Today's Trends in Credit Regulation

HUD Publishes Final SAFE Act Rule
By Timothy P. Meredith

On June 30, 2011, HUD published a final rule (the “Rule”) to implement the Secure and Fair Enforcement Mortgage Licensing Act of 2008 (the “SAFE Act”). The rule was published in the Federal Register at 76 FR 38464, June 30, 2011. The rule is found at 24 CFR Part 3400.

The SAFE Act requires HUD to establish minimum requirements for licensing of residential mortgage loan originators. It requires states to adopt laws to require licensing of mortgage loan originators. If HUD determines that a state has not adopted a law that meets the minimum requirements, residential mortgage loan originators in that state will be subject to the federal registration requirements. HUD’s responsibilities under the SAFE Act were transferred to the Consumer Finance Protection Bureau on July 21, 2011. The Rule clarifies the following points.

Loss Mitigation. The final rule does not require a state to license individuals engaged in loss mitigation on behalf of a loan servicer or individuals working as third-party loan modification specialists. HUD considered requiring those individuals to be licensed, but decided to leave that issue for the CFPB to sort out. Individuals involved in refinance transactions are subject to licensing under the SAFE Act. A refinancing results in a new loan, not a modified loan.

Definition of Loan Originator. An individual engages in the business of a loan originator if the individual habitually or repeatedly engages in the following activities:

  • Takes or receives a residential mortgage loan application; and
  • Offers or negotiates terms of a residential mortgage loan for compensation or gain; or
  • Represents to the public, through advertising or other means of communicating or providing information (including the use of business cards, stationery, brochures, signs, rate lists, or other promotional items), that such individual can or will perform the loan originator activities.

HUD clarified that the simple act of taking an application does not itself trigger the definition. However, a person who receives an application and negotiates the loan terms is a loan originator, even if the person does not receive the application directly from the applicant. A person cannot avoid the definition by having a “straw man” take the application and pass it on to the person who negotiates the transaction.

“Offer or Negotiate.” An individual “offers or negotiates terms of a residential mortgage loan for compensation or gain” if the individual:

  • Receives or expects to receive payment of anything of value in connection with any of the following activities or as a result of any loan terms entered into as a result of those activities:
    • Presents loan terms to a prospective borrower;
    • Communicates directly or indirectly with a prospective borrower for the purpose of reaching a mutual understanding about possible loan terms; or
    • Recommends, refers, or steers a prospective borrower to a particular lender or set of loan terms, in accordance with a duty to or incentive from any person other than the prospective borrower.

HUD clarified that the concept of “compensation or gain” is broader than a commission or a contingent fee paid upon closing a loan. It includes a salary, even if that salary is not affected by the number of loans closed. It could include a sales commission for selling a manufactured home, if the retailer also arranged the loan, even if the retailer did not receive extra compensation for arranging the loan. HUD believes that a “same as cash” payment for the sale is a thing of value. As a result, if the salesperson presents loan terms to the buyer or refers the buyer to a lender, the salesperson is a loan originator even if the salesperson does not receive extra compensation from the borrower, the employer or the lender for helping to negotiate or arrange the financing. HUD stated that a sales commission received by an individual in the manufactured home retail industry would likely meet the definition of “for compensation or gain” if it is received or expected to be received “in connection with” activities that constitute “offering or negotiating.” According to HUD, the following activities would not be covered under “offering or negotiating:”

  • The mere sharing of general information about a financing source;
  • Discussing hypothetical financing options, i.e., options not related to a specific financing source;
  • Giving a buyer a list of available financing sources without recommending any of the sources;
  • Discussing a buyer’s ability to afford a home;
  • Presenting or discussing generic facts or generic rate sheets; or
  • Closing the transaction.

Recreational Vehicles and Houseboats. The SAFE Act applies to transactions involving a residential mortgage loan, as that term is defined in the Truth in Lending Act. The definition in TILA captures any structure that is a dwelling. As a result, the SAFE Act could apply to transactions involving an RV or a boat if the RV or boat is a dwelling. Some in the RV and boat industries asked HUD to create an exemption for RV’s and boats. HUD determined that it had no authority to create an exemption, and refused to do so.

Financial Advisors. HUD was asked to create an exemption for financial advisors. It declined to do so. However, it pointed out that a financial advisor is not a mortgage loan originator simply because it is paid to refer an applicant to a mortgage lender affiliated with the advisor’s company unless the advisor will also take an application.

Exemption for Nonprofits. States do not have to license an employee of a bona fide nonprofit organization who acts as a loan originator only on behalf of the bona fide nonprofit organization, and only in connection with residential mortgage loans with terms that are favorable to the borrower. A loan is considered to have terms that are favorable to the borrower if the state determines that the terms are consistent with loan origination in a public or charitable context, rather than a commercial context. For an organization to be considered a bona fide nonprofit organization, the state licensing authority must determine that the organization:

  • Is a tax-exempt organization under section 501(c)(3) of the Internal Revenue Code of 1986;
  • Promotes affordable housing or provides homeownership education, or similar services;
  • Conducts its activities in a manner that serves public or charitable purposes, rather than commercial purposes;
  • Receives funding and revenue and charges fees in a manner that does not incentivize it or its employees to act other than in the best interests of its clients;
  • Compensates its employees in a manner that does not incentivize employees to act other than in the best interests of its clients;
  • Provides or identifies for the borrower residential mortgage loans with terms favorable to the borrower and comparable to mortgage loans and housing assistance provided under government housing assistance programs; and
  • Meets other standards that the state determines are appropriate.

Exemption for Housing Finance Agencies. The SAFE Act does not cover employees of government agencies or housing finance agencies who act as loan originators in accordance with their duties as employees of those agencies. Individuals who act as loan originators as employees of government agencies or of housing finance agencies are not subject to the licensing and registration requirements of the SAFE Act.

Timothy P. Meredith is a partner in the Maryland office of Hudson Cook, LLP. Tim can be reached at 410-865-5404 or by email at

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