Insights

If you are still trying to figure out how and when you need to comply with the SAFE Act, you are not alone. Although most state SAFE Act licensing and registration requirements are in effect, there are still questions about the Nationwide Mortgage Licensing System (NMLS), the status of the Federal Agencies’ proposed loan originator registration rules and the status of HUD’s proposed rules.

To recap, we saw a flurry of activity last year as states rushed to pass SAFE Act laws before July 30, 2009. Not every state met the deadline, but, with the recent enactment of the SAFE Act by Minnesota, all states have at least passed a law that requires individual mortgage loan originators to register or obtain a license through the NMLS.

Licensed Mortgage Loan Originators

The state laws, however, are subject to change. We have been waiting with breath held for HUD to release its final rule implementing the SAFE Act. HUD’s notice of proposed rulemaking was published in the Federal Register on December 15, 2009. The total number of comments received (according to www.regulations.gov) was 5,131! It’s hard to tell if there are duplicate filings or attachment that showed up as double submissions, but it doesn’t really matter. What is evident is that HUD’s proposed rule raised significant issues for a number of individuals, non-profit, and for-profit companies that will be affected by the new law in some way. Suffice it to say that it will take HUD some time to sift through and address the comments before the final rule is published. We have heard that the rule could come out in late summer, but it is impossible to confirm this information. While states may need to revise their laws to come into compliance with HUD’s final rule, it is important for HUD to take the time to evaluate the comments and to consider potential changes that would improve the effectiveness of the final rule without compromising the ultimate purpose, which is to protect consumers from predatory practices at origination.

Even if HUD’s final rule requires some additional licensing not anticipated by state legislatures (such as licensing employees of mortgage servicers engaged in loan modifications or having licensed mortgage loan originators supervise loan processors and underwriters not just a company), it is safe to say that at this point, individuals who take an application or negotiate terms of a mortgage loan must be licensed as mortgage loan originators. Although companies may be able to compartmentalize certain activities to minimize the number of employees who need licenses, companies should ensure that those employees who fall within the definition of ‘mortgage loan originator’ are properly licensed.

This brings us to the next big change we have seen in the last year or so – significant development of the NMLS capabilities. At this point, most states are operating under the NLMS system or plan to do so in the very near future. The Maine Bureau of Consumer Credit, Minnesota Department of Commerce, and Nevada Division of Mortgage Lending will begin accepting new application and transition requests through NMLS starting October 1, 2010. The Utah Department of Financial Institutions will begin accepting new applications for Mortgage Loan Originators through NMLS starting October 1, 2010. It does not appear that Florida and Hawaii have provided a transition plan to the NMLS, but we expect to see those plans soon.

According to the Second Annual Report on the NMLS (released on May 14, 2010), 2,520 new company licenses and 40,375 individual licenses were processed through the NMLS in 27 states in 2009. The NMLS collected and disbursed more than $33 million in state licensing fees. These numbers are expected to jump significantly as states like California, Florida, Illinois, New Jersey, Ohio, and Texas transition to the NMLS system in 2010. NMLS also began administering tests on July 30, 2009 – the national test and the state component for 11 states. The 2009 Annual Report shows that for the national test, the pass rate was 68%; for the 11 states (aggregated) the pass rate was 75%. NMLS expects that tests will be developed for the remaining states in 2010. These pass rates are a little higher than those anecdotal reports that circulated after the tests were first released, so either the preparation has improved or the test has been revised. The statistics show that 81% of individuals hold one license, about 10% hold two licenses, 6% hold three to five licenses, 2% hold six to ten licenses, and 1% holds 11 or more licenses.

Before the end of 2010, expect all of the states to license and register individuals through the NMLS and for HUD to issue its final rule.

Registered Mortgage Loan Originators

Turning now to mortgage loan originators who are employees of federally insured depository institutions or owned and controlled as subsidiaries of federally regulated depository institutions: There just isn’t much to report because the federal agencies have not yet published a final rule implementing the SAFE Act registration requirements.

To refresh your memory, back on November 13, 2009, the FDIC posted a Financial Institution Letter (FIL-64-2009) that stated that the FDIC Board of Directors had approved a draft final rule implementing the SAFE Act and had published the draft final rule on its website, while awaiting review and approval of the rule by the other agencies. The FDIC reported that—to the extent there might be differences between the draft final rule approved by the FDIC and the version ultimately published by the agencies in the Federal Register—the FDIC would highlight those changes in a revised Financial Institutions Letter at the time of publication. In March 2010, the Federal Financial Institutions Examination Council (FFIEC) posted SAFE Act FAQs for the federal agencies, stating that the draft final rule was under review by the OMB pursuant to Executive Order 12866, and that the agencies “expect to publish the rule following the completion of that review process and final agency approval, as necessary.” According to information posted by the OMB, its review was scheduled to be finalized in April or May. That date has been “extended,” but no final date for review has been identified. As of this writing, we still wait. The good news is that the FFIEC reports that the draft final rule provides for a 180-day period within which to complete initial registrations. The period begins on the date that the agencies provide – in a public notice – that the Registry is accepting registrations from agency-regulated institution employees. The agencies will notify the institutions they supervise when the Registry becomes operational. That information will also be posted on the FFIEC SAFE Act website as well as on the NMLS website.

We fully expect that, even if there are further extensions, the federal agencies will publish a final rule this year. For now, we wait.

Lisa C. DeLessio is a partner in the Maryland office of Hudson Cook, LLP. Basis Points readers can reach Lisa at 410-865-5437 or by email at ldelessio@hudco.com.