Ben Giumarra

By being careful to comply with SAFE Act requirements by maintaining NMLS licenses for more employees than is likely necessary, are bankers putting themselves at greater risk of running afoul of Truth in Lending requirements? The requirements I’m referring to are those put in place by the Dodd-Frank Act as applicable to mortgage loan originators – effective first in 2010, then significantly updated in 2014. These Truth in Lending requirements make up what is known as the “TILA Rule.”

In some cases, yes.

Both the SAFE Act and TILA Rule apply to “loan originators.” Both have similar requirements and use much the same language. But the TILA Rule is tougher. Its applicability is broader, and carries more severe penalties.

TILA Tougher Than SAFE Act

The SAFE Act has requirements for licensing, general education, qualifications, and disclosures.

The TILA Rule has requirements for licensing (many of which are covered by the SAFE Act), compensation, general education, qualification, and disclosures. Aside from compensation, much of the TILA Rule is nullified by compliance with Federal NMLS licensing standards. But the vast majority of employees at depository institutions are merely registered – not fully licensed. For these registered originators, the TILA Rule’s education and qualification requirements can be quite startling.

For example, the TILA Rule requires a credit check as a precursor to allowing anyone to work as an originator. How many originators have you hired since 2014 (when this TILA Rule was put in place)? There’s a number of similar tripping points to watch out for.

Of course, the biggest difference with the TILA Rule is that it includes actual limitations on how originators can be paid. So, while it may make sense to play it safe with the SAFE Act and get all branch personnel licensed – it’s not quite as easy as structuring their compensation plans to work in compliance with the TILA Rule.

TILA Has A Wider Reach

The SAFE Act applies “loan originators,” which it defines as someone who: (a) takes a residential mortgage loan application; and (b) offers or negotiates terms of a residential mortgage loan for compensation or gain.

The TILA Rule also applies to loan originators, but defines the term more broadly. Per the rule, a loan originator is someone who, “in expectation of direct or indirect compensation or other monetary gain or for direct or indirect compensation or other monetary gain, performs any of the following activities: takes an application, offers, arranges, assists a consumer in obtaining or applying to obtain, negotiates, or otherwise obtains or makes an extension of consumer credit for another person; or through advertising or other means of communication represents to the public that such person can or will perform any of these activities.”

NMLS License Increases TILA Risk 

Anyone familiar with the industry can easily see how much broader this is. If you’re triggering the need for an NMLS license, you should definitely be complying with the TILA Rule. But that’s the opposite of what we actually see at most depository institutions; often we’ll see an institution with 50 employees with NMLS licenses, but less than half that number are true mortgage originators. In such a case, the institution will argue that they’re just being cautious – it’s better to get all retail employees an NMLS license in case they need to help a customer with a mortgage application.

That was certainly a fine idea before 2010 – and still can be – but now we have the TILA Rule to consider.

If you assign an employee an NMLS number, you’re acknowledging that they may engage in mortgage origination activities. Remember: if the activity falls under the category of “origination” so as to require an NMLS license, it will certainly trigger TILA Rule requirements.

If you really want to play it safe, you’ll have to make sure the employee not only has an NMLS number but that they also comply with the TILA Rule requirements. In general, that means TILA’s education, qualification, and compensation requirements. Not doing so would put their annual, institution-wide bonus at risk. It would also require that a credit check was done prior to their employment. They’ll need a written compensation plan in compliance with TILA, will need to participate in training sufficient to satisfy TILA standards, among other requirement they’ll need to be in compliance with.

Make no mistake about it – this can all still be accomplished; it’s not unreasonable. But merely getting retail employees an NMLS license is not a safe bet – if you are not also complying with all TILA requirements, this is actively increasing the risk to your institution.

Ben Giumarra is a risk management consultant with Spillane Consulting. He may be reached at BenGiumarra@ SCAPartnering.com or (781) 356-2772.