Insights

Minnesota has become the last state to enact legislation in response to the Secure and Fair Enforcement for Mortgage Licensing Act of 2008, more commonly known the SAFE Act. The federal SAFE Act directed states whose legislatures meet annually to enact legislation by July 31, 2009 that would establish licensing standards for residential mortgage loan originators.

Minnesota failed to enact SAFE Act legislation during the 2008 legislative session. Instead, Minnesota enacted legislation amending the Residential Mortgage Originator and Servicer Licensing Act to conform the Act’s education requirements to the SAFE Act. It also authorized the Minnesota Department of Commerce to implement testing requirements. These education and testing requirements became effective September 1, 2009. However, individuals were not required to obtain a license to engage in residential mortgage loan origination. During the 2010 legislation, Minnesota corrected this oversight through a new comprehensive state SAFE Act contained in Senate File No. 2510.

The legislation, known as the “Minnesota Secure and Fair Enforcement for Mortgage Licensing Act of 2010” or the “Minnesota S.A.F.E. Mortgage Licensing Act of 2010,” adds a new Chapter 58A to the Minnesota Statutes. The legislation is similar to that enacted in other states and provides that an individual, unless specifically exempted from Chapter 58A, may not engage in the business of a “mortgage loan originator” with respect to a dwelling located in Minnesota without first obtaining and maintaining a license under Chapter 58A. Additionally, an individual may not engage in the mortgage loan business unless the individual is employed and supervised by an entity that is either licensed or exempt from licensing under Residential Mortgage Originator and Servicer Licensing Act.

Minnesota’s SAFE Act defines “mortgage loan originator” to mean an individual who, for compensation or gain or in the expectation of compensation or gain: (i) takes a residential mortgage loan application; or (ii) offers or negotiates terms of a residential mortgage loan. The Act does not include an exemption for loan servicers, but does exclude from the definition of “mortgage loan originator” “a person who merely assists, without advising, the consumer in locating or understanding a loan application, and does not do anything that would be considered to be acting as a mortgage loan originator under federal or state laws.” This provision, however, is subject to final approval by the United States Department of Housing and Urban Development, and is severable to the extent that HUD determines that it is not compliant with federal law.

Minnesota’s SAFE Act also excludes from the definition of “mortgage loan originator” an individual engaged solely as a loan processor or underwriter unless the individual is acting as an independent contractor. “Loan processor or underwriter” means an individual “who performs clerical or support duties” as an employee at the direction of and subject to the supervision and instruction of a person licensed or exempt from licensing under the Residential Mortgage Originator and Servicer Licensing Act. Like the HUD model law, for purposes of this provision, the term “clerical or support duties” may include after the receipt of an application: (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 the communication does not include offering or negotiating loan rates or terms, or counseling consumers about residential mortgage loan rates or terms.

Senate File 2510 deletes the educational and testing provisions from the Residential Mortgage Originator and Servicer Licensing Act, and places new provisions in Chapter 58A that are similar to the model SAFE Act. There is an initial prelicensing requirement of 20 hours of approved education, and a 15-hour annual continuing education requirement. Individuals also must pass, in accordance with the standards set forth in Chapter 58A, a qualified written test developed by the Nationwide Mortgage Licensing System and Registry (NMLS). Licensed mortgage loan originator also must register with and maintain a valid unique identifier issued by NMLS.

Also of note, Senate File No. 2510 eliminates from the Residential Mortgage Originator and Servicer Licensing Act the current solvency requirements for mortgage originator companies. It does require, however, that such companies maintain a surety bond of up to $200,000 based upon the dollar value of closed residential mortgage loans as shown by the licensee’s mortgage call report.

The Minnesota SAFE Act portion of Senate File No. 2510 provides that “[i]n order to facilitate an orderly transition to licensing and minimize disruption in the mortgage marketplace, the effective date for subdivision 1 is July 31, 2010, or a later date approved by the Secretary of the U.S. Department of Housing and Urban Development, under the authority granted in Public Law 110-289, section 1508(a).” However, Minnesota is not scheduled to transition to the Nationwide Mortgage Licensing System (NMLS) until October 1, 2010. Therefore, company licenses and mortgage loan originator licenses will not be managed in NMLS until after that date.

A representative with the Minnesota Department of Commerce, Financial Examinations Division, has confirmed to this author that Minnesota will not be implementing transitional testing or licensing requirements prior joining the NMLS. The Division did indicate, however, that individuals still need to comply with the educational requirements adopted during the 2009 legislative session.

According to the NMLS website, companies that hold a residential mortgage originator license or residential mortgage servicer license in Minnesota have until December 1, 2010, to complete and submit through NMLS a Form MU1 for the company and a Form MU2 for each of their control persons. For each branch operating in Minnesota, a company must complete and submit through NMLS a Form MU3 by December 1, 2010. Individual mortgage loan originators have until December 1, 2010, to complete and submit a Form MU4 through the NMLS.

Of course, until HUD’s rules are final, some things remain unclear for Minnesota and other states.

David Darland is a partner in the Washington, D.C., office of Hudson Cook, LLP. Basis Points readers can reach David at 202-327-9707 or by email at ddarland@hudco.com.