By the Division of Banks

Comment Period on Regulatory Bulletin 5.1-101 Extended Until Friday, September 8, 2006 - Proposed Revisions to Regulatory Bulletin 5.1-101 Issued for Industry Comment

DRAFT

The Commonwealth of Massachusetts
Division of Banks
Regulatory Bulletin 5.1-101
Date, 2006

Mortgage Lender and Mortgage Broker Licensing Exemption Guidelines & Enforcement Policy for Unlicensed Entities and Activities

  1. APPLICABILITY AND SCOPE

    The purpose of this policy statement of the Division is to protect the Commonwealth's consumers by eliminating or restricting the ability of unlicensed mortgage lenders and mortgage brokers to conduct business in violation of G.L. c. 255E and its implementing regulations 209 CMR 42.00 et seq., as well as other applicable laws. G.L. c. 255E clearly is designed to prohibit unlicensed persons or entities, unless otherwise specifically exempt, from acting as mortgage lenders and/or brokers in residential mortgage loan transactions. The statute permits the granting of licenses to only those individuals or entities that possess the requisite financial responsibility, character, reputation, integrity and fitness.

    These standards are intended to ensure that licensed mortgage lenders and brokers will operate their businesses honestly, fairly, soundly and in the public interest. The Division's implementing regulations, 209 CMR 42.00 et seq., further protect consumers by safeguarding prepaid mortgage loan related fees, and ensuring compliance with all applicable state and federal consumer protection laws and regulations through the licensing and the on-site inspection/examination process. The failure or unwillingness of any person or entity to comply with the Act's licensing and substantive provisions exposes consumers to unnecessary risk of financial loss and potentially abusive mortgage lending practices. The Division, therefore, issues the following policy to ensure that Massachusetts consumers receive the benefits of licensing and other safeguards.

    Section II of this bulletin sets forth the Division's policy relative to the licensing exemption set forth in G.L. c. 255E, §2 for individuals acting in the capacity of a mortgage lender or mortgage broker who are either employed by or associated with and under the direction of a licensed mortgage lender or mortgage broker (collectively referred to as "licensees").

    Section III of this bulletin sets forth the Division's policy relative to office locations of licensed mortgage lenders and mortgage brokers and prohibited practices with respect to the operation and maintenance of office locations.

    Section IV of this bulletin sets forth the Division's enforcement policies relative to unlicensed mortgage lenders and mortgage brokers who are otherwise subject to G.L. c. 255E, the Commonwealth's mortgage Lender and Broker Licensing Act. The policy statement specifies the regulatory sanctions and procedures the Division may employ to: (a) require unlicensed mortgage lenders and brokers to cease operating; (b) to require the immediate licensing of such unlicensed entities; (c) to publicize the identities of such unlicensed entities to the general public and the mortgage lending industry; (d) to publicize the identities of those formerly licensed mortgage lenders and brokers whose licenses are not renewed at the annual renewal date for any reason; (e) to impose penalties including monetary fines for violations of laws or regulations; (f) to reiterate the sanctions facing such unlicensed entities as well as licensed entities which do business with an unlicensed mortgage lender or broker.

  2. EXEMPTION PROVISIONS FOR EMPLOYEES AND ASSOCIATED PERSONS

    1. Statutory Background

      Massachusetts General Laws, chapter 255E, § 2 provides an exemption from the mortgage broker and mortgage lender licensing requirement for, "[A]ny person who is employed by or associated with a licensed mortgage broker or mortgage lender in the capacity of a mortgage broker or mortgage lender under the direction of said licensed mortgage broker or mortgage lender shall not be required to obtain such license." (Emphasis supplied.)

    2. Exemption Criteria

      1. The statutory exemption is only available to individuals. Business entities are not exempted from licensing requirements.

      2. The statutory exemption is available to individuals acting in the capacity of a mortgage broker or lender on a full-time or part-time basis, provided that all other requirements set forth in this bulletin are met.

      3. For every individual employed by or associated with a licensee who will be operating in the capacity of a mortgage broker or lender, the licensee must file with the Division a "Statement of Accountability" in which the licensee undertakes responsibility for the activities of the individuals listed in the Statement of Accountability. See Attachment I.

      4. Each individual employed by or associated with a licensee who will be operating in the capacity of a mortgage broker or lender may engage in such activities only on behalf of one licensee and the individual must be listed on the licensee's completed Statement of Accountability filed with the Division.

      5. Pursuant to G.L c. 255E, § 2, a mortgage broker or mortgage lender making fewer than 5 mortgage loans within any period of 12 consecutive months need not obtain a license. This exemption applies only to those individuals who are operating independently and does not apply to individuals who are operating exclusively on behalf of a licensed mortgage broker or mortgage lender.

    3. Licensee's Responsibilities and Obligations when Engaging Unlicensed Individuals to Act in the Capacity of a Mortgage Broker or Mortgage Lender on the Licensee's Behalf

      1. A licensee must certify that it has conducted a thorough investigation of the associate/employee and that the associate/employee is fully qualified and possesses the requisite financial responsibility, character, reputation, integrity and general fitness for the position. The investigation must include a thorough review and verification of the background, experience, and qualifications of all associates for whom they are accountable prior to retaining such associates/employees. Examiners will review the licensee's books, records, and internal control procedures to confirm that the licensee took the proper steps prior to authorizing such associates/employees to operate in the capacity of mortgage lenders or mortgage brokers on the licensee's behalf.

      2. A licensee must file with the Division the Statement of Accountability. See Attachment I.

      3. A licensee must maintain a record of all associates/employees which will include, among other things, the date the relationship was established and the date of termination. This record shall be available for review during the examination process.

      4. A licensee must notify the Division in writing within five business days of the effective date of a change involving an associate/employee, including the termination of a working relationship with an associate/employee and the addition of new associates/employees.

      5. Licensees are reminded of the prohibition against kickbacks and unearned fees as set forth in the Real Estate Settlement Procedures Act (RESPA), 12 USC 2607, and its implementing regulations. Pursuant to RESPA, individuals cannot be compensated for services in connection with a mortgage loan transaction other than for services actually performed in the making of a loan. The improper payment of fees or compensation could result in RESPA violations for the licensee and the payee.

      6. Licensees are reminded that in instances where individuals operating on their behalf, or the licensees themselves, are also engaged in other business activities related to the mortgage loan industry inherent conflicts of interest may result if such individuals are acting in dual capacities with respect to the same mortgage transaction.

  3. OFFICE LOCATIONS

    In general, office locations are governed by G.L. c. 255E, §5 and 209 CMR 42.13.

    1. Prohibited Practices Related to Office Locations

      It is unlawful for any licensed mortgage lender and/or broker to conduct business with a person or entity which should be licensed under G.L. c. 255E and which it knows or should know is an unlicensed mortgage lender or broker. Such activity constitutes an unfair or deceptive act for a mortgage broker or mortgage lender under 940 CMR 8.06(9), an expressly prohibited practice under the Office of the Attorney General's Mortgage Brokers and Mortgage Lenders Regulations, issued pursuant to G.L. c. 93A, the Commonwealth's Consumer Protection Act. A licensee is deemed to have knowledge of the unlicensed status of a mortgage lender and/or broker if an advisory is issued by the Division under Section IV(A)(3)(a) and Section IV(A)(4) of this bulletin.

    2. Net Branching

      1. The purpose of this section is to provide clarification to all licensees engaged in mortgage lending and mortgage brokering activity in Massachusetts of certain requirements and expectations regarding permissible "branch arrangements" which may be maintained by licensed mortgage lenders and mortgage brokers under Massachusetts General Laws chapter 255E. Although by prior published opinion the Division has attempted to provide guidance on the licensing requirements applicable to mortgage lenders and mortgage brokers who sought to expand their operation by requesting approval of additional licensed locations, this and other closely associated issues addressed herein, continue to be areas of common confusion and violations which the Division has witnessed during both the licensing and the inspection/examination of mortgage lenders and mortgage brokers. The issues arising in these areas are attributable, in part, to a concept routinely referred to in the mortgage lending industry as "net branching."

        The Division recognizes that the term "net branch" is not defined by either applicable statute or regulation. Due to this lack of an accepted definition, practices observed in the industry have illustrated various branch arrangements, some of which are consistent with the rules governing the operation of a branch location and some that are impermissible.

      2. The Division will review the facts and circumstances of each branch location arrangement on a case-by-case basis, taking into account the totality of such circumstances. Any branch operation agreements or guidelines maintained by the licensee may be subject to inspection/examination by the Division in order to determine the licensee's level of compliance with the licensing standards of General Laws chapter 255E. In recognition of the various branch arrangements previously observed, the Division may find that any arrangement that seeks to evade or circumvent the standards for maintaining an additional licensed location under General Laws chapter 255E, as further described herein, as a violation of General Laws chapter 255E and the Division's regulations at 209 C.M.R. 42.00 et seq.

        In evaluating whether an impermissible "net branch" arrangement exists, the Division will require, at a minimum, that the licensee ensure, that it:

        1. Refrains from engaging or retaining an existing, separate corporation, partnership, limited liability company or other similar entity that conducts business as a mortgage lender or mortgage broker as an additional licensed location of the licensee or allowing such entity to originate or broker residential mortgage loans under a license obtained from the Commissioner in the name of the licensee;

        2. Adopts or revises, as applicable, standard operating rules to ensure that the branch manager of any additional licensed location, other than the licensee's main office, shall not be required to individually bear the expenses of such location. The contractual relationships established and maintained with vendors at the additional licensed locations, other than the licensee's main office, shall be entered in the name of the licensee. These expenses shall include, but shall not be limited to, expenses arising from the leasing, renting, or ownership of the licensed premises, telephones, utilities, advertising, marketing, any third party mortgage-related fees such as title, appraisal, and credit report fees, and any capital expenses incurred at the additional licensed location. Such expenses shall appear as obligations of the licensee and shall be paid from an operating account maintained by, and in the name of, the licensee;

        3. Refrains from representing to any third party vendors that any additional licensed location is an independent corporation, partnership, association, or other similar entity that is separate and distinct from the licensee. The licensee shall ensure that any business shall at all times be conducted in the name of the licensee as it appears on the license for the additional licensed location;

        4. Adopts or revises, as applicable, standard operating rules to ensure that any qualifying employee/associate is prohibited from employing, or otherwise compensating, any other natural person or legal entity to engage in the licensed business on behalf of either the employee/associate or the licensee as such person or entity would be required to separately obtain the relevant license from the Commissioner;

        5. Adopts or revises, as applicable, standard operating rules to ensure that the branch manager shall not be obligated to reimburse the licensee, either directly or indirectly, for licensing fees incurred in the conduct of the mortgage lender or mortgage broker business at the additional licensed location. Further, the branch manager shall not otherwise be responsible to indemnify the licensee from his or her own funds, or other account which is not maintained in the name of the licensee, for the operating expenses incurred in the conduct of the business at the additional licensed location, if such branch manager is an employee of the licensee. All such expenses shall be entered in the financial records and accounting ledger of the licensee and shall be treated as an obligation of the licensee. Any funds advanced to a branch manager, loan originator, or other employee shall be reported on the licensee's financial statements in accordance with generally accepted accounting principles when submitted to the Division;

        6. Refrains from permitting or requiring any condition or arrangement under which those engaging in the licensed business on the licensee's behalf, who would not qualify for an exemption under the standards and procedures imposed by Section II above, are limited to making or originating four or fewer mortgage loans within a twelve month period; and

        7. Prevents any branch manager from advertising or conducting the licensed business in any name other than as it appears on the licensee's original license.

          In maintaining additional licensed locations, best practices would include the adoption or revision, as applicable, of quality control standards contained in policies and procedures that will ensure that branch managers, loan originators, and other employees operating on behalf of the licensee are adequately supervised to ensure compliance with all state and federal laws and regulations applicable to those engaged in the business of a mortgage lender and mortgage broker in Massachusetts. Such quality control standards should provide for a loan review process to assess the compliance of the licensee, and those engaged as employees/associates to operate on the licensee's behalf, with the statutes, regulations, regulatory bulletins, and other relevant provisions of law applicable to those engaged in the business of a mortgage lender and mortgage broker in Massachusetts.

  4. ENFORCEMENT POLICY FOR UNLICENSED ENTITIES AND ACTIVITIES

    1. Unlicensed Mortgage Lenders and Brokers

      1. It is unlawful for any person or entity to act as a mortgage lender and/or broker without a valid license issued by the Division, unless such person or entity is expressly exempt from such licensing by G.L. c. 255E, § 2. ( See also 209 CMR 42.05 and 42.08.)

      2. Any person or entity who, based upon information from whatever source deemed reliable, is suspected by the Division of engaging in, or advertising, unlicensed mortgage lender or broker activities shall be ordered in writing to immediately cease engaging in such activity until such person or entity:

        1. Demonstrates to the Division's satisfaction their exempt status; or

        2. Applies for and obtains a license(s) from the Division under G.L. c. 255E and 209 CMR 42.00.

      3. Any person or entity who fails to comply with the requirements of the preceding paragraph, within the time periods specified by the Division, shall be subject to any and all of the following remedial actions:

        1. Such person's or entity's name address and other pertinent information regarding their unlicensed status shall be published in a periodic public advisory, including a posting on the Division's website, issued by the Division to the general media, mortgage and banking industry trade groups and individual licensed mortgage lenders and brokers;

        2. The Division shall refer the matter to the Attorney General for enforcement and the imposition of civil or criminal penalties pursuant to G.L. c. 255E, §§ 9-10;

        3. The Division may impose penalties including fines; orders prohibiting the issuance of a license; prohibiting participation as a principal employee of a licensee; or prohibiting participation in the conduct of affairs of the licensee; pursuant to G.L. c. 255E, §§10, 11, and 12.

        4. Any pending application for a mortgage lender or a broker license may be denied under G.L. c. 255E, §4, as such non-compliance constitutes evidence or grounds for determining that the applicant lacks the requisite character, reputation and fitness to be licensed under the Act.

      4. Any person or entity whose mortgage lender or broker license is not renewed at the annual renewal date for any reason shall have their name, address and other pertinent information published as specified above in Section IV(A)(3)(a) and shall be subject to the remedial measures specified in Section IV(A)(3)(b)-(c) of this bulletin.

    2. Mortgage Lenders and Brokers Doing Business with Unlicensed Entities

      1. It is unlawful for any licensed mortgage lender and/or broker to conduct business with a person or entity which should be licensed under G.L. c. 255E and which it knows or should know is an unlicensed mortgage lender or broker. Such activity constitutes an unfair or deceptive act for a mortgage broker or mortgage lender under 940 CMR 8.06(9), an expressly prohibited practice under the Office of the Attorney General's Mortgage Brokers and Mortgage Lenders Regulations, issued pursuant to G.L. c. 93A, the Commonwealth's Consumer Protection Act. A licensee is deemed to have knowledge of the unlicensed status of a mortgage lender and/or broker if an advisory is issued by the Division under Section IV(A)(3)(a) and Section IV(A)(4) of this bulletin.

      2. Pursuant to 209 CMR 42.09(1), all licensed mortgage lenders and brokers are required to maintain records and internal controls and policies that verify the licensing or exempt status of all mortgage lenders or brokers with whom they do business. Failure to do so, shall constitute an unsound practice and shall constitute a violation of 209 CMR 42.04(2)(b) or 209 CMR 42.07(2)(b), as applicable.

      3. Any licensed mortgage lender or broker who fails to comply with the requirements of the preceding two (2) paragraphs shall be subject to any and all of the following remedial actions:

        1. License suspension or revocation under G.L. c. 255E, s. 6;

        2. The issuance of a cease and desist order under G.L. c. 255E, s. 7;

        3. The imposition of penalties including monetary fines and orders of prohibition under G.L. c. 255E, §§10, 11, 12.

        4. Referral of the matter to the Attorney General for enforcement and the imposition of civil or criminal penalties and fines pursuant to G.L. c. 255E, §§ 9-10.

  5. EFFECTIVE DATE AND IMPACT ON PRIOR POSITION STATEMENTS

    This bulletin shall become effective as of [insert date]. However, licensees shall have the option of complying with the provisions of the bulletin as of the issuance date of the bulletin.

    This bulletin supersedes the previously issued Regulatory Bulletin 5.1-101 and previously issued opinions of the Division relative to the positions stated herein.

  6. HISTORICAL NOTES

    This bulletin was first issued on November 13, 1997 as Administrative Bulletin 37-1. This bulletin was revised effective [insert date].

  7. Authority

    G.L. c. 255E, ss. 2, 5, 6, 7, 9, 10, 11 and 12; 209 CMR 42.00; 940 CMR 8.00.

DRAFT

Attachment I

STATEMENT OF ACCOUNTABILITY

The undersigned licensee hereby undertakes responsibility for the activities, authorized by Massachusetts General Laws chapter 255E and its implementing regulations at 209 CMR 42.00 et seq., and engaged in by its associates and employees listed below on behalf of the undersigned. It is fully understood and agreed that the Division of Banks ("Division") may take regulatory action, as set forth in M.G.L. c. 255E and its implementing regulations, against the undersigned for the activities of its associates and employees which are not in conformance with said chapter 255E and the regulations promulgated thereunder. If the working relationship with an associate or employee listed below is terminated, the undersigned will notify the Division within five business days of the effective date of the termination.

The undersigned is responsible for maintaining a record of all associates and employees listed below which will include, among other things, the date the relationship was established and the date of termination. This record shall be available for review during the examination of the licensee by the Division.

The undersigned hereby affirms that an investigation has been completed as to the character and ability of the associates and employees listed below and has determined that the associates and employees listed below possess the qualifications necessary to engage in mortgage broker and mortgage lender activities, as authorized by M.G.L. c. 255E.

________________________________________________________________
NAME OF LICENSEE License No.

By: __________________________________________
(Signature of individual licensee)
If the licensee is a business entity, the signator of this statement hereby certifies that he or she is duly authorized to sign this statement on behalf of such business entity.

___________________________________
(Name and Title)

ASSOCIATES AND EMPLOYEES INCLUDED IN STATEMENT OF ACCOUNTABILITY

NAME AND HOME ADDRESS

_____________________________________________________________________________

_____________________________________________________________________________

_____________________________________________________________________________

_____________________________________________________________________________

_____________________________________________________________________________

ACKNOWLEDGMENT

__________________________
Date

State: _________________________________________

County: ________________________________________

Then personally appeared before me _______________________ and acknowledged the foregoing to be his/her free act and deed.

_______________________________________
Notary Public