Understanding the Small Institution exemption in the SAFE Act
Here is a story problem for you. You are a tiny institution with 10 full-time employees and two part-time employees. You have several Mortgage Loan Originators on staff. This makes it difficult to have an administrator who is NOT an MLO, as the regulation requires. However, you appoint one MLO to serve as your system administrator because section 1007.103 provides an exemption for small institutions that have ten full time employees or less. Your SAFE Act program is compliant right?
Well maybe it is and maybe it isn’t. The small institution exemption doesn’t say ten employees or less. To be entirely accurate, it says “not more than ten full-time or equivalent employees.” What is an EQUIVALENT employee? The regulation does not define employee, much less define an equivalent employee. And examiners are not typically fans of going outside their regulatory guidelines or the guidelines within the FFIEC umbrella. So is it possible that the examiners will consider the two part-time employees as the equivalent of a full-time employee? Or employees who work a minimum number of hours per month? The GAO offers guidance. Obamacare offers guidance. But for the small institution near the threshold, there are some decisions to be made. Examiners can go by the letter of the law, but if they do consider the two part-time employees as another equivalent full employee, the institution in this scenario will be in violation.
Like many exemptions written into Federal regulation, this one may be more trouble than it’s worth. The cure is often worse than the disease. Unless you are truly a very small institution where there really is no option, it may be safest to appoint a SAFE Act administrator who is NOT an MLO.