Compliance Blog

Nov 22, 2019

CFPB Issues Interpretive Rule Clarifying Loan Originator Screening Requirements

Greetings Compliance Friends!

I’d like to start off today’s blog with a brief scenario: ABC Credit Union is seeking to expand its staff of loan originators to accommodate an uptick in loan applications. One new employee comes from another state and although she has applied, does not yet have the required license to conduct loan originator activities in the state where ABC Credit Union is located. ABC’s prudent compliance officer remembers that there is a provision in Regulation Z requiring specific screening and ongoing training for loan originators who are not state licensed and wonders if this rule applies to this new hire. The CFPB explains that this is not the case in its recently issued interpretive rule, clarifying that a loan originator organization is not required to follow the screening and periodic training requirements under section 1026.36(f)(3) of Regulation Z where a loan originator who is required to be licensed is operating with temporary authority due to a pending state license application.

The Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act) prohibits individuals from “engaging in the business of a loan originator” without meeting certain requirements. Loan originators who are employees of federal credit unions are generally required to register as a loan originator under Regulation G and obtain a unique identifier from the Nationwide Mortgage Licensing System and Registry (NMLSR). Loan originators employed at state-chartered credit unions are also required to be registered and may be subject to state licensing requirements under Regulation H or applicable state law. See also, NCUA Risk Alert 14-RA-05.

A state may but is not required to impose licensing requirements for loan originators if such individuals are lawfully registered and maintain their unique NMLSR identifier in accordance with section 1008.103(e)(5) of Regulation H. For loan originators that are not required to be state-licensed, section 1026.36(f)(3) of Regulation Z provides certain screening and ongoing training requirements that a loan originator organization is required to fulfill before its employee may act as a loan originator in a dwelling-secured consumer credit transaction.

Section 106 of the Economic Growth Regulatory Relief and Consumer Protection Act of 2018 (EGRRCPA) amends the SAFE Act to establish temporary loan origination authority for loan originators who are registered in the NMLSR and move to an employer and state where licensure is required. See, 12 USC § 5117(c) (Remember, this does not cover institutions like federal credit unions). The amendment permits these individuals to act as a loan originator for a temporary period of time while applying for a new license. Those eligible for the temporary authority include current employees who have applied for a license in a new State and satisfy the following minimum qualifications:

·       The individual has not had an application for a loan originator license denied;

·       The individual has not had a loan originator license revoked or suspended;

·       The individual has not been subject to, or served with, a cease and desist order;

·       The individual has not been convicted of a misdemeanor or felony that would preclude licensure under the law of the application State; and

·       The individual was registered in the NMLSR as a loan originator during the 1-year period preceding the date of application.

This amendment created confusion in the industry with many wondering whether individuals who fall under this temporary authority are also subject to the previously discussed screening and ongoing training requirements from section 1026.36(f)(3) of Regulation Z. In admitting that the regulatory language is ambiguous, the bureau clarifies that the requirements of section 1026.36(f)(3) do not apply to loan originators with temporary authority. It is the bureau’s understanding that this furthers the intent of Congress of “eliminating barriers to jobs for loan originators,” which also happens to be the title of section 106:

“The Bureau believes that Congress aimed to permit a loan originator that satisfies certain enumerated criteria and who is transitioning to a new State to be able to begin acting as a loan originator in the application State with minimal burden and delay and before the State has completed all of its processes relating to determining whether to grant a State license.”

It seems the intent of section 1026.36(f)(3) was to address the qualifications of employees who are not subject to loan originator licensing under the SAFE Act at any point during their employment. 84 FR 63793.  The interpretive rule is effective November 24, 2019. The CFPB plans to incorporate the interpretive rule into the Official Interpretations to Regulation Z at a later time and has updated the Small Entity Compliance Guide.

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