New Mortgage Licensing Requirements Come to the West

Bradley Arant Boult Cummings LLP
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Bradley Arant Boult Cummings LLP

During this pandemic, both Idaho and South Dakota have been busy adding new mortgage licensing requirements. As discussed below, these new licensing requirements will materially impact mortgage lenders and servicers doing business in these states.

Idaho

Earlier in 2020, Idaho passed H0401, which amended the definition of “mortgage lender” to include mortgage companies that engage in mortgage servicing. Additionally, the legislation excluded commercial construction lending from applicable licensing requirements. To the relief of many in the mortgage industry, the legislation also removed the control person position of “qualified individual” from the mortgage licensing requirements. Many will remember that the Idaho qualified individual needed to: (a) have three years of experience in the mortgage industry, (b) had to provide proof of this experience with an appropriate resume, and (c) be a licensed Idaho mortgage loan originator (MLO).

This legislation became effective on July 1, 2020. As now in effect, the definition section of the statute includes the following, “Borrower does not include an organization that, as part of a regular business of constructing and rehabilitating dwelling, makes application for a residential mortgage loan to finance the constitution or rehabilitation for a dwelling.” Idaho Code § 26-31-102. Accordingly, the commercial lending licensing requirement no longer exists.

Additionally, the statutory definition of “mortgage lending activities” has been updated to include the following language “for compensation or gain or in the expectation of compensation or gain, either directly or indirectly, accepting or offering to accept applications for residential mortgage loans or assisting or offering to assist in the preparation of an application for a residential mortgage loan, or servicing a residential mortgage loan on behalf of any person.” Idaho Code § 26-31-201 (emphasis added). It also adds the definition of “servicing,” which means “collecting payments of principal, interest, or any other payment obligations required pursuant to the residential mortgage loan.” Id. By amending these definitions and updating the license requirement on the NMLS Resource Center, Idaho now firmly treats mortgage servicing as a licensable activity.

Although the statute appears to impose additional burdens on the mortgage servicing industry by requiring the companies that only service loans to be licensed in Idaho – the good news is that all qualified individual requirements have been removed from the statue. This will help many startup companies that wish to become licensed in Idaho, where the qualified individual requirements previously were too difficult to meet with new mortgage personnel.

The Idaho Department of Finance’s website does not currently provide information as to when all mortgage servicing companies must be licensed to conduct business in Idaho. However, we believe that it would be in the mortgage servicing companies’ best practices to submit an application for licensure within the first 30 days of the requirement, meaning by July 31, 2020.

South Dakota

After years of being a mortgage industry darling by having “company only licensing,” on July 1, 2020, South Dakota added a branch license requirement to the Mortgage Lender License via an update to the NMLS Resource Center. This was a big surprise to many mortgage companies, as most MLOs are not able to work from a licensed location during the COVID-19 pandemic; additionally, the mortgage business is moving away from the idea of a licensed branch location for originating loans and meeting with potential borrowers. The new branch license will be required for any location other than the corporate location that originates, sells, or services South Dakota mortgages. Additionally, the branch manager of any branch location must be a South Dakota mortgage loan originator.

Although this is a dramatic change for mortgage companies that have relied on South Dakota’s “no branch licensing policy,” the positive is that mortgage companies have until December 31, 2021, to license all branch locations engaging in South Dakota mortgage business. Hopefully, by December 2021, the pandemic will be over, and the mortgage industry can get back to “normal.”

Bradley will continue to monitor the branch licensing situations for all states to see if the MLO working from a licensed branch location is still a viable business model after months of almost all personnel working from home and all origination, servicing, and other mortgage business being conducted exclusively by virtual means.

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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