We believe that hiring a mortgage loan originator (MLO) with a bankruptcy or numerous collection items could pose some risks under the Regulation Z, which requires you to run credit checks and assess each loan originator’s financial responsibility, character, and general fitness, among other requirements. However, the degree of risk would depend on the specific facts in each case. The Official Interpretations recommend establishing written procedures for determining whether applicants meet the financial responsibility, character, and general fitness standards, and if you do have these procedures in place, you should begin your analysis of the facts by looking at them.

The Official Interpretations also provide helpful guidance for weighing different factors when considering a loan originator or applicant’s financial responsibility, character, and general fitness.

A review and assessment of financial responsibility is sufficient if it considers, as relevant factors, the existence of current outstanding judgments, tax liens, other government liens, nonpayment of child support, or a pattern of bankruptcies, foreclosures, or delinquent accounts. A review and assessment of financial responsibility is not required to consider debts arising from medical expenses. A review and assessment of character and general fitness is sufficient if it considers, as relevant factors, acts of unfairness or dishonesty, including dishonesty by the individual in the course of seeking employment or in connection with determinations pursuant to the qualification requirements of §1026.36(f), and any disciplinary actions by regulatory or professional licensing agencies. No single factor necessarily requires a determination that the individual does not meet the standards for financial responsibility, character, or general fitness, provided that the loan originator organization considers all relevant factors and reasonably determines that, on balance, the individual meets the standards.

However, we would note that the Bankruptcy Code prohibits employers from discriminating with respect to the employment of an individual solely because the individual has been a debtor in a bankruptcy case, among other reasons. As a result, we recommend consulting with employment counsel before making an employment decision solely on the basis of a bankruptcy reported on an individual’s credit report.

We do not believe that a financial institution should establish different standards for MLOs who have not registered with the Nationwide Mortgage Licensing System and Registry (NMLSR) due to the SAFE Act’s de minimis exception (bank employees who originate five or fewer mortgage loans each year). Regulation Z also has loan originator requirements, and it does not provide a de minimis test; it applies to all loan originators equally. (However, you will not have access to the same information for an unregistered loan originator as you would for a registered loan originator, since unregistered loan originators do not have NMLSR files. For unregistered loan originators, Regulation Z requires you to obtain background information from other sources, such as by obtaining a background check from a commercial agency and other information directly “from the individual loan originator.”) 

For resources related to our guidance, please see below:

• Regulation Z — 12 CFR 1026.36(f)(3)(ii)(B) (loan originator must demonstrate financial responsibility, character, and general fitness)

• Regulation Z — Official Interpretations, 12 CFR 1026, Paragraph 36(f)(3)(ii)(B), Comment 1 (weighing factors when determining a loan originator’s financial responsibility, character, and general fitness)

• Regulation Z—Official Interpretations, 12 CFR 1026, Paragraph 36(f)(3)(ii)(B), Comment 2 (establishing written procedures for determining a loan originator’s financial responsibility, character, and general fitness)

• Bankruptcy Code — 11 USC 525(b) (discrimination provisions)