There are thousands of mortgage processors acting on a contract basis in the United States. The SAFE Mortgage License Act that passed in July 2008 requires contract mortgage processors to be licensed by July 2010. How does the new law affect contract mortgage processors? Obtaining mortgage loan originator (MLO) licenses in multiple states can be very costly. What can a contract mortgage processor do to comply and not break the bank?
Let’s first look at the definition of a contract mortgage processor under the SAFE Mortgage Licensing Act. The Act defines a mortgage processor as an individual that gathers documents from borrowers and submits the documents to a lender, but does not take residential loan applications. The Act then goes on to state that a mortgage processor is exempt from mortgage loan originator licensing as long as they are a w-2 employee of just one mortgage company. Thus a mortgage processor that is 1099 and/or processes loans for more than one mortgage company must be licensed as a mortgage loan originator (MLO) and is considered a contract mortgage processor. If you are defined as a contract processor, then what are your options for obtaining a license in each state you process loans?
You can choose to become a w-2 employee of just one mortgage company and process mortgage loans for only that one company. This is probably not the ideal situation for most contract mortgage processors, but it may be the only option for some. The cost of licensing can be expensive and a license is required in each state you process loans. Also, as we will discuss shortly, you may need to obtain a mortgage company license too. This is even more costly than obtaining just the mortgage loan originator license.
The down side to this option is obvious. You can’t continue to process mortgage loans for your other customers. Also, it may be hard to find a company that will hire you on a full-time w-2 basis. Most smaller companies just do not have the resources to maintain a full-time processor on staff.
You can choose to obtain a mortgage loan originator (MLO) license in each state you want to process loans in. Then you can have your primary customer sponsor those mortgage loan originator licenses. To get a mortgage loan originator license, you will need to complete 20 hours of education, two tests, fingerprinting, credit check, and pay an application fee between $100 and $400 per state. Then you can have your primary customer sponsor your mortgage loan originator license. This will allow you to process loans for your primary customer on a 1099 contract basis. The problem is that if you want to have other customers, you would have to set up your contract between your sponsoring primary employer and the other customers. So when you want to get paid by your other customers, the other customers would have to pay your primary customer and then your primary customer could pay you. This obviously poses a huge problem for most contract processors since it is very unlikely you will find a primary customer that will be willing to sign processing contracts with your other customers. However, this is how the states are saying it must be done. Some states may be implementing this slightly differently, so I recommend contacting the state or a licensing service to determine how the state is interpreting these requirements.
You can choose to obtain a mortgage company license and a mortgage loan originator (MLO) license in each state you want to process loans in. This is the ideal situation, because then you do not have to be limited to just one employer as in option 1 and you do not have to have a primary customer sponsor you and pay you for your other customers work as in option 2. However, this is the most costly option. It usually costs about $1,000 to $3,000 to apply for a mortgage company license per state. And some states have net worth requirements, experience requirements, and bonding requirements that can be difficult barriers to overcome.
If you are able to go this option, you will actually be able to avoid the mortgage loan originator licensing in many of the states by paying yourself as a w-2 employee of your contract processing company, but the costs will still be much higher. If you are thinking of going this way, you will want to get licensed only in states you plan on processing ten or more loans in each month. In fact, most people that go this route will benefit from having a few contract processors work with them to offset the costs.
There are really no good answers to this dilemma. In fact, this may be one of the worst problems facing the mortgage industry right now that most people are not even aware of. Plan for the business of contract processing to change dramatically starting August 2010. And make sure to be prepared to fall under one of these 3 options or you could be out of business.