New rules for Mortage Loan Originators (MLOs) and how this will affect you

The OCC, Federal Reserve Board, FDIC, OTS, FCA and NCUA (herein, the “Agencies”) published a final rule requiring employees of Agency-regulated institutions who act as residential mortgage loan originators (“MLOs”) to register with the Nationwide Mortgage Licensing System and Registry (“NMLS”) as required under the federal Secure and Fair Enforcement for Mortgage Licensing Act (the “SAFE Act”).  The Rule becomes effective on October 1, 2010.  However, the Agencies will publish a notice stating the date that the NMLS will be available to begin accepting federal registrations, and MLOs will have 180 days from such date to register.  The NMLS is not expected to be available to accept federal registrations before January 2011.  Institutions are encouraged to start gathering information and establishing the requisite policies and procedures immediately in an effort to be in compliance by the end of the 180 day period.

The Rule uses the more narrow SAFE Act definition of an MLO, and therefore, only an individual who both takes an application and offers or negotiates terms of a loan must register.  The Rule does not expressly exempt individuals engaging in loan modification activities.  However, it appears that the Agencies generally view individuals engaging solely in such activity as not taking new applications and therefore not meeting the definition of an MLO.  The Agencies emphasize that an individual’s activities, not his or her job title, are determinative in whether that individual must register.

An MLO must be federally-registered if that individual is an employee of (a) a depository institution, (b) any subsidiary owned and controlled by a depository institution and regulated by a federal banking agency, or (c) an institution regulated by the FCA.  The Rule’s definition of “depository institution” does not include bank or savings association holding companies or their non-depository subsidiaries.  Employees of these entities who act as MLOs are not covered by the federal requirement and, therefore, must comply with state requirements.  Additionally, those MLOs engaging in dual employment may be required to comply with both federal and state requirements.

The Rule requires an MLO to submit less information than state-licensed MLOs and does not impose educational or testing requirements either as a prerequisite to registration or for annual renewal.  However, the MLO must still submit fingerprints and authorize a criminal background check.  Responsibility for complying with the Rule’s requirements falls on both the individual MLO and the employing institution, and both the MLO and the employing institution must submit information to the NMLS for each registration to be complete.  Each Agency-regulated institution is also required to establish policies and procedures to ensure its employees’ compliance with the SAFE Act and the Rule.  The Rule anticipates that fees will be charged in connection with registration; however, the Agencies have not yet determined the amount of such fees and will provide an opportunity for public comment in the future.

FHA Proposes to Implement Policy Changes for Borrower Credit Scores and Seller Concessions

The Federal Housing Administration (FHA) published a Notice in the Federal Register on July 15, 2010 (Vol. 75, No. 135) announcing proposed policy changes to its single family programs.  Public comments on these changes will be accepted for a period of 30 days from the date of publication.
Under these changes, new borrowers applying for an FHA insured mortgage will need a minimum FICO score of 580 to qualify for a down payment of 3.5%.  Borrowers with FICO scores between 500 and 580 will have to make a down payment of 10%.  Borrowers with credit scores below 500 will no longer qualify.

The proposed changes would also reduce the current seller concessions permitted by FHA from 6% to 3%.  FHA believes that the current 6% limit on seller concessions exposes the FHA to excess risk by potentially driving up the cost of the home beyond its appraised value.  This change would also bring the FHA requirements in conformity with industry standards.  FHA also proposes to tighten underwriting standards for manually underwritten loans.
The new policy changes are designed to reduce financial risk to FHA and protect its capital reserves.

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