Since the passage of the SAFE Act in 2008 and the subsequently enacted legislation in California, real estate professionals and employees of California finance lenders who want to originate home loans in California must apply for a Mortgage Loan Originator (MLO) endorsement through the Nationwide Mortgage Licensing System & Registry (NMLS).

For licensees and applicants with felony convictions in their background, this requirement can delay the endorsement or even result in a lifetime bar from licensure.  Section 10166.05 of the California Business and Professions Code requires applicants to disclose all felony convictions to the Department of Real Estate on their MLO endorsement application.  Under section (b)(1), the applicant cannot be convicted of a felony during the seven-year period preceding the date of application.  This applies to all felonies, regardless of type of circumstance.  As this is an absolute bar, the Department of Real Estate or Department of Corporations must deny an MLO endorsement to any applicant with a felony conviction in the seven years before the date of application.

Section (b)(2) further disqualifies those applicants who have, at any time, committed a felony involving “fraud, dishonesty, a breach of trust, or money laundering.”  The distinction between which felonies “involve” these four categories and which do not is critical; if the Department can show that a particular felony committed by an applicant involves fraud or dishonesty, that applicant can never get an MLO certificate.  On the other hand, if an applicant can successfully show that his or her conviction did not involve one of the four categories within section (b)(2), the applicant can, with proper disclosures and a showing of rehabilitation, receive the MLO certificate and originate home loans.

Certain felonies are easier to classify than others.  A felony conviction for embezzlement, credit card fraud, wire fraud, or money laundering would fall within the literal definition of section (b)(2).  Most other felonies, at first glance, might not appear to fall within the definition of section (b)(2).  For example, a conviction for murder, although a very serious offense in its own right, would not seem to be a conviction involving “dishonesty” or “fraud.”  However, the Department of Real Estate has taken the position that whether or not a felony conviction “involves” dishonesty depends on the facts and circumstances surrounding the conviction.  A murder conviction, therefore, might involve dishonesty if it was accomplished by dishonest means or while in the process of a dishonest act.

To illustrate how this distinction can have serious consequences for a potential licensee, imagine a first-time applicant to the Department of Real Estate who, decades ago, was convicted of a serious crime, such as a murder.  Imagine that this murder was committed while the applicant was in the process of committing a burglary, such as a “robbery-gone-wrong” or a burglar was surprised by the unexpected return of the occupant of the home.  Even if the applicant was never charged with burglary or robbery, the Department could still argue that the murder “involved” dishonesty, and attempt to forever exclude the applicant from originating home loans.

Of course, the crime described in the example above is a serious crime, and the applicant would likely have been severely punished.  However, even if this applicant served a very lengthy prison sentence, even if he or she fully complied with the terms of his parole and probation, and even if he or she successfully rehabilitated himself, paid restitution, and restored his reputation within the community, he or she can never restore his or her relationship with the Department if the felony is deemed to have “involved” dishonesty or fraud.

It is also possible to get even felony convictions reduced from felonies to misdemeanors under California Penal Code section 17(b) if the felony is a "wobbler" (can be a felony or misdemeanor) and was not punished by a term served in state prison.  Likewise, a felony conviction dismissed through a diversion program or some other court alternative sentencing program might not be a felony conviction for licensing purposes.

If you are a licensee or an applicant to the Department of Real Estate or Department of Corporations with a felony conviction in your background, it is especially important to secure legal representation if you plan to apply for an MLO endorsement.  Thorough legal research is necessary to determine whether or not your felony could be categorized as “dishonest” within the meaning of California law, and the results can have lifelong, irreversible effects.  We strongly recommend also that you explore any and all avenues for reduction of a felony conviction before making the nationwide disclosure required by the NMLS MLO endorsement application system.