What are we required to do as far as employee background checks? If an employee already has license through NMLS, do we need to do a background check? We are merging with our mortgage bank subsidiary, resulting in those mortgage loan originators (MLOs) becoming bank employees.

Both federal and Illinois law require banks to screen for criminal convictions before hiring or serving as an employee, officer, director, or controlling stockholder.

For employees that already are registered with the NMLS, you must review their criminal background reports in any event. The SAFE Act regulations require financial institutions to review criminal background reports for the mortgage loan originators they employ. But based on conversations that we have had with the IDFPR and the NMLS, our understanding is that your bank also will be required to order new background checks through the NMLS when the employees switch their “sponsoring entity” (i.e., their employer) from the mortgage subsidiary to your bank. The NMLS will provide those new background check reports to your bank for review.

Importantly, the SAFE Act regulations require screenings only for crimes “involving dishonesty, breach of trust, or money laundering,” but the Illinois Banking Act is broader. The Illinois law requires banks to screen for all felony convictions, not just for those involving dishonesty, breach of trust, or money laundering. When reviewing the NMLS background check reports, you should ensure that they meet all of the requirements under the Illinois law. If the NMLS background check reports are too narrow and do not cover all felonies, you also will need to obtain separate, more complete background checks in order to comply with the Illinois Banking Act’s requirements.

For resources related to our guidance, please see:

Illinois Banking Act, 205 ILCS 5/16.5 (“Except with the prior written consent of the Commissioner, no State bank shall knowingly employ or otherwise permit an individual to serve as an officer, director, employee, or agent of the State bank if the individual has been convicted of a felony or of any criminal offense relating to dishonesty or breach of trust.”)

Federal Deposit Insurance Act, 12 USC 1829 (“Except with the prior written consent of the Corporation (A) any person who has been convicted of any criminal offense involving dishonesty or a breach of trust or money laundering, or has agreed to enter into a pretrial diversion or similar program in connection with a prosecution for such offense, may not (i) become, or continue as, an institution-affiliated party with respect to any insured depository institution; (ii) own or control, directly or indirectly, any insured depository institution; or (iii) otherwise participate, directly or indirectly, in the conduct of the affairs of any insured depository institution; and (B) any insured depository institution may not permit any person referred to in subparagraph (A) to engage in any conduct or continue any relationship prohibited under such subparagraph.”)

Federal Deposit Insurance Act, 12 USC 1813(u) (“The term ‘institution-affiliated party’ means (1) any director, officer, employee, or controlling stockholder (other than a bank holding company or savings and loan holding company) of, or agent for, an insured depository institution; (2) any other person who has filed or is required to file a change-in-control notice with the appropriate Federal banking agency under section 1817(j) of this title; (3) any shareholder (other than a bank holding company or savings and loan holding company), consultant, joint venture partner, and any other person as determined by the appropriate Federal banking agency (by regulation or case-by-case) who participates in the conduct of the affairs of an insured depository institution; and (4) any independent contractor (including any attorney, appraiser, or accountant) who knowingly or recklessly participates in (A) any violation of any law or regulation; (B) any breach of fiduciary duty; or (C) any unsafe or unsound practice, which caused or is likely to cause more than a minimal financial loss to, or a significant adverse effect on, the insured depository institution.”)

SAFE Act regulations, 12 CFR 365.104(h) (“An insured State nonmember bank that employs one or more mortgage loan originators must adopt and follow written policies and procedures designed to assure compliance with this subpart. . . At a minimum, these policies and procedures must: . . . . (h) Establish a process for reviewing employee criminal history background reports received pursuant to this subpart, taking appropriate action consistent with applicable Federal law, including section 19 of the Federal Deposit Insurance Act (12 U.S.C. 1829) and implementing regulations with respect to these reports, and maintaining records of these reports and actions taken with respect to applicable employees; . . .”)

NMLS, Criminal Background Check Status and Results (“A Federal Registry Institution user has the ability to manage their mortgage loan originators criminal back check and subsequently view the status and results through NMLS. The status will indicate where an individual is in the CBC process. Once the individual has completed the CBC process and results have been received, the institution can view the results in NMLS.”)