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Regulation Z Screening Requirements

Question: What does my organization need to do to comply with the new Regulation Z screening requirements for loan originators?

Response & Analysis:

The Consumer Financial Protection Board (“CFPB”) has issued a final rule to incorporate Dodd-Frank requirements into the existing Regulation Z loan originator compensation rule that applies to mortgage loans. The loan originator compensation requirements, under the Truth in Lending Act (Regulation Z) Final Rule, 12 CFR Part 1026, became effective January 2014.

Under the final rule, additional qualification requirements are imposed on a loan originator who is not required to be licensed under the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (the “SAFE Act”). These additional requirements include (i) collecting background information about an employee, (ii) determining if an employee is qualified and (iii) making sure an employee is properly trained.

The definition of “loan originator” differs from the definition of “mortgage loan originator” under the SAFE Act. Under the final rule, “loan originator” is expanded to mean a person who, in expectation of direct or indirect compensation or other monetary gain or for direct or indirect compensation or other monetary gain, performs any of the following activities: takes an application, offers, arranges, assists a consumer in obtaining or applying to obtain, negotiates, or otherwise obtains or makes an extension of consumer credit for another person; or through advertising or other means of communication, represents to the public that he or she can or will perform any of these activities.

Loan originator organizations must collect the following background information about any loan originator not required to be licensed under the SAFE Act:

  • A criminal background check
  • A credit report (which includes, among other things, credit history activity; payment information and history; and public record information including bankruptcies)
  • Information from the National Mortgage Licensing System and Registry (“NMLSR”) on administrative, civil or criminal findings reported by any government jurisdiction, or from the individual loan originator if not required to be registered under the NMLSR.

The above information must be collected for any individual hired on or after Jan. 1, 2014. It must also be collected for any individual hired before that date in cases where no applicable statutory or regulatory screening standards were in effect at the time of hire, or if applicable standards were not used to screen that individual. After the initial screening, subsequent reviews are only required if reliable information indicates that the individual loan originator likely does not meet the standards set by the rule.

Based on the background information obtained, it is the responsibility of the loan originator organization to confirm that the individual loan originator has no felony convictions and that he or she has demonstrated the financial responsibility, character and general fitness that would lead one to determine the individual loan originator would operate honestly, fairly and efficiently. To make such a determination, all required and reasonably available information that would be discovered during a prudent hiring process must be assessed. A sufficient review and assessment of financial responsibility considers relevant factors such as nonpayment of child support, bankruptcies, foreclosures and delinquent accounts; however, debts arising from medical expenses do not need to be considered. A sufficient review and assessment of character and general fitness considers acts of unfairness and dishonesty—including in the course of seeking employment and concerning qualifications— and disciplinary actions by regulatory or professional licensing agencies.

Finally, the loan originator organization is required to provide periodic training covering federal and state law requirements to loan originator employees that is appropriate and consistent with their origination activities. The training must be sufficient in frequency, timing, duration and content to ensure that the individual loan originators understand all state and federal legal requirements that apply to their loan origination activities.

To access the final rule in its entirety, click on the following link:

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This document and/or presentation is provided as a service to our customers. Its contents are designed solely for informational purposes, and should not be inferred or understood as legal advice or binding case law, nor shared with any third parties. Persons in need of legal assistance should seek the advice of competent legal counsel. Although care has been taken in preparation of these materials, we cannot guarantee the accuracy, currency or completeness of the information contained within it. Anyone using this information does so at his or her own risk.

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