employee in connection with financial services-related activities, dismissals with settlements or judicial findings that the employee violated financial services-related statutes or regulations will need to be disclosed.

Each Institution will also be required to submit information to the Registry so that a bank record can be created in the NMLSR. The information will include location information, the EIN number, identification of the Institution’s primary regulator, and the name and contact information for the Institution employee authorized to act as the Institution’s primary point of contact for the Registry. Institutions will also need to establish policies and procedures for identifying the employees that need to be registered, instructing employees on how to register and monitoring for compliance with registration requirements.

Contrast HUD’s Proposed Rule: The Federal Banking Agencies took a very different approach to implementing the SAFE Act than HUD. The Agencies’ Final Rules include several key differences from HUD’s Proposed Rule (which is still not final).

In the model state SAFE Act drafted by CSBS with assistance from HUD, a mortgage loan originator is defined as someone who engages in either taking an application or offering or negotiating terms of a mortgage loans. This is much more expansive than the Federal Agencies’ Final Rule.

The Federal Banking Agencies excluded certain mortgage loan modification activities, requiring employees servicing mortgage loans to be registered only if they engage in the mortgage origination process. This is an important exclusion because there has been a great deal of concern that requiring registration (or licensing) of employees working on loan modifications will bring loss mitigation – and Treasury’s Making Home Affordable Programs – to a halt. In light of this exclusion, it will be interesting to see if HUD backs away from its public position that employees of mortgage loan servicers working on loan modifications are “taking applications” for residential mortgage loans. However, even if HUD does modify its position, the states can still require employees working on loan modifications to be licensed as mortgage loan originators, and some state SAFE Act adoptions (like the Washington state statute) have taken that approach.

The discussion of the Final Rule contained in the Federal Register does not mention the Dodd-Frank Act. This may just be a timing issue. However, it is important to note that Title XIV of the Dodd-Frank Act could be read as expanding the scope of Institution employees that will need to be registered in the NMLSR. Section 1401 amends the Truth in Lending Act to add a definition of “mortgage originator.” A “mortgage originator” includes a person who takes a residential mortgage loan application, assists a consumer in obtaining or applying to obtain a residential mortgage loan or offers or negotiates the terms of a mortgage loan. Section 1402 of the Dodd-Frank Act imposes certain standards of care on “mortgage originators,” including a requirement that mortgage originators be qualified and “when required, registered and licensed” as mortgage loan originators in accordance with Federal and state law, including the SAFE Act. An additional standard is to “include on all loan documents any unique identifier of the mortgage originator provided by the [NMLSR].” It is not clear whether this standard expands the scope of who must obtain a unique identifier. Fortunately, this provision of the Dodd-Frank Act should not take effect for another year or more, so there is time to sort out the issue.

Robert A. Cook is a partner in the Maryland office of Hudson Cook, LLP. Robert can be reached at 410-865-5401 or by email at rcook@hudco.com.

Lisa C. DeLessio is a partner in the Maryland office of Hudson Cook, LLP. Lisa can be reached at 410-865-5437 or by email at ldelessio@hudco.com.