Over the last several months, states have been working on legislation to comply with the SAFE Act. With the July 31 deadline now behind us, 49 states (all but California and Minnesota) have implemented new licensing standards for individual “mortgage loan originators.” The majority of these states have adopted licensing requirements that capture employees of mortgage loan servicers who engage in loan modification activities. Thus, as mortgage loan servicers are under pressure to modify more mortgage loans, their efforts may be slowed in the coming year as they deal with the challenge of having employees licensed and tested. Moreover, most states impose stiff civil and criminal penalties for failure to comply with the new licensing requirements. For instance, in Pennsylvania, any person who fails to obtain the appropriate license may be liable for a civil penalty of up to $10,000 for each offense and may be found guilty of a felony of the third degree, which is punishable by a fine of up to $15,000 and/or imprisonment for up to seven years. Therefore, mortgage loan servicers must carefully consider their licensing obligations in order to avoid liability in the wake of the recent state SAFE Act legislation.
Of the 49 states that have implemented new mortgage loan originator licensing requirements, all but two states have adopted a definition of “mortgage loan originator” that is functionally equivalent to the HUD State Model Law definition of “mortgage loan originator.” The HUD State Model Law defines “mortgage loan originator” as an individual who for compensation or gain or in the expectation of compensation or gain, takes a residential mortgage loan application or offers or negotiates terms of a residential mortgage loan. Although loan modifications typically involve workouts with borrowers on terms that are more favorable than the existing loans and are designed to enable the borrowers to retain their homes, HUD has taken the position that an application for and negotiation of a loan modification resembles a mortgage loan application, thus triggering a licensing requirement.
Notwithstanding HUD’s position, many states tried to create exemptions or delayed effective dates for employees of loan servicers.
Mississippi and Kansas adopted definitions of “mortgage loan originator” that are not intended to capture mortgage loan servicers. Mississippi adopted the “conjunctive” federal SAFE Act definition that requires a license for originators who take applications and offer or negotiate terms of residential mortgage loans. Although Mississippi may have attempted to avoid licensing for employees of servicers, HUD will still likely view Mississippi as a state requiring servicer employees to be licensed. On the other hand, in Kansas, the definition of “mortgage loan originator” is limited to individuals who have contact with borrowers during the loan origination process. Because servicers engaged in loss mitigation activities typically do not have contact with borrowers until after the loan closes, it appears that such servicers would not be subject to mortgage loan originator licensing requirements in Kansas.
There are 16 states (AL, CO, CT, IA, LA, MD, MI, MT, NV, NC, OH, PA, SC, VA, WA, and WV) that adopted some form of exclusion or exemption for persons engaged in loss mitigation activities. The states adopting some form of an exclusion or exemption for persons engaged in loss mitigation activities did so by: (1) Adopting a clear exclusion or exemption for individuals engaged in loss mitigation activities; (2) Adopting a conditional exemption pending any determination by HUD, a state regulator, or a court, that such exemption is not consistent with the federal SAFE Act; (3) Adopting a delayed implementation period for the licensing requirements with respect to persons engaged in loss mitigation activities; or (4) Adopting a conditional delayed implementation period pending a determination by HUD, a state regulator, or a court, that such delayed implementation is not consistent with the federal SAFE Act.
Six states (CO, CT, IA, MD, NV, and VA) have adopted an express exemption for individual servicers engaged in certain loss mitigation activities. The specific nature of the exemption differs in each of the states. For example, in Colorado, the exemption broadly applies to individuals “servicing a mortgage loan,” while in other states, such as Connecticut, the exemption is limited to individuals who “solely renegotiate terms for existing mortgage loans.” Servicers must look to the specific state law to determine whether, based on their servicing activities, they may take advantage of an exemption. Nevertheless, it seems clear in these states that the legislatures intended to exempt certain mortgage loan servicers from the individual mortgage loan originator licensing requirements.
Five states (LA, MT, NC, PA, and WV) have included a conditional exemption for individual servicers engaged in certain loss mitigation activities. In these states, such individuals will not be subject to licensing unless HUD, a state regulator, or a court determines that the federal SAFE Act requires those employees to be licensed as mortgage originators under state law.
Two states (AL and WA) have adopted a delayed implementation period for the mortgage loan originator licensing requirements with respect to individual servicers engaged in certain loss mitigation activities until July 2011. Each state defines the categories of persons subject to the delayed implementation period slightly differently. Therefore, as noted above, servicers must look to the specific state law to determine whether they are subject to the delayed implementation period.
Finally, three states (MI, OH, and SC) have included a conditional delayed implementation period for individual servicers engaged in certain loss mitigation activities. In these states, such individuals will be subject to the delayed implementation period unless HUD, a state regulator, or a court determines that the federal SAFE Act requires those employees to be licensed as mortgage originators under state law.
All of this means that individual employees of mortgage loan servicers engaged in loan modifications are subject to the SAFE Act licensing requirements in at least 31 states, without question. The looming question is whether HUD will issue regulations mandating that employees of servicers engaged in loan modifications obtain a license, thereby negating the exemptions or delayed effective dates in place in the 16 states discussed above. The answer seems to be heading toward “yes.” In a recently issued response to a Frequently Asked Question about whether the SAFE Act licensing requirements apply to individuals who perform loan modifications for loan servicers that modify existing loans, HUD stated that it “is generally inclined to provide in rulemaking that the SAFE Act’s definition of loan originator covers 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, and that such individuals are subject to the licensing and registration requirements of the SAFE Act.” HUD’s response is consistent with what we have heard regarding HUD’s intent to adopt a rule requiring coverage of such individuals. If HUD adopts regulations requiring coverage of employees engaged in loan modifications, the states may be forced to amend their laws or enforce HUD’s view.
So how much time do employees of servicers have to get licensed? In some states, there is no time at all (e.g., in AR, NH, and OR, the new licensing requirements have already taken effect). However, in most states, employees of servicers will have until July 2010 to get tested and obtain licenses. The hope is that HUD will quickly issue regulations that will either allow an exemption for employees of servicers or delay the effective enforcement so that loan servicers can devote as many resources as possible to modifying loans during this critical time rather than diminishing resources with new and onerous licensing requirements.
Catharine S. Andricos is an associate in the Washington, D.C., office of Hudson Cook, LLP. Basis Points readers can reach Catharine at 202-327-9706 or by email at candricos@hudco.com.