Anatomy of a Policy Win-The Mortgage Loan Originator Exemption Legislation
In the early morning hours of August 1, the Massachusetts Legislature’s 2017-2018 Session ended with a flurry of last minute bills. Among these was an Economic Development Bill that contained a small provision that MACDC had sought: an exemption for employees of certain nonprofits from the requirement to obtain licensing as a mortgage loan originator – a requirement we believe is unnecessary, burdensome, and counter-productive. While this was not the biggest, or most high-profile policy victory in MACDC history, it is one of which I am very proud because our success reflects on many of MACDC’s core strengths as an organization: strong relationships with and frequent communication with MACDC members; good working relationships with legislators and agency officials; strong collaborations with CHAPA and other allied organizations; and the capacity to do the necessary homework on the issue.
The need for the exemption stems from a state law enacted almost a decade ago, the third in a succession of laws (state and federal) aimed to protect consumers from predatory lenders so prevalent before and during the foreclosure crisis. The commercial mortgage lending industry experienced major changes in the early-to mid-2000s, reflecting what we now look back on as the “housing bubble”: rapid home price appreciation coupled with a proliferation of mortgage lenders and mortgage products, including predatory loans made with complete disregard of borrowers’ ability to repay the loans, which resulted in a massive increase in foreclosures starting in 2006-2007. MACDC and other affordable housing advocates clamored for a state law to protect consumers that resulted in the 2007 passage of “An Act Protecting and Preserving Home Ownership” (Chapter 206 of the Acts of 2007), which, among other things, placed non-bank mortgage lenders under the regulation of the MA Division of Banks (DOB).
In 2008, the U.S. Congress passed The Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (S.A.F.E. Act), which requires states to enact legislation requiring licensing of mortgage loan originators (MLOs). In recognition that administering publicly-funded loans (such as loans for home repair, or for down payment assistance) is very different from lending in a commercial context, the S.A.F.E. Act permits states to exempt employees of “bona fide nonprofits” from the MLO requirements, as detailed in Section 1008.103 of the federal regulations.
Massachusetts passed a law adopting the S.A.F.E. Act in 2009, under Chapter 44 of the Acts of 2009. Unfortunately, the Massachusetts legislation enacted to comply with the S.A.F.E. Act did not provide for the exemptions for certain nonprofits permitted under the federal regulations.
Between 2008 and 2017, CDCs and other nonprofits who administered publicly funded programs relied on a 2008 Opinion Letter by the DOB, which stated that employees of nonprofits who administer exclusively publicly-funded loan programs were exempt from the licensing requirements on the basis that they are acting on behalf of government entities. In June 2017, however, the DOB issued an “Industry Letter," which stated that the 2009 MA legislation altered the regulatory requirements and that, in fact, as of July 31, 2009, any person who meets the definition of a MLO must be licensed as such, even if he, or she is employed by a nonprofit entity that is exempt from licensing. In its letter, DOB acknowledged there was confusion with regard to the 2009 law and said that it would take no enforcement action on this until December 31, 2017, at which time those engaging in mortgage lending activity must be licensed.
The process and the cost for an individual to obtain a license are significant. They must pay a fee, receive at least 20 hours of pre-licensing education, pass a written test, and submit fingerprints for a criminal background check, among other requirements. The costs to the individual (or to the nonprofit which employs them) for initial licensing is more than $1,000. In addition, the employee must take annual continuing education courses. If a licensed MLO person leaves the employ of the nonprofit, the new person hired must also be licensed. Beyond being unnecessary and burdensome, the pre-licensing and continuing education provided to mortgage loan originators, if applied to employees of the nonprofits administering public programs, will likely come at the expense of learning the skills necessary to effectively and efficiently administer these public programs.
The MLO education is tailored to ensuring that a commercial mortgage lender is trained on the various aspects of commercial lending: federal laws on topics including required disclosures and definitions of high-cost mortgages; understanding the wide variety of mortgage products, including subprime lending; ethical issues including redlining and predatory lending; and many other topics intended to provide profit-motivated mortgage lenders, whose employees are typically compensated based on the number of loans they make, with the legal and ethical standards they are required to follow. In contrast, the lending programs administered by tax-exempt nonprofits on behalf of a municipality, for example, typically have loan terms and guidelines established by the public sector. The loans are made with a charitable purpose; loan terms are favorable to the borrower, frequently at no interest, with repayment deferred until the home is sold or refinanced; and the compensation for the nonprofit is established by the municipality.
The Effort to Obtain the Exemption for Certain Nonprofits:
Therefore, CDCs and other nonprofits administering publicly funded loans faced the prospect of embarking upon the costly and time-consuming process of obtaining MLO licenses for their employees, who were engaged in activity that the federal government had acknowledged was distinct from commercial lending. While working to educate its members on the process for obtaining licensing for their employees, MACDC also embarked on a campaign to exempt nonprofits from the licensing requirements, as allowed by the S.A.F.E. Act. In November 2017, MACDC and its allies met with the DOB Commissioner. Commissioner McGinnis noted that while existing state law did not provide a nonprofit exemption, he agreed with us that certain nonprofits should be exempt from the MLO licensing requirements and said that DOB would support legislation to provide for an exemption. Later that month, the DOB notified MACDC and others that, in recognition of the concerns that have been raised, DOB would suspend enforcement of the MLO licensing requirements until June 30, 2018.
In the course of the months that followed, MACDC worked with CHAPA, the Regional Housing Network of MA (RHN), and Habitat for Humanity Greater Boston. MACDC helped draft legislative language that was ultimately deemed acceptable to the DOB, the Mass Mortgage Bankers Association (MMBA), and our allies. It would exempt two categories of lenders: bona fide nonprofit homeownership organizations (Habitat and its affiliates), and other tax-exempt nonprofits who lend exclusively public funds. This second exemption would codify into State Law the exemption expressed in the DOB’s 2008 Opinion Letter. Some CDCs, Community Development Financial Institutions (CDFIs), and other nonprofits who lend private money would continue to be subject to the MLO licensing requirements. Recognizing that stand-alone legislation may not succeed, we were successful in obtaining the Senate’s approval to include the MLO licensing exemption in its version of the Economic Development Bill. Because it was not included in the House version of the bill, the provision was the subject of negotiation between the House and Senate right up until the last hours of the legislative session. Fortunately, the exemption provision was included in the final version of the bill and was signed into law by the Governor.
Reasons We Succeeded:
- Frequent Communication with MACDC Members:
MACDC Members called our attention to the June 2017 Industry Letter, and to the challenges it created for their programs and those they serve. We worked closely with our members on understanding the costs and the process associated with licensing and kept them informed about our efforts to secure legislation to provide an exemption. When the time came for members to make calls to legislators to advocate for inclusion of the exemption language in the Economic Development legislation, the response from members was overwhelming, with over 50 calls placed to legislators.
- Good Working Relationships with Legislators, Agency Officials, and Allies:
MACDC and our allies reached out to the DOB in the summer and fall of 2017, culminating in the November meeting with the new DOB Commissioner, where he agreed to work with us on a legislative remedy. MACDC worked with its allies, the DOB, and the MMBA to come up with legislative language comfortable to all. We joined forces with Habitat for Humanity Greater Boston, developing a relationship that proved essential in eventual passage of the legislation and establishing the basis for future cooperation. We utilized, and nurtured, the good working relationships that MACDC, RHN, CHAPA, and Habitat had with legislators to advance legislation which was ultimately adopted.
- Doing our Homework on the Policies in MA and Other States, and on the federal level:
MACDC and our allies researched the exemptions allowed in the S.A.F.E., existing MA law, and the exemption legislation enacted by other States. This enabled us to approach our interactions with the DOB, the MA Legislature, our Members, and others with a thorough understanding of why an exemption was reasonable and necessary, legislative language to achieve the exemption, and how to be most effective in our advocacy.
MACDC is grateful to our allies, the DOB and MMBA, and the numerous legislators who supported our efforts. We are particularly grateful to the following legislators: Speaker DeLeo, Senate President Spilka, and Senate President Emerita Chandler; Representatives Coppinger, Sanchez, Wagner, Peake and Kulik; and Senators Cyr, Eldridge, Lesser and Welch.