On December 15, 2009, the U.S. Department of Housing and Urban Development (“HUD”) published the long-awaited proposed rule (“Proposed Rule”)[1] that would set the minimum standards that states must meet to comply with the federal Secure and Fair Enforcement Mortgage Licensing Act of 2008 (“SAFE Act”) in licensing loan originators.[2] (Note that the SAFE Act licensing requirements apply to individuals, not their employers.) This Proposed Rule also would set forth clarifications and interpretations of the SAFE Act that HUD previously provided to the public through published commentary. The rulemaking will be open to public comment for 60 days (until February 16, 2009).

Among the important clarifications that this rule proposes to make are definitions of what activities are included in “tak[ing] a residential mortgage loan application’’ and “offer[ing] or negotiate[ing] terms of a residential mortgage loan,” and what it means to do so “for compensation or gain.” The meanings of these terms largely determine whether or not a particular individual is subject to state loan origination licensing requirements – including mortgage servicers, loan modification specialists, and housing counselors.

To the extent an individual is not “taking a loan application” or “negotiating loan terms” with the prospective borrower, it is questionable that the person would be subject to the SAFE Act as enacted by Congress. But HUD views these terms broadly in the Proposed Rulemaking and, to date, some state laws (and the state regulators interpreting them) take a more stringent position. Moreover, HUD makes clear that its inclination is to require licensing – at least in certain instances – for activity related to loan modification and third-party loan modification specialists.

The application of SAFE Act-based state licensing and registration laws for loan originators to housing counselors would have massive and widespread adverse implications for the entire HUD-approved housing counseling industry. These new requirements would include unique, per-state licensing (of individual housing counselors), bonding, pre-licensing educational courses, testing, educational requirements, advertising restrictions, disclosures, application fees, and more. Some of these requirements would have no immediate relevance to the work of housing counselors or would overlap with existing HUD requirements.

The SAFE Act and the related state laws and regulations enacted may inadvertently and unintentionally result in an entirely new, burdensome, unwieldy, and costly regulatory structure on the nonprofit housing counseling industry (already underfunded and highly regulated) and its individual counselors. Moreover, there is concern that if licensing obligations were applicable to housing counselors, the requirements could severely impact the overall success of the U.S. Department of Treasury’s Making Homes Affordable program and other government-promoted solutions to the nation’s housing crisis.

While HUD does not interpret individual state laws and only sets the minimum requirements for loan origination licensing laws, HUD is positioned to assess state compliance with the requirements of the SAFE Act and propose interpretations. Further, HUD has previously issued commentary of its interpretation of certain “key” provisions in the SAFE Act and the model legislation – virtually all of which would be adopted with the Proposed Rule.

I. Background.

A. Generally.

The SAFE Act was enacted as part of the federal Housing and Economic Recovery Act of 2008.[3] The SAFE Act directs states to adopt licensing and registration requirements for loan originators that meet the minimum standards specified in the SAFE Act in lieu of HUD establishing and maintaining a licensing system for loan originators.

The SAFE Act requires all 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. HUD may grant an extension of 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. The SAFE Act requires state statutes to require originators to become licensed, take an education course, pass a test, and undergo civil, criminal and financial background checks.

If HUD determines that a state’s mortgage loan origination licensing standards do not meet the minimum requirements of the statute, HUD is charged with establishing and implementing a system for all mortgage loan originators in that state. Additionally, if HUD determines that the nationwide mortgage licensing system and registry is failing to meet the SAFE Act’s requirements, HUD is charged with establishing and maintaining a licensing and tracking system for mortgage loan originators.

B. Model State Legislation and Licensing Program.

The SAFE Act also encourages the Conference of State Bank Supervisors (“CSBS”) and the American Association of Residential Mortgage Regulators (“AARMR”) to establish a nationwide mortgage licensing system and registry (“NMLSR”) for the residential mortgage industry for the purpose of providing: (1) uniform state-licensing application and reporting requirements for residential mortgage loan originators, and (2) a comprehensive database to find and track mortgage loan originators licensed by the states and mortgage loan originators who work for federally-regulated banks. Loan originators who are employees of federally-regulated depository institutions and their subsidiaries are required to register through the NMLSR, but are not subject to state licensing requirements.

The SAFE Act requires HUD to establish: (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 NMLSR established by CSBS and AARMR is not SAFE Act-compliant; (3) the minimum requirements for the administration of the NMLSR; and (4) HUD’s enforcement authority if it operates a state licensing system.

Shortly after the passage of the SAFE Act, the NMLSR, CSBS and AARMR developed model legislation to aid and facilitate states’ compliance with the requirements of the SAFE Act. Because overall responsibility for interpretation, implementation and compliance with the SAFE Act rests with HUD, CSBS and AARMR requested that HUD review the model legislation, and advise of its sufficiency in meeting applicable minimum requirements of the SAFE Act. HUD reviewed the model legislation and advised the public that the model legislation offers an approach that meets the minimum requirements of the SAFE Act.[4] As a result, states that adopt and implement a state licensing system that follows the provisions of the model legislation, whether by statute or regulation, will be presumed to have met the applicable minimum requirements of the SAFE Act.

C. HUD's Commentary and FAQs.

In early 2009, HUD presented its views and interpretations of certain statutory provisions in the form of “Commentary” published on HUD’s website and in the Federal Register.[5] More recently, HUD posted responses to frequently-asked questions about the SAFE Act on its website.[6]

D. Banking Agencies Take Their Own Approach.

The Office of the Comptroller of the Currency, Federal Reserve Board, Federal Deposit Insurance Corporation, Office of Thrift Supervision, Farm Credit System (“FCS”), and National Credit Union Association (collectively, the “Banking Agencies”) have adopted their own final rules to implement the SAFE Act.[7] The SAFE Act requires an employee of a bank, savings association, credit union, or FCS institution and certain of their subsidiaries who acts as a residential mortgage loan originator to register with the NMLSR.

The Banking Agencies’ final rule tracks the definitions of the SAFE Act, but offers significant commentary and notable examples of when a person is or is not acting as a loan originator that would trigger the registration obligation.

The Banking Agencies’ draft final rule states, in relevant part:

[T]he Agencies conclude that the SAFE Act’s definition of ‘mortgage loan originator’ generally would not include employees engaged in loan modifications or assumptions because they typically would not meet the two-prong test of this definition. However, if an employee engaged in a transaction labeled a loan ‘modification’ or ‘assumption’ can be found to meet the definition of ‘mortgage loan originator,’ due to the nature of the specific transaction in question, he or she would be subject to the SAFE Act and this final rule. The substance of a transaction, not the label attached to it, is determinative of whether the Agency-regulated institution employee associated with it is a mortgage loan originator for purposes of this rule.[8]

In addition, the Banking Agencies provide an appendix of examples. For example, the draft final rule states that offering or negotiating terms of a loan does not include:

Collecting information about a consumer in order to provide the consumer with information on loan products for which the consumer generally may qualify, without presenting a specific loan offer to the consumer for acceptance, either verbally or in writing.[9]

With that said, it is important to underscore that, while not irrelevant, the federal Banking Agencies’ interpretation and final rule are not at all binding on HUD or non-Banking Agency institutions. In addition, as described below HUD has taken a different approach than the Banking Agencies. Significantly, HUD has not expressly proposed to adopt examples of when a person is or is not acting as a loan originator that would trigger the registration obligation. HUD also has concluded it would generally cover loan modification activity, which is different than the approach outlined in the Banking Agencies’ draft final rule.

II. The Proposed Rule.

Highlights of the Proposed Rule include:

  • Engaging in the Business of Loan Origination and State Licensure. Consistent with Section 1504(a) of the SAFE Act, Section 3400.103 of the Proposed Rule provides that an individual must comply with a state’s licensing and registry requirement in order to engage in the business of loan origination with respect to any residential property in that state. In addition, consistent with section 1503(3)(A)(ii) of the SAFE Act, this section makes clear that a person who performs only “administrative and clerical tasks” does not “engage in the business of a loan originator.” [10] In particular, as the Proposed Rule states, clerical or support duties include:

(i) The receipt, collection, distribution, and analysis of information common for the processing or underwriting of a residential mortgage loan; and (ii) Communicating with a consumer to obtain the information necessary for the processing or underwriting of a loan, to the extent that such communication does not include offering or negotiating loan rates or terms, or counseling consumers about residential mortgage loan rates or terms.[11]

Thus, consistent with section 1503(3)(A)(ii) of the SAFE Act, this section makes clear that a person who performs only “administrative and clerical tasks” does not “engage in the business of a loan originator.” [12]

  • “Taking an Application.” 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.” The Proposed Rule would incorporate in section 3400.23 the interpretation of “application” provided in HUD’s Commentary. The Commentary stated that “application” includes 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.[13] The Proposed Rule also would incorporate Commentary that states the phrase “tak[ing] an application” means 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.” [14]

In addition, the Proposed Rule states that HUD views the term “takes a residential mortgage loan application” [15] to exclude an individual whose only role with respect to the application is physically handling a completed application form or transmitting a completed form to a lender on behalf of a prospective borrower.

  • Offering or Negotiating. Like HUD’s views on the term “loan originator,” HUD states that it views the terms “offers or negotiates” broadly. “HUD views these terms as encompassing interactions between an individual and a borrower where the individual is likely to seek to further his or her own interests or those of a third party.”[16] Further, HUD “proposes to clarify that ‘offers or negotiates’ includes actions by an individual that make a prospective borrower more likely to accept a particular set of loan terms or an offer from a particular lender, where the individual may be influenced by a duty to or incentive from any party other than the borrower. Such actions may have the same effect on the borrower’s decision as overt negotiations, but without the borrower’s knowledge or understanding that other options may be available.”[17] HUD indicates that examples it views as negotiation include “a contingent payment, a contractual duty to recommend one lender or product, or a pattern of steering to a lender that provides grant funding to the steering housing counselor.”[18]  
  • “For Compensation or Gain.”[19] HUD proposes that the terms “for compensation or gain” are to be broadly defined and would include any circumstances in which “an individual receives, or expects to receive, anything of value in connection with offering or negotiating terms of a residential mortgage loan.” HUD makes clear that “these terms would not be limited to payments that are contingent upon closing of a loan.” [20]  
  • Individuals Not Subject to Licensing Requirements.[21] HUD proposes that taking an “application” would involve a commercial context and that issues such as frequency would be important considerations. In addition, HUD states the definition of loan originator generally would not apply to, for example, a licensed attorney who negotiates the terms of a residential mortgage loan with a prospective lender on behalf of a client as an ancillary action to the attorney’s representation of the client.  
  • Loan Origination.[22] HUD’s inclination is to require licensing, as loan originators under the SAFE Act, of individuals who perform loan modifications that involve the offering or negotiating of loan terms that are materially different from the original loan. HUD first addressed this issue in a FAQ section on its website concerning the SAFE Act. According to HUD:

Today’s loan modifications may include an increase or decrease in the interest rate, a change to the type of interest rate (e.g., fixed rate versus adjustable rate), an extension of the loan term, an increase or a write-down of the principal, the addition of collateral, changes to provisions for prepayment penalties and balloon payments, and even a change in the parties to the loan through assumption or the addition of a co-signer.[23]

In addition, HUD describes the activities of loan servicers of existing loans as “virtually indistinguishable from the performance of a refinancing, which is unambiguously covered by the SAFE Act.” Thus, HUD states it “is inclined to include in its definition of a loan originator, which is being developed through this rulemaking, 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.” [24] Further, HUD notes that loan servicers respond to modification requests with “much of the same, if not exactly the same, information necessary in an application to refinance a mortgage or obtain a new loan, and the loan servicer offers or negotiates the terms of the modification with the borrower.”

To assist with HUD’s consideration and resolution of this issue, HUD specifically invites submission of views on:

  • “[A]ny mandatory licensing provisions, quality controls, and training requirements that are already applicable to servicers, and on whether such measures provide protections for consumers that are equivalent to those under the SAFE Act.” [25]  
  • What, if any, characteristics of a modification should be used to classify the modification as so immaterial that it should not be covered by the SAFE Act. [26]  
  • Whether, if SAFE Act licensing of loan servicers is required at HUD’s final rule stage, the rule should provide for an extension of the licensing deadline for individuals performing modifications only under the federal government’s Making Home Affordable program. HUD is interested in whether, by granting an extension of time under this limited set of circumstances, states could be assured that consumers working with unlicensed individuals are still provided strong protections from fraud and abuse. Such an extension would be in addition to the reasonable delays that states may provide to all individuals, in accordance with the guidance provided in HUD’s Commentary.[27]
  • “Taking a residential mortgage loan application OR offering or negotiating.” [28] Several states have opted to enact legislation defining a loan originator as an individual who takes a residential mortgage loan application or who offers or negotiates the terms of a residential mortgage loan for compensation or gain. HUD has determined that the model state law developed by CSBS and AARMR, which contains this definition of loan originator, meets the minimum requirements of the SAFE Act. Therefore, since an individual performing a loan modification almost certainly offers or negotiates the terms of a residential mortgage loan, there could be coverage under one or more of these state laws irrespective of HUD’s view. Thus, HUD states, “[a]lthough HUD is requesting the submission of views on whether it will require states to cover such individuals, HUD’s view is that the decisions of those states to cover such individuals are fully consistent with the SAFE Act and that, in any case, states are free to exceed the standards required by HUD.” [29]  
  • Third-Party Loan Origination Consultants.[30] It is HUD’s view that third-party loan modification specialists should be covered by the licensing requirements of the SAFE Act. In this regard, HUD specifically requests comment on the following issues:
    • Whether third-party loan modification specialists should be covered by the definition of loan originator and, consequently, be subject to the licensing and registration requirements of the SAFE Act.  
    • Whether third-party loan modification specialists should be covered by the definition of loan originator and, consequently, be subject to the licensing and registration requirements of the SAFE Act.  
    • What specific functions performed by third-party loan modification specialists should be characterized as equivalent to the functions of a loan originator that are covered by the SAFE Act.

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The foregoing regulatory developments, as well as continuing legislative developments (especially at the state level for loan origination licensing and related areas), may present significant challenges for HUD-approved housing counselors and other involved in loan modifications. Moreover, HUD-approved housing counseling agencies that modify their foreclosure prevention housing counseling model in response to changes in the Obama administration’s and loan servicers’ plans to assist distressed borrowers, should continually reevaluate their SAFE Act licensing obligations.

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Comments from the public will be accepted by HUD through February 16, 2009.