By Andrew E. Bigart and Evan R. Minsberg
Recent efforts by state regulators to streamline the process of applying for and obtaining state financial services licenses are a welcome development for non-bank financial services providers. In May 2017, the Conference of State Bank Supervisors (CSBS) announced “Vision 2020,” an initiative designed to make the multi-state licensing experience “as seamless as possible” by redesigning the Nationwide Multistate Licensing System (NMLS) and harmonizing multistate supervision. More recently, some state finance regulators have announced plans to push for greater coordination in licensing and supervision. Bryan Schneider, the Secretary of the Illinois Department of Financial and Professional Regulation and chairman of a multistate regulatory task force, has stated that “Our goal is uniformity across the United States.”
One of the primary methods of achieving uniformity being discussed is a reciprocity system, sometimes called “passporting,” under which obtaining a license in one state would allow for a streamlined application and approval process in other states. A similar system currently exists for “producer” licensing to sell, solicit, or negotiate insurance. The National Association of Registered Agents and Brokers Reform Act of 2015 (or NARAB II) created the NARAB, a nonprofit membership-based organization charged with establishing requirements and procedures to enable applicants to simultaneously apply for nonresident licensing in multiple jurisdictions.
Applying the NARAB model to financial services, one can imagine NMLS expanding in a similar way in the future. NMLS’s effortsto harmonize money transmitter reporting requirements is just one example of this evolution. Like NARAB, NMLS is an entity created by federal law (under the Secure and Fair Enforcement for Mortgage Licensing Act of 2008), with the original mission of streamlining the licensing process for individual mortgage loan originators (MLOs). Currently, all U.S. jurisdictions use NMLS to receive MLO license applications and other residential mortgage-related licenses. The majority of jurisdictions have also transitioned other financial services licenses to NMLS, including non-mortgage lending, money transmission, and debt collection licenses.
As NMLS continues to grow and evolve, states could develop an effective reciprocity system with the following features:
- A single, uniform application standard accepted by all states for each financial services activity.
- Once approved for an activity, an NMLS “member” could conduct that activity in additional states after paying licensing fees, increasing the amount of a common surety bond, and updating any required credit report or criminal background check.
- Each state regulator would retain the ability to deny a license for certain enumerated reasons, such as criminal history or prior enforcement action, and would retain the authority to supervise and regulate NMLS members active in their state.
The benefits of such a system are numerous. First, non-bank financial services providers would be encouraged to accept state regulation if the process were streamlined in this manner. The expense associated with licensing would be drastically reduced, as would the time to market. Second, with the licensing review function effectively outsourced to NMLS under a uniform application, regulators could focus their resources on identifying unlicensed activity and activities that violate their financial services laws, instead of reviewing license applications. Far from threatening consumer protection, reciprocity would increase the amount of resources available to investigate bad actors. Third, efforts to streamline licensing may provide the framework and further motivation for additional harmonization in state financial services regulation.
While CSBS and several individual state regulators appear to be considering such a system, resolving differences in state licensing requirements will be a challenge. Some of the more difficult issues may include:
- Authorized Activities: Each state has different licenses permitting a different range of activities – some authorize a narrow set of financial services, while others allow for multiple activities under a single license. For example, a North Dakota Money Broker License permits the holder to engage in any consumer or commercial unsecured, secured, or real-estate secured (mortgage) lending and broker activities, with the exception of payday lending. New York requires at least three different licenses to perform the same activities. How will these be reconciled?
- Data Security:In recent years several states have developed their own data security laws which, in some cases, impose higher or different requirements than federal law. The New York Department of Financial Services Cybersecurity Rules have received significant attention, but other states, including Massachusetts and Nevada, have also introduced laws covering encryption, monitoring, training, and other data security controls. As state regulators make efforts to harmonize existing licensing standards, emerging data security requirements should also be included in this effort.
- Fingerprints and Principal Investigations: Currently, many states accept fingerprints for background checks on officers, directors, and large shareholders through a single electronic submission with NMLS preferred fingerprint vendor. However, outside of NMLS, multiple hard-copy rolled fingerprint cards are required in several states. While this issue would be resolved easily if each state accepted electronic fingerprints through NMLS, a more difficult question concerns who needs to provide fingerprints and other disclosures in each state.
There is no uniform standard for which principals of a company need to be disclosed and provide information as part of a licensing application. NMLS provides a definition of “control” for purposes of determining who should be disclosed, but ultimately it is a fact-based inquiry that states often interpret differently. The result is that some states may only require disclosure of the primary officers of the company to be licensed, while others will require information about individuals at every level of the corporate structure.
- Usury Laws: Usury rates present a particularly tricky issue for state uniformity standards. The maximum rates that non-bank lenders may charge vary widely from state to state, and many states may be unwilling to alter their usury laws out of consumer protection concerns. Usury laws are also directly linked to licensing issues in states where the requirement to obtain a license is triggered only by loans above a certain interest rate. For example, a license is required in Texas to make consumer loans above 10% per year, while Rhode Island’s law suggests a license is required to make any consumer loan, regardless of interest.