Know what to do when your employment requires a transition from one mortgage loan originator (MLO) licensing scheme to another.
This is the second in our article series about MLO licensing. The first article can be found here.
Mortgage loan originators in California
A person who accepts a consumer mortgage application or arranges a consumer mortgage for a fee is classified as a mortgage loan originator (MLO).
Editor’s note — A consumer mortgage is a mortgage that:
- primarily funds a personal, family or household use; and
- is secured by a one-to-four unit dwelling, owner-occupied or not. [Calif. Business and Professions Code §10166.01(d); Calif. Financial Code §§22012(e), 50003(p)]
A consumer mortgage is distinguished from a business mortgage. A business mortgage is a mortgage made primarily for business, investment or agricultural purposes. MLO designation does not apply to individuals who only take applications for or arrange business mortgages.
Identification, licensing and registration of all MLOs is mandated by the federal Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act).
The federal entity in charge of enforcing the SAFE Act is the Consumer Financial Protection Bureau (CFPB). Each state also enforces their adopted version of the SAFE Act for licensing MLOs.
An MLO working in California needs to be:
- a state-licensed MLO under the California Bureau of Real Estate (CalBRE) with an MLO endorsement on their license [Bus & P C §10166.02(b)];
- a state-licensed MLO under the California Department of Business Oversight (DBO) [Fin C §§22100(a), 50120]; or
- a federally registered MLO working for a federally regulated bank. [12 United States Code §5103(a)]
Each of the three schemes offer different benefits, depending on the specific activity undertaken by the MLO. However, an MLO’s career often sees them transitioning from one type of consumer mortgage activity to another, under different types of employers. Understanding how to smoothly transition between MLO licensing schemes is critical to developing a career advancement plan.
Basic MLO requirements
To understand the mechanics of transitioning from one mortgage origination scheme to another, a general review of licensing requirements is necessary.
To become a state-licensed MLO, individuals need to:
- complete pre-licensing coursework;
- pass exams on state and federal mortgage law; and
- meet minimum financial and employment history requirements, as verified by credit and background checks.
In addition, each of the two California state licensing entities may impose agency-specific requirements. For example, CalBRE requires an individual hold a CalBRE real estate license before they may obtain an MLO endorsement on that license. The DBO issues individual and company MLO licenses. [Bus & P C §10166.02(b)]
Further, state-licensed MLOs need to renew their MLO licenses or endorsement every year. The renewal process involves the completion of Nationwide Mortgage Licensing System (NMLS)-approved continuing education, online renewal and the payment of renewal fees to CalBRE and NMLS through the NMLS system. State-mandated renewal requirements may include:
- state-specific continuing education;
- background checks; or
- minimum financial requirements.
In contrast, federally registered MLOs are employed by a federally regulated bank. These bank-employed MLOs need to meet minimum financial and employment history requirements verified by credit and background checks. However, they do not need to complete pre-licensing education or pass state or federal exams.
A federally registered MLO may perform the services of an MLO only while they are employed by a federally regulated bank.
An active federally registered MLO may work for a DBO MLO company without holding a DBO MLO license, due to a DBO exemption. [Fin C§§22100(g), 50002(e)]
Editor’s note — CalBRE does not extend a similar exemption.
Federally registered MLOs are required to update their registration information in the NMLS registry within 30 days of:
- a change in the MLO’s name;
- the MLO leaving the federally regulated bank’s employment; or
- a change in the disciplinary history or legal actions taken against the MLO. [12 Code of Federal Regulations §1007.103(b)(1)]
The federally regulated bank is also required to report to the NMLS within 30 days of a change in a federally registered MLO’s employment. [12 CFR §1007.103(e)(2)(ii)]
Federally registered MLOs are not subject to continuing education requirements, but still need to renew each year.
Common transitions and basic requirements for making those transitions follow.
Note that the NMLS ID used to identify each MLO “follows” the MLO throughout their career, much like a CalBRE license number — across companies, MLO license types and states. The purpose of the unique identifier is to allow consumers to see the MLO’s employment and disciplinary history, regardless of which type of MLO they are under the SAFE Act.
Transitioning from a registered MLO to a state-licensed MLO
Consider an MLO who works for several years as a registered MLO with ABC Bank, a federally regulated bank. ABC Bank closes its consumer mortgage department. The MLO decides to go into business for themselves and open their own, non-federally regulated mortgage company.
Can the MLO use their federally registered MLO status to originate loans for their own non-federally regulated mortgage company?
No! The SAFE Act exempts a federally registered MLO from state MLO licensing requirements only if the MLO is an employee of a federally regulated bank. Without meeting that bank employment requirement, the MLO is merely an unlicensed individual with an NMLS ID — unemployed by a bank and unauthorized to practice until individually licensed by the state.
To continue their MLO activities after their bank employment terminates, the NMLS registrant needs to:
- acquire a state DBO MLO license or a CalBRE license with an MLO endorsement to practice independently;
- find employment with a state-licensed MLO company; or
- find employment with another federally regulated bank.
Thus, if the MLO was not previously a DBO-licensed or CalBRE-licensed MLO, they need to complete the required pre-licensing education and testing to become one, as well as meet any agency-specific requirements set by the state licensing agencies — CalBRE or DBO.
The CFPB does not provide for a transitional grace period between when the MLO loses their federally registered bank employment status and when they become a state-licensed MLO. [CFPB Bulletin from April 19, 2013]
If the MLO was previously state-licensed, they do not need to repeat any NMLS pre-licensing courses or exams. However, they do need to fulfill any new requirements put in place after they completed their state-licensed MLO requirements.
For example, an MLO completes pre-licensing education, testing and background checks to be a state-licensed DBO MLO in 2012. In 2013, they find employment with a federally regulated bank and become a federally registered MLO, letting their DBO MLO license lapse.
In 2015, the MLO leaves the employment of the federally regulated bank to form their own DBO MLO mortgage company.
In 2015, DBO began requiring two hours of California-specific mortgage law as part of the pre-licensing education requirements. Since the MLO did not originally complete these two hours of California-specific mortgage law, they are required to do so before they are eligible to reacquire their DBO MLO license.
Transitioning from a state-licensed MLO to a registered MLO
Now consider an individual who holds a CalBRE broker license with an MLO endorsement. After originating consumer mortgages for a few years as a mortgage broker using their CalBRE license, the MLO decides to make a career change. They obtain a position with a federally regulated bank as a consumer mortgage loan officer. This change requires them to be a registered MLO, rather than a state-licensed MLO.
What steps does the MLO need to take to make this transition?
An MLO transitioning from acting as a state-licensed MLO (here, CalBRE) to a federally registered MLO meets the federal registration requirements if they:
- update their principal place of business and business contact information in the NMLS registry;
- update their ten-year financial services-related employment history;
- submit new fingerprints to the NMLS for a background check;
- re-authorize a background check;
- attest to the correctness of the updated information; and
- re-authorize the NMLS to publish their name, new principal place of business and any adverse disciplinary history to NMLS registry. [12 CFR §1007.103(a)(4)]
Fingerprints on file with the NMLS are sufficient for the fingerprinting requirement if they are less than three years old. [12 CFR §1007.103(a)(4)(i)(B)]
The employing federally regulated bank is then tasked with:
- bringing its information on file with the NMLS current; and
- confirming the employment of the transitioning MLO. [12 CFR §1007.103(a)(4)(i)(C)]
Editor’s note — These same steps are taken when a federally registered MLO changes employers from one federally regulated bank to another.
CalBRE also requires notification whenever an MLO begins or ceases consumer mortgage activity under their CalBRE MLO endorsement. [Bus & P C §10166.01]
Intrastate transition: CalBRE to DBO
Moving between employers subject to different state agency rules also requires transitional steps.
Individual brokers and sales agents holding an active CalBRE license with a current MLO endorsement are able to perform consumer mortgage activities as an employee of a DBO MLO company without acquiring an additional license as a DBO MLO. Note this employment is not reported to the NMLS, and thus the NMLS registry does not reflect a CalBRE licensee’s employment under a DBO MLO company. [Fin C §§22100(b), 50002.5(a)]
For MLO transitions, the definition of an active license changes depending on whether the licensee is a:
- broker associate; or
- sales agent.
A CalBRE broker has an active CalBRE license and MLO endorsement if:
- their CalBRE license is current and in good standing; and
- they are either:
- a CalBRE broker holding both a current individual and a company (sole proprietorship or corporation) MLO endorsement; or
- a broker associate employed by a CalBRE broker who holds both a current individual and a company MLO endorsement.
Since a CalBRE broker needs both an individual MLO endorsement and a company MLO endorsement, a broker associate with only an individual MLO endorsement who is no longer employed by an active CalBRE broker is inactive. To begin work employed by a DBO MLO company, the unemployed broker associate needs to obtain an individual DBO MLO license.
Alternatively, they may apply for a CalBRE company MLO endorsement with the NMLS. This route provides the CalBRE broker more latitude to work for themselves as a CalBRE MLO and work for a DBO MLO company at the same time.
A CalBRE sales agent has an active license and MLO endorsement if:
- their CalBRE license is current and in good standing; and
- they are employed by a CalBRE broker who holds individual and company MLO endorsements.
Once a CalBRE sales agent is no longer employed by an MLO-endorsed CalBRE broker, they are inactive. They need to acquire a DBO MLO license to perform MLO services for the DBO MLO company.
A transitioning CalBRE MLO is able to apply previously completed pre-licensing education towards their DBO MLO license requirements. Since so much of the coursework involves federal mortgage law, this transferability of courses is common for all state-to-state (or intrastate) MLO transitions. [Bus & P C §10166.06(c); Fin C §§22109.2(e), 50142(e)]
However, any agency-specific pre-licensing MLO education required needs to be completed before the transitioning MLO is eligible for the new license.
As of 2015, DBO requires two hours of DBO-specific pre-licensing education. Thus, a CalBRE MLO transitioning to a DBO MLO license needs to complete this new pre-licensing requirement before they are eligible to obtain a DBO MLO license. [Fin C §§22109.5(a), 50145]
The federal and California-specific MLO exam requirements are the same for CalBRE and DBO MLOs. However, if it has been five years or longer since the MLO held an active MLO endorsement or license, they are required to retake both exams to re-qualify. Time spent as a federally registered MLO does not count towards the five-year period. [Bus & P C §10166.06(j); Fin C §§22109.3(g). 50143(d)(4)]
Fingerprints, credit and background reports are also resubmitted to the NMLS.
If negative financial, criminal, civil or administrative history and explanations were previously filed with the MLO’s CalBRE MLO application, the MLO may submit an affidavit to the DBO in lieu of re-submitting this information. The affidavit gives the DBO the authority to review the MLO’s history and contact CalBRE for additional details.
A CalBRE MLO looking to transition to a DBO MLO and hire other MLOs is also required to meet net worth and surety bond requirements.
For renewal of a DBO license, continuing education requirements have shifted from a generic one-hour elective each year to a DBO-specific one-hour elective. [Fin C §§22109.5(a), 50145]
Intrastate agency transition: DBO to CalBRE
The CalBRE MLO requirements are the strictest in the state. A DBO MLO transitioning to a CalBRE MLO has no licensing or endorsement exemption. In order to work for a CalBRE MLO company, they must obtain a CalBRE license and an MLO endorsement on that license.
Further, a CalBRE sales agent license and MLO endorsement allows the MLO agent to provide consumer mortgage services only under the employment of a CalBRE broker with both an individual and a company MLO endorsement. A CalBRE broker with both an individual and a company MLO endorsement is allowed to hire other MLOs who are CalBRE-licensed and MLO-endorsed.
Both CalBRE brokers and sales agents are required to complete statutory education and exams before applying for the MLO endorsement. [Bus & P C §10166.06(a); Fin C §§22109.2(a), 50142(a)]
However, CalBRE does not impose agency-specific pre-licensing or exam requirements. The pre-licensing education and exams taken by a DBO MLO will meet CalBRE MLO endorsement requirements.
Fingerprints, credit and background reports are also resubmitted to the NMLS, including a full financial, criminal, civil or administrative history, and explanations of any negative history.
California MLOs relocating to another state who intend to continue MLO activities also transition from one regulatory scheme to another.
For federally registered MLOs, moving out of state but staying under the employment of a federally regulated bank means updating the MLO’s registration, but no additional filings.
For DBO- and CalBRE-licensed MLOs, state MLO licensing agencies have authority to agree to reciprocity agreements with agencies in other states. State agencies may take into consideration or rely on findings made by another state agency when evaluating an MLO applicant’s eligibility. [76 Federal Register 38464, 38482]
California does not have reciprocity agreements with other states. Thus, to perform MLO services in California, an individual needs an MLO license or endorsement under one of the three schemes:
- DBO; or
- federal registration.
California MLOs looking to move out of state need to check with their destination state’s MLO licensing agency to see if it recognizes a transitional license. A transitional license allows the MLO to perform MLO services for a short period of time while they fulfill the mandatory requirements to obtain a full state MLO license in their destination state.
Before a transitional license can be issued, a state-licensed MLO is required to:
- meet net worth or surety bond requirements of the destination state; or
- pay into the destination state’s state fund. [CFPB Bulletin 2012-05]
Neither California agency recognizes a transitional license.
An alternative: multiple licenses
An alternative to transitioning from one scheme to another is to be licensed (or endorsed, in CalBRE parlance) under multiple schemes at once.
Of course, holding multiple licenses is less a function of a transitioning MLO than an MLO who is actively providing MLO services in multiple states concurrently. For smaller MLO companies and individual MLOs, the time and money it takes to obtain and maintain multiple state licenses is to be weighed against the amount of business expected in the additional state.
For example, in some regions of the state, such as in the Lake Tahoe area, holding multiple licenses is a logical business step to serve the basin’s bi-state inhabitants.
Editor’s note — The location of the financed dwelling determines the state agency from which the MLO is required to obtain the MLO license.
For instance, if the property securing the consumer mortgage is located in California, the MLO needs to hold either a CalBRE or DBO MLO license. The MLO may not from their Nevada location negotiate consumer mortgages for California properties by telephone. This is an unlawful circumvention of California and federal SAFE Acts. [HUD Commentary on Model State Law, Section E]
As mortgage rates rise and prices drop (or stagnate) in 2016 and beyond, the prevailing strategy for most MLOs is to expand to other regions. The NMLS reported that in 2014, the average number of licenses held by a state-licensed MLO nationwide was 2.74.
Holding multiple MLO licenses commits an MLO to:
- fulfilling the individual state agency requirements to obtain each license; and
- annually renewing each state license.
Licensing and renewal fees for each state are paid separately. For example, an individual MLO licensed as a CalBRE sales agent MLO and a DBO MLO pays:
- $330 for the CalBRE MLO annual renewal; and
- $330 for the DBO MLO annual renewal.
Continuing education requirements vary from agency to agency, as well. The core requirements — three hours of federal mortgage law, two hours of consumer protection and fraud and two hours of nontraditional mortgage products — are the same for all state-licensed MLOs. An MLO with multiple MLO licenses needs to take the core requirements only once per year. Credit for the core requirements are applied to all state MLO licenses the MLO holds.
However, the remaining hours required — whether elective or state-specific — vary by state agency. In addition to the core requirements, an additional hour of elective material is required. The DBO imposes an agency-specific course for this hour; CalBRE does not.
In addition to education and fee considerations, state agencies may require additional state-specific conditions, such as:
- annual background checks;
- surety bond requirements;
- net worth requirements; and
- residency requirements.
An active federally registered MLO may also hold a state MLO license. Federally registered MLOs are not required to complete continuing education to renew their federal registrations. Additionally, renewal of a federal registration requires only a minimal fee, usually paid by the employing bank.
Thus, the majority of the renewal obligations required of an MLO who holds both a federal registration and a state MLO license come from their state MLO license.