Mortgage License Laws Explained
States license many professional occupations under the theory that licensure is necessary to protect the public from unsavory, unscrupulous or incompetent individuals. Professions commonly held to a licensing standard include: doctors, dentists, lawyers, and other professionals in the law, medicine, accounting, architecture, surveying, engineering and more. Mortgage licensing requirements follow in this tradition, except that its application is not restricted to one particular profession. Individuals such as loan officers, loan originators and mortgage brokers/agents are subject to the mortgage licensing requirements unless a specific exemption applies.
The need for licensure varies by state and can be viewed on a continuum. At one end of the scale, licensure is mandated for all mortgage industry participants, including lenders, brokers/agents, loan officers and loan originators. The regulatory burden on participants is generally quite extensive. Much of the requirement for licensure includes the filing of written policies or plans that describe how the mortgage company will conduct business. The policies and procedures also include detailed requirements to check a prospective employee’s criminal history, credit worthiness and employment history, as well as to receive training on a variety of issues, such as fraud prevention and fair lending. These licensing standards are designed to ensure that a mortgage company is both qualified and ethical in its activities and that consumers are protected from those who may try to defraud the public. In some states, such standards also are intended to keep mortgage company employees current on changing state and federal laws governing conduct in the industry. In states with such a licensing scheme, an unlicensed mortgage company or employee is in violation of state law and may be subject to criminal prosecution .
Licensure requirements can also be more nuanced and targeted, such as only requiring licensure for certain positions. In states with this type of licensure scheme, these specific positions may include only loan officers and loan originators. It is important for companies who rely on whether licensure is required to be mindful of the fact that even when only certain positions need to be licensed, all other employees are impacted because the company must adopt, post and ideally train its staff on the procedures that have been implemented to comply with the regulations governing those licensed employees. Failure of the company to adopt and train all employees on such policies is a mistake that could wind up costing the company in the event the state should bring an enforcement action for the licensed employee’s violation of state law.
The states also vary once again from the aforementioned scheme in terms of whether a state imposes licensure costs and training and testing requirements on its employees. For example, having a bonded employee may be sufficient to serve as a license substitute for a mortgage company that has qualified staff in place to service (exclusively) the referral side of the mortgage industry. Other states do not require licensure for one or more categories of mortgage industry participants, possibly because the participants engage only in an incidental portion of the industry. Mortgage companies should keep in mind that even if a state does not require licensure for one or more categories of participants, it does not mean that such participants are free of state oversight. This is true because many states impose an affirmative obligation on any participant to seek licensure or apply for licensure exemptions. Failure to do so could subject an unlicensed mortgage company or employee to a patchwork of regulatory enforcement actions or fines.
State v Federal Mortgage License Requirements
When analyzing mortgage licensing by state, it is important to distinguish between federal and state mortgage licensing requirements. One gutcheck that is often overlooked in the state analysis is that most state mortgage licensing requirements are subject to overarching federal laws and requirements. Perhaps the most important of these federal laws is the S.A.F.E. Act which is the Secure and Fair Enforcement for Mortgage Licensing Act of 2008. The S.A.F.E. Act implemented Fannie Mae’s new National Mortgage Licensing System and Registry requiring all banks, credit unions, and nondepository institutions involved in residential mortgage lending or brokering to be licensed in accordance with the S.A.F.E. Act.
A key feature of the S.A.F.E. Act is that it requires that all states provide a way for licensees to apply for a license through the National Mortgage Licensing System and Registry. Each state may have additional requirements for individual mortgage license applications.
The individual licensing requirements under the S.A.F.E. Act includes both a stumbled credit report from the consumer finance protection bureau (CFPB) along with at least twenty hours of education. One of the twenty hours of education must relate to federal law, and two hours of education must relate to ethics. In addition, one hour of education must relate to lending standards for nontraditional mortgages, one hour of education must relate to the borrower’s ability to repay and qualification standards for the residential mortgage market, along with one hour of education on the right to loan estimate disclosure under the Real Estate Settlement Procedures Act along with any other state requirements.
In addition to complying with the S.A.F.E. Act requirements under the CFPB, states may have their own requirements. Regulators like the New York Department of Financial Services (NYDFS) have their own requirements, that allow children over the age of four or five to be in an office or branch, while most states like California Department of Business Oversight (DBO) prohibit children in offices or branches under 18 years old. Other requirements for licensing requirements for originators by state agencies include security requirements such as providing a copy of their business location or a sample of their letterhead and stating whether the name under which the company is organized is the name under which business will be transacted, and stating whether this business will be transacted under a licensed organization.
Top Licensing Requirements in Each State
While there exists a unique landscape of state-specific requirements, there are several areas where state requirements overlap under common guidelines. Most states require educational prerequisites and have course requirements. In addition to education, almost all states require applicants to maintain a certain amount of continued education credits each year. Federal law requires individuals to complete 8 hours of continuing education annually. Some states also require up to another 10 or 12 hours in specific areas such as state law and ethics, and in some cases a third area. Some examples of this include:
While nearly all states also require that individuals pass one or more examinations, there are notable examples where applicants can be exempted from testing such as Texas where certain federal exemptions exists under the Texas Finance Code and Florida where applicants who have been licensed in the past three years are exempt.
Experience requirements also vary across state lines. For example, most states have a requirement of two years of experience working as a loan officer or other individual involved in mortgage lending such as compliance. However, Louisiana has its own unique requirement that allows applicants to waive experience by taking its Mortgage Industry Studies program.
Additionally, with the widespread use of the Nationwide Multistate Licensing System & Registry (NMLS), states have requirements that set out which mortgage business activities must be covered by a license. Nearly every state requires a license if an applicant plans to take applications, negotiate terms or make a residential mortgage loan. However, there are notable exceptions such as South Carolina, where it only requires a license if a person will close, broker, lend or purchase loans.
While each state has its own requirements and licensing procedures, these commonalities and differences must be understood, analyzed and accounted for to successfully satisfy the various requirements for each state where a company wants to operate.
State Assessments of Minimum Licensing Guidelines
When it comes to mortgage licensing, states can sometimes have unusual requirements that are not typically found in other license applications. Some of the most common of these non-standard requirements include: experience requirements; charting control persons; CPA audits; additionally licensed staff; surety bonds; and background checks. These will be addressed briefly below.
California and North Carolina, both of which have had stricter mortgage licensing laws than most other states in the country, impose experience requirements on non-controlling shareholders and non-managerial staff. In California, a single residential mortgage loan originator license requires that the individual have at least three years of mortgage experience working as a mortgage loan originator or other position that required a license under California’s mortgage regulations. In North Carolina, to be considered "financially responsible," a controlling person must have three years’ relevant management experience, and a non-controlling person with a "significant interest" must be "sufficiently skilled, knowledgeable, and experienced by reason of past operations in the financial services field."
There are a handful of states – Washington, South Carolina, Virginia, and Louisiana – that require contributions from the licensee’s control persons. Some of these states require that the control person(s) make and maintain their own residential mortgage license surety bond. For instance, in Washington, each "control person" must be licensed and hold a surety bond in the amount of $100,000. Previously, South Carolina did not require a surety bond for residential mortgage lenders or originators but has changed that requirement, and now it appears that both states have a $50,000 bond requirement.
In addition to the bond requirements, South Carolina and Virginia require annual CPA audits, as does Kentucky. These types of requirements often present significant challenges to multi-state license holders, such as when they run afoul of certain State’s grace periods for new licensees.
Besides the audit requirements, several states have disqualifying events, such as felony convictions, that can impact applicants. For instance, if an applicant had a felony conviction, the applicant is barred from licensure in Indiana for 15 years after the date of conviction. On the other hand, not all states require background checks and some, like Hawaii, allow licenses to be issued to both businesses and individuals. Of course, just because a state does not require a background check does not mean that a licensee will be immune from prosecution. It simply means that, while an entity has been licensed, its individuals might still become subject to criminal investigations.
Experience requirements, surety bond requirements, and even to some extent audit requirements are often some of the most burdensome to manage, not only because of financial implications, but because they must also be managed "on time" or risk being found to be out of compliance. This is in contrast to something like an employee licensing requirement, which can be managed so long as it is timely detected and timely addressed.
The Effects of Licensing on Mortgage Employees
The differing licensing requirements and procedures for mortgage professionals between states have far-reaching consequences. They may restrict mobility, make cross-state market penalties disparate and may push smaller businesses out of certain markets. A lender operating in multiple states may find that it must apply for as many as 50 local licenses to service its customers in different parts of the country. This can be a costly process and requires a level of expertise that would not be so difficult under a more uniform set of rules. Complying with the existing system of regulation can eat up all of the company’s overhead, especially if they have to hire compliance professionals to assist in keeping current and in order to obtain new licenses . Additionally, there is a risk that the company may not even realize when it is in violation of a pin-point law buried deep within a separate body of law. All the while, the objectives of the regulations for licensing are served.
There are also notable advantages to the current system. It provides state regulators with the ability to properly regulate their markets and its borrowers. Smaller, more localized institutions are able to compete with larger, national banks on a level playing field. It also helps state regulators better implement loan originator compensation rules as applicable (though opposed) to their state-licensed lenders. In addition, the nuances of the process may actually help the legal compliance industry create jobs in a time of rising unemployment.
How to Deal with Individual State Licensing Requirements
Navigating the complex web of state mortgage licensing requirements can be daunting, but with the right approach, mortgage professionals can stay ahead of the curve. Here are some practical steps to ensure that you meet all of the requirements.
First, familiarize yourself with the licensing requirements for each state in which you operate. Utilize online databases to keep abreast of the ever-changing landscape of state licensing. This will give you a comprehensive overview of requirements, such as licensing fees and continuing education obligations.
Next, maintain organized records for all your license applications and renewals to keep track of important deadlines and to provide documentation in case of any compliance inquiries. This will also ensure that you are prepared for any state examinations, which can occur at any time.
Ongoing continuing education is critical in this industry. Not all states have the same requirements regarding education, so it is important to plan accordingly. Stay on top of the deadlines in each state and make sure that all correspondence with continuing education providers is well organized, just in case you need to provide proof of compliance.
Finally, if you are a mortgage professional or a company operating in multiple states, it is essential to manage licenses proactively to avoid any lapses. Review licensing status frequently and make sure that all fees are paid. Use technology to ensure that you are reminded of renewal deadlines and continuing education deadlines well in advance.
Being proactive with respect to state-specific licensing requirements will go a long way toward keeping your mortgage operations compliant. As a result, you will be able to focus on work, save costs and avoid the headache of dealing with a compliance investigation or examination.
Mortgage Licensing Resources and Tools
When it comes to compliance with state licensing requirements, mortgage professionals are operating in a world of uncertainty because laws and regulations are not uniform from state to state. So, armed with knowledge and information, how can you successfully navigate the requirements when you have limited or no knowledge of the specific requirements of a state? I suggest taking advantage of the federal resources available through the Nationwide Multistate Licensing System and Registry (NMLS) which, among many things, sets requirements for initial licensure, renewal licensing, and surety bonding, and provides a compilation of state-specific requirements by state for financial services institutions and individuals. Similarly, the Conference of State Bank Supervisors (CSBS) maintains a list of financial services resources by state that is divided into residential mortgage lenders, money services businesses, debt management companies, trust companies, and other resources such as pooled investment funds and consumer credit unions. In addition, CSBS’s Mortgage Regulatory Handbook provides a compilation of all the state mortgage laws as well as other information on regulations concerning the National Housing Act. There are also useful private sector sources for state-by-state information on licensing. For example, the Mortgage Licensing Group, LLC, offers online lists of state and federal licensing requirements by type of business . It also provides state-by-state snapshots for mortgage brokers, mortgage lenders, mortgage loan originators, and credit services organizations with each snapshot containing links to the relevant licensing authority for the business type and details such as licensing fees, examination and reporting requirements, and continuing education requirements. Moreover, the many associations that provides membership to mortgage professionals offer various levels of information on state licensing requirements, including the American Association of Residential Mortgage Regulators (AARMR), the Association of Mortgage Investors (AMI), and the Mortgage Bankers Association (MBA). While AARMR lists the member states and territories’ contact information in its online resource center, AMI offers a compilation of state and federal regulations involving mortgage brokers, bankers, lenders, and loan servicers. And, the MBA’s state licensing page contains links to general information about national, state, and local licensing requirements gathered from various regulatory and industry experts for those companies that originate, buy, and/or sell residential mortgages. Spring is upon us again and that means for many mortgage professionals, it’s time to check your state licensing situation in order to renew or obtain the appropriate state licenses for the upcoming year. Unless you have managed to go through the process before, history shows that satisfying the multitude of state licensing requirements takes significant time and effort, but thoughtfully assembling the right resources and tools can make the process less daunting.