NMLS Disciplinary Actions

State regulators use the Nationwide Multistate Licensing System (NMLS) to track and coordinate disciplinary actions against mortgage loan originators. Understanding these actions, their causes, and their consequences is essential for maintaining a compliant mortgage career.

Types of Disciplinary Actions

Administrative Actions

Consent Orders vs. Formal Actions

Consent Orders:

• Settlement agreement between MLO and regulator
• MLO agrees to specific findings and penalties
• Avoids formal hearing process
• Still becomes part of permanent NMLS record
• May include admission or denial of wrongdoing

Formal Administrative Actions:

• Full hearing before administrative law judge
• Evidence presented by both sides
• Formal findings of fact and conclusions of law
• Can be appealed to higher authority
• Typically results in more severe penalties if MLO loses

Common Violations Leading to Discipline

Tier 1: Most Serious (Typically Result in Revocation)

1. Fraud in the Loan Origination Process

   • Falsifying borrower information
   • Creating fake documents
   • Identity theft
   • Participating in straw buyer schemes

2. Felony Convictions

   • Any felony within 7 years
   • Financial crimes at any time
   • Crimes of moral turpitude

3. Willful Violation of State or Federal Law

   • Intentional fair lending violations
   • Knowing RESPA/TILA violations
   • Deliberate privacy breaches

Tier 2: Serious (Suspension to Revocation)

1. Failure to Disclose Material Information

   • Prior criminal history
   • Civil judgments
   • Regulatory actions in other states
   • Financial problems (bankruptcy, liens)

2. Unlicensed Activity

   • Operating without valid license
   • Operating outside license scope
   • Allowing unlicensed persons to act as MLOs

3. Consumer Harm Violations

   • Steering to inappropriate products
   • Collecting unauthorized fees
   • Failing to make required disclosures

Tier 3: Moderate (Fines to Suspension)

1. Administrative Violations

   • Late license renewal
   • Failure to report changes
   • Incomplete continuing education

2. Supervisory Failures

   • Inadequate oversight of supervised MLOs
   • Failure to maintain required records
   • Insufficient compliance procedures

3. Technical Violations

   • Advertising errors
   • Missing NMLS ID in communications
   • Late fee disclosures

The Disciplinary Process

Step 1: Investigation

Investigations are triggered by:

• Consumer complaints filed with state regulator
• Examination findings during routine audits
• Referrals from other agencies (CFPB, FBI, other states)
• Self-reporting by employers or MLOs
• Whistleblower reports

Investigation Timeline:

• Initial complaint review: 30-60 days
• Full investigation: 90 days - 2 years
• MLOs may be contacted for response to allegations
• License may be suspended during investigation for serious matters

Step 2: Notice of Charges

If investigation finds violations:

• Formal notice issued to MLO
• Specific violations alleged
• Evidence supporting charges outlined
• Proposed penalties listed
• Right to hearing explained

Step 3: Resolution Options

Option A: Consent Agreement

• Negotiate settlement with regulator
• Agree to findings and penalties
• Avoid public hearing
• Faster resolution (30-90 days)

Option B: Administrative Hearing

• Full evidentiary hearing
• Right to present evidence and witnesses
• Right to cross-examine state witnesses
• Right to legal representation
• Decision by administrative law judge

Step 4: Decision and Penalties

After hearing or consent:

• Written order issued
• Penalties imposed
• Compliance timeline established
• NMLS record updated
• Other states notified through NMLS

The Appeal Process

Administrative Appeals

1. Request for Reconsideration (15-30 days after decision)

   • Ask same body to reconsider based on new evidence
   • Rarely successful without new information

2. Appeal to Agency Head (30-45 days)

   • State Banking Commissioner or Director reviews case
   • Can affirm, modify, or reverse decision
   • New evidence generally not allowed

3. Appeal to State Board (where applicable)

   • Some states have banking boards that hear appeals
   • Reviews record for legal errors
   • Limited review of factual findings

Judicial Appeals

1. State Court Review (60-90 days after administrative appeal exhausted)

   • File petition in state court
   • Court reviews for legal errors and abuse of discretion
   • Generally defers to agency factual findings
   • Can overturn arbitrary or capricious decisions

2. Appellate Court (if state court review unsuccessful)

   • Higher court reviews lower court decision
   • Focuses on legal issues only
   • Final state-level review

Success Rates for Appeals:

• Administrative reconsideration: ~10% success
• Appeal to agency head: ~15% success
• State court review: ~20% success
• Appellate court: ~25% of those who reach this level

Practical Note: Most MLOs accept consent agreements rather than pursue lengthy appeals. Legal costs for full appeals often exceed $50,000-$100,000.

Industry Bar Consequences

What an Industry Bar Means

An industry bar prohibits an individual from:

• Holding any mortgage license in any state
• Working as an MLO, processor, or underwriter
• Being employed by a mortgage company in any capacity
• Owning or controlling a mortgage business

Types of Industry Bars

Lifetime Effects of Industry Bars

Immediate Consequences:

• Loss of all state licenses
• Termination from current employment
• NMLS record marked with bar notation
• Notification to all states through NMLS

Long-Term Consequences:

• Background checks reveal bar to future employers
• May affect licensing in related fields (real estate, insurance, banking)
• Professional reputation permanently damaged
• Career change often necessary

Real Case: Lifetime Industry Bar

Case: Multi-State Fraud Scheme (2021)

• Violations: MLO participated in $4.5 million flipping scheme across 3 states
• Penalties: License revoked in all states, permanent industry bar, $1.2 million in restitution
• Criminal: 87 months federal prison
• Outcome: Individual can never work in mortgage industry again

NMLS Public Record and Disclosure

What Appears on NMLS Consumer Access

The public can view through NMLS Consumer Access:

• Current license status in all states
• Employment history
• Examination passage/failure (not scores)
• Disclosed events (criminal, regulatory, civil)
• Formal disciplinary actions

What Employers Can See

Through NMLS, prospective employers access:

• Complete employment history
• All disciplinary actions in detail
• Examination history
• Credit report authorization status
• Background check results

Permanent Nature of NMLS Records

Records that remain permanently:

• All license applications (approved or denied)
• All disciplinary actions
• All disclosed events
• Employment history

Records are NOT removed for:

• Passage of time
• Dismissed charges (if initially disclosed)
• Expunged criminal records
• Completion of penalties

Critical Understanding: Your NMLS record is essentially permanent. One serious violation creates a record that follows you throughout your career, affecting employment opportunities even decades later.

Protecting Your License

Proactive Compliance

1. Stay Current - Complete CE on time, renew early
2. Disclose Everything - Report changes within required timeframes
3. Document Carefully - Keep records of all transactions
4. Ask Questions - When uncertain, consult compliance
5. Report Concerns - Don't ignore red flags

If You Face Investigation

1. Take it seriously - Even minor complaints can escalate
2. Respond promptly - Delayed responses create negative impressions
3. Consider legal counsel - Early representation can prevent escalation
4. Cooperate fully - Obstruction results in additional charges
5. Preserve records - Keep all documents related to transactions in question

Rehabilitation After Discipline

For MLOs who have faced discipline but want to continue careers:

1. Complete all requirements - Fines, education, restitution
2. Wait required periods - Don't apply before suspension/bar ends
3. Document rehabilitation - Community service, clean record, references
4. Be transparent - Fully explain circumstances and lessons learned
5. Consider related fields - Real estate, insurance may be options
6. Seek conditional license - Some states allow return with supervision

State Coordination Through NMLS

Multi-State Actions

When one state takes action:

• Action is recorded in NMLS immediately
• Other states receive notification
• Other states may take independent action
• Patterns across states are tracked

Common Multi-State Responses

The "Bad Actor" Database

NMLS maintains records that identify:

• MLOs with multiple state actions
• Pattern violators
• Those with pending actions in multiple states
• Industry-barred individuals attempting new licenses

Warning: Attempting to obtain a license in a new state after adverse action in another state, without disclosure, is itself grounds for denial and additional penalties.