United States: Ohio Consolidates Its Mortgage Finance Licensing Laws Into A New Residential Mortgage Lending Act

On December 22, 2017, Ohio Governor Kasich signed into law Ohio House Bill 199, which will make significant changes in how the state will license and regulate mortgage lenders and brokers. The bill takes effect 91 days after filing with the Ohio Secretary of State (which filing had not been made as of January 4, 2018).

The bill amends the Ohio Mortgage Brokers Act (the "OMBA") to bring the registration of mortgage lenders and brokers, and the licensing of mortgage loan originators, together under a single statute. The amended statute will be called the Ohio Residential Mortgage Lending Act ("ORMLA"). The Nationwide Multistate Licensing System will continue to facilitate the registration and licensing process. House Bill 199 also amends the Ohio Mortgage Loan Act (known as the "Second Mortgage Loan Act"), deleting all references to mortgage loans and mortgage finance activity, causing that Act to apply going forward only to consumer loans. Although that Ohio Mortgage Loan Act imposes a registration obligation for an entity to collect payments on its own or for another in connection with residential mortgage loans other than first-lien loans, the new ORMLA does not require registration of entities servicing residential mortgage loans.

Under the existing OMBA, the definition of "mortgage broker" is compound and convoluted:

  1. A person that holds that person out as being able to assist a buyer in obtaining a mortgage and charges or receives from either the buyer or lender money or other valuable consideration readily convertible into money for providing this assistance;
  2. A person that solicits financial and mortgage information from the public, provides that information to a mortgage broker or a person that makes residential mortgage loans, and charges or receives from either of them money or other valuable consideration readily convertible into money for providing the information;
  3. A person engaged in table-funding or warehouse-lending mortgage loans that are first lien residential mortgage loans."

House Bill 199 repeals and replaces that definition. When the ORMLA becomes effective, the term "mortgage broker" will mean an entity that obtains, attempts to obtain, or assists in obtaining a mortgage loan for a borrower from a mortgage lender in return for consideration or in anticipation of consideration. "Attempting to obtain" or "assisting in obtaining" a mortgage loan will include referring a borrower to a mortgage lender, soliciting or offering to solicit a mortgage loan on behalf of a borrower, or negotiating or offering to negotiate the terms or conditions of a mortgage loan with a mortgage lender on behalf of a borrower.

The term "residential mortgage loan" will mean "a loan primarily for personal, family, or household use that is secured by a mortgage, deed of trust, or other equivalent security interest on a dwelling or on residential real estate located in Ohio," and will apply to first- and subordinate-lien residential mortgage loans.

The term "mortgage lender" will mean "an entity that consummates a residential mortgage loan, advances funds, offers to advance funds, or commits to advancing funds for a residential mortgage loan applicant." The ORMLA will continue to provide for the licensing of individual mortgage loan originators, largely retaining the prior definition. Notably, the Ohio definition of "mortgage loan originator" goes beyond the typical two-prong definition found in most other states. Nonetheless, by having a single definition of "mortgage loan originator" under the new ORMLA, individuals will be relieved of the dual obligation of having to obtain approval as a loan originator under the OMBA and as a mortgage loan originator under the OMLA.

Therefore, under the new ORMLA, the registration requirement will apply to a business organization or a sole proprietor making or brokering first-or subordinate-lien mortgage loans; whereas an individual conducting mortgage loan origination activities will obtain a license as a mortgage loan originator.

The new ORMLA provides the Ohio Superintendent of Financial Institutions with certain broad rulemaking authority to amend those definitions if the superintendent finds it necessary to remain consistent with the purposes of the federal Secure and Fair Enforcement for Mortgage Licensing (SAFE Act). Predictably, we have not seen anything issued publicly by the Superintendent of Financial Institutions on the manner in which the ORMLA will be applied.

The new ORMLA also reconciles other distinctions between Ohio's prior regulatory regimes. The OMLA does not require that an office be maintained in Ohio for purposes of registration, while the OMBA requires a registrant to maintain an office in the state for the transaction of mortgage broker business. The new ORMLA will provide that a registrant must "maintain an office location for the transaction of business as a mortgage lender or mortgage broker in this state." That provision is somewhat ambiguous as to whether it requires an in-state office, or whether it merely provides that for the purpose of transacting mortgage lender or mortgage broker business in the, the mortgage lender or broker must have an office location, which may be within or outside the state. We believe the better reading is the new ORMLA will not require a registrant to maintain an office in Ohio. Nevertheless, due to the ambiguity, we have asked Ohio regulators for confirmation.

The new ORMLA will otherwise retain many, but not all, of the exemptions found in the OMBA, including for, among others, a national bank, federal savings bank, or bank chartered by Ohio or another state, and for a subsidiary of such banks that is regulated by a federal banking agency and owned and controlled by the bank. The ORMLA does not define the term "owned and controlled," or clarify the extent to which a subsidiary must be regulated by a federal banking agency for purposes of the exemption. If you have any questions about the exemption, please call to discuss.

The ORMLA, however, repeals the exemption from registration under the OMBA that was available to a "mortgage banker," which reached certain HUD-, Fannie Mae-, Freddie Mac-, or VA-approved entities under certain conditions. Many lenders relied on that mortgage banker exemption in Ohio when making mortgage loans. Those companies will accordingly need to register under the ORMLA, as would other companies making or brokering first- or subordinate-lien mortgage loans, unless the company qualifies for another exemption under the ORMLA.

The ORMLA is unclear if separate registration as a mortgage lender and as a mortgage broker will be needed if an entity performs both activities. The ORMLA also is unclear if an entity that is registered under the OMBA will need to do anything further to be approved as a registrant under the ORMLA to make or broker mortgage loans. We understand from informal conversations with regulators of the ORMLA that they see the wisdom in not requiring a mortgage broker registrant to apply for separate registration as a mortgage lender. Moreover, we understand that they intend to provide for a smooth transition for those that currently registered as mortgage brokers under the OMBA, with additional guidance in the next few weeks. If you have any questions about, or need help in applying for registration under, the new ORMLA, please let us know.

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© Copyright 2018. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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