CRIMINAL BACKGROUND CHECKS AND CREDIT REPORTS FOR LOAN ORIGINATORS

I have had a lot of questions regarding new loan originator qualification standards that take effect on January 10, 2014. On January 20, 2013 the Consumer Financial Protection Bureau (CFPB) published revisions to Regulation Z that expand the SAFE Act requirements that apply to Loan Originators. It is odd that SAFE Act revisions end up in the Truth in Lending Act, but this not the most seriously odd thing that Congress has done lately.

Section 1026.36(f)(3)(i) requires the loan originator organization (your bank) to obtain, for any of its individual loan originator employees who is not required to be licensed and is not licensed as a loan originator pursuant to the SAFE Act, a criminal background check, a credit report, and information related to any administrative, civil, or criminal determinations by any government jurisdiction. Loan originators who work for banks are required to register under federal law, but are not required to be licensed under state law. So this new rule applies to loan originators who work for banks. The regulation generally refers to such individuals as unlicensed loan originators.

Terminology Differences

Regulation G (the SAFE Act regulation) refers to “mortgage loan originator” while Regulation Z uses the term “loan originator.” Under Regulation Z, a person is a “loan originator” if the person engages in any one of the following activities for, or in expectation of, direct or indirect compensation or gain: (1) takes a loan application; (2) assists a consumer in obtaining or applying to obtain a loan; or (3) offers or negotiates terms of a loan. Under Regulation G a person is a “mortgage loan originator” only if the person engages in both of the following activities: (1) takes a residential mortgage loan application; and (2) offers or negotiates terms of a residential mortgage loan for compensation or gain. 12 U.S.C. 5102(4).

There are three primary differences between the two definitions, in terms of the activities involved. First, any individual element under Regulation Z qualifies the person as a loan originator, while the Regulation G requires that an individual must participate in both taking an application and offering or negotiating terms to trigger the statute’s requirements. Second, the Regulation Z definition of “loan originator” is separately triggered by assisting a consumer in obtaining or applying to obtain a loan, which is further defined to include, among other things, advising on terms, preparing loan packages, or collecting information on behalf of the consumer, while Regulation G does not specifically reference this activity. Third, “loan originator” under Regulation Z further includes “any person who represents to the public through advertising or other means of communicating or providing information . . . that such person can or will provide any of the services or perform any of the activities.”

Timing

Section 1026.36(f)(3)(i) does not require the loan originator organization to obtain the covered information for an individual whom the loan originator organization hired as a loan originator on or before January 10, 2014, and screened under applicable statutory or regulatory background standards in effect at the time. The rules apply to those hired or moved into the position of loan originator on or after the effective date.

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