Governor Brian Kemp signed SB 470 into law on May 2, 2022 (the Effective Date), amending the provisions of the Georgia Residential Mortgage Act, O.C.G.A. §§ 7-1-1000 et seq., that prohibited a Georgia mortgage lender or mortgage broker from employing any person with a felony conviction. The enactment of SB 470 is a major step towards resolving a long-time issue within the mortgage industry by significantly reducing the burden for Georgia mortgage lenders and mortgage brokers to monitor their employees’ felony convictions on an ongoing basis and avoid a license application denial or license revocation.
Prior to the Effective Date, O.C.G.A. § 7-1-1004(h) expressly prohibited a Georgia mortgage lender or mortgage broker from employing any person that had a prior felony conviction. This provision stated, in relevant part:
The department shall not issue or may revoke a license or registration if it finds that the mortgage loan originator, mortgage broker, or mortgage lender applicant or licensee, or any person who is a director, officer, partner, agent, employee, or ultimate equitable owner of 10 percent or more of the mortgage broker or mortgage lender applicant, registrant, or licensee or any individual who directs the affairs or establishes policy for the mortgage broker or mortgage lender applicant, registrant, or licensee, has been convicted of a felony in any jurisdiction or of a crime which, if committed within this state, would constitute a felony under the laws of this state (emphasis added).
The terms “agent” and “employee” were not defined in O.C.G.A. § 7-1-1000; however, the Georgia Department of Banking and Finance (the Department) interpreted these terms to include anyone employed by the licensee/registrant, irrespective of whether they engaged in Georgia residential mortgage business on behalf of the licensee/registrant or otherwise maintained contact with Georgia borrowers (i.e., custodial staff, mailroom employees, office services, etc.). As anyone in the industry will note, O.C.G.A. § 7-1-1004(h) had a significant impact on a Georgia Mortgage Lender Licensee/Registrant’s ability to do business. O.C.G.A. § 7-1-1004(h) not only burdened licensees/registrants with actively monitoring felony convictions for all employees on an ongoing basis, but it also subjected to licensees/registrants to severe penalties if they inadvertently employed someone with a prior felony conviction. The Department had the authority to deny a license or revoke a license for a Georgia mortgage lender or mortgage broker for such an error, which are reportable events that require the licensee/registrant to update its answers to its Disclosure Questions and provide a corresponding Disclosure Explanation to resolve. As a result, the provision had a widespread impact on licensees/registrants that extended well beyond the borders of the State of Georgia.
Moreover, Georgia’s historical prohibition on employing individuals with prior felony convictions has been “out of step” with the same requirements under the federal Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act). Under the SAFE Act, only a mortgage loan originator (MLO) is required to submit to a criminal background check, and the MLO would only be considered ineligible for licensure if s/he is found to have been convicted of a felony involving dishonesty, breach of trust, or money laundering against the employee or organizations controlled by the employee, or agreements to enter into a pretrial diversion or similar program in connection with the prosecution for such offenses within seven years of the criminal background check. The Department’s historical interpretation of O.C.G.A. § 7-1-1004(h) raised the bar for Georgia mortgage companies, requiring all employees to submit for criminal background checks and penalizing the mortgage company if any employee has been convicted of any action that would be considered a felony under the laws of Georgia at any time in his/her life.
Georgia legislators introduced SB 470 to course correct for this long-standing issue. It was met with overwhelming support in the Georgia House of Representatives (142 to 1) and Senate (47 to 1). In short, SB 470 permits Georgia mortgage lenders and mortgage brokers to employ convicted felons if such employees are not involved in certain mortgage loan-related activities. As of the Effective Date, O.C.G.A. §7-1-1004(h) provides:
The department shall not issue or may revoke a license or registration if it finds that the mortgage loan originator, mortgage broker, or mortgage lender applicant or licensee, or any person who is a director, officer, partner,
agent, covered employee, or ultimate equitable owner of 10 percent or more of the mortgage broker or mortgage lender applicant, registrant, or licensee or any individual who directs the affairs or establishes policy for the mortgage broker or mortgage lender applicant, registrant, or licensee, has been convicted of a felony in any jurisdiction or of a crime which, if committed within this state, would constitute a felony under the laws of this state (emphasis added).
O.C.G.A. § 7-1-1000 also includes the following definition for a “covered employee,” limiting the scope of employees to which this provision applies:
“Covered employee” means any employee of a mortgage lender or mortgage broker who is involved in residential mortgage loan related activities for property located in Georgia and includes, but is not limited to, a mortgage loan originator, processor, or underwriter, or other employee who has access to residential mortgage loan origination, processing, or underwriting information.”
Also of note, O.C.G.A. § 7-1-1004(i) provides for an alternative definition of “covered employees,” defining such persons as “employees who work in this state and also have the authority to enter, delete, or verify any information on any mortgage loan application form or document.” It is not clear from the amended laws which definition governs and, to the extent that two definitions of the term exist, when each such definition applies.
Although this is a significant step forward in reducing the regulatory burden on Georgia mortgage lenders and mortgage brokers, this is not a perfect solution to the problem. Further legislative changes need to be made to clarify the types of employees that constitute “covered employees” and bring the Georgia Residential Mortgage Act completely in alignment with requirements under the federal SAFE Act. Amended O.C.G.A. § 7-1-1004(h) generally limits the scope of the provisions applicability to those involved in mortgage-related activities and, ostensibly, the scope to those employees located in Georgia that have the authority to enter, delete, or verify any information on mortgage loan applications and documents; however, the amended laws can also be read to prohibit Georgia mortgage lenders and mortgage brokers from employing individuals with felony convictions if they have “access to residential mortgage origination, processing, or underwriting information.” It remains to be seen how far the Department will extend the scope of this provision’s applicability. For example, if a mailroom employee of a Georgia Mortgage Lender Licensee/Registrant could open up a package from a Georgia borrower that contains a residential mortgage loan application, then the Department could require the licensee/registrant to ensure that the mailroom employee does not have a prior felony conviction or else be subject to revocation of its license. What is more, amended O.C.G.A. § 7-1-1004(h) and the new definitions of “covered employee” in O.C.G.A. §§ 7-1-1000 and 7-1-1004(i) do not limit the types of felony convictions or the timeframe during which a felony conviction occurred in any meaningful way. Georgia mortgage lenders and mortgage brokers remain liable for employing any “covered employee” that has a prior conviction that would constitute a felony under Georgia law at any point in his/her life.
The practical impact of the amended laws should not be minimized. As of the Effective Date, Georgia mortgage lenders and mortgage brokers can rest a bit easier knowing that they will not be subject to the Department’s scrutiny if employees with prior felony convictions – arguably, only those that are located outside of Georgia – do not engage in the activities of a “covered employee” for Georgia loans and do not have access to information relating to Georgia loans. Nevertheless, we await further guidance or rulemaking from the Department that clarifies what constitutes a “covered employee” and limits the scope of felony convictions covered under the law.