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W-2s For Originators, Montana Says

Ryan Kingsley
Aug 29, 2023
Montana Division of Banking and Financial Institutions

The state reminds employers that MLOs are not independent contractors.

Montana’s Division of Banking and Financial Institutions (DBFI) issued a memo today describing mandatory worker classifications for mortgage loan originators sponsored by the state. 

Specifically, the memo states that the Montana Mortgage Act “requires that mortgage loan originators (MLOs) receive a W-2.” No explanation was offered as to why the memo was issued. Exceptions apply only for MLOs who are also owners of the brokerage or lender entity listed as their employer. 

Montana’s no market-mover when it comes to the housing industry, but the memo is significant because it addresses an ongoing and contentious debate in mortgage finance over whether to classify MLOs, from a tax perspective, as employees or independent contractors. Though states may set their own rules for worker classification of MLOs, the IRS regards originators as W-2 employees. 

The debate has been thrown into sharper focus over the past year as lenders’ profit margins have eroded, the result of nominal origination volume. 

For tax purposes, it benefits both employers and MLOs for originators to be classified as Form-1099 independent contractors. Employers aren’t on the hook for payroll taxes or health insurance and originators have maximum flexibility in reporting their gross adjusted income after subtracting expenses, such as marketing, travel, and other incidentals. 

Yet, there are technical, functional differences between “employees” as designated by the W-2 and “indepedent contractors” as designated by Form-1099. “No matter how badly you may want to be an independent contractor, that isn’t how it works,” says Debra Killian, CRMS, director of mortgage compliance, education and training for, an MLO education platform and provider.

As a matter of fact, she says, the default worker classification for federal tax purposes is a W-2 employee. 

In other words, to be an independent contractor you must prove you are one. In the mortgage world, in reality, there’s little independence for MLOs – though much entrepreneurialism, which might account for some of the confusion. Among other items, MLOs rely on their employers’ software, warehouse lines, training tools, marketing platforms, third-party services, and contact lists. 

“I cannot come up with any scenario under which an originator could meet the burden of proving they’re an independent contractor,” says Killian. She's of the mind that every lender's worst nightmare should be an IRS audit. Even to receive a loan application and originate a loan requires an MLO to first be sponsored by a company, per National Mortgage Licensing System (NMLS) guidelines. 

In Killian’s experience, those in the mortgage industry pushing the Form-1099 tax status for MLOs are blending federal tax law with mortgage licensing law. Most important to remember, she says, is that the W-2 and Form-1099 are federal tax forms. States do not have the jurisdiction to determine the federal tax status of particular employees. 

“It’s football and baseball, they’re not even on the same field,” she quips. Unfortunately, no matter the team you’re on, those companies that are out of compliance because they pay their MLOs with the Form-1099 are contributing to an unfair playing field across the industry, particularly when it comes to recruitment. 

Not only is the Form-1099 attractive to MLOs – “there’s huge savings for lenders if MLOs are paid as independent contractors,” Killian says. 

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