On the heels of my article in the inaugural (May) issue of Basis Points concerning the unintended consequences of reregulation in the form of the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 or “SAFE Act,” I received an email from a concerned reader pointing out that I had not mentioned the uneven playing field for the distinct categories of loan processors and underwriters delineated in the SAFE Act. The reader’s point is well-taken. While the playing field for loan processors and underwriters may be smaller than the playing field for mortgage loan originators, the inequities are nevertheless as glaring, and the burdens are no less onerous.
Under the SAFE Act and the model state law approved by the United States Department of Housing and Urban Development, a “loan processor or underwriter” is, generally, an individual who performs clerical or support duties at the direction of and subject to the supervision and instruction of either a state-licensed loan originator or a registered loan originator. Those clerical or support duties include: (1) the receipt, collection, distribution, and analysis of information common for the processing or underwriting of a residential mortgage loan; and (2) 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. Although the tasks, functions, and restrictions for all loan processors and underwriters are the same, it makes a significant difference when a loan processor or underwriter is classified as an employee, as opposed to an independent contractor.
Specifically, the SAFE Act provides an exemption from state licensing or registration requirements for “supervised” loan processors and underwriters – the term “supervised” is not defined in the SAFE Act, but in light of the alternate loan processor and underwriter classification, it should be interpreted to mean an employee or co-employee of a state-licensed loan originator. However, the SAFE Act does not exempt from state licensing or registration requirements an individual who is an independent contractor and acts in the capacity of a loan processor or underwriter. The model state law similarly requires state-licensing of loan processors and underwriters only when they are employed as independent contractors. The licensing requirement, of course, means that independent contractors performing loan processing or underwriting functions must undergo the same background checks, undertake the same rigorous pre-licensing educational classes, pass the same standardized national test, complete the same regular continuing education courses, and satisfy a state’s financial responsibility requirements, which may include the posting of a bond, that are applicable to individuals who actually take residential mortgage loan applications and/or offer or negotiate the terms of a residential mortgage loan. This is true even though loan processors and underwriters do not, and cannot, perform those loan originator functions under their defined meanings in the SAFE Act and model state law.
The state licensing requirement for independent contractors who perform loan processing and underwriting functions will impact not only the mortgage bankers that rely on third party firms to provide such services, including, among others, contract underwriters provided by mortgage insurance companies and vendors providing back-office processing and underwriting support for mortgage bankers with a temporary need, but more significantly, will impact the service providers themselves in terms of increased operating costs and cumbersome geographic restrictions. For example, independent vendors who provide loan processing support to mortgage bankers will be required to license their loan processing staff in each state in which a property that is the subject of a residential mortgage loan application is located. Likewise, multi-state lenders that periodically use independent contractors in times of high volume loan application activity will likely be obligated to engage more independent contractors than previously needed to make certain that loan processing and underwriting tasks are assigned by state and only to such loan processors and underwriters that are duly licensed in a particular state.
While it is wholly unclear to me why the SAFE Act and model state law distinguish between loan processors and underwriters who are employees versus independent contractors – particularly when both are required to perform their duties at the direction of and subject to the supervision of state-licensed or registered loan originators – the effect of the distinction is certainly that smaller-sized mortgage bankers, who cannot maintain the overhead of permanent employees, will become less competitive in the market, and that vendors’ costs of compliance with the licensing requirements will ultimately be passed on to consumers resulting in an increase in mortgage loan origination fees and costs.
Dana Frederick Clarke, is a partner in the California office of Hudson Cook, LLP. Basis Points readers can reach Dana at 310-349-8433 or by email at dclarke@hudco.com.