In response to the many disruptions caused by the COVID-19 pandemic many states have made accommodations for certain licensing requirements across various industries. Last month, in our blog post “Relief from Branch Office Licensing,” we generally reported on the actions taken by many state mortgage finance regulators to temporarily allow licensed mortgage companies and their licensed mortgage loans originators (MLOs) to originate residential mortgage loans from the MLO’s unlicensed home or some other remote unlicensed location. To provide that guidance, we reviewed the mortgage finance licensing laws of each state, the District of Columbia, and Puerto Rico (herein, each a “jurisdiction” or collectively, the “jurisdictions”), called or emailed key licensing regulators in each jurisdiction, and documented our findings in a chart that examined: (i) whether the jurisdiction will allow a licensed MLO to work from home and/or another unlicensed remote location; (ii) whether the home or other remote location will need to be licensed as a branch office of the licensed company; (iii) if branch licensing is not needed, whether some other approval of the regulators is needed for the licensed MLO to work from such an unlicensed location; (iv) if a branch license or other approval is not needed, whether notice must be provided to regulators that a licensed MLO is working from an unlicensed location; and (v) whether the jurisdiction extended this “no branch license period” into 2021.
As we understand, this issue of branch licensing given the COVID-19 pandemic was a hot topic during a session at last month’s NMLS Annual Conference and Training hosted by the Conference of State Bank Supervisors (CSBS). Given the time dedicated to thoroughly gather, analyze, and organize the available guidance in each jurisdiction, we understand why this topic generated considerable discussion at the NMLS Conference.
As we approach the first year anniversary of when many of us pivoted to work from home or some other remote location in response to a pandemic-related executive order or other directive, this issue continues to be of significant interest to both regulators and industry. Given our work reviewing this issue in each jurisdiction, we were asked by the CSBS and some state regulators to share our findings with them, which we have done, but we also thought it beneficial to generally share a few of our key findings with the industry as well.
Our findings can be categorized broadly as being either “progressive and forward looking,” or “surprising and alarming.” With respect to the former, we found that all but a handful of jurisdictions allow a licensed MLO to work from his or her home without the home being licensed as a branch office of the mortgage lender or mortgage broker licensee. Far fewer jurisdictions allow an MLO to work from some other unlicensed location. A few other states that allow a licensed MLO to originate mortgage loans from her or his home or some other remote location are Maryland, Pennsylvania, and Texas. Among the states that only permit a licensed MLO to originate mortgage loans from his or her unlicensed home, but not some other unlicensed location, are Connecticut, Mississippi, New York, and Washington. In reply to an inquiry from our Firm, Connecticut regulators clarified that although a licensed MLO cannot meet consumers at the MLO’s unlicensed home, the licensed MLO can still conduct other generally licensable activities from her or his unlicensed home. Although we did not specifically examine this distinction with regulators in other states, in many states, a licensed MLO could not meet consumers at the MLO’s unlicensed home.
In many states where an MLO could work from his or her unlicensed home, the MLO could not simply start to work from home without giving this arrangement some further thought and attention. In many states, certain conditions must be met for a licensed MLO to work from home or other remote location, including, among other conditions, (i) ensuring that certain data security and/or privacy requirements are satisfied, (ii) refraining from advertising, indicating on business cards, or holding out to the public the unlicensed location is an office of the mortgage company licensee, (iii) sufficiently supervising the mortgage loan origination activities being conducted from the unlicensed home or other location, and (iv) as indicated above, not meeting consumers at the unlicensed location. If these conditions, and certain other conditions in different jurisdictions are not met, the licensed company or MLO conceivably could be sanctioned by the licensing authority.
In a few states, an MLO’s authority to work from her or his home must be based upon a COVID-19-related reason, and regulators in those jurisdictions are examining the reason for working from an unlicensed home or other location. In other jurisdictions that allow an MLO to work from her or his unlicensed home, some other approval from, or notice to, the regulator is required. For example, Kentucky and Nebraska require the licensed company to notify the state regulators of the names and Unique Identifier of the licensed MLO originating mortgage loans from her or his state. Nebraska’s requirement is particularly burdensome as the licensee must notify the state regulators of the licensed MLOs and the location from which the person is working every quarter.
While the regulators in many jurisdictions favor allowing a licensed MLO to originate mortgage loans from her or his home, the governing mortgage finance licensing statute of many jurisdictions generally requires all locations from which mortgage loans are originated to be licensed. Additionally, some of these mortgage finance statutes do not expressly provide the state regulators discretion to do otherwise. In some states, regulators base their authority to provide relief from branch licensing on orders or directives issued by the governor of their state or other state official. In other states, regulators have creatively dealt with this lack of discretion by exercising their authority in another manner. These regulators have stated publicly that pursuant to certain conditions being satisfied, they will not take an enforcement action against licensed companies or licensed MLOs working from an unlicensed home or other location. However, as we have not reviewed the case law on this position, we are uncertain if this position would stand up in court if challenged by a consumer. The state regulator may have discretion as to how she or he will enforce the law, but if the state law requires a branch location to be licensed, a consumer may have a valid claim for damages because the mortgage loan was originated at an unlicensed location, and depending on the state licensing law, the mortgage loan may be unenforceable.
With respect to the surprising and alarming finding, we learned that, to date, only a handful of states plan to provide advance notice to licensees that this period of relief from branch licensing would be expiring. In some states, this period expires on a date certain in 2021 as early as March 31, 2021 and in some states, as late as December 31, 2021. In other states, the expiration date is somewhere in between. However, in many states, there is no expiration date for this “relief from branch licensing period,” first adopted in 2020. Arguably, state regulators can terminate this relief at their discretion. From our initial review, regulators in less than six states indicated that they plan to provide advance notice to licensees of the expiration of the “relief from branch licensing period.”
In many states, regulators are not preparing to notify licensees that the relief from branch licensing would be expiring. After gearing up to originate mortgage loans from an MLO’s unlicensed home or other unlicensed location, and allocating capital and resources to do so, licensed companies doing business from unlicensed locations could find that their authority to do so in many states has suddenly and unexpectedly been extinguished. Without adequate notice, a licensee could find that one day a branch license is not needed, and then, the next day, without any notice, the licensee could find that it is originating mortgage loans from an unlicensed or unauthorized location, in violation of the licensing statute, subject to penalties or other sanctions, and possibly holding an unenforceable and unsaleable mortgage loan.
Thus, in our discussions with state regulators, we strongly advocated that they should not “pull the rug out” from under licensed companies or MLOs who are relying upon the state allowing them to originate mortgage loans from their homes or other locations without a license. We also raised this issue with CSBS officials and we have, and will continue to advocate that, at least, advance notice of the expiration of this “relief from this branch license period” be provided to licensees and the public. In light of the possible ramifications should certain regulators not provide any notice of the expiration of the relief period, licensed companies and MLOs that have gotten used to originating mortgage loans from the MLOs unlicensed home or other unlicensed locations, may want to consider getting the home or other location licensed as a branch to ensure that they can continue to originate mortgage loans from the home or other location without any interruption should the “relief from branch licensing period” be ended unexpectedly. We can help in this regard.
There is, however, one more positive point to add - several state regulators with whom we have communicated have advised that much has been learned much from this period of “relief from branch licensing.” For that reason, regulators in a number of states have taken the position, or are favorably considering, that branch office licenses should no longer be needed once COVID-19 has run its course. Among others, Washington regulators are working on enacting legislation to amend their mortgage finance licensing law to allow licensed MLOs to work from home on a permanent basis. Of note, some states have never licensed branch offices, or do not license branch offices outside the state, so the issue of branch licensing has never been a great concern in these states.
With advances in technology and the experience of the past year, this is the time to seriously consider dispensing with branch office licensing. Licensed mortgage companies and licensed MLOs should use this opportunity to bring this issue to the attention of their state legislators, and strongly advocate for a change under the state’s mortgage finance licensing law to eliminate the mortgage finance companies licensed branch office requirement. Additionally, we expect that as the future reduction or elimination of the branch licensing requirement continues to be explored by state regulators, those states that traditionally have not required a branch license will have much experience to offer their colleagues in other states. Therefore, mask up and stay tuned.
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