Compliance

When You Are—And Aren't—A Loan Originator

New Reg Z rules contain a broader definition of ‘loan originator.’

July 22, 2013
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Will you be a mortgage loan originator (MLO) under the Consumer Financial Protection Bureau’s (CFPB) new Regulation Z rule?

If you’re not an MLO under the SAFE (Secure and Fair Enforcement for Mortgage Licensing) Act then no, right? Wrong.

The new loan originator rules in Reg Z—expected to be effective Jan. 10, 2014—contain a much broader definition of “loan originator.”

The loan originator compensation rule was the last mortgage rule the CFPB issued in January.

With the industry gasping for breath under the weight of the previously issued rules, this rule has flown a bit under the radar. (I’m guilty of this. After reading and analyzing the other mortgage rules shortly after the CFPB issued them, it was a few weeks until I begrudgingly sifted through the loan originator rule).

Now that we’ve stepped back from the ability to repay and servicing rules, we can see the loan originator compensation rule also has a lot of moving parts that will require changes at most credit unions.

One major change will be defining who at your credit union is a loan originator. The SAFE Act defines an MLO as an individual who takes a residential mortgage application and offers or negotiates the terms for compensation. The new Reg Z rule defines “loan originator” as a person who performs any of the following activities for compensation:

Takes an application;

Offers, arranges, or assists a consumer in obtaining, applying, or negotiating an extension of consumer credit; or

Advertises that they’ll perform the activities described above.

The difference between “and” and “any” is exactly one letter, but the meanings are miles apart. You can be a loan originator under Reg Z’s rule without offering or negotiating the terms of the transaction at all. Merely collecting certain information from a consumer or assisting a consumer in filling out an application form could qualify you as a loan originator under the new rule.

So, what does this difference mean? It doesn’t mean that as a loan originator under Reg Z you’ll have to register with the Nationwide Mortgage Licensing System (NMLS). The SAFE Act and Reg Z are separate—the new Reg Z definition of “loan originator” doesn’t change anything in the SAFE Act. MLOs under the SAFE Act still must register with the NMLS and use their unique identifier.

Beginning Jan. 10, 2014, they also must comply with the new loan originator rules. All MLOs under the SAFE Act are loan originators under Reg Z, but not vice versa.

If you or any other employees are loan originators under Reg Z for consumer credit transactions secured by a dwelling—whether or not you’re an MLO under the SAFE Act—you’ll be subject to the rules on dual compensation, compensation based on a term of a transaction, loan originator qualifications, and training requirements.

All credit unions engaging in home-secured lending should take a close look at who within the credit union is performing “loan originator” activities under the new rule and analyze how to most efficiently implement the new requirements.

One last note: Always think about “what’s next” with the CFPB. Congress ordered the CFPB to issue these mortgage rules, but the CFPB has barely started issuing rules solely on its own initiative.

The definition of “loan originator” actually isn’t limited to home-secured loans. The substantive provisions of the new rule all limit their applicability to home-secured loans, but the definition of “loan originator” actually extends to any consumer credit transaction.

It wouldn’t surprise me to see the CFPB in the future apply this broad definition outside of the home-secured arena.

JEFF ANDERSEN is regulatory counsel for PolicyWorks LLC. Contact him at jeffa@policyworksllc.com or at policyworksllc.com. The services provided by PolicyWorks shouldn’t be construed as legal services, legal advice, or in any way establishing an attorney-client relationship. 

►CUNA and PolicyWorks have partnered to create two mortgage lending compliance solutions for credit unions. Click here to learn more.

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