SAFE Act Update

Joseph M. KolarBuckleySandler LLP

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Overview

Background on the SAFE Act

Update on State Law Implementation

Update on NMLS&R Process

Issues in Proposed HUD Regulation

Federal Banking Agency Guidance for bank originators

Prospects for SAFE Act Statutory Changes

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Background on the SAFE Act

The Secure and Fair Enforcement for Mortgage Licensing Act of 2008, Title V of the Housing and Economic Recovery Act of 2008, better known as the SAFE Act, was signed into law on July 30, 2008. The SAFE Act requires states and federal agencies to enact systems for licensing and registering “loan originators”Loan originator (“LO”) is defined as “an individual who (i) takes a residential mortgage loan application; and (ii) offers or negotiates terms of a residential mortgage loan for compensation or gain.”

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Background on the SAFE Act

Why was the SAFE Act passed?The stated purpose of the SAFE Act is to “increase uniformity, reduce regulatory burden, enhance consumer protection and reduce fraud.”The incomplete data on loan originators (and lack of data on their competency, integrity and business knowledge) is considered partly to blame for the mortgage crisis of 2007-2009.The SAFE Act is an attempt to ensure that those who originate residential home loans know the rules of the road, are identifiable, and can be held to some extent accountable for the loans they originate.

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Background on the SAFE Act

LO Licensure v. RegistrationRegistration - An individual LO employed by a depository institution, a depository institution subsidiary, or an institution regulated by the Farm Credit Administration can be registered. Licensure - A licensed originator is any individual engaged in loan origination activities who does not qualify to be registered. LO Licensure is required on a state-by-state basisLO Registration is required once for national coverageLO licensure requirements are far more onerous than registration requirements

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Background on the SAFE ActWhat’s the big deal?

Prior to SAFE, less than half of the states required individual licensure. Many of these state systems exempted from licensing broad categories of persons, meaning that significant numbers of companies engaging in mortgage lending, brokering, and the LO employees of such companies, were not licensed or registered at all.SAFE is the floor – not the ceiling

States are empowered to pass more restrictive legislation so long as the it meets the minimum requirements under SAFETherefore, there is not perfect uniformity among the states’ SAFE Act –compliant legislation

Employees of non-exempt entities who meet the definition of loan originator must secure individual licensure in any state where they operate – this is shaping up to be a huge burden on industry

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Update on State Law Implementation

By August 1, 2009, all states were required to have a system of licensing in place for residential mortgage LOs that meets national definitions and minimum standards.If a state failed to provide the appropriate licensing structure, HUD is mandated to provide one after one year (for states in which their legislatures meet annually) or in two years (for states whose legislatures meet biannually) subject to a two yearextension for states that are making progress toward creating the called for regime.As of today, all states and the District of Columbia, except forMinnesota, have enacted SAFE Act-compliant mortgage loan originator licensing standards. Minnesota does not currently have any SAFE Act-compliant legislation pending.

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Update on State Law Implementation

Model State LawThe CSBS and AARMR developed a “Model State Law,” which HUD found to be in conformance with the minimum requirements of SAFE.The Model State Law uses the disjunctive “or” instead of “and” in the definition of loan originator. Nearly every state has adopted the Model State Law’s definition of loan originator that includes the disjunctive “or.”This ostensibly minor difference in language greatly expands the scope of loan originator licensing.

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Update on State Law Implementation

What about Loan Modification?The broad definition of “loan originator” in the Model State Law may be applicable to loan modification or loss mitigation specialists who work with consumers to try and salvage troubled loans. Some states have explicitly excluded or included loan modification and/or loss mitigation specialist from their definition of loan originator.But most states have signaled that there are awaiting final rulemaking from HUD on this issue.

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Update on NMLS Process

Overview of the NMLS&RSection 1502 of the SAFE Act mandates that the CSBS and the AARMR must develop and maintain the Nationwide Mortgage Licensing System & Registry (“NMLS&R”).NMLS&R is responsible for the following:

Establishing protocols for the issuance of unique identifiers. Receiving and processing fingerprints for national and state criminal history background checks for all loan originators. Reviewing and approving, using reasonable standards, pre-licensure and continuing education courses. Developing a qualified written test and approve test providers. Developing a mortgage call report. Providing public access to licensing information.

If HUD determines that the NMLS&R is failing to meet these responsibilities, HUD will develop and maintain its own system – this is unlikely to happen.

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Update on NMLS Process

NMLS&R is a web-based mortgage application processing and record system that operates in real-time.Pre-SAFE, states voluntarily participated on the system.Now, all states must license mortgage loan originators through NMLS&R.

45 jurisdictions are currently participating on the NMLS&R.Some states elect to also process company application and records on the NMLS&R.

Unique Identification #All state licensed and federally registered mortgage loan originators must be registered with the NMLS&R. Each licensee or registrant will be assigned a unique ID# by NMLS&R.Tool that allows regulatory agencies to trace the activities of LOs.An LO is expected to put his/her unique ID# on all loan documents that s/he originates and all advertising materials.

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Update on NMLS Process

New Features of the NMLS&RMortgage Call Report

Under the SAFE Act, state laws must require all mortgage licensees to submit a Mortgage Call Report to the NMLS&R.NMLS&R is responsible for the format and content of the report.The Mortgage Call Report will endeavor to minimize the number of individual state-specific annual report requirements.

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Update on NMLS Process

Consumer Access Tool This feature allows consumers to confirm that a particular originator is licensed, as well confirm his or her affiliation with a mortgage company.

Federal Criminal Background Check ProcessingAllows mortgage loan originator applicants to request a federal criminal background check from the FBI through the NMLS&R. Uses an NMLS&R- approved electronic fingerprint vendor.

Testing and Education While the NMLS&R is not a web-based education portal, it does provide a detailed resource center for navigating this process.

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Issues in Proposed HUD Regulation

HUD’s RoleHUD is the federal regulatory body identified in the SAFE Act as responsible for determining state compliance with the Act.HUD must determine:1. that the state’s mortgage loan originator licensing standards meet

the federally mandated minimums, and 2. that the state is participating in NMLS&R. If HUD determines that a state is not in compliance with both items above, HUD must implement a system for all state licensed mortgage loan originators in that state. HUD is currently reviewing the states’ SAFE Act-compliant statutes and is issuing review letters to the state regulatory agencies.

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Issues in Proposed HUD Regulation

On December 10, 2009, HUD released its highly-anticipated proposed rule implementing the SAFE Act. The original public comment deadline was February 16, 2010, but has been extended to March 5, 2010.As expected, the proposed rule sets expands upon the minimum standards that the SAFE Act requires states to meet in licensing LOs. Consistent with HUD's charge under the SAFE Act, the proposed rule provides the following: 1. the procedure that HUD will use to determine whether a state's licensing

and registration system is SAFE Act compliant; 2. the actions that HUD will take if HUD determines that a state has not

established a SAFE Act-compliant licensing and registration system or that the NMLS&R established by the CSBS and AARMR is not SAFE Act compliant;

3. the minimum requirements for the administration of the NMLS&R; and 4. HUD's enforcement authority if it operates a state licensing system.

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Issues in Proposed HUD Regulation

HUD also proposes to clarify or interpret certain statutory provisions that pertain to the scope of the SAFE Act licensing requirements

Provides examples for what it means “take a residential mortgage loan” and “offer or negotiate”In sum, these terms are interpreted very broadly!

The proposal indicates that HUD is “inclined” to include in the definition of loan originator “an individual who performs a residential mortgage loan modification that involves offering or negotiating of loan terms that are materially different from the original loan.”

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Issues in Proposed HUD Regulation

It is expected by most that HUD will include loan modification activities within the definition of loan originator in its final rules, but will likely recommend a delayed effective date

Industry should expect each state to follow suit.There is considerable public and political pressure for mortgage servicers to modify loans under the Obama Administration’s “Making Home Affordable” loan modification program.Could this expected licensing requirement deter lenders and servicers from offering loan modifications to distressed borrowers?

At the very least, licensing could slow down the pace of loan modification assistance.

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Federal Banking Agency Guidance for Bank Originators

Role of Federal AgenciesWithin one year of the enactment, the SAFE Act required the Federal banking agencies (through the FFIEC) together with the Farm Credit Administration to jointly develop and maintain a system for registering the employees of depository institutions, the subsidiaries that the depository institutions “own and control” and institutions regulated by the Farm Credit Administration, as registered loan originators with the NMLS&R. The Federal Agencies’ SAFE Act Working Group started meeting in Sept. 2008.Draft regulations were first issued in the summer of 2009.

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Federal Banking Agency Guidance for Bank Originators

On November 12, 2009, the FDIC adopted draft final rules regarding the implementation of SAFE Act. The draft final rules require registration of LOs on the NMLS&R and provides procedures for completion of this process.The definition of loan originator and the registration requirements under the Federal Agencies rules are in stark contrast to the definitions and requirements under HUD’s proposed rule.Examples:

Rule provides an exception to the registration requirement for an employee of an agency-regulated institution who has never been registered or licensed through the NMLS&R as a mortgage loan originator and who has acted as a mortgage loan originator for five or fewer residential mortgage loans during the last twelve months.

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Federal Banking Agency Guidance for Bank Originators

Rule also provides that employees who engage in loan modification activities only are not considered mortgage loan originators and are, therefore, not required to register. Employees are not required to obtain registrations until the NMLS&R has been modified to accommodate these types of registrations. Rule uses conjunctive “and” in the definition of loan originator, in contrast to the Model State Laws’ use of “or”

The Federal Agencies are currently working with CSBS to devise an implementation system

Federal Banking Agency Guidance for Bank Originators

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Federal Banking Agency Guidance for Bank Originators

Timing for Federal Registration180 day implementation period beginning after system is available to accept registrations and on a date specified by notice from the Federal Agencies.Employees of Agency-regulated institutions not subject to sanctions under federal regulation if they operate during implementation period without registration. What about the gap period before implementation of federal registry but after state laws take effect?

State Model SAFE Act legislation exempts registered mortgage loan originators.

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Federal Banking Agency Guidance for Bank Originators

PreemptionNo express statement of preemption in regulation.Supplementary Information of Draft Final Regulation includes several statements suggesting preemption.Agency-regulated institutions and their employees who are acting within the scope of their employment with the Agency-regulated institutions are:

“not subject to State licensing or registration requirements for mortgage loan originators.”“subject only to the Federal registration requirements of the S.A.F.E. Act as implemented by the Agencies through this rulemaking.”

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Federal Banking Agency Guidance for Bank Originators

PreemptionBut an employee of any Agency-regulated institution may also be subject to state licensing if acting outside the scope of employment by Agency-regulated institution.Example:

Dual employees of a bank and a nondepositorysubsidiary of a bank holding company would be subject to both Federal and State SAFE act regimes when acting as loan originators.

Bottom Line – Not clear how courts will view this preemption!

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Prospects for SAFE Act Statutory Changes

Evening the playing-field between depositories and non-depositories?

One of the principal complaints from industry is the striking difference between the licensing process and the registration process for LO.Concern that loan originators will migrate heavily to banks.

There is no indication that Congress will address this disparity.Can we expect guidance from HUD relating to preemption?

Will HUD confirm that the licensee and registrant categories are mutually exclusive?

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For Further Information

Joseph M. Kolar202-349-8020

jkolar@buckleysandler.com