New Dodd-Frank regulations are impacting the way bank subsidiaries are able to operate, and lenders are being forced to adapt.
In past years, lenders that operated as subsidiaries of federal banks were exempt from individual state licensing. With the regulations from Dodd-Frank in effect, all that has changed.
“The implementation of Dodd-Frank means that we can no longer rely on the benefit of the federal preemption of state laws while operating within a subsidiary of our federal bank,” says Kenneth Klawans, president of iReverse, a subsidiary of Hopkins Federal Savings Bank. “Each state can now decide whether to impose additional licensing and registration requirements on our company.”
The idea of federal preemption comes from the National Bank Acts, which created a federal charter for commercial banks and placed them under the control of the Office of the Comptroller of the Currency (OCC). Preemption received a huge boost in 1996 when the U.S. Supreme Court issued a landmark ruling that invalidated a state law that prohibited national banks from selling insurance in small Florida towns.
And in 2004, the OCC issued rules that preempted national banks and their operating subsidiaries from state laws that “obstruct, impair or condition” their ability to make loans and take in deposits, and also granted sole authority to examine and supervise national banks to itself. Further, in 2007, the U.S. Supreme Court ruled in the case of Watters v. Wachovia Bank that subsidiaries of federally regulated banks had the same preemptive rights as their parent bank.
This led to large number of mortgage originators joining banks as subsidiaries and as a result, the companies weren’t required to obtain licensing to originate loans in each state. Dodd-Frank has changed all that and has left national banks and federal thrifts with two options for their subsidiaries, according to K&L Gates.
“One is to merge the operating subsidiaries into the parent,” the firm wrote in a note to clients. “The other option is to bring the operations subs into compliance with state law, which could include obtaining a number of state licenses (depending on the specific activities in which the operating subs engage).”
Many states provide exemptions from licensing requirements for subsidiaries or affiliates of banks, therefore, the repeal of preemption would not affect their ability to rely on any exemptions granted to them by state law. Luckily for lenders like iReverse, the majority of its business comes from states that are providing licensing exemptions. However, some states seem to be taking advantage of their new ability to impose additional oversight to banks by requiring all companies originating to obtain licenses.
“This is unfortunate because there is no benefit to the consumers in their state to add an additional layer of regulation,” says Klawans. “It seems obvious the only reason for them not exempting subsidiaries who are already being regulated by the federal government is to collect additional revenue.”
iReverse does plan on going through the licensing process in states such as Georgia and Arizona, where it does a good amount of business. However, being a bank subsidiary still provides additional benefits.
The Secure and Fair Enforcement for Mortgage Licensing Act of 2008 required loan officers employed by national banks and their operating subsidiaries to register with the Nationwide Mortgage Licensing System, a database run by the states. Operating as a bank subsidiary, loan officers are not required to obtain licensing for each state, rather they must only register with the National Mortgage Licensing System.
Registering with the NMLS is dramatically less costly than obtaining state licensing. A report from the American Financial Services Association (AFSA) found the total cost of registering one mortgage loan originator through the NMLS in one state is conservatively estimated to be $661. For a company to license one loan originator in all states, AFSA estimates it would cost $27,072.
For banks, to register its loan originators through the NMLS, they only have to pay a one time $30 fee to register an individual on a nationwide basis. “The disparity in costs may create an incentive for some companies to opt for a federal charter and enjoy savings and exemptions from multiple state oversight,” said the report.
The loss of preemption could be a big change for many banks in the reverse mortgage industry. Two banks who spoke with RMD said they were evaluating their options under Dodd-Frank, and MetLife (NYSE:MET) announced last week it is looking to sell its bank arm to avoid excess government regulation. In a letter to employees obtained by National Mortgage Professional, MetLife said it plans to license each of its loan officers over the next year.
Despite the implementation of Dodd-Frank, comments from Thomas Curry, the potential new head of the OCC seems to indicate preemption might not disappear after all.
During a Senate Banking Committee nomination hearing earlier this week, Curry said he wouldn’t alter the agency’s longstanding position that institutions it oversees should be exempt from tougher rules put in place by states, especially those regulating mortgages and other consumer products. Curry added that he would “zealously enforce and uphold” federal bank law, particularly the exemption from state consumer laws.
Sen. Bob Corker (R-TN), said he hoped the OCC will continue to push uniform national standards for banks and urged Mr. Curry to resist pressure to change that position.