BNK-33-08-00002-P Authorization of Providers of Education Courses for Mortgage Loan Originators and Establishing Administrative Requirements

8/13/08 N.Y. St. Reg. BNK-33-08-00002-P

NEW YORK STATE REGISTER

VOLUME XXX, ISSUE 33

August 13, 2008

RULE MAKING ACTIVITIES

BANKING DEPARTMENT

PROPOSED RULE MAKING

NO HEARING(S) SCHEDULED

 

I.D No. BNK-33-08-00002-P

Authorization of Providers of Education Courses for Mortgage Loan Originators and Establishing Administrative Requirements

PURSUANT TO THE PROVISIONS OF THE State Administrative Procedure Act, NOTICE is hereby given of the following proposed rule:

Proposed Action:

Addition of new Supervisory Procedure MB 108 to Title 3 NYCRR.

Statutory authority:

Banking Law, Article 12-E

Subject:

Authorization of providers of education courses for mortgage loan originators and establishing administrative requirements.

Purpose:

To set forth the details of the application procedure and certain administrative responsibilities of education providers.

Substance of proposed rule (Full text is posted at the following State website: www.banking.state.ny.us):

Section 108.1 contains definitions of defined terms used in the Supervisory Procedure, including distinguishing between “Approved Providers” (those approved by the Superintendent) and “Authorized Providers” (those authorized by the statute). It also defines Course Records (which are important for the recordkeeping requirements).

Section 108.2 describes the content of an application to be authorized by the Superintendent as an Approved Provider, and what happens when the Superintendent deems an application to be incomplete. It also notes that a list of Approved Providers, approved education courses and each trade association and education institution that has notified the Superintendent that it intends to offer Education Courses to MLOs authorized in New York will be available on the Banking Department’s website.

Section 108.3 repeats the statutory requirement that an Authorized Provider must make its own determination that each Education Course offered by it is consistent with the purpose of Article 12-E of the Banking Law. It also provides that an Authorized Provider may at its discretion apply for prior approval of Education Courses. At the same time, it makes clear that an Approved Provider may not give any Education Course unless the Superintendent has approved it, and may not accept payment for courses until approval has been received. It also sets forth the procedures for obtaining prior approval of courses, including the information about the course that should be provided to the Superintendent and the duration of an approval. Finally, it prohibits a provider from using an Education Course to promote a particular loan product or originating entity, requires each Provider to give the Superintendent a schedule of its course offerings and allow the Superintendent to audit courses, and authorizes the Superintendent to suspend or revoke a course approval if he or she finds that the course does not conform to the requirements of Article 12-E and the Provider does not timely rectify the deficiencies after having been notified thereof.

Section 108.4 sets forth the formats in which courses may be given. It requires Education Courses taken by Inexperienced Originators (those with less than 4 years of experience) to be in one of three formats: (i) a traditional live classroom setting, (ii) fully interactive video or audio conferences, where there is an opportunity for students to ask questions, or (iii) a format where the student cannot progress from one course segment to another or complete the course without answering questions that test the student’s comprehension of subjects previously covered. For experienced MLOs (those with 4 or more years of experience), it requires that half of the credit hours for each biennial or quadrennial continuing education period be in the same formats required for Inexperienced Originators.

Section 108.5 summarizes the subject matter of required courses for inexperienced originators.

Section 108.6 describes the subject matter of required courses for experienced MLOs.

Section 108.7 sets forth the requirements for certificates of course completion and for verifying that the student attended all required classes and sessions. It also explains how the number of credit hours for each course is to be calculated.

Section 108.8 sets forth the required qualifications for instructors of Education Courses.

Section 108.9 sets forth the obligations of providers of Education Courses with respect to record retention, distribution of written course evaluation questionnaires and ensuring that advertisements for Education Courses state whether the course is appropriate for Inexperienced or Experienced Originators.

Section 108.10 provides contact information for obtaining forms, instructions and assistance from the Banking Department.

Text of proposed rule and any required statements and analyses may be obtained from:

Sam. L. Abram, Secretary to the Banking Board, New York State Banking Department, One State St., New York, NY 10004-1416, [phone], email: [e-mail].

Data, views or arguments may be submitted to:

Sam L. Abram, Secretary to the Banking Board, New York State Banking Department, One State St., New York, NY 10004-1416, [phone], email: [e-mail].

Public comment will be received until:

45 days after publication of this notice.

Regulatory Impact Statement

1. Statutory Authority. Article 12-E of the Banking Law, as amended by the Legislature in 2007, creates a framework for the regulation of mortgage loan originators (MLOs), who are the individuals employed by or affiliated with mortgage bankers and mortgage brokers and who engage in mortgage loan originating. MLOs must be authorized by the Superintendent of Banks. In addition, Section 599-d of the Banking Law, as a condition to initial authorization and subsequent annual authorization, requires MLOs to take Education Courses relating to the current business of mortgage loan originating. These courses must include education in the statutory and regulatory requirements and judicial interpretations governing the mortgage industry and mortgage practices in New York, as well as courses in the ethics of mortgage loan originating and mortgage lending. The Banking Law designates certain entities as “Authorized Providers.” These include certain trade associations as well as institutions of secondary education approved by the Board of Regents. The Banking Law also allows for other providers of Education Courses for MLOs to be approved by the Superintendent.

Superintendent’s Regulation 420 contains rules designed to effectuate the requirements of Article 12-E. Supervisory Procedure MB 107 sets forth additional information on applications for authorization by mortgage loan originators. Both these proposed regulations have been adopted. The Superintendent is now publishing for comment Proposed Supervisory Procedure MB 108, which sets forth additional information on applications for authorization as an Approved Provider of Education Courses, and on applications for approval of individual courses.

2. Legislative Objectives. The legislature deems it necessary, in order to ensure the public welfare, that mortgage loan originators be subject to regulation by the Superintendent and that they be required to take a certain number of hours of Education Courses each prescribed education period. The recent problems with respect to sub-prime lending require immediate attention, and requiring MLOs to take Education Courses given by Authorized Providers or Approved Providers, including courses on the laws governing and ethical issues arising out of mortgage loan origination, will address many of the concerns that have been identified in the sub-prime mortgage market by improving the integrity and professionalism of individuals in the mortgage lending industry.

The continuing education requirements of Article 12-E, like those imposed on insurance brokers and real estate brokers, ensure that individuals engaging in the business of mortgage loan origination have a solid understanding of the mortgage business as well as an understanding of ethical business practices and relevant federal and state laws and regulations. In addition, the continuing education component of the law recognizes that laws, regulations and practices governing the mortgage industry are subject to continuing change and requires those individuals involved in mortgage origination to maintain an understanding of these changes.

By authorizing the Superintendent to determine which providers of Education Courses should be approved, the law helps to ensure that the courses taken by MLOs will achieve the legislative objective.

3. Needs and Benefits. This proposal is needed to implement the statute and is a natural outgrowth of the requirement for MLOs to take Education Courses. By increasing the level of knowledge of the laws and ethical practices in the industry, the proposed Supervisory Procedure will help to address the problems that led to the adoption of Article 12-E.

4. Costs. Education providers will not be charged fees for submission of applications for provider and course approval. Providers may incur administrative costs associated with preparing applications for provider and curriculum approval, as well as record retention. Providers may, however, charge MLOs fees for attending the continuing education courses. The Department’s increased effectiveness in fighting mortgage fraud and predatory lending is expected to lower costs related to litigation and to decrease losses to consumers and the mortgage industry by hundreds of millions of dollars.

The proposal will not result in any fiscal implications to the State. The Banking Department is funded by the regulated financial services industry. Fees charged to the industry will be adjusted periodically to cover Department expenses incurred in carrying out this regulatory responsibility.

5. Local Government Mandates. None.

6. Paperwork. Supervisory Procedure MB 108 establishes an application process to apply for authorization as an Approved Provider of Education Courses for MLOs. Applicants must submit an application for provider approval and separate applications for course approval. Providers must retain certain records with respect to each course for at least four years.

7. Duplication. The proposed regulation does not duplicate, overlap or conflict with any other regulations.

8. Alternatives. The industry has supported passage of Article 12-E and has had substantial opportunity to comment on the specific requirements of the statute, and its supporting regulation and Supervisory Procedures. In addition, the industry has been involved in an on-going policy dialogue with the Department during rule development. Meetings have been held with representatives of the mortgage industry to ensure regulation that will impose an adequate level of supervisory oversight where none previously existed. The purpose of the proposed regulation is to address problems that have arisen in the mortgage market while at the same time avoiding overly complex and restrictive rules that would have imposed unnecessary burdens on the industry. For example, the Department considered whether it was desirable to require that MLO’s with less than four years’ experience to obtain continuing education only in a traditional live classroom setting, to facilitate the answering of questions and to ensure a high level of attention. Although the Department believes this may be the most desirable educational setting for inexperienced MLOs, the Department, concluded that alternative settings for continuing education would adequately address the intent of the statute, without imposing undue burdens upon regulated parties or proposed providers of Education Courses. Such alternative settings may include fully interactive video or audio conferences or a format where the student cannot progress from one course segment to another or complete the course without answering questions that test the student’s comprehension of subjects previously covered. In addition, experienced MLO may fulfill half their requirements for credit hours of Education Courses with an even broader selection of course formats.

9. Federal Standards. While federal regulators have issued guidance on the origination of mortgage products, the responsibility for regulating non-bank entities such as mortgage bankers and mortgage brokers is largely assumed by the states. Moreover, as the mortgage industry has fragmented in recent years, a significant share of the residential mortgage business, particularly the non-prime sector, has been served by these entities, which are typically licensed through state agencies. Although the U.S. House of Representatives has passed a bill, HR 3915, which would require the registration of MLOs and would require MLOs to fulfill certain pre-registration education course and testing requirements, it is not certain when or if such federal legislation will be passed. The existing bill relies heavily on the National Mortgage Licensing System developed by the Conference of State Bank Supervisors (CSBS), which is part of the registration system being adopted by the Superintendent under Article 12-E.

10. Compliance Schedule. The proposed regulation will become effective when approved. Individuals who engaged in mortgage loan origination before January 2008 will have until January 1, 2010 to comply with the initial education requirements. Those who became employed on or after January 1, 2008 must complete the initial education requirements by the end of the year in which the first anniversary of their authorization occurs. Approved Providers may not give Education Courses (or accept money for Education Courses) until they have been approved by the Superintendent.

Regulatory Flexibility Analysis

1. Effect of the Rule: The proposal will not have any impact on local governments. However, a large number of providers of education courses may be considered small businesses.

2. Compliance Requirements: In order to provide education courses to Mortgage Loan Originators that satisfy the education requirements under Article 12-E of the Banking Law, a provider of education course that is not (i) a trade association controlled by and whose membership comprises mortgage bankers, mortgage brokers or banking institutions, or (ii) an institution of post-secondary education chartered, approved or licensed by the Board of Regents, must be authorized by the Superintendent as an “Approved Provider.” Moreover, trade associations that meet the requirements of clause (i) of this paragraph must maintain supervision of education courses satisfactory to the Superintendent. Approved Providers must also submit applications for approval of education courses they offer.

Section 108.2 describes the application process to become an Approved Provider. Paragraph (c)(14) of that Section notes that, in determining whether to grant approval of an application, the Superintendent expects that the applicant will have regularly sponsored or organized education courses in the past. Moreover, the applicant must demonstrate that it is capable of organizing education courses, including instructors with the requisite knowledge and experience, and is capable of administering the education course requirements of Article 12-E. The applicant must provide information as to the course formats it will use, as well as a description of the applicant’s facilities for conducing or distributing education courses in those formats. Finally, the applicant must provide a copy of its refund policy and its procedures for verifying attendance at its courses.

Section 108.3 describes the process of approval of individual education courses. Such an application requires a detailed course outline that describes the topics covered and the time devoted to each topic, as well as information regarding the method the applicant will use to determine that the qualifications and criminal history of course instructors satisfy regulatory requirements.

Approved Providers of education courses have a number of obligations under Supervisory Procedure 108. This includes the requirement to retain, for at least four years from the date a course was given, certain records with respect to each course, the obligation to distribute written evaluation questionnaires in which students may evaluate the course content, instruction and materials and retain completed questionnaires for at least four years, and the obligation to ensure that course advertisements that describe individual education courses state whether the course is appropriate for inexperienced or experienced originators.

Some education providers seeking to participate in the MLO continuing education program may be small businesses. Those providers must submit an application for provider approval and separate applications for course approval and maintain records of course programs and attendance. The Department believes that this rule will not impose a burdensome set of requirements on small businesses, except to the extent required by Article 12-E.

3. Professional Services: None.

4. Compliance Costs: Education providers will not be charged fees for submission of applications for provider and course approval. Providers may incur administrative costs associated with preparing applications for provider and curriculum approval, as well as in making provisions for monitoring or verifying attendance and in recordkeeping. Providers may, however, recover these expenses by charging fees for attending the continuing education courses.

5. Economic and Technological Feasibility: The proposed rule-making should impose no adverse economic or technological burden on education providers who are small businesses.

6. Minimizing Adverse Impacts: The industry, and specifically small businesses who are licensed and registered mortgage businesses, supported passage of Article 12-E and has had substantial opportunity to comment on the specific requirements of this statute and its supporting regulation. In addition, these businesses were involved in an on-going policy dialogue with the Department during rule development. Meetings have been held with representatives of the mortgage industry to ensure regulation that will impose an adequate level of supervisory oversight where none previously existed without having an adverse impact on small business. The Department worked with mortgage businesses during rule development to minimize adverse impacts in many instances. For example, the Department considered an examination requirement for mortgage loan originators, as is currently the practice with real estate brokers and sales persons. The Department, however, believes that the education and continuing education requirements will be sufficient to raise the knowledge of originators to acceptable levels. Similarly, the Department discussed whether it was desirable to require that MLOs with less than four years’ experience to obtain continuing education only in a traditional live classroom setting, to facilitate the answering of questions and to ensure a high level of attention. Although the Department believes this may be the most desirable educational setting for inexperienced MLOs, the Department, concluded that alternative settings for continuing education would adequately address the intent of the statute, without imposing undue burdens upon regulated parties. The ongoing discussion with the industry helped the Department achieve a workable, efficient and effective regulation to implement the statute.

7. Small Business and Local Government Participation: Representatives of the following entities participated in a number of outreach meetings that were conducted during both the statutory and regulatory drafting process: New York Association of Mortgage Brokers; New York Bankers Association; Empire State Mortgage Bankers Association; Citigroup; HSBC; Mortgage Bankers Association; and representatives from GORR.

Rural Area Flexibility Analysis

Types and Estimated Numbers: The New York State Banking Department currently licenses over 2,700 mortgage bankers and brokers throughout the state and anticipates that up to 40,000 mortgage loan originators may register in 2008. Many of these entities and MLOs will be operating in rural areas of New York State. Consequently, it is possible that the education providers that seek to provide education courses to MLOs will also be operating in rural areas of New York State and would be impacted by the proposal.

Compliance Requirements. In order to provide education courses to Mortgage Loan Originators that satisfy the education requirements under Article 12-E of the Banking Law, an education course provider that is not (i) a trade association controlled by and whose membership comprises mortgage bankers, mortgage brokers or banking institutions, or (ii) an institution of post-secondary education chartered, approved or licensed by the Board of Regents, must be authorized by the Superintendent to as an “Approved Provider.” Moreover, trade associations that meet the requirements of clause (i) of this paragraph must maintain supervision of education courses satisfactory to the Superintendent. Approved Providers must also submit applications for approval of education courses they offer.

Section 108.2 describes the application process to become an Approved Provider. Paragraph (c)(14) of that Section notes that, in determining whether to grant approval of an application, the Superintendent expects that the applicant will have regularly sponsored or organized education courses in the past. Moreover, the applicant must demonstrate that it is capable of organizing education courses, including instructors with the requisite knowledge and experience, and is capable of administering the education course requirements of Article 12-E. The applicant must provide information as to the course formats it will use, as well as a description of the applicant’s facilities for conducting or distributing education courses in those formats. Finally, the applicant must provide a copy of its refund policy and its procedures for verifying attendance at its courses.

Section 108.3 describes the process of approval of individual Education Courses. Such an application requires a detailed course outline that describes the topics covered and the time devoted to each topic, as well as information regarding the method the applicant will use to determine that the qualifications and criminal history of course instructors satisfy regulatory requirements.

Approved Providers of Education Courses have a number of obligations under Supervisory Procedure 108. This includes the requirement to retain, for at least four years from the date a course was given, certain records with respect to each course, the obligation to distribute written evaluation questionnaires in which students may evaluate the course content, instruction and materials and retain completed questionnaires for at least four years, and the obligation to ensure that course advertisements that describe individual education courses state whether the course is appropriate for inexperienced or experienced originators.

The Department believes that this rule will not impose a burdensome set of requirements on entities operating in rural areas.

Costs. Education providers will not be charged fees for submission of applications for provider and course approval. Providers may incur administrative costs associated with preparing applications for provider and curriculum approval. Providers may, however, charge MLOs fees for attending the continuing education courses. The Department’s increased effectiveness in fighting mortgage fraud and predatory lending will lower costs related to litigation and will decrease losses to consumers and the mortgage industry by hundreds of millions of dollars.

Minimizing Adverse Impacts. The industry has supported passage of Article 12-E and has had substantial opportunity to comment on the specific requirements of this statute and its supporting regulations. In addition, the industry has been involved in an on-going policy dialogue with the Department during rule development. Meetings have been held with representatives of the mortgage industry to ensure regulation that will impose an adequate level of supervisory oversight while at the same time avoiding overly complex and restrictive rules that would have imposed unnecessary burdens on mortgage companies in rural areas. The Department believes that the education and continuing education requirements will be sufficient to raise the knowledge of originators to acceptable levels. Certain industry representatives objected to an earlier Department proposal to requiring MLOs with less than four years experience to obtain continuing education only in a traditional face-to-face setting. The Department has revised this requirement so that inexperienced MLOs may take courses in one of three formats. The Department also added a requirement that experienced MLOs take half the required credit hours in one of these three formats. The Department believes that the two alternative formats for continued education courses adequately address the intent of the statute, without imposing undue burdens upon regulated parties in rural areas. The ongoing discussion with the industry helped the Department achieve a workable, efficient and effective regulation to implement the statute and minimize adverse impacts wherever possible.

Rural Area Participation. Representatives of the following entities have been invited to participate in a number of outreach meetings that were conducted during both the statutory and regulatory drafting process: New York Association of Mortgage Brokers; New York Bankers Association; Empire State Mortgage Bankers Association; Citigroup; HSBC; Mortgage Bankers Association. These entities include mortgage bankers and brokers conducting business in rural areas and entities that conduct mortgage originating in rural areas.

Job Impact Statement

Article 12-E of the Banking Law requires Mortgage Loan Originators, as a condition of initial and subsequent annual authorization, to have completed education requirements by taking education courses. Section 599-b of the Banking Law defines the persons who may provide such education courses. Section 599-h authorizes the Superintendent of Banks to make rules and regulations that in his judgment are necessary or appropriate for the effective administration or enforcement of Article 12-E. This proposed Supervisory Procedure provides information on how to become an Approved Education Provider and on the continuing substantive and procedural requirements for education courses. Applicants who fail to qualify for authorization to provide continuing education courses will still be able to give courses, but their offerings will be less attractive to Mortgage Loan Originators in New York because they will not fulfill the education course requirements in New York. Any impact on jobs and employment opportunities is due to the nature and purpose of the statute rather than the provisions of this proposal.