January 7, 2009

On December 30, 2008, the U.S. Department of Housing and Urban Development (HUD) issued its analysis and approval of the CSBS/AARMR Model State Law (MSL), making it clear that it perceived its authority under the Secure and Fair Enforcement for Mortgage Licensing Act of 2009 (SAFE Act) as having the “overall responsibility for interpretation, implementation, and compliance with the SAFE Act”.

While it found that the MSL meets the minimum standards of SAFE, and noted that a state can exceed them, it cautioned that state legislation exceeding SAFE standards cannot impose requirements that frustrate the objectives of SAFE (the ten objectives are listed in the memo). In this regard, HUD singled out SAFE’S objective of providing a “comprehensive licensing and supervisory system with uniform application and reporting requirements”. This seems to be clear notice to the states that HUD would not look favorably on standards or requirements that undermine the concept of uniformity inherent in SAFE and the MSL. This raises one obvious question as to what a state can do if it wants to add educational or testing requirements to those in the minimum standards.

HUD devotes a significant part of the memo on the definition of “loan originator”. This was necessary because SAFE defined the loan originator as one who takes the application “and” “offers or negotiates terms of a residential mortgage loan”. CSBS and AARMR were justifiably concerned that by having one employee take the application and another negotiate with the borrower, a company could avoid licensing a loan originator and therefore substituted the word “or” for “and” in the MSL. HUD deals with this very directly and concludes that an individual is included in the loan originator definition whether or not he/she directly takes the “application”, which HUD interprets as including any request from a borrower for an offer for a residential mortgage loan. Since one can’t offer or negotiate loan terms without receiving a request from a borrower (including a response to a solicitation), even if the request were indirectly communicated to an individual who negotiates the loan terms, he/she would be a “loan originator” under SAFE. Therefore, the license cannot be avoided by having a different individual take the loan application! 

The MSL, as indicated, simply changed the word “and” to “or” which achieves the same result but would be unnecessary given HUD’s opinion. HUD does indicate that a loan originator license is not needed if the individual is performing “purely administrative or clerical tasks such as physically handling a completed application form or transmitting it to a lender”. While the taking of an application itself would, under the MSL, require a license because of the use of the word “or” rather than “and”, the memo is less than clear on what activity HUD would consider as “taking an application” in order to trigger the need for a license under the MSL.

HUD also advises that the definition of a “residential mortgage loan” which is subject to the Act includes a security interest on a “dwelling” as defined in Reg Z, that includes 1 to 4 units whether or not attached to real property thereby including condo’s, coop’s, mobile homes and trailers that are used as residences.

HUD notes that while the license law in state’s like New Jersey and Pennsylvania must be in place by July 31, 2009, the loan originators don’t have to be licensed before July 31, 2010 ( individuals who are not already licensed as loan originators). If individuals were already licensed prior to the SAFE Act- compliant system, they don’t have to be licensed under the Act until December 31, 2010.  These dates can be extended by HUD where a substantial number of loan originators would face unusual hardship. 

It is made clear that a loan originator must be licensed in the state in which the residential property involved is located regardless of the state in which the borrower or loan originator is located.

With regard to felony convictions, an individual is ineligible for a loan originator license even if the conviction is later expunged. That is not the case if the individual is pardoned.   The law of the state where the individual is convicted controls whether a particular crime is considered a felony (not the state where the license application is made).

HUD also confirms that if a company employs more than one loan originator, a bonding requirement can be met by the company’s bond rather than by bonding each loan originator.

We will keep members informed of any further developments.