It's Time to Dispense with Branch Office Licensing

Miles & Stockbridge P.C.
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Well, summer is more than half over, and although the initial pandemic has nearly run its course, a new COVID variant appears to be on the rise. Before we hunker down and mask up to fight off this stronger DELTA version of COVID, we urge the mortgage finance community and state regulators to permanently apply the valuable lessons learned from the initial COVID convergence and allow licensed mortgage loan originators (“MLOs”), under proper conditions and safeguards, to originate residential mortgage loans from home or other remote location without the location being licensed as a branch office.

When COIVD first hit the land, most state regulators acted quickly, reasonably, and responsibly to allow licensed MLOs to work from home without the home being licensed as a branch office of the licensed mortgage lender. Of course, prior to the pandemic, a few states never licensed the home or other remote location as a branch office. However, during the pandemic, some state regulators did not require branch licensing of all offices from which residential mortgage loans were being originated, while other state regulators had sufficient discretion to forgo licensing the MLO’s home or other remote location.

This practice appears to have worked very well where instituted, and enabled MLOs to continue originating mortgage loans during the pandemic, without waiting for the home to be licensed as a branch office. In turn, this also increased home financing sources for consumers, where the financing may have otherwise dried up.

Recently though, before the nationwide dawn of DELTA, states seemed to have had some control over COVID, and many, but not all, began to revert back to policies that restrict the origination of residential mortgage loans to licensed locations. Conversely, forward-looking regulators in some states, including Connecticut, Kansas, Maryland, Massachusetts, New Mexico and Washington, have taken the licensing lessons learned during the COVID pandemic and now allow licensed MLOs to originate residential mortgage loans from their home or other remote location without a branch office license. No doubt there was some concern and trepidation in allowing licensed MLOs, to originate mortgage loans from an unlicensed location, but with certain safeguards in place the concerns are addressed. Thus, these regulators have not lifted the licensing gates arbitrarily or without condition, but after careful examination have instituted certain reasonable conditions for MLOs to originate mortgage loans from their home or other remote location without the location being licensed. Conditions imposed by some states are the following:

(i) not meeting consumer at an unlicensed location, (ii) ensuring that data security and or privacy requirements are satisfied, (iii) refraining from advertising, listing on business cards, or holding out to the public the unlicensed location as an office of the mortgage company licensee, (iv) sufficiently supervising the mortgage loan origination activities being conducted from the unlicensed home or other unlicensed location.

Since the early days of the pandemic, we have been tracking the state responses as to whether MLOs are authorized to work from unlicensed remote locations. We prepared a chart that examines, among other issues (i) whether the jurisdiction would allow a licensed MLO to work from her or his unlicensed home or other location, (ii) whether the home would need to be licensed as a branch office of the licensed company, (iii) if branch licensing was not needed, whether an alternative regulatory approval was needed for the licensed MLO to work from the unlicensed home, and (iv) if branch licensing or some other approval was not needed, whether notice had to be provided to the state regulators that a licensed MLO was working from her or his unlicensed home or other location.

In addition, we examined the branch licensing provisions under states’ mortgage finance licensing laws in “Relief from Branch Office Licensing,” and reported on the actions taken by many state mortgage finance regulators to allow licensed mortgage companies and their licensed MLOs to originate residential mortgage loans from the MLO’s unlicensed home or other remote unlicensed location in “Further Relief from Branch Office Licensing.”

In March of this year we wrote to the Conference of State Bank Supervisors (“CSBS”) Ombudsman, Jim Payne, Assistant Deputy Commissioner with the Kansas Office of the State Bank Commissioner on this issue. At that time, Kansas allowed MLOs to work from home or other remote location without the home or other location being licensed as a branch, provided the MLO did not meet existing or prospective borrowers at the unlicensed location. In our letter to the Ombudsman, we requested support for our call to provide relief from branch office licensing and for the following actions to be undertaken by state regulators:

  1. Each state that had allowed a licensed mortgage lender or MLO to originate mortgage loans from the MLO’s home or other remote location should issue a branch approval letter for that location [if it was the state’s intention to revert to licensing such locations].
  2. To alleviate concerns that litigation could arise if there were no assurances that the originated mortgage loans were enforceable, each state that had allowed a licensed mortgage company or MLO to originate mortgage loans from the MLO’s unlicensed home or other unlicensed location should issue public guidance clarifying that: (i) the mortgage loans originated from the unlicensed, but otherwise authorized, home or other location were originated under the authority of the state and the state’s mortgage finance licensing law, and (ii) the mortgage loans are enforceable.
  3. If state is not willing to issue a branch approval as set forth above, then each state that had authorized the conduct of licensable activities from an unlicensed home or other unlicensed location should provide notice to the licensed company or MLO at least 60 days in advance of the precise date of when the licensable activities from an unlicensed home or other location would no longer be authorized.
  4. Each state whose mortgage finance licensing law imposes a branch office licensing obligation should seek repeal of such a licensing provision from the mortgage finance licensing statute.

We recognize that a number of licensed mortgage companies requested relief from branch office licensing and that the issue likely will remain under consideration as states prepare legislative packages during the next several months. We also expect that the issue will likely be raised during the upcoming AARMR and NMLS Conferences. With advances in technology and the experience of the past year, now is the time to seriously consider dispensing with branch office licensing. We urge licensed mortgage companies that support repeal of branch office licensing to make their thoughts known to state regulators.

Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.

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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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