Pennsylvania Amends Mortgage Licensing Act

by Reed Smith
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On July 2, 2013, Pennsylvania Governor Tom Corbett signed into law HB 1124, which amends the Mortgage Licensing Act (“MLA”), 7 Pa. C.S. § 6101 et seq. This bipartisan bill was first introduced by Representatives Scavello (R. Dist. 176), Heffley (R. Dist. 122), Millard (R. Dist. 109), Maher (R. Dist. 40), Carroll (D. Dist. 118), Cohen (D. Dist. 202), Helm (R. Dist. 104) and Caltagirone (D. Dist. 27), and was also supported by the Department of Banking and Securities (“Department”), which regulates and enforces the MLA.

Key amendments to the MLA as a result of the passage of HB 1124 include new exceptions to licensure and new statutory requirements, and clarify existing provisions of the MLA.

First, HB 1124 amends existing exceptions to MLA and establishes new exceptions to licensure.

  • De minimus exception expanded.  Currently, the only de minimus exception to licensure in the MLA is for a person who offers or negotiates the terms of a loan for a member of that person’s immediate family. 7 Pa. C.S. § 6112(3). This meant that even offering or negotiating the terms of one mortgage loan a year required a license. HB 1124 repeals this exemption and replaces it with a more general exemption for persons who “engage in the ‘mortgage loan business’ less than four times in a calendar year, unless otherwise determined to be engaged in the mortgage loan business by the Department.” (Emphasis added.) The MLA defines “mortgage loan business” as the “business of advertising, causing to be advertised, soliciting, negotiating or arranging in the ordinary course of business or offering to make or making mortgage loans.” 7 Pa. C.S. § 6102. This de minimus exception to licensure expands the previous exception of up to two loans in a calendar year provided in the former Mortgage Bankers and Brokers and Consumer Equity Protection Act, 63 P.S. § 456.302 (“MBBCEPA”), which was repealed and replaced by the MLA. This provides a safe harbor for those persons who are not in the mortgage business, but who may have an occasion to engage in activity that would have previously required a license.
  • New nonprofit exception. The two current exceptions to licensure for nonprofit organizations have been repealed and replaced with a new exception for “bona fide nonprofit organizations” and their employees. Currently, the exceptions apply to (a) nonprofit organizations not holding themselves out to the public as being engaged in the mortgage loan business, and (b) nonprofit organizations that make mortgage loans retained in the corporation’s portfolio and made to promote and advance the cultural traditions and lifestyles of bona fide religious organizations. 7 Pa. C.S. § 6112(11) and (12). HB 1124 eliminates exemption (12), and revises exemption (11) to provide that the nonprofit exemption will apply to a “bona fide nonprofit organization and employees of the organization acting within the scope of their employment, unless otherwise deemed to be engaged in the mortgage loan business.” HB 1124 defines a “bona fide nonprofit organization” to include entities that promote affordable housing, homeownership education, or other similar service. This exemption will be beneficial for entities such as the Pennsylvania Housing Finance Agency (PHFA) that were not previously exempt from licensure. The bona fide nonprofit organization must still meet the recordkeeping and bond requirements of the MLA and be subject to examination and possible fines by the Department. The Department will publish a list of entities that qualify as bona fide nonprofit organizations on its website.
  • New exception if no Pennsylvania nexus. The MLA is amended to include an exception to licensure for loan originators that are physically located in Pennsylvania but that do not engage in transactions involving Pennsylvania consumers, Pennsylvania dwellings or Pennsylvania residential real estate. This is a logical exception to licensure as these transactions have no meaningful connection to Pennsylvania that would require regulation.
  • New exception for loan modifications. Persons engaged in mortgage loan modifications for existing mortgage loans held or serviced by that person or the person’s employer who do not otherwise engage in the mortgage loan business are now exempt from licensure per HB 1124.

Second, HB 1124 amends the MLA to clarify a number of the existing provisions.

  • Dual Employees. The MLA does not currently restrict the number of companies that a mortgage originator may work for. The MLA has been amended to require that mortgage originators only be engaged in the mortgage loan business on behalf of a single employer (whether it be a broker, lender, loan correspondent, or exempted entity).
  • Education. Currently, the MLA requires licensees to complete continuing education. However, the MLA does not indicate how often the education must be completed. HB 1124 clarifies that the continuing education requirement is an annual requirement that is applicable to all branch managers, loan originators and qualifying individuals. A “qualifying individual” is defined as an employee of a mortgage broker, lender or loan correspondent, as well as a management-level officer assigned to the principal place of business. 7 Pa. C.S. § 6102. Mortgage lenders and brokers will be required to designate a “qualifying individual” for the licensee’s principal place of business and separate individuals as branch managers for each branch location for purposes of the education requirements.
  • Records. Other than stating that the Department must have access to a licensee’s records, the MLA did not dictate how long a licensee must retain its records. With the passage of HB 1124, licensees are now required to maintain their records for four years.
  • Commission. To reflect the merger between the Department of Banking and the Securities Commission that occurred in 2012, references to the “Secretary of Banking” are deleted and replaced with the “commission.”

Third, HB 1124 adds new restrictions and penalties for mortgage loan originators.

  • 100 Mile Rule. Perhaps the most significant amendment to the MLA is the restriction on how far a mortgage originator may live from his or her assigned office. The MLA requires a loan originator to work out of a licensed location. However, the MLA never restricted the distance a loan originator may live from his or her assigned office. (In addition, the former MBBCEPA did not provide for such restriction.) HB 1124 requires mortgage originators to be assigned to work out of a licensed location that is either the originator’s residence or a licensed location of the licensee that is not more than 100 miles from the originator’s residence. No other licensing statute regulated by the Department dictates how far an employee may live from his or her assigned office. It will be interesting to see how strictly the Department enforces this new provision. For instance, what if a loan originator lives 101 miles away from his or her assigned office? What about loan originators who accepted positions more than 100 miles from their office prior to the amendment of this law? If the purpose of this provision is to ensure that loan originators do in fact work from the assigned office, will licensees be provided the opportunity to demonstrate that the loan originator does in fact work from the assigned office? While 100 miles may sound like a long way to travel for work, the distance from Philadelphia to Harrisburg is approximately 107 miles; not a completely unheard-of commute.
  • Penalties and Fines. Finally, the MLA has been amended so that mortgage originators will be subject to the same fines and penalties for violations of the MLA as other licensees.

The amendments to the MLA take effect August 31, 2013, which is 60 days from the date the governor signed the bill. While some of the amendments will be viewed positively by the mortgage industry, the restriction on how far mortgage originators may live from their assigned offices could have a major impact on how licensees conduct business.

Click here to view a copy of HB 1124, included for your reference.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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