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State Developments: SAFE and More

State Developments: SAFE and More Kris D. Kully, Esq. K&L Gates, LLP Washington, DC State Developments – SAFE and More Nationwide Mortgage Licensing System (January 2008) Reduce regulatory burden on multi-state companies Uniform data (MU Forms) Improved communication among regulators

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State Developments: SAFE and More

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  1. State Developments: SAFE and More Kris D. Kully, Esq. K&L Gates, LLP Washington, DC

  2. State Developments – SAFE and More • Nationwide Mortgage Licensing System (January 2008) • Reduce regulatory burden on multi-state companies • Uniform data (MU Forms) • Improved communication among regulators • More efficient use of resources • Keep bad actors out of the state system • Modeled after registration of securities/investment advisors • Voluntary state participation . . . • Recently: course providers, testing outlines

  3. State Developments – SAFE and More • Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act) • Signed into law on July 30, 2008 • Establishes federal minimum standards for licensing and registration for individual "loan originators" • State licensing and registration of state loan originators; registration of financial institution loan originators. Must be one or the other. • NMLSR • HUD: Determines whether state system of licensing complies with SAFE Act (in accordance with statutory standards). If not, then HUD licenses/regulates in that state. Deadline: July 31, 2009 (unless extended).

  4. State Developments – SAFE and More • Model State Law: To assist states, CSBS/AARMR drafted and distributed to state regulators a model law. • HUD determined Model State Law satisfies the minimum requirements of the SAFE Act. • Deadlines: HUD has not extended the date by which each state must implement SAFE Act, but has agreed to delay the date by which loan originators must be licensed under state’s SAFE Act compliant law. • States are beginning to implement SAFE Act (Model State Law).

  5. State Developments – SAFE and More • Uniformity? • Not a single national license. Will likely need a separate license in each state (and/or possibly a HUD license). • HUD’s backup licensing authority does not displace state authority – An LO licensed in a state without a SAFE Act compliant licensing law would need both a state license and a HUD license. • Does not mandate licensing of entities engaged in mortgage finance activities – an LO employee of a broker or lender must be licensed/registered, but licensing of the broker or lender may not be required (exempt). • Registration of LO employees of depository institutions/subsidiaries by federal banking agencies = unknown. • But, Model State Law provides for states to recognize reciprocity for prelicensing and continuing education.

  6. Loan Originator = Individual who takes a residential mortgage loan application and offers or negotiates terms of a residential mortgage loan for compensation/gain. (Model State Law uses “or.”) • SAFE Act Excludes: (i) Individual performing purely administrative or clerical tasks on behalf of a loan originator; (ii) Person/entity only performing real estate brokerage activities and is licensed or registered in accordance with applicable state law, unless compensated by a lender/mortgage broker/loan originator/agent; or (iii) Person/entity solely involved timeshare extensions of credit. • Model State Law Also Excludes: (i) Individual acting on behalf of an immediate family member; (ii) Individual in connection with individual’s own dwelling; (iii) Licensed attorney, ancillary to attorney’s representation, unless compensated by a lender/mortgage broker/loan originator/agent (as well as “registered mortgage loan originators”). • Although the additional exempt classes of individuals are not exempt under the SAFE Act, HUD approved these exemptions through its endorsement of the Model State Law.

  7. State Developments – SAFE and More • Servicing Activities – Loan Modifications? • Making Home Affordable/Home Affordable Modification Program (HMP) • Documented financial hardship • Determination of imminence of default (debt, cash reserves) • Pull credit report • Current mortgage payment ratio • Servicer discretion when borrower in bankruptcy • Property valuation • Verifying income & occupancy status • Model State Law working group considered excluding certain servicing individuals, but did not send that version to HUD. • CSBS/AARMR petitioned HUD for clarification and to recognize a delayed effective date (July 31, 2011, or later) to license loss mitigation specialists working for servicers.

  8. State Developments – SAFE and More • SAFE Act Implementation • To date, approx. 18 states have enacted SAFE Act legislation (AR, DC, GA, ID, IA, KS, KY, MD, MS, NE, NM, ND, SD, UT, VA, WA, WI, and WY). • Legislation has been introduced in approx. 26 other states. • Most states have adopted Model State Law, particularly in connection with broader definition of “loan originator.” • Very few states expressly exclude servicer employees conducting “loss mitigation” activities (IA, MD, VA). In a few other states, not an express exclusion, although arguments can be made. • However, two states (WA, WV-if enacted) would affirmatively include loss mitigation employees, after a delayed effective date (July 1, 2011). • It is unclear if HUD will find state laws that exclude servicing personnel from loan originator licensing to be SAFE Act compliant or agree to this delayed effective date to license loss mitigation specialists.

  9. State Developments– SAFE and More • Registered Loan Originator • Individual who meets the definition of loan originator • Is an employee of: (i) a depository institution; (ii) a subsidiary that is owned and controlled by a depository institution and regulated by a federal banking agency; or (iii) an institution regulated by the Farm Credit Administration; • Is registered with, and maintains a unique identifier through, the NMLSR. • Model State Law – exempts mortgage loan originators working on behalf of one of those entities, and who are registered.

  10. State Developments– SAFE and More • SAFE Act Implementation by Federal Banking Agencies • Must jointly develop and maintain a registration system with the NMLSR.  • Deadline: July 31, 2009. No backup authority. Failure to meet deadline affects ability to act as loan originator, as well as exemption from state/HUD licensing (although preemption under other federal law for certain LOs). • “And” versus “Or.” • “Employee” not defined. Federal banking agencies may seek to define broadly to include agents.

  11. State Developments– SAFE and More • “Residential Mortgage Loan” • SAFE Act defines essentially as any dwelling secured loan primarily for personal, family, or household use. (Model State law adopts that definition.) • May mean expansion of licensing obligation (for loan originators, brokers, lenders, etc.) in those states that restricted their definition to owner-occupied property. • Geographical limitations: SAFE Act/Model State Law do not address (i.e., don’t limit to properties located in state); however, some states are enacting such a limitation.

  12. State Developments – SAFE and More • Requirements and Qualifications for State Licensees: • State and national criminal history background check/fingerprints • Never had a loan originator license revoked in any governmental jurisdiction • No conviction of, or plea of guilty or nolo contendere to, a felony during the prior 7-year period, or at any time if felony involved fraud, dishonesty, breach of trust, or money laundering • Financial responsibility, character, and general fitness • Pre-licensing education (20 hrs.) • Written examination (75%) • Net worth/surety bond/state fund • Continuing education (8 hrs.) • NMLSR to approve all education and testing of state licensed loan originators

  13. Oversight and Enforcement • Under compliant SAFE Act state law, state agency has supervision and enforcement authority. • If a state and its loan originators are subject to HUD licensing, HUD has examination and enforcement authority, AND state also has examination authority. • For registered loan originators, apparently federal banking agencies have examination and enforcement authority.

  14. State Developments – SAFE and More • Effective Dates • Must have compliant law by July 31, 2009 • Bills enacted so far typically become effective July 1, 2009 • Bills enacted so far typically require LO license by January 1, 2010 or July 31, 2010 (or in some states that already license originator individuals, must otherwise comply with SAFE Act requirements by January 1, 2011).

  15. State Developments – SAFE and More • Third-Parties Engaging in Loan Modification/Loss Mitigation: • Contact consumers to advise them of options • Take income information from the borrower • Assist in negotiating the terms • Certain states have been notifying these vendors that a licensing or registration obligation may arise (unless exempt) • Licensing obligation may arise as the following, depending on exact scope of activities (although certain contrary arguments are available): • Broker/lender/servicer • Credit services/repair organization • Collection agency • Debt adjuster/manager • Escrow agent • Foreclosure consultant • Real estate broker

  16. Kris Kully, Esq. K&L Gates, LLP Kris.kully@klgates.com (202) 778-9301

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