On December 15, 2009, HUD published a proposed rule implementing and interpreting certain statutory provisions of the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (the “SAFE Act”). Not surprisingly, in the Supplementary Information, HUD has re-stated its position (as previously published in its SAFE Act FAQs) that “an individual who performs a residential mortgage loan modification that involves offering or negotiating loan terms that are materially different from the original loan” must be licensed as a loan originator. In effect, it seems that the proposal would require virtually all employees working on loan modifications to be licensed under the SAFE Act.
At this point, it is clear that HUD does not intend to adopt a blanket exclusion for employees of mortgage servicers performing loss mitigation activities, as some states have done. HUD has, however, presented an opportunity for mortgage servicers to identify “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.” There are two important things that a servicer may want to consider in preparing comments on this point: (1) what activities do the employees perform that will have no effect on the ultimate terms of the modification; and (2) what terms would objectively benefit the borrower so that the protections for which the licensing requirement exists would not come into play?
Servicers may want to point out that there are critical contacts before a borrower can be qualified for a loan modification that do not fit within the definition of accepting an application or negotiating terms (and note that these activities may already be excluded by the current definition). For example, as part of its outreach efforts, the servicer will want to advise the borrower about available loss mitigation options; the servicer may request preliminary information about the borrower, the borrower’s ability to pay and the status of the loan. A servicer may send information to a borrower, and the borrower will need to return information before the terms of a modification can be established. A servicer will need to review and obtain missing information before a borrower can be fully considered for a loan modification. It should be clear that none of these activities would trigger a licensing requirement.
Servicers may also want to seek an exemption for modifying the terms of a loan in such a way that it could not be considered detrimental to a borrower – and thus would be objectively beneficial even if materially different. Some examples include reducing the interest rate, waiving fees, eliminating prepayment penalties, and reducing principal.
Servicers may also want to consider requesting a licensing exemption for employees performing modifications under Treasury’s Home Affordable Modification Program (“HAMP”) rather than simply delaying enforcement until July or December 2010. Under HAMP’s stringent guidelines, servicers’ employees are required to follow a waterfall process in order to modify the loan. The employees do not have the discretion to skip steps in the waterfall process. There is no evidence that servicers can defraud borrowers when they follow the HAMP guidelines. As such, there is no need to license employees while the servicer is acting under a government mandate to modify as many loans as quickly as possible.
Finally, one important thing to keep in mind is that HUD’s position, with respect to employees of servicers engaged in loan modifications, is grounded in an assumption that the activities that result in a modification are virtually indistinguishable from those that result in a refinancing. This assumption may be based on an understanding that the process under new programs for modifications is more formal now and, therefore, may more closely resemble the origination process. However, even if the process is similar, the two activities and level of risk are substantially different—a loan modification is clearly distinguishable from a refinancing. First, a refinancing results in a new loan for the borrower and requires comprehensive underwriting, which includes an assessment of the borrower’s financial condition as well as the value of the property. A refinancing may involve payment of points, fees, and closing costs. In contrast, a modification does not involve new funds, and the terms are modified at the request of a borrower who cannot afford to pay according to the terms of an existing loan agreement. When a loan is modified the borrower does not pay points or closing costs. Moreover, when a potential borrower contacts a lender about a refinancing, the lender’s employees have discretion to direct the borrower to different products. A servicer performing loan modifications is bound by the investor’s guidelines, which will dictate the terms that can or cannot be changed. Possible consequences for borrowers negotiating a new loan may include borrowers agreeing to terms they cannot understand or sustain. In contrast, the consequences for borrowers who can obtain loan modification are positive: avoiding foreclosure, minimizing loss, and retaining their homes.
These are just a few examples of issues that servicers may wish to consider and comment on in response to HUD’s proposal. By permitting exemptions for certain loss mitigation activities and programs, HUD can actually do more to help borrowers than it can by imposing a licensing requirement that will have little benefit to borrowers.
Catharine 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.