Bulletin No. 2003-09-CF

Net Branching, Employee status, and Licensing Under the Mortgage Brokers, Lenders, and Servicers Licensing Act, the Secondary Mortgage Loan Act, and the Consumer Financial Services Act

Issued and entered December 3, 2003 by Linda A. Watters, Commissioner of Financial and Insurance Services 
 

This bulletin supersedes and rescinds Consumer Finance Bulletin No. 1991-1, issued May 15, 1991, and its Addendum, issued November 6, 1992.

Section 2 of the Mortgage Brokers, Lenders, and Servicers Licensing Act (MBLSLA), 1987 PA 173, MCL 445.1652 provides in part that,

(1) A person shall not act as a mortgage broker, mortgage lender, or mortgage servicer without first obtaining a license under this act, unless 1 or more of the following apply:


(a) The person is solely performing services as an employee of only 1 mortgage broker, mortgage lender, or mortgage servicer.
(b) The person is exempted from the act under section 25.
(c) The person is licensed as a class I licensee under the consumer financial services act, 1988 PA 161, MCL 487.2051 to 487.2072.

. . .


(3) Unless a residential mortgage originator is otherwise licensed or registered under this act, a residential mortgage originator shall not receive directly or indirectly any compensation, commission, fee, points, or other remuneration or benefits from a mortgage broker, mortgage lender, or mortgage servicer other than the employer of the residential mortgage originator.

(4) Unless a residential mortgage originator is otherwise licensed or registered under this act, a mortgage broker, mortgage lender, or mortgage servicer shall not pay directly or indirectly any compensation, commission, fee, points, or other remuneration or benefits to a residential mortgage originator other than an employee of the mortgage broker, mortgage lender, or mortgage servicer. As used in this subsection, and subsection (3), "residential mortgage originator" means a person who assists another person in obtaining a mortgage loan.

Despite the clear requirements of MCL 445.1652 quoted above and comparable provisions in The Secondary Mortgage Loan Act (SMLA) - MCL 493.51-493.81 - and the Consumer Financial Services Act (CFSA) - MCL 487.2051-487.2072, the Office of Financial and Insurance Services (OFIS) continues to encounter persons brokering, making, and servicing mortgage loans or offering to broker, make, and service mortgage loans who are neither licensed or registered under one of these acts nor sole and exclusive employees of a licensee or registrant. The practice is commonly called "net branching" and usually involves a licensee or registrant entering into a loose affiliation with another business or individual to offer a licensee or registrant's mortgages or other financial services at a different branch or location and often under a different name. The same legal principles apply to a licensed or registered company that conducts business at only one location, but pays compensation and commissions to unlicensed, independent contractors who assist people in obtaining loans at that location.

The MBLSLA, SMLA, and CFSA do not require licensure or registration for more than one location, if only employees of the licensee or registrant offer to broker, make, or service mortgage loans at the additional locations. If the licensee or registrant operates any location with an independent contractor or someone performing services for multiple mortgage brokers, mortgage lenders, or mortgage servicers, then both the licensee or registrant and the person, persons, or business operating the net branch or the unlicensed independent contractor operating a single location are violating the MBLSLA, SMLA, and CFSA and are subject to all cumulative remedies provided in the respective Acts. In order to comply with the three Acts, any person assisting others in obtaining mortgage loans must be either an employee of a licensee or registrant or hold his or her own license or registration. The cumulative remedies for violation of the three Acts include regulatory and civil fines; a cease and desist order; restitution; denial of the application for, or censure, suspension, and revocation of the license or registration; and referral to the attorney general or county prosecuting attorney for actions seeking injunctive relief or criminal penalties.

Whether the operation of a branch location or a single location by a licensee or registrant is in accordance with or in violation of the MBLSLA, SMLA, and CFSA depends upon whether persons assisting customers in obtaining mortgages are employees of a licensee or registrant. OFIS, like other agencies of the State of Michigan, the Internal Revenue Service, and federal and state courts, will consider a series of factors to determine whether a person working at a branch or single location is an employee of a licensee or registrant.

Factors generally supporting employee status for persons assisting others to obtain mortgages are:

  • The licensee or registrant reports compensation on an IRS W-2 form or in accordance with the Internal Revenue Code and federal regulations.
  • Licensee or registrant provides training, supervision, and control of the staff and location.
  • Advertising and promotions use the licensee or registrant's name.
  • Contracts for facilities, services, supplies, and equipment are in licensee or registrant's name.
  • Licensee or registrant pays benefits, such as insurance, pension, or paid leave.
  • Licensee or registrant makes unemployment contributions and pays workers compensation premiums for staff.

Factors generally negating employee status for persons assisting others to obtain mortgages are:

  • Compensation is reported on an IRS 1099 form.
  • The absence of licensee or registrant training, supervision, and control of staff and location.
  • A licensee or registrant leases the person.
  • Payment to a licensee or registrant of a fee for each mortgage transaction brokered or closed by an unlicensed person.
  • Maintaining books of profit and loss separately from the licensee or registrant.
  • Use of a name in advertising and promotions that does not appear on the license or registration.
  • Contracts for facilities, services, supplies, and equipment are entered into by unlicensed persons, without prior approval or assumption of liability by licensee or registrant.
  • Unlicensed persons offering mortgages at a branch or single location have a significant investment in the branch facility or significant liability for operation of the location.

Licensees or registrants and persons offering to broker, make, and service mortgage loans at branch or single locations who wish to avoid OFIS enforcement action are advised to reduce the terms of their business relationships to a written contract in accordance with the above factors and to review all advertising and promotions to assure that licensees or registrants operate only under the name appearing on the license or registration. OFIS will consider such contracts and advertising and promotional materials with the factors identified above to determine employee status and compliance with the Acts.

OFIS will continue to enforce aggressively the mandatory licensing provisions of the MBLSLA, SMLA, and CFSA and impose stiff civil penalties against all persons assisting others to obtain mortgages who operate without a license or registration. OFIS will also enforce aggressively the same provisions against business entities that hold a license or registration and staff any location - a branch or a single location - with unlicensed persons who are not employees.

Any questions regarding this bulletin should be directed to:

Office of Financial and Insurance Services
611 West Ottawa Street
P.O. Box 30220
Lansing, Michigan 48909-7720

Toll Free: (877) 999-6442