Complete Guide to NMLS Regulatory Compliance

As lending startups seek to build credit, secure loans, and raise debt capital, they must also navigate a complex web of laws and regulations designed to protect consumers and promote fair lending practices. Failure to comply with these laws and regulations can result in significant legal and financial consequences, including fines, lawsuits, and reputational damage.

This means that it’s crucial for founders to understand the regulatory laws and the role of NMLS and other lending licenses. You must also know how to build a strong compliance program and be diligent in keeping up with regulatory changes. We’ll look at each of these key areas of regulatory compliance below. 

Overview of Relevant Laws and Regulations

Lending startups must comply with a variety of laws and regulations that govern their activities. Some of the most important laws and regulations that lending startups need to be aware of include:

• Data Privacy Laws
• Anti-Money Laundering (AML) Regulations
• Consumer Protection Laws
• Usury Laws
• Securities Laws

Compliance with these laws and regulations is essential for lending startups to build trust with customers and investors, avoid legal and financial consequences, and gain a competitive advantage in the marketplace. Below, we’ll take a closer look at each of these kinds of laws. 

Data Privacy Laws

Data privacy laws regulate the collection, use, and disclosure of personal information. Examples of data privacy laws include the General Data Protection Regulation (GDPR) in Europe and the California Consumer Privacy Act (CCPA) in the United States.

Anti-Money Laundering (AML) Regulations

Anti-Money Laundering regulations require financial institutions to implement programs to detect and prevent money laundering and terrorist financing. Examples of AML regulations include the Bank Secrecy Act (BSA) and the Financial Action Task Force (FATF) recommendations.

Consumer Protection Laws

Consumer protection laws protect consumers from unfair or deceptive practices by financial institutions. Examples of consumer protection laws include the Truth in Lending Act (TILA) and the Fair Credit Reporting Act (FCRA) in the United States.

Usury Laws

Usury laws regulate the maximum interest rates that can be charged on loans. Usury laws vary by state and country.

Securities Laws

Securities laws regulate the issuance and sale of securities, including stocks, bonds, and other financial instruments. Examples of securities laws include the Securities Act of 1933 and the Securities Exchange Act of 1934 in the United States.

NMLS State Licenses

For lending startups that engage in mortgage broker, lender, or servicer activities, obtaining and maintaining an NMLS state license is often a key component of regulatory compliance. The NMLS is a central licensing platform that many states use to regulate and license mortgage professionals and companies.

The licensing process involves submitting an application, paying fees, and completing pre-licensing education and testing requirements. Once a license is obtained, companies must adhere to ongoing reporting and renewal requirements.

While not all lending startups are required to obtain an NMLS state license, those that do must ensure that they are in compliance with all relevant state and federal laws and regulations. Failure to do so can result in fines, revocation of the license, and reputational damage.

In addition to obtaining an NMLS state license, lending startups should also consider other compliance-related activities, such as creating policies and procedures for compliance with relevant laws and regulations, training employees on compliance-related topics, and conducting ongoing monitoring and testing to ensure that the compliance program is effective.

By prioritizing regulatory compliance and obtaining an NMLS state license where required, lending startups can build trust with customers and investors and reduce their risk exposure. In the next section, we will discuss how to build an effective compliance program.

Check out our post on NMLS State Licenses for a more in-depth and comprehensive look at the topic. 

How to Build an Effective Compliance Program

To ensure that lending startups are in compliance with all relevant laws and regulations, it is important to have a comprehensive compliance program in place. An effective compliance program should include the following elements:

• Policies and procedures
• Training
• Monitoring and testing
• Response to non-compliance

We’ll take a closer look at each of these key areas of compliance, but first, it is important to note that compliance is an ongoing process, and lending startups should regularly review and update their compliance program to ensure that it remains effective in the face of changing laws and regulations.

By building an effective compliance program, lending startups can reduce their risk exposure, build trust with customers and investors, and gain a competitive advantage in the marketplace.

Policies and Procedures 

Lending startups should create policies and procedures that outline how the company will comply with relevant laws and regulations. These policies and procedures should be regularly reviewed and updated as needed.

Training 

All employees should receive training on compliance-related topics, including the company’s policies and procedures, relevant laws and regulations, and best practices for compliance.

Monitoring and Testing

Lending startups should conduct ongoing monitoring and testing to ensure that the compliance program is effective. This can include conducting periodic audits, reviewing employee activities, and testing the effectiveness of policies and procedures.

Response to Non-compliance

Lending startups should have a plan in place to address instances of non-compliance. This should include a process for reporting and investigating potential violations, as well as disciplinary measures for employees who violate compliance policies.

Regulatory Changes and How to Stay Up-to-Date

Regulatory compliance is an ever-changing landscape, with laws and regulations constantly evolving in response to new risks and challenges. To ensure that lending startups remain in compliance with relevant laws and regulations, it is important to stay up-to-date on regulatory changes.

Additionally, lending startups should also be proactive in anticipating and preparing for potential changes in laws and regulations. This can involve monitoring legislative and regulatory developments, conducting risk assessments, and reviewing compliance policies and procedures on a regular basis.

By staying informed and proactive, lending startups can minimize their risk exposure and ensure that they remain in compliance with all relevant laws and regulations.

3 Tips for Keeping Up with Regulatory Changes

Just because there are many and frequent regulatory changes to know doesn’t mean that it has to be hard. Below are a few tips to make keeping up with it all a bit simpler. 

1. Subscribe to industry publications. Industry publications, such as trade magazines and newsletters, often provide updates on regulatory changes and best practices for compliance. Some popular publications include American Banker, Entrepreneur, Forbes, Business Insider, and TechCrunch.

2. Attend conferences and seminars. Conferences and seminars can provide valuable opportunities to learn about regulatory changes and network with other professionals in the industry. Money20/20 is one example popular industry conference. 

3. Work with legal and compliance experts. Legal and compliance experts can provide guidance and advice on regulatory changes and help lending startups stay up-to-date on compliance-related issues.

These, however, are just a few of the ways lending startups can make the process of keeping up with regulatory changes simpler.  

Final Thoughts

Regulatory compliance is crucial for lending startups to build trust with customers and investors, avoid legal and financial consequences, and gain a competitive advantage in the marketplace. To ensure compliance, lending startups must be aware of and adhere to various laws and regulations, build an effective compliance program, and stay up-to-date on regulatory changes. By prioritizing compliance, lending startups can mitigate their risk exposure and foster long-term success.

NMLS Regulatory Compliance FAQ

Below, you will find some of the frequently asked questions founders have about regulatory compliance and their answers. 

What is NMLS and who is required to be registered with it?

NMLS stands for Nationwide Multistate Licensing System & Registry. It is a web-based system that provides a central repository for state licensing information and facilitates the licensing and registration of individuals and entities in the mortgage industry. Individuals and entities that are required to be registered with NMLS include mortgage loan originators, mortgage companies, mortgage brokers, and mortgage servicers.

What is the SAFE Act and how does it relate to NMLS?

The Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act) is a federal law that was enacted in 2008. It requires mortgage loan originators to be registered with NMLS and to meet certain standards for character, fitness, and financial responsibility. The SAFE Act also requires states to establish licensing and registration requirements for mortgage loan originators and to participate in the NMLS.

What are some of the compliance requirements for NMLS registrants?

NMLS registrants are required to complete pre-licensing education, pass a national test, undergo a background check, and meet ongoing continuing education requirements. In addition, they must comply with various state and federal laws and regulations, including those related to advertising, disclosure, and consumer protection.

What happens if an NMLS registrant violates a compliance requirement?

If an NMLS registrant violates a compliance requirement, they may be subject to disciplinary action, including fines, license suspension or revocation, and other penalties. In some cases, violations may also result in criminal charges or civil lawsuits.

How can NMLS registrants stay up-to-date on regulatory compliance requirements?

NMLS registrants can stay up-to-date on regulatory compliance requirements by regularly reviewing relevant laws and regulations, participating in industry training and education programs, and consulting with legal or compliance professionals. The NMLS also provides resources and support to help registrants stay informed about compliance requirements and best practices.

Frank Gogol

A seasoned SEO expert, Frank has a long history of working with and for startups. Starting in mid-2018, Frank served as the SEO Strategist for Stilt, a fintech startup that provided fair loans for immigrants in the US and other underserved markets. While with the company, he scaled site traffic from zero to more than 1.5 million unique visits per month, driving the bulk of the company’s lead generation until it was acquired by J.G. Wentworth in December 2022. As employee #5 at Stilt, Frank was witness to, and part of, the successful building and sale of a fintech company, uniquely positioning him to create content for founders about all things startups.

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