Regulatory Overreach Harms Nonprofit Lenders

In case you missed it, the Massachusetts Division of Banks is imposing an onerous requirement on nonprofits that provide no interest home improvement loans with government funds (think loans with CDBG funds). The DoB has concluded that staff making these loans must register as loan originators pursuant to General Laws c. 255F. This makes no sense on its face and appears to be based on a flawed analysis of applicable state statutes and federal requirements.

To understand where we are today, you have to go back to what the law was in Massachusetts before the Great Recession. Those with really long memories will remember that the crisis of subprime lending started to be recognized as a problem in Massachusetts in 2007-2008. At that time, Massachusetts had two statutes governing the registration of those involved with residential lending, namely G.L. c. 255E which regulated mortgage lenders (companies and institutions) and G.L. c. 255F regulating mortgage loan originators (people). Chapter 255E was amended in 2008. Then in 2009 the legislature amended c. 255F regarding registration of people originating the loans. The amendment of c. 255F occurred partly because the state needed to comply with a federal law known as the S.A.F.E. act. The idea was to clamp down on unqualified or shady mortgage loan originators (MLOs) who contributed to the subprime loan crisis.

In a June 15, 2017, letter to Massachusetts nonprofits, the Division of Banks stated that “the [2009] amendments to M.G.L. c. 255F altered the regulatory scheme to require that any person that meets the definition of a mortgage loan originator must be licensed as such, even if he or she is employed by a nonprofit entity that is exempt from licensure as a mortgage lender or mortgage broker” (emphasis in original). The problem with this statement is that it is just wrong. While it is true that the legislature amended c. 255F, those changes did not affect whether nonprofit staff were required to register as MLOs. The language of the statute before 2009 defined an MLO as “a natural person who . . . negotiates, solicits, arranges, provides or accepts mortgage loan applications . . . .” After 2009, an MLO was defined as “a person who for compensation or gain   . . . takes a residential mortgage loan application.” Nothing in the amendments “altered the regulatory scheme” to require nonprofit staff to register after 2009. (The change that the DoB seems to be referring to in its letter was a change in the application of c. 255E to nonprofit institutions but there is no language tying the definition of a mortgage lender under c. 255E to MLOs in c. 255F). If anything, the definition of an MLO after 2009 is arguably more restrictive and thus less applicable to nonprofit staff. This is because, under the current definition, a MLO is one who accepts a mortgage loan application “for compensation or gain.” Employees of nonprofits do not accept mortgage loan applications for compensation or gain within the meaning of the statute.

Registration as a mortgage loan originator is time consuming and expensive, particularly for small organizations and those serving rural communities. Hopefully, the DoB will reconsider its position and conclude that employees of nonprofits that assist homeowners with home rehabilitation loans with federal and state funds are not required to register because they do not accept loan applications “for compensation or gain.”