|Closer Look at Proposed LO Compensation RuleWebinar discusses CFPB proposal
Oct. 15, 2012
By JERRY DeMUTH MortgageDaily.com
|The Consumer Finance Protection Bureau’s current proposal for loan originator compensation, while clarifying many aspects of the current rule, also could lead to violations of some state laws, or even Internal Revenue Service codes, according to a recent online event on the subject. The deadline for public comments on the proposal is Tuesday.
The presentation was made by three attorneys with the mortgage banking and the consumer financial services groups at the national law firm, Ballard Spahr LLP. They spoke during a webinar on the proposed new rule sponsored by the Washington, D.C.-based firm.First, the definition of loan originator is “very broad” under the proposed rule, said John D. Socknat, and even includes persons who assist consumers by advising them on credit terms, preparing application packages, collecting application and supporting information, or even advertises or otherwise communicates to the public that they provide such services. The latter, he said, would include business cards, rate sheets and promotional items.
But managers and administrative and clerical staff are excluded if they do not arrange, negotiate or otherwise obtain an extension of credit for a consumer or if their compensation is not based actual loan originations.The proposal also “finally addresses” the anti-steering safe harbor issue, said Richard J. Andreano. The key to complying, he said, is that loan originators have to present the loan with the lowest rate to consumers, even if it includes more points than they said they are willing to pay and if they qualify for that loan. The current rule does not specifically require originators to present to borrowers the loan with the lowest rate, only the one with the lowest rates and fees.
“But the originator can’t impose points and fees on a loan unless it results in a lower rate. But this only applies before the consumer has received the good-faith estimate and since this is occurring before the good-faith estimate,” Andreano pondered, “how do you determine if they may not qualify for a loan?”
Healso noted all of this is in the preamble to the proposed new rule, not in the section on pricing policies. That section sets forth ties between specific increases and decreases in rates and the size of points and fees, with a specific rate reduction for each additional point.
“These are very complex proposals,” he commented. Andreano also pointed out that the CFPB, which originally had considered a flat-fee approach to originations, with the same fee applying to all loans, now proposes a “zero-zero alternative.” Under this proposal, any originator who receives compensation from any person other than the consumer may not impose on the consumer any points or fees unless a comparable, alternative loan without points and fees is made available to the consumer.
“That’s an interesting concept,” he said.To prevent manipulation of loan qualifications and loan availability, the CFPB, Andreano said, is considering two different alternatives that would either prevent originators from changing their underwriting standards for the purpose of disqualifying consumers from a “zero-zero alternative” or prevent originators from offering loans with points and fees unless the consumer would qualify for a comparable loan without points and fees. The proposed rules, said Michael S. Waldron, also now address the matter of compensation paid on a borrower’s behalf by parties other than the borrower. “This was not addressed previously,” he said, but warned that such an arrangement can be impacted by state laws.
“You have to make sure you follow state law,” Waldron emphasized.Waldron also noted that while the current rule does not expressly address the sharing of pooled compensation, the proposed rule “outright bans” pooled compensation among loan originators who are compensated differently for loans with different terms.
“Point blanks,” Waldron noted, are not expressly addressed by the current rule and may not be allowed under the proposed rule. Citing a CFPB advisory comment on the proposed rule that “there are no circumstances under which point blanks are permissible, and they there continue to be prohibited,” Waldron said, “‘Continue’ is a critical word. It truly shuts the door on point blanks.” New conditions also are placed on contributions to both qualified and non-qualified profit-sharing plans, Waldron pointed out. When applying these, he said, loan originator participants have to make sure they do not violate Internal Revenue Codes or become non-compliant with other rules.
“There’s a lot of pitfalls when amending qualified and non-qualified plans,” he cautioned.Finally, while under the current rule a loan originator’s compensation may not be changed based on changes to a specific loan’s terms or conditions, Socknat pointed out that the proposed rule would permit a reduction in an originator’s compensation to cover unanticipated increased non-affiliated, third-party closing costs that cause the actual amount of costs to exceed limits imposed by applicable law. However, Socknat said, the proposed rule forbids an originator from agreeing to pay part of a borrower’s closing costs to avoid high-cost loan provisions. The comment deadline on the proposed rule is Oct. 16.
Comments can be submitted to www.regulations.gov.
From National Mortgage Professional—
The Consumer Financial Protection Bureau (CFPB) has announced its latest proposal to bring greater transparency to the mortgage marketplace and simplify the understanding of mortgage costs and comparison shopping for consumers. The CFPB is seeking comment on and will finalize these rules by January 2013.
Click here to view the CFPB’s latest round of proposed rules.
Highlighted among the rules set forth by the CFPB:
►Require lenders to make a no-point, no-fee option available: This option would enable prospective homebuyers or those seeking to refinance a simpler method of comparing varying offers, making it simpler to compare offers from a particular creditor, and deciding whether they would receive an adequate reduction in monthly loan payments in exchange for the choice of making upfront payments.
►The prohibition of steering incentives towards LOs: The CFPB’s rule would implement the Dodd-Frank Act provision and clarify certain issues in the existing rule that have created industry confusion.
►Require an interest-rate reduction when consumers elect to pay upfront points or fees: The CFPB is seeking comment on proposals to require that any upfront payment, whether it is a point or a fee, must be “bona fide,” which means that consumers must receive at least a certain minimum reduction of the interest rate in return for paying the point or fee.
In addition to regulating upfront points and fees, the CFPB is proposing changes to existing rules governing mortgage loan originators’ qualifications and compensation.
►Set screening standards: The CFPB is proposing rules to implement Dodd-Frank Act requirements that all loan originators be qualified. The proposal would help level the playing field for different types of loan originators so consumers could be confident that originators are ethical and knowledgeable. The proposed rule includes: Character and fitness requirements, criminal background checks; and training requirements.
►Restrictions on arbitration clauses and financing of credit insurance: The proposal implements Dodd-Frank Act provisions that, for both mortgage and home equity loans, prohibit including mandatory arbitration clauses in loan documents and increasing loan amounts to cover credit insurance premiums.
“Consumers have a hard time comparing loans when they are dealing with a bewildering array of points and fees,” said CFPB Director Richard Cordray. “We want to provide consumers with clearer options and enable them to choose the loan that they believe is right for them.”
The CFPB has engaged with consumers and industry, including through a Small Business Review Panel, and used this feedback in developing the proposed rules. The CFPB believes that this proposal, if adopted, would promote stability in the mortgage market, which would otherwise face radical restructuring of the current pricing structure in order to comply with Dodd-Frank.
“The CFPB has released a number of rules in the last few weeks that, if finalized properly over time, will go a long way toward proving needed clarity and certainty to lenders and consumers, helping increase access to credit for qualified borrowers, stabilizing and growing the housing market,” said David H. Stevens, president and CEO of the Mortgage Bankers Association (MBA). “We look forward to reviewing the proposed rule more thoroughly over the coming weeks and providing comprehensive comments.”
The public will have 60 days, until Oct. 16, 2012, to review and provide comments on the proposed rules. The CFPB will review and analyze the comments before issuing final rules in January of 2013.
|A further update on the rules as reported by Mortgage Daily….(see our previous post on this topic).
Guidance Issued on LO Comp Rule
CFPB proposes rules on fees, originator qualifications and originator compensation
Aug. 17, 2012
By MortgageDaily.com staff
|New rules on loan fees and interest rates have been proposed, while another proposal seeks to eliminate some of the disparity between bank and non-bank loan originators. In addition, changes are being proposed to the existing loan originator compensation rule that should alleviate some industry concerns.
On mortgages where a mortgage broker or creditor pays a loan originator a transaction-specific commission, the Dodd-Frank Wall Street Reform and Consumer Protection Act prohibits up-front discount points, origination points or fees that are retained by the creditor, broker or affiliate. While bona fide up-front payments to independent third parties such as appraisers are still being permitted, the change would result in a restructuring of current pricing practices in the vast majority of transactions.
But the Consumer Financial Protection Bureau is proposing to use its exemption authority to allow the origination of loans with up-front fees and/or points as long as certain other options are made available to prospective borrowers.
The proposed rules would require that before up-front fees or points — excluding those from non-affiliated independent third parties — are imposed, lenders provide prospective borrowers with a loan option that has no discount points or origination fees. The option is intended to make it easier to compare offers from competing lenders. It would also make it easier to compare multiple offers from the same lender and determine whether the amount of the payment reduction is adequate when up-front fees are paid.
An exception to the proposed rule would be cases when the consumer won’t qualify for no-fee loans.
In addition, the CFPB is proposing that the interest rate is reduced when borrowers do pay up-front fees or points.
According to the regulator, without the proposed rules — the Dodd-Frank act would prohibit up-front points and fees for most home loans even if the borrower prefers a lower interest rate with some up-front costs. The CFPB’s approach is expected to benefit consumers and the mortgage industry.
A safe harbor would be provided under the rule for lenders that offered a quote for a loan with up-front fees or points before the application, while the rule would also provide a safe harbor when creditors provide brokers with the pricing for all of their zero-zero alternatives.
“The proposed approach would promote stability in the mortgage market, which otherwise would face radical restructuring of its existing pricing structures and practices to comply with the new Dodd-Frank act requirement,” according to the bureau.
The CFPB is seeking feedback on whether it should adopt a bona fide requirement to ensure consumers receive value in return for paying up-front fees and points and how such a requirement should be structured. It also wants comments on whether changes to how affiliate fees are treated would make it easier for consumers to compare offers between multiple lenders.
Feedback is also sought on a potentially different approach when consumers don’t qualify for the zero-zero alternative, whether advertising should include information about the zero-zero alternative and whether such disclosures should be required within three days of the application.
Also being proposed are changes to existing rules governing mortgage loan originators’ qualifications and compensation.
The CFPB is proposing to eliminate the disparity in standards between loan originators who work for financial institutions, mortgage brokerages and nonprofit organizations. If the originator is not subject to the Secure and Fair Enforcement for Mortgage Licensing Act, then equivalent SAFE act requirements would be imposed.
Regardless of their charter type, originators would be subject to the same standards for character, fitness, and financial responsibility. Each would need to have a criminal background check to screen for felony convictions. They would also be required to undertake training to ensure they have the knowledge necessary for the types of loans they originate.
Employers are responsible for ensuring that their originators who are subject to the SAFE act are licensed or registered. The license or registration number of the employer and the originator on a transaction will need to be noted on certain key loan documents.
“In its proposal, the bureau describes rule text that may be included in the final rule to implement a Dodd-Frank act requirement that the bureau require depository institutions to establish and maintain procedures to assure and monitor compliance with many of the requirements described above and the registration procedures established under the SAFE act,” the CFPB stated.
Mortgage Bankers Association President and Chief Executive Officer David H. Stevens issued a statement that said, “Consumers benefit from a vibrant and competitive mortgage market with a diversity of players, and this rule, as it relates to loan originator qualification and screening, should ensure a level playing field for originators regardless of business model.”
A rule issued in 2010 by the Federal Reserve Board intended to end the practice of steering borrowers into higher priced loans with the sole objective of earning more compensation. A similar provision in the Dodd-Frank act prohibited the practice of varying loan originator compensation based on interest rates or other loan terms.
One adjustment being proposed by the consumer regulator is allowing originators to reduce their compensation to cover unanticipated increased closing costs from non-affiliated third parties in some circumstances.
In addition, the CFPB seeks to clarify and revise restrictions on pooled compensation, profit-sharing and bonus plans for originators. The proposal would allow contributions from general mortgage activity profits to 401(k) plans, employee stock plans and other qualified plans under tax and employment law as long as profits aren’t based on the terms of transactions generated by the originator. It would also allow contributions to non-qualified profit-sharing or retirement plans as long as the originator hasn’t originated more than five mortgages during the prior 12 months or the company’s mortgage business revenues are limited to no more than half of total revenues — though a 25 percent limitation is also being considered.
While originators would still be banned from being paid by both the borrower and other parties, mortgage brokerage that are paid by the consumer would be able to pay individual originators a commission as long as the commission isn’t based on the terms of the transaction. However, originator compensation paid by sellers, home builders, home improvement contractors or other similar parties will be considered to be payments made by the consumer directly to the originator.
MBA’s Stevens applauded the efforts to protect borrowers by eliminating steering.
Another proposal would implement Dodd-Frank provisions that prohibit including mandatory arbitration clauses in loan documents and increasing loan amounts to cover credit insurance premiums on mortgages and home-equity loans.
The CFPB says that the rules will bring greater accountability to the mortgage loan origination market and make it easier for consumers to understand mortgage costs and compare loans.
Comments are being accepted at www.regulations.gov until Oct. 13 on the proposals, which are expected to become final in January 2013.
Just in as reported in HousingWire late Friday…more details and analysis will follow next week….
The Consumer Financial Protection Bureau proposed rules on August 17 that it says will bring greater accountability to the home loan origination market and make it easier for consumers to understand loan costs. They expand existing regulations governing loan originator compensation and qualifications, while implementing new laws.
The proposed rules require lenders to offer consumers a comparable, alternative loan with no upfront discount points, origination points or fees that are retained by lenders or their affiliates before it imposes upfront points and fees on consumers. The ban on paying or receiving commissions based on terms of the transaction other than the loan amount will continue, but with some refinements. For example, the proposal allows reductions in loan originator compensation to cover unanticipated increases in closing costs from non-affiliated third parties under certain circumstances. Lenders will be forced to reduce interest rates when consumers elect to pay upfront points, expressed as a percentage of the loan amount, or fees to covers costs associated with origination or prepaid interest charges.
Earlier in the year, the CFPB considered a flat origination fee that could not vary with the size of the loan. However, after meeting with outside groups and small businesses, the bureau decided that approach “was not in anyone’s interest,” a senior CFPB official said on a conference call. “After looking at that information, we thought (a flat fee) would have a disproportionate impact on lower income borrowers,” the official said. “Also, it seemed like it would be a very complicated approach, that is you could have multiple fees, which goes against the notion of simple disclosure and shopping tool for consumers.”
Under state law and the federal Secure and Fair Enforcement for Mortgage Licensing Act, loan originators must meet different sets of qualification and screening standards, depending on whether they work for a bank, thrift, mortgage brokerage or nonprofit organization. The CFPB is proposing to implement Dodd-Frank Act requirements that subject all loan originators to character and fitness requirements, criminal background checks and training requirements for loan originators.
“The proposal would help level the playing field for different types of loan originators so consumers could be confident that originators are ethical and knowledgeable,” the bureau said in a statement. The public has October 16 to provide comments on the proposed rules, which the CFPB will analyze before finalizing in January. “Consumers have a hard time comparing loans when they are dealing with a bewildering array of points and fees,” said CFPB Director Richard Cordray. “We want to provide consumers with clearer options and enable them to choose the loan that they believe is right for them.”
The Consumer Financial Protection Bureau will consider an exemption for a Dodd-Frank Act rule prohibiting mortgage loan officers from being paid by both the borrower and the brokerage firm. The Federal Reserve rule went into effect in April 2011, forbidding payments to loan officers based on a mortgage’s terms or conditions. The rules also keep a loan officer from being paid by both the borrower and any other party in the deal. This was meant to crack down on the practice of steering borrowers into higher cost loans, which would result in a higher payment for the loan officer.
The CFPB held a meeting with industry members in June to discuss possible exemptions. The Fed rule without any leeway goes into effect January 21, 2013. “Because these types of compensation are present in the vast majority of originations and the payment of upfront points and fees is widespread, implementation without exemption would significantly change the financing for most current mortgage loan originations,” the CFPB said in an outline of proposals released in May.
The exemption under consideration would allow borrowers to pay discount points resulting in a minimum deduction of the interest rate for each point paid upfront and a “flat” origination fee that cannot vary with the size of the loan. But the Mortgage Bankers Association even pushed back against that stipulation in a letter. “The CFPB could make this determination by concluding that absent an exemption, all points and fees would have to be included in the rate, resulting in higher rates and less affordable credit for borrowers. This would provide ample basis for either waiver or exemption,” according to the MBA letter. Borrowers of loans with a lower balance could end up being charged higher fees as a percentage of their mortgage than wealthier homeowners taking out larger loans, according to the trade group. Also, a flat fee could result in smaller mortgages exceeding minimal percentage-based triggers under the pending CFPB rule on the Qualified Mortgage. Originators would be prohibited under the current proposal from extending higher-priced mortgages without determining a borrower’s ability to repay. It defines a higher-priced loan as having an interest rate set by 1.5 percentage points more than a comparable transaction. Flat fees on smaller loans could push the expense beyond this threshold, making less available due to a lenders’ heightened liability should the loan later default.
CFPB Director Richard Cordray testified earlier in the year that easing restrictions on the loan officer compensation rule would be “sensible.” The CFPB is considering a slew of other exemptions as well, even allowing a dual-compensation in some particular states but not others, according to the MBA. Or, it might apply the flat fee exemption to particular mortgages, not all of them. The bureau said it might also allow the exemption to sunset the partial exemption after five years. This would give the CFPB time to evaluate the rule to see how it is working with the exemption. “At that time, the CFPB will have had time to conduct a more detailed assessment of the payment of points and fees in a more stable regulatory environment to determine the long-term regulatory regime that would maximize consumer protections and credit availability,” according to the proposal outlined in May.
But the MBA pushed back even against that, complaining a sunset or partial implementation would result in higher costs and confusion. They want a clear broad exemption from a rule that was once highly contested in court before industry representatives dropped suits last year. “Nearly 16 months ago, the lending industry implemented the Federal Reserve’s loan officer compensation rules, which required a complete overhaul of compensation practices for mortgage loan originators,” the MBA wrote. “The implementation process was problematic, guidance that seemed to extend far beyond the rules was provided, and compliance was demanded in too short a period.” Source: HousingWire
From: Ballard Spahr
The Consumer Financial Protection Bureau announced yesterday that it will propose residential mortgage loan origination standards this summer, with a goal of adopting final rules in January 2013. The standards will address the compensation of loan originators, the charging of discount points and origination points and fees, and uniform qualification requirements for individuals who are loan originators.
The proposal will implement a portion of the loan originator compensation provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which are similar in some respects to a loan originator compensation rule adopted by the Fed in 2010 under the Truth in Lending Act.
Although the CFPB proposal will address the compensation of loan originators and certain other issues, it will not address the Dodd-Frank provisions that prohibit steering by loan originators. The CFPB plans to address the anti-steering provisions “at a later time.”
The important elements of the proposal under consideration by the CFPB are:
Under the SAFE Act loan originator employees of depository institutions must be registered and loan originator employees of non-depository institutions must be licensed, and the requirements for licensing are more onerous. In particular, to obtain a license an originator must (1) not have a felony conviction, (2) demonstrate appropriate character, fitness and financial responsibility, (3) satisfy education requirements and (4) pass a test.
The CFPB is considering requirements that originators employed by depository institutions must meet character, fitness, and criminal background standards equivalent to the standards for obtaining a license, and that the depository institutions provide appropriate training to the originators commensurate with the size and mortgage lending activity of the institution.
Points and Fees
Dodd-Frank provides that a consumer may pay a loan originator’s compensation, but a creditor could not pay a loan originator’s compensation unless the consumer did not pay any loan originator compensation and also did not pay any upfront discount points, origination points or fees, other than bona fide third-party charges, except as permitted by a regulatory exception.
The CFPB is considering an exception under which a creditor could pay loan originator compensation as long as (1) the consumer does not pay any originator compensation, (2) if the consumer pays any discount points, the points must be bona fide (pursuant to standards that the CFPB is developing under the ability to repay requirements) and the creditor also must offer the option of a no discount point loan, (3) if the consumer pays any origination fees, the fees are “flat” and cannot vary with the size of the loan, and (4) any upfront fees paid to an affiliate of the creditor or loan originator are also “flat” and cannot vary with the size of the loan, except payments for title insurance which can vary based on the loan size.
The CFPB, thus, is considering an exception that would prohibit the common percentage-based loan origination fee in cases in which the creditor paid compensation to a loan originator. It is unclear if the CFPB understands that it is common practice for lenders to offer a range of rate and discount point combinations for a given loan.
The existing loan originator compensation rule prohibits the compensation of a loan originator based on the terms or conditions of a loan, or on a proxy for the terms or conditions of a loan. The CFPB acknowledges the uncertainty created by the proxy restriction, and is considering establishing a test for whether a factor is such a proxy.
Under the test, a factor would be a proxy for a loan term or condition if (1) the factor substantially correlates with a loan term, and (2) the loan originator has discretion to use the factor to present a loan to the consumer with more costly or less advantageous term(s) than the term(s) of another loan available through the originator for which the consumer likely qualifies. It appears that further guidance will be needed for companies to better understand how to assess factors under the test.
Compensation Based on Profits
The Fed staff interpreted the existing loan originator compensation rule to prohibit the compensation of loan originators based on mortgage-related profits. The CFPB is considering proposals that would permit loan originators to be compensated based on mortgage business profits subject to various restrictions, but compensation to a loan originator based on profitability of the loans he or she originates would not be permitted. Consistent with guidance provided in Bulletin 2012-02.
The CFPB is considering an exception for various qualified retirement and related plans. The CFPB also is considering exceptions that would permit compensation through bonuses, or through qualified or non-qualified plan contributions, based on profits if the total mortgage revenue portion of the profits was limited, and/or both the number of loans made by an originator and the proportion of the originator’s loans as compared to the loans made by the company were below certain levels (no specific levels are proposed).
Under the existing loan originator compensation rule, a loan originator may not reduce his or her compensation or pay for a borrower cost as a method of providing a pricing concession to the consumer. The CFPB is considering a proposal that would allow a loan originator to cover unanticipated increases in third party settlement charges, if the charges are not controlled by the originator, creditor or an affiliate of either, and the charges exceed or are in addition to amounts disclosed in the Good Faith Estimate.
The Fed staff interpreted the existing loan originator compensation rule to prohibit various arrangements, often called “point banks,” under which a loan originator could apply credits to adjust the standard pricing on a loan. The CFPB is considering a proposal that would define point bank arrangements as “compensation” for purposes of the loan originator compensation provisions, and that would provide guidance on circumstances in which the awarding of points to originators would not violate the provisions.
The CFPB is considering an approach under which a creditor could contribute to a point bank if (1) the creditor does not base the amount of the contribution for a given transaction on the terms or conditions of the transaction, (2) the creditor does not change its contributions to the point bank over time based on terms or conditions of the originator’s loans, or on whether the originator overdraws the point bank, and (3) if the originator may overdraw the point bank, the creditor does not reduce the originator’s commission on a transaction when he or she does so.
The CFPB interprets the Dodd-Frank loan originator compensation provisions to prohibit a mortgage brokerage firm from paying compensation to a loan originator employee based on a specific loan transaction, such as a commission based on the loan amount, if the consumer pays compensation to the brokerage firm. The CFPB is considering an exemption that would permit a mortgage brokerage firm to pay compensation to a loan originator employee based on a specific transaction as long as the conditions noted above on upfront points and fees that would permit a creditor to pay originator compensation are met.
A summary of the issues being considered by the CFPB is set forth in outline to be used by a Small Business Review Panel being convened pursuant to the Small Business Regulatory Enforcement Fairness Act.
The CFPB also presents questions on which it seeks comments from small business representatives.
Ballard Spahr’s Mortgage Banking Group combines broad regulatory experience assisting clients in both the residential and commercial residential mortgage industry with formidable skill in litigation and depth in enforcement actions and transactions. It is part of Ballard Spahr’s Consumer Financial Services Group, nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs).
From National Mortgage News
When MetLife Bank NA jettisoned its mortgage subsidiary back in January most of the firm’s loan officers moved to Wells Fargo and other banks. For the LOs affected, moving to a nonbank lender wasn’t a practical option. The reason is simple: the mortgage loan officer registration and licensing law known as the SAFE Act makes it cumbersome for bank LOs to jump to an independent (nonbank) mortgage company. In general, the requirements for bank LOs are lax compared to the tougher standards set for state-licensed (nonbank) LOs. A bank LO only has to register under the SAFE Act and undergo a criminal background check by his/her employer. For a bank LO suddenly out of work, it could take 60 to 90 days to meet all the state testing and education requirements to become a state-licensed LO—plus they must undergo a financial check to ensure they are not struggling with bills and other obligations.
To reduce the waiting time, some industry groups tried to obtain regulatory approval for the states to issue “transitional” licenses which allow a former bank LO to originate loans while they undergo the state licensing process. But the Consumer Financial Protection Bureau closed the door on that option, claiming it is not permissible under the Secure and Fair Enforcement for Mortgage Licensing Act. The reason is simple: the mortgage loan officer registration and licensing law known as the SAFE Act makes it cumbersome for bank LOs to jump to an independent (nonbank) mortgage company.
In general, the requirements for bank LOs are lax compared to the tougher standards set for state-licensed (nonbank) LOs. A bank LO only has to register under the SAFE Act and undergo a criminal background check by his/her employer. For a bank LO suddenly out of work, it could take 60 to 90 days to meet all the state testing and education requirements to become a state-licensed LO—plus they must undergo a financial check to ensure they are not struggling with bills and other obligations. To reduce the waiting time, some industry groups tried to obtain regulatory approval for the states to issue “transitional” licenses which allow a former bank LO to originate loans while they undergo the state licensing process.
But the Consumer Financial Protection Bureau closed the door on that option, claiming it is not permissible under the Secure and Fair Enforcement for Mortgage Licensing Act. “We are very disappointed in [CFPB’s] interpretation,” said Glen Corso, managing director of the Community Mortgage Banking Project. The CFPB is also is working with the Conference of State Banking Supervisors on another approach known as “de novo inactive.” It’s not as elegant as a transitional license, but it allows the bank LO to secretly complete the state’s educational and testing requirements while working at a bank. No license is issued until they actually resign from the bank and go to work at a state-licensed lender. “Then a license can be issued in a few days,” Corso said.
Currently, 21 states permit the de novo inactive process and 15 states are considering it. The other 14 states won’t allow a bank LO to take the tests until they are employed by the state-licensed lender. The de novo process creates opportunities for bank LOs to take the tests even if they don’t intend to change jobs or use the state-license immediately, according to Stevens. If they do move to an independent mortgage company, “they can become active without going through a period of unemployment,” Stevens said. Source: National Mortgage News