Origination News Feature Story

SAFE Act Confusion Seen by Attorney

By Jennifer Harmon

ALBANY, NY-There is growing confusion surrounding mortgage licenses affected by the SAFE Act, which allows states to enact their own requirements for granting a license to sell on top of what federal law already dictates, according to Deborah Robertson, an attorney with the law firm McGlinchey Stafford PLLC here.

So far, 26 states have put in place a licensing system for mortgage loan originators before the federal government's July 30 deadline under the Secure and Fair Enforcement for Mortgage Licensing Act, which is part of the Home Economic Recovery Act passed last July. In order to assist the states in getting these laws on their books quickly, HUD approved a Model State Law, which is making lenders scratch their heads and say, "Who is covered under this law?"

It is not clear how broad the Model State Law is intended to go to capture people who take applications. It has upset the retailers of manufactured housing and it has also upset mortgage servicers.

"Some states have taken the model law and haven't tried to co-mingle it with a current law but other states have incorporated it into their mortgage lender law and it's changing a lot of the definitions within their current law," says Ms. Robertson.

"That has created confusion as to who now is covered under the mortgage lender laws. For example, a loan originator is someone who takes an application or offers or negotiates a residential mortgage loan application. This is defined to include the word 'dwelling.'"

This is where manufactured housing comes in, she explains. "What's happening is when the states are incorporating this definition of residential mortgage loan into their mortgage lending laws, they are now including manufactured homes without regard to real estate."

The manufactured housing industry is concerned that lawmakers are including potentially the retail sellers of manufactured homes within the mortgage loan originator licensing requirements, because of the use of the word "dwelling."

"If they took your application for credit and submitted it to a finance company, and gave you the feedback from the company, that retailer is now a mortgage loan originator," said Ms. Robertson.

Under the SAFE Act, the definition of a loan originator is "someone who takes a residential mortgage loan application and offers or negotiates the term. The Model State Law took the 'and' out and put the 'or' in. That really opened the window and expanded the amount of people covered. What does 'take an application' mean? Does that mean, you are just handing it to me and I physically receive it? The problem is there's no guidance on that."

The Model State Law has also upset servicers, she says, because their employees help in workouts to modify loans. Loss mitigation specialists might have to be covered under this law, because they take applications to make a credit decision on the best way to help borrowers in default. "So now, every single person in the call center that helps becomes a mortgage loan originator. They have to be licensed."

No response has been published yet by the Conference of State Bank Supervisors, which has established a nationwide licensing system. It's HUD's job to implement that system. "HUD is quiet. I think they believe these MLOs have to be licensed to curtail the activity of the defaults." If some states fail to have a law in place by July 30, HUD steps in and will tell them what their law has to be. "I think every state has introduced legislation. I think we're going to make it," adds Ms. Robertson.

"I'm not certain they are going after the real fraudsters that they were probably intending to go after. This came into law after the bubble burst, and they were determining all these no-doc loans were being issued no-verifiable income. People were being given these unrealistic adjustable-rate mortgages. There was appraisal fraud, mortgage fraud, they had to try and regulate people that were not currently regulated, and really these were the only people left. Mortgage brokers and lenders are licensed. Servicers are licensed. These are all employees of the entities that are currently licensed."

She thinks the required education and testing elements under the SAFE Act are good for individuals if they are actually negotiating and assisting consumers with obtaining loans. "They should be knowledgeable. We should make sure people are getting into the right, affordable financing. I think 12 months was too short of a time (for states to create laws). Whether or not the electronic system is going to be able to handle everything in the next few months, I'm not sure."