About
the Act
The Housing and Economic Recovery Act of 2008, signed into law on
July 30, 2008 (Public Law 110-289) (HERA), constitutes a major new
housing law that is designed to assist with the recovery and the
revitalization of America's residential housing market - from modernization
of the Federal Housing Administration, to foreclosure prevention,
to enhancing consumer protections. The SAFE Act is a key component
of HERA.
The SAFE Act is designed to enhance consumer protection and reduce
fraud by encouraging states to establish minimum standards for the
licensing and registration of state-licensed mortgage loan originators
and for the Conference of State Bank Supervisors (CSBS) and the
American Association of Residential Mortgage Regulators (AARMR)
to establish and maintain a nationwide mortgage licensing system
and registry for the residential mortgage industry for the purpose
of achieving the following objectives:
(1)
Providing uniform license applications and reporting requirements
for state licensed-loan originators;
(2) Providing a comprehensive licensing and supervisory database;
(3) Aggregating and improving the flow of information to and between
regulators;
(4) Providing increased accountability and tracking of loan originators;
(5) Streamlining the licensing process and reducing regulatory burden;
(6) Enhancing consumer protections and supporting anti-fraud measures;
(7) Providing consumers with easily accessible information, offered
at no charge, utilizing electronic media, including the Internet,
regarding the employment history of, and publicly adjudicated disciplinary
and enforcement actions against, loan originators;
(8) Establishing a means by which residential mortgage loan originators
would, to the greatest extent possible, be required to act in the
best interests of the consumer;
(9) Facilitating responsible behavior in the subprime mortgage market
place and providing comprehensive training and examination requirements
related to subprime mortgage lending;
(10)
Facilitating the collection and disbursement of consumer complaints
on behalf of state mortgage regulators.
The
new standards, as well as the uniformity and consistency of such
standards, directed to be established nationwide by the SAFE Act
present a significant step in the effort to increase integrity in
the residential mortgage loan market, enhance consumer protections,
and reduce fraud. The SAFE Act encourages states to participate
in the Nationwide Mortgage Licensing System and Registry, and requires
states to have in place, by law or regulation, a system for licensing
and registering loan originators that meets the requirements of
sections 1505, 1506, and 1508(d) of the SAFE Act.The SAFE Act requires
the states to have the licensing and registration system in place
by: (1) July 31, 2009, for states whose legislatures meet annually;
and (2) July 31, 2010, for states whose legislatures meet biennially.
For both this 1-year period and 2-year period, HUD may extend the
deadline, by not more than 24 months, if HUD determines that a state
is making a good faith effort to establish a state licensing law
that meets the minimum requirements of the SAFE Act. (See the complete
text of the SAFE Act.)
To
aid and facilitate states' compliance with the requirements of the
SAFE Act, the Act directs the establishment of a nationwide mortgage
licensing system and registry (NMLSR), to be developed and maintained
by CSBS and AARMR. If HUD determines that a state's mortgage loan
originator licensing standards do not meet the minimum requirements
of the Act, HUD must implement and administer a licensing system
for that state. A loan originator in such a state would have to
comply with the requirements of HUD's SAFE Act-compliant licensing
system for that state as well as with any applicable state requirements.
A HUD license for a state would be valid only for that state, even
if HUD must implement licensing systems in multiple states. Additionally,
if HUD determines that the NMLSR is failing to meet the requirements
and purposes of the SAFE Act, HUD must establish a system that meets
the requirements of the SAFE Act.
For the last several months, CSBS and AARMR have undertaken considerable
outreach to states and the financial services industry regarding
the development of the NMLSR and of legislation that would meet
the requirements of the SAFE Act. CSBS and AARMR have developed
a model state law (MSL) designed to assist and facilitate states
to enact legislation on mortgage loan originator licensing that
complies with the SAFE Act and by the deadlines imposed by the SAFE
Act. While states are charged with enacting licensing standards
that meet the requirements of the SAFE Act, overall responsibility
for interpretation, implementation, and compliance with the SAFE
Act rests with HUD. In this regard, CSBS and AARMR requested that
HUD review the model legislation, and advise of its sufficiency
in meeting applicable minimum requirements of the SAFE Act.
CSBS/AARMR
Model Legislation
HUD reviewed the model legislation to determine whether it meets
the minimum requirements of the SAFE Act and finds that it does.
State legislation that follows the provisions of the model legislation,
whether by statute or regulation, will be determined to have met
the applicable minimum requirements of the SAFE Act. The complete
text of the model legislation, reviewed by HUD, is provided here.)
More information about the model legislation can be found at CSBS's
website. The commentary that follows
presents HUD's views and interpretations of certain statutory provisions
that required consideration and analysis in determining that the
model legislation meets the minimum requirements of the SAFE Act.
HUD
Commentary
Through this commentary, HUD advises of the analysis of the SAFE
Act that was undertaken in reviewing the model legislation and of
HUD's interpretation of certain provisions in the SAFE Act. These
interpretations are designed to assist the states, as well as members
of the public, in understanding how HUD determined that the model
legislation meets the minimum requirements of the SAFE Act, and
to assist states in adopting legislation or regulations that meet
the minimum requirements of the SAFE Act.
A.
Standards in Legislation May Exceed Standards in SAFE Act
The SAFE Act's licensing and registration standards for mortgage
loan originators are minimum standards. (See section 1505(b).) Legislation
enacted or regulations promulgated by a state may exceed the minimum
standards of the SAFE Act. States may not, however, enact legislation,
promulgate regulations, or otherwise impose requirements that would
frustrate the objectives of the SAFE Act, keeping in mind that the
SAFE Act's primary objectives include provision of a comprehensive
licensing and supervisory system with uniform application and reporting
requirements.
B.
Definition of Loan Originator
Section 1503(3)(A)(i) of the SAFE Act defines "loan originator"
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." Section 1503(3)(B), entitled "Other Definitions
Relating to Loan Originator" provides "For purposes of this subsection,
an individual `assists a consumer in obtaining or applying to obtain
a residential mortgage loan' by, among other things, advising on
loan terms (including rates, fees, other costs), preparing loan
packages, or collecting information on behalf of the consumer with
regard to a residential mortgage loan.
"
HUD interprets "application" to include any request from a borrower,
however communicated, for an offer (or in response to a solicitation
of an offer) of residential mortgage loan terms, as well as the
information from the borrower that is typically required in order
to make such an offer. HUD interprets "tak[ing]" an application
to mean receipt of an application for the purpose of deciding whether
or not to extend the requested offer of a loan to the borrower,
whether the application is received directly or indirectly from
the borrower.
Since
it generally would not be possible for an individual to offer to
or negotiate residential mortgage loan terms with a borrower without
first receiving the request from the borrower (including a positive
response to a solicitation of an offer) as well as the information
typically contained in a borrower's application, HUD considers the
definition of loan originator to encompass any individual who, for
compensation or gain, offers or negotiates pursuant to a request
from and based on the information provided by the borrower. Such
an individual would be included in the definition of loan originator,
regardless of whether the individual takes the request from the
borrower for an offer (or positive response to an offer) of residential
mortgage loan terms directly or indirectly from the borrower.
The SAFE Act also describes activities in the residential mortgage
process that are excluded from the definition of "loan originator."
Activities that are excluded are those that pertain to administrative
or clerical tasks; real estate brokerage activities by individuals
licensed or registered by a state to undertake real estate brokerage
activities unless a person is compensated by a loan originator,
loan processing or underwriting undertaken under the direction and
supervision of a state-licensed loan originator or registered loan
originator; and those individuals solely involved in extensions
of credit relating to timeshare plans.
HUD interprets an individual who "takes a residential mortgage loan
application" to exclude an individual who performs purely administrative
or clerical tasks, such as physically handling a completed application
form or transmitting a completed form to a lender on behalf of a
prospective borrower. This interpretation is consistent with the
exclusion defined in section 1503(3)(C) of the SAFE Act. On the
other hand, HUD views activity that involves assisting or advising
a prospective borrower in the completion of an application extending
beyond purely administrative or clerical tasks falls within coverage
of the SAFE Act provided by section 1503(3)(B). As a result, an
individual who offers or negotiates residential mortgage loan terms
for compensation or gain could not avoid applicability of the SAFE
Act standards by having another person or entity take the application
from the prospective borrower and then pass the application to the
individual. A state licensing and registration system that permits
such individuals to avoid compliance with SAFE Act standards would
be determined by HUD to be not in compliance with the SAFE Act.
A state may clarify that such individuals are not exempt from licensing
requirements. The MSL provides one approach in making this clarification
in section XX.XXX.030(6).
Notwithstanding the broad definition of "loan originator" in the
SAFE Act, there are some limited contexts where offering or negotiating
residential mortgage loan terms would not make an individual a loan
originator. The provision in the definition that loan originators
are individuals who take an "application" implies a formality and
commercial context that is wholly absent where an individual offers
or negotiates terms of a residential mortgage loan with or on behalf
of a member of his or her immediate family. State legislation that
excludes from licensing and registration requirements an individual
who offers or negotiates terms of a residential mortgage loan only
with or on behalf of an immediate family member will not be found
to be out of compliance with the SAFE Act merely because of such
exclusion. The MSL includes this exclusion in section XX.XXX.040(3)(b).
The commercial context implied by the taking of an "application"
is also absent where an individual seller provides financing to
a buyer pursuant to the sale of the seller's own residence. The
frequency with which a particular seller provides financing is so
limited that HUD's view is that Congress did not intend to require
such sellers to obtain loan originator licenses. Accordingly, state
legislation that excludes from licensing and registration requirements
an individual who offers or negotiates terms of a residential mortgage
loan only to the buyer or prospective buyer of the seller's residence
will not be found to be out of compliance with the SAFE Act. The
MSL includes this exclusion in section XX.XXX.040(3)(c).
Additionally, the definition generally would not apply to, for example,
a licensed attorney who negotiates terms of a residential mortgage
loan with a prospective lender on behalf of a client as an ancillary
matter to the attorney's representation of the client, unless the
attorney is compensated by a lender, mortgage broker, or other mortgage
loan originator or by an agent of such lender, mortgage broker,
or other loan originator. In such cases, the duties of loyalty,
competence, and diligence owed by the attorney to his or her client
are significant. HUD views the SAFE Act's requirements for registration
and licensing as not applying in this context, which is distinguished
from the commercial context contemplated in the SAFE Act. The MSL
includes this exclusion in section XX.XXX.040(3)(d).
C.
Definition of "Dwelling"
The SAFE Act's definition of "residential mortgage loan" includes
a loan secured by a consensual security interest on a "dwelling"
and cross-references the definition of dwelling in section 103(v)
of the Truth in Lending Act (TILA) (15 U.S.C. 1601 note).
Regulation Z, which implements TILA, defines dwelling to mean "a
residential structure that contains 1 to 4 units, whether or not
that structure is attached to real property. The term includes an
individual condominium unit, cooperative unit, mobile home, and
trailer, if it is used as a residence." (12 CFR 226.2(a)(19).) Since
both the SAFE Act and TILA address consumer protections for borrowers
in housing finance transactions, HUD finds that the same interpretation
applies under the SAFE Act. In addition, HUD interprets "mobile
home" to include a manufactured home, as defined in the National
Manufactured Housing Construction and Safety Standards Act of 1974.
(42 U.S.C. 5402(6).)
D.
Delayed Effective Date of Requirement to Obtain and Maintain a License
Under the SAFE Act, HUD may determine the acceptability of states'
licensing and registration systems and of their participation in
the NMLS as early as July 31, 2009, or July 31, 2010, as applicable.
As a result, states are facing tight deadlines before they must
enact legislation and implement systems to carry out licensing and
registration requirements. To meet the SAFE Act's licensing requirements,
NMLSR will have to develop tests and approve educational courses,
mortgage loan originators will have to comply with testing, education,
and bonding requirements, and states will have to evaluate the records
of thousands of applicants.
Although a state should enact legislation or promulgate regulations
by the applicable deadline, HUD's position is that Congress did
not intend for states to require all mortgage loan originators to
be licensed in accordance with the SAFE Act's standards immediately
upon enactment of the state's legislation or issuance of regulations.
Such a requirement could cause a massive disruption in the housing
finance industry at a time when millions of Americans may be seeking
to refinance their existing mortgages or to purchase a new home.
The ability of loan originators to facilitate such transactions
is critical to ameliorate the current conditions in the housing
market, but in many states, individuals currently performing loan
originations may not be able to meet the educational, testing, and
background check requirements by the time required legislation or
regulations become effective. In addition, HUD is aware that some
states already require licensure of loan originators, and that some
individuals in those states will hold licenses that do not expire
until as late as December 2010. Nonetheless, the provision for HUD
to enforce the SAFE Act's standards in any state that fails to implement
these standards reflects the underlying statutory concern that loan
originators who do not meet these standards pose a significant risk
to borrowers and the housing finance system. As a result, any period
during which loan originators may operate without a SAFE Act-compliant
license must be only as long as necessary for substantial numbers
of qualified loan originators to obtain licenses.
Accordingly, HUD will not determine that a state's legislation is
not in compliance with the SAFE Act merely because the legislation
or regulations provide for a reasonable period following enactment
for certain loan originators to be licensed under the new requirements.
Considering the education, testing, and background check standards
that license applicants must meet, HUD views a reasonable delay,
with respect to individuals who do not already possess a valid loan
originator license, is one which does not extend past July 31, 2010.
Such a delay generally provides one year from state enactment of
legislation for individuals to come into compliance with applicable
requirements. (HUD has determined that all state legislatures that
meet only biennially meet in 2009, which means that these states
will have the opportunity to enact SAFE Act compliant legislation
by July 31, 2009.) For individuals who possess licenses granted
under a system that was in place prior to the SAFE Act-compliant
system, HUD views a reasonable delay is one that does not extend
past December 31, 2010. This effective date will accommodate individuals
with two-year licenses that were granted or renewed as late as December
2008, and also synchronizes with the NMLSR's uniform annual license
expiration date of December 31. The MSL provides in section L26-(1)(2)
for these delayed effective dates for the state licensing requirement,
and provides that these effective dates could be further extended
only with HUD's approval. HUD may approve a later date only upon
a state's demonstration that substantial numbers of loan originators
(or of a class of loan originators) who require a state license
face unusual hardship, through no fault of their own or of the state
government, in complying with the standards required by the SAFE
Act to be in the state legislation and in obtaining state licenses
within one year.
E.
State of Licensure
Section
1504(a) of the SAFE Act prohibits an individual from "engag[ing]
in the business of a loan originator" without first obtaining a
registration or state license. HUD interprets this provision to
mean that an individual must comply with licensing and registry
requirements of a state in order to engage in the business of a
loan originator with respect to any residential property in that
state, regardless of whether the individual or the prospective borrower
is located in the state. This interpretation ensures that each state
is able to establish and enforce the provisions of its SAFE Act
licensing system and prevents an individual from circumventing a
state's requirements simply by physically locating outside of the
state and conducting business by telephone or other means. This
interpretation, however, does not affect the level of reciprocity
a state may grant to another state's determination that its own
SAFE Act-compliant licensing requirements have been met. This interpretation
promotes clarity by unambiguously determining which state's license
is required for a given transaction. The MSL incorporates this interpretation
in section XX.XXX.040(1).
F.
Felony Convictions
Section 1505(b)(2) of the SAFE Act provides that, to be eligible
for a license, an individual must not have been convicted of any
felony within the preceding seven years or convicted of certain
types of felonies at any time prior to application. Since the provision
is triggered by a conviction, rather than by an extant record of
a conviction, HUD interprets the provision to make an individual
ineligible for a loan originator license even if the conviction
is later expunged. Pardoned convictions, in contrast, are generally
treated as legal nullities for all purposes under state law and
would not render an individual ineligible. The law under which an
individual is convicted, rather than the state where the individual
applies for a license, determines whether a particular crime is
classified as a felony. The MSL clarifies that a pardoned conviction
does not render an individual ineligible for a license under section
XX.XXX.060(2)(c).
G.
Surety Bond
Section 1508(d)(6) of the SAFE Act provides that states must set
minimum net worth or surety bond requirements or establish a recovery
fund paid into by loan originators. HUD has determined that a state
may comply with the SAFE Act requirement by providing that, in the
case of a company that employs more than one loan originator, the
bonding requirement may be met at the company level. Individual
loan originators would not have to be bonded separately. The MSL
incorporates this interpretation in section XX.XXX.140(1).
FURTHER
INFORMATION CONTACT:
HUD
Office of Regulatory Affairs and Manufactured Housing
Department of Housing and Urban Development
451 Seventh Street, SW
Rm. 9162
Washington, DC 20410-8000
Telephone: (202) 708-6401
FAX: (202) 708-2678
Email: safeprogram@hud.gov
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