[Federal Register Volume 76, Number 126 (Thursday, June 30, 2011)]
[Rules and Regulations]
[Pages 38464-38501]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-15672]
[[Page 38463]]
Vol. 76
Thursday,
No. 126
June 30, 2011
Part II
Department of Housing and Urban Development
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24 CFR Parts 30 and 3400
SAFE Mortgage Licensing Act: Minimum Licensing Standards and Oversight
Responsibilities; Final Rule
Federal Register / Vol. 76 , No. 126 / Thursday, June 30, 2011 /
Rules and Regulations
[[Page 38464]]
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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
24 CFR Parts 30 and 3400
[Docket No. FR-5271-F-03]
RIN 2502-A170
SAFE Mortgage Licensing Act: Minimum Licensing Standards and
Oversight Responsibilities
AGENCY: Office of the Assistant Secretary for Housing-Federal Housing
Commissioner, HUD.
ACTION: Final rule.
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SUMMARY: This final rule sets forth the minimum standards for the state
licensing and registration of residential mortgage loan originators,
requirements for operating the Nationwide Mortgage Licensing System and
Registry (NMLSR), and HUD's Federal oversight responsibilities pursuant
to the Secure and Fair Enforcement Mortgage Licensing Act of 2008 (SAFE
Act or Act), to ensure proper monitoring and enforcement of states'
compliance with statutory requirements. This 2008 law directs states to
adopt loan originator licensing and registration requirements that meet
the minimum standards specified in the SAFE Act.
In addition to codifying the minimum licensing standards and HUD's
oversight responsibilities under the SAFE Act, this rule also clarifies
or interprets certain statutory provisions that pertain to the scope of
the SAFE Act's licensing requirements, and other requirements that
pertain to the implementation, oversight, and enforcement
responsibilities of the states.
DATES: Effective Date: August 29, 2011.
FOR FURTHER INFORMATION CONTACT: Kevin L. Stevens, SAFE Act Office,
Office of Housing; Room 3151; telephone number 202-708-6401 (this is
not a toll-free number). For legal questions, contact Paul S. Ceja,
Assistant General Counsel, or Joan L. Kayagil, Deputy Assistant General
Counsel, SAFE-RESPA Division, Room 9262; telephone (202) 708-3137.
Persons with hearing or speech impairments may access this number via
TTY by calling the toll-free Federal Relay Service at 800-877-8339. The
address for the above listed persons is: Department of Housing and
Urban Development, 451 7th Street, SW., Washington, DC 20410.
SUPPLEMENTARY INFORMATION:
I. Overview of the SAFE Act
The Housing and Economic Recovery Act of 2008 (Pub. L. 110-289,
approved July 30, 2008) (HERA) is comprised of several significant
housing laws that address the dramatic rise in mortgage delinquencies
and foreclosures in the residential mortgage market. Included among
these new laws is the SAFE Act. The SAFE Act establishes the minimum
standards for state licensing of residential mortgage loan originators
in order to increase uniformity, improve accountability of loan
originators, combat fraud, and enhance consumer protections. The SAFE
Act also requires states to participate in the NMLSR. As noted earlier,
the SAFE Act encourages CSBS and AARMR to establish and maintain the
NMLSR, and these organizations have established such a system, which is
being used by states to license and register residential mortgage loan
originators. The CSBS and AARMR system is available online,\1\ and
consumers will soon be able to access free information regarding the
status and employment history of all state-licensed and federally loan
originators, as well as any disciplinary and enforcement actions
against them on an additional Web site.\2\
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\1\ http://www.stateregulatoryregistry.org.
\2\ http://www.nmlsconsumeraccess.org.
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The SAFE Act, as enacted in 2008, charged HUD with oversight of
states' compliance with the Act. The SAFE Act also charged HUD to
establish and maintain a licensing and registration system for a state
or territory that does not have a system in place for licensing loan
originators that meets the requirements of the SAFE Act, or that fails
to participate in the NMLSR. To operate in any state where HUD (or
subsequently, the Bureau) has had to establish such a licensing and
registration system (a Federal SAFE Act-compliant licensing system), a
loan originator would have to comply with the requirements of the
Federal SAFE Act-compliant licensing system for that state, as set
forth in this final rule, as well as with any applicable state
requirements. A license for a loan originator in a particular state
issued under a Federal SAFE Act-compliant licensing system would be
valid only for that state, even if a Federal SAFE Act-compliant
licensing system must be established in several states. Additionally,
if a determination is made that the NMLSR is failing to meet the
requirements and purposes of the SAFE Act, HUD or the new Bureau must
establish a nationwide licensing and registration system that meets the
requirements of the Act.
In addition to developing the NMLSR, CSBS and AARMR developed model
legislation \3\ to aid states' compliance with the requirements of the
SAFE Act. CSBS and AARMR requested that HUD review the model
legislation, and that HUD advise of the model legislation's sufficiency
in meeting the applicable minimum requirements of the SAFE Act. HUD
reviewed the model legislation and advised the public that the model
legislation offers an approach that meets or exceeds the minimum
requirements of the SAFE Act and that states that adopt and implement a
state licensing system that follows the provisions of the model
legislation, whether by statute or regulation, will be presumed to have
met the applicable minimum statutory requirements of the SAFE Act. In
advising the public of its assessment of the model legislation, HUD
also presented its views and interpretations of certain statutory
provisions that required consideration and analysis in determining
whether the model legislation meets the minimum requirements of the
SAFE Act. These views and interpretations, referred to as HUD's
Commentary (or Commentary),\4\ were discussed in HUD's December 2009
proposed rule and are referenced in this final rule, with further
elaboration and clarification as determined appropriate and in response
to public comment.
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\3\ http://www.hud.gov/safe.
\4\ HUD's Commentary can be found at http://www.hud.gov/safe.
(See also HUD's Federal Register notice published on January 5,
2009, at 74 FR 312, advising of the availability of the model
legislation and HUD's Commentary.)
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The SAFE Act also requires the Office of the Comptroller of the
Currency of the Department of the Treasury, the Federal Reserve System,
the Federal Deposit Insurance Corporation (FDIC), the Office of Thrift
Supervision of the Department of the Treasury, the Farm Credit
Administration (FCA), and the National Credit Union Administration
(collectively, the Federal banking agencies), through the Federal
Financial Institutions Examination Council (FFIEC) and the FCA, to
develop, implement, and maintain a Federal registration system for
employees of an institution regulated by one (or more) of the Federal
banking agencies. The Federal banking agencies published their final
rule to implement this registration system on July 28, 2010 (75 FR
44656; corrected and republished at 75 FR 51623, August 23, 2010). The
SAFE Act specifically prohibits, with certain exceptions, an individual
employed by an agency-regulated institution from engaging in the
business of a residential mortgage loan originator without first
obtaining a unique identifier and registering and annually maintaining
registration as a
[[Page 38465]]
registered mortgage loan originator. The Federal banking agencies
published their final rule to implement this registration system on
July 28, 2010 (75 FR 44656).
The SAFE Act was amended by the Dodd-Frank Wall Street Reform and
Consumer Protection Act (Pub. L. 111-203, approved July 21, 2010)
(Dodd-Frank Act), and the authorities and duties delegated to HUD by
the SAFE Act will be transferred on July 21, 2011, to the new Consumer
Financial Protection Bureau (the Bureau) established by the Dodd-Frank
Act. Accordingly, references to HUD's authorities and duties throughout
this final rule should be understood to refer to the authorities and
responsibilities of the Bureau once the transfer occurs.
II. HUD's December 2009 Proposed Rule
On December 15, 2009, at 74 FR 66548, HUD published a proposed rule
to clarify HUD's responsibilities under the SAFE Act and the minimum
standards that the SAFE Act provides for states to meet in licensing
loan originators. The proposed rule provided proposed clarifications
and interpretations of certain statutory provisions that pertain to the
scope of the SAFE Act licensing requirements, and other requirements
that pertain to the implementation, oversight, and enforcement
responsibilities of the states. In addition, the proposed rule provided
the procedure that would be used to determine whether a state's
licensing and registration system is SAFE Act compliant, the actions
that HUD would take if it determined that a state has not established a
SAFE Act-compliant licensing and registration system or that the NMLSR
established by CSBS and AARMR is not SAFE Act compliant, the minimum
requirements for the administration of the NMLSR, and enforcement
authority to be utilized in the administration of a Federal licensing
and registration system.
Through the proposed rule, HUD solicited public comment and
suggestions on the proposed clarifications and regulations. On February
17, 2010, HUD published a notice \5\ extending the public comment
period until March 5, 2010, due to severe inclement weather conditions
and closures of government and private organizations that may have
prevented many members of the public from submitting comments.
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\5\ 75 FR 7149.
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A more detailed discussion of HUD's December 15, 2009, proposed
rule can be found at 74 FR 66548 through 66562 of the December 15,
2009, edition of the Federal Register.
III. Overview of Final Rule--Key Clarifications
After reviewing issues raised by the commenters, which are
discussed in Section IV of this preamble, and upon HUD's further
consideration of issues related to this final rule, the following
highlights key clarifications made by this final rule.
An individual required to be licensed under the SAFE Act is an
individual who is engaged in the ``business of a loan originator'';
that is, an individual who acts as a residential mortgage loan
originator with respect to financing that is provided in a commercial
context and with some degree of habitualness or repetition. The SAFE
Act defines ``loan originator'' to mean ``an individual who takes a
residential mortgage loan application; and offers or negotiates the
terms of a residential mortgage loan for compensation or gain.''
Section 1504(a) of the SAFE Act requires licensing of those individuals
who ``engage in the business'' of a loan originator. It is HUD's view
that the SAFE Act's distinction between individuals who may meet the
definition of ``loan originator'' (because of the activities they carry
out) versus those individuals who ``engage in the business'' of a loan
originator, means that not every individual who acts as a loan
originator is necessarily subject to the SAFE Act's licensing and
registration requirements. A basic definition of ``business'' is ``a
commercial enterprise carried on for profit; a particular occupation or
employment habitually engaged in for livelihood or gain.'' (See Black's
Law Dictionary 211 (8th ed. 2004).) It is HUD's view that to engage in
the ``business'' of a loan originator and be subject to licensing under
the SAFE Act, an individual must act or hold oneself out as acting as a
loan originator with respect to mortgage loan origination activities
that are carried out in a commercial context and with some degree of
habitualness or repetition. To act in a commercial context, the
individual who acts as a loan originator must do so for the purpose of
obtaining profit for an entity or individual for which the individual
acts (including, e.g., a sole proprietorship or other entity that
includes only the individual), rather than exclusively for public,
charitable, or family purposes. The requisite habitualness or
repetition of the mortgage loan origination activities may be met if
either the individual who acts as a loan originator does so with a
degree of habitualness or repetition, or if the source of the
prospective financing provides such financing or performs other phases
of originations of residential mortgage loans with a degree of
habitualness or repetition. The absence of either a commercial context
or a degree of habitualness or repetition means that the activity in
which the individual is engaged does not constitute the ``business'' of
a loan originator. This final rule codifies this distinction at Sec.
3400.103(b)(1) and in an appendix and identifies instances where such
absence indicates that an individual is not subject to SAFE Act
licensing requirements.
An overarching purpose of the SAFE Act is to enhance consumer
protection and support anti-fraud measures through establishment of
state licensing systems that will ensure that loan originators have the
necessary integrity and knowledge needed to perform their functions
properly. To accomplish this purpose, the SAFE Act requires, among
other things, that an applicant for a state license must provide
information demonstrating that he or she will act honestly and fairly,
complete courses, and pass a written test on Federal and state laws
governing loan origination, ethics, consumer protection, fraud, fair
lending, and standards in the nontraditional mortgage product
marketplace.
Once licensed, a loan originator is required: (1) To continue to
meet the minimum licensing standards; (2) to complete continuing
education courses; and (3) to ensure the submission of periodic reports
on the loans that he or she originates. The SAFE Act seeks to protect
consumers from incompetency, fraud, and other abuses by ensuring that
individuals who act as a loan originator with the purpose of obtaining
profit for another entity and with respect to financing that is
provided with some degree of habitualness have received training on and
have demonstrated understanding of the applicable legal and ethical
obligations. In contrast, consumers are unlikely to need the
protections provided by loan originator licensing when an individual
acts as a loan originator in a purely public or charitable context,
without the purpose of obtaining profit, or who acts as a loan
originator with respect to financing that is provided only once or very
rarely.
The SAFE Act's purposes and licensing requirements apply to
individuals who act as loan originators with respect to financing that
is provided in a commercial context and with some degree of
habitualness or repetition. This final rule includes discussion of a
number of cases where the requisite commercial context or habitualness
may be absent.
[[Page 38466]]
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 such agencies. Individuals who act as loan
originators as employees of government agencies or of housing finance
agencies, as defined \6\ by this rule, are not subject to the licensing
and registration requirements of the SAFE Act. Many government agencies
and housing finance agencies provide direct housing assistance to low-
and moderate-income people through residential mortgage loans with
favorable terms. The entities that administer such government housing
assistance include Federal, state, and local governments and housing
finance agencies.
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\6\ ``Housing finance agency'' means any authority that is
chartered by a state to help meet the affordable housing needs of
the residents of the state, is supervised directly or indirectly by
the state government, is subject to audit and review by the state in
which it operates, and whose activities make it eligible to be a
member of the National Council of State Housing Agencies.
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These government entities are generally granted authority and
funding and are overseen by Congress, state legislatures, or municipal
councils, and are presumed to carry out their activities for the
benefit of the borrowers they serve. Their employees act as loan
originators in accordance with strict agency policies and pursuant to
highly prescriptive statutory and regulatory requirements that Federal,
state, and local government public officials or elected representatives
have determined are consistent with the public interest and provide
adequate protections for borrowers. An individual's status as an
employee of a government agency or housing finance agency ensures that
the agency has the power to ensure that all aspects of the individual's
conduct are consistent with the public purposes of the agency.
Another key distinction between loan originators covered by the
SAFE Act and government employees administering government assistance
is the pecuniary purpose for acting as a loan originator. Loan
originators working in a commercial context undertake their activities
in order to further the financial interests of the entity for which
they work. In contrast, government agencies and housing finance
agencies that carry out housing finance programs generally do so
without the purpose of obtaining profit for any entity.
For these reasons, the requisite commercial context is lacking and,
as a result, these individuals do not engage in the ``business'' of a
loan originator. Consequently, the SAFE Act definition of a loan
originator does not encompass governmental employees, and governmental
employees are not required to obtain a state license and registration
for any loan origination under a government housing assistance program.
To ensure that all of the individual's actions in the course of acting
as a loan originator are subject to the control of the agency or
housing finance agency and are consistent with the agency's public or
government mission, the individual must be an employee of the agency.
However, the fact that a prospective residential mortgage loan is
to be insured or guaranteed under a government program does not mean
that the individual acting as a loan originator with respect to the
loan is not covered by the SAFE Act. For example, loan originators
working for entities that originate residential mortgage loans under
the mortgage insurance programs or loan guarantee programs of the
Federal Housing Administration or the Department of Veterans Affairs
are generally covered by the licensing and registration requirements of
the SAFE Act. While these mortgage insurance and loan guarantee
programs were created by Federal statute, and are governed by Federal
regulations, the individuals who act as loan originators with respect
to these government-insured loans generally do so in the commercial
context, in part because they generally do so for the purpose of
obtaining profit for the entity for which they work (including, e.g., a
sole proprietorship or other entity that includes only the individual).
Since these loans are originated in a commercial context, the loan
originators are generally subject to state licensing and registration
requirements.
The SAFE Act does not cover employees of bona fide nonprofit
organizations who act as loan originators with respect to residential
mortgage loans outside a commercial context. Individuals who act as
loan originators with respect to certain kinds of loans as employees of
``bona fide'' nonprofit organizations, as defined by this final rule,
are not subject to the licensing and registration requirements of the
SAFE Act. Under the circumstances defined in this final rule, such
individuals are similar to government employees who act as loan
originators pursuant to government-funded and regulated housing
assistance programs, in that employees of a bona fide nonprofit
organization who act as loan originators do so for public or charitable
purposes, and not for the profit of another individual or entity.
Employees of bona fide nonprofit organizations who act as loan
originators do not act in a commercial context and consequently are not
covered by the SAFE Act.
HUD recognizes that the mere fact of an organization's 501(c)(3)
status is insufficient to conclude that its employees who act as loan
originators necessarily do so for the benefit of the borrower and for
public or charitable purposes, rather than for the profit of the
organization or another entity or individual. Instead, the
organization's activities, purpose, incentive structures, and loan
products must be considered in order to determine that its employees
who act as loan originators do so outside of a commercial context.
Accordingly, this final rule provides that an organization is
considered to be a ``bona fide'' nonprofit organization if the
organization demonstrates to the satisfaction of the applicable
regulator that the organization:
(1) Maintains tax-exempt status under section 501(c)(3) of the
Internal Revenue Code of 1986;
(2) Promotes affordable housing or provides homeownership
education, or similar services;
(3) Conducts its activities in a manner that serves public or
charitable purposes;
(4) Receives funding and revenue and charges fees in a manner that
does not incentivize the organization or its employees to act other
than in the best interests of its clients;
(5) Compensates employees in a manner that does not incentivize
employees to act other than in the best interests of its clients;
(6) Provides to or identifies for the borrower residential mortgage
loans with terms that are favorable to the borrower and comparable to
mortgage loans and housing assistance provided under government housing
assistance programs; and
(7) Meets such other standards that the state determines
appropriate.
With respect to whether particular mortgage terms are favorable to
borrowers, the applicable regulator should examine the interest rate
that the home loan would carry; the charges that are imposed on the
borrower for origination, application, closing and other costs; whether
the mortgage includes any predatory characteristics; the borrower's
ability to repay the loan; and the term of the mortgage.
Finally, to ensure that all of the individual's actions in the
course of acting as a loan originator are subject to the control of the
bona fide nonprofit organization and are consistent with the
organization's mission and practices,
[[Page 38467]]
the individual must be an employee of the organization and must be
acting within the scope of his or her employment on behalf of the
organization. (Applicability of SAFE Act licensing requirements to
volunteers is addressed below under the section of this preamble that
addresses ``for compensation or gain.'')
An individual selling his or her own residence is not engaged in
the business of loan originator. As the foregoing clarifications
highlight, the SAFE Act requires licensing of individuals engaged in
the ``business'' of a loan originator, and the statutory phrasing of
who is required to be licensed reflects a habitualness and commercial
context, both of which are likely absent in the case of a homeowner
financing the sale of his or her own residence, whether such residence
is the homeowner's principal residence or a vacation property. As HUD
stated in the proposed rule, the frequency with which a particular
seller provides financing to a buyer to facilitate the sale of the
seller's own residence is so limited that Congress could not have
intended to require such sellers to obtain loan originator licenses.
This final rule confirms and more clearly applies this point by adding
the concept of habitualness or repetition expressly into the language
on ``engages in the business of a loan originator'' in Sec.
3400.103(b) of the rule.
However, as discussed later in this preamble, a remaining issue
with respect to seller financing is when the infrequency with which an
owner finances the sale of properties other than his or her residence,
along with other factors, indicate that an individual is not ``engaged
in the business'' of a loan originator, either because the
transactions' requisite commercial context or habitualness, or both,
are absent. HUD received a large number of public comments suggesting
that an individual should be able to provide financing pursuant to the
sale of any property the individual owns, regardless of whether
property served as the seller's residence. As further discussed below,
some commenters stated that seller financing should be permitted for a
limited number of such properties, while others stated that financing
the sales of an unlimited number of such properties should be
permitted, without subjecting the provider of the financing to SAFE Act
licensing requirements.
HUD appreciates the concerns of the commenters and agrees that
there may be cases where the seller of a property or properties in
which the seller has never lived may provide financing for the sale
without the seller's acts arising to ``engag[ing] in the business'' of
a loan originator. While the fact that the seller has not lived in the
properties makes it more likely that financing is provided in order to
obtain a profit, and therefore makes it more likely that a commercial
context is present, the infrequency with which a particular seller
undertakes such actions, combined with the fact that it is the
individual who is providing the financing (rather than a business
entity that regularly provides financing), may mean that the requisite
habitualness needed to constitute ``engage[ing] in the business'' of a
loan originator is absent. However, HUD is unable to state how often an
individual may undertake such transactions before the requisite
habitualness is met. Despite the requests of many commenters, HUD has
no authority under the SAFE Act to exempt from licensing requirements
individuals who engage in the business of a loan originator. For
example, HUD has no authority under the SAFE Act to establish a ``de
minimis'' exemption that would shield individuals who do engage in the
business of a loan originator from the SAFE Act's licensing
requirements, but who do so infrequently. The SAFE Act expressly
provides the Federal banking agencies with such authority but does not
provide comparable authority to HUD. Accordingly, although HUD agrees
that an individual must act as a loan originator with respect to
financing that is provided or other origination activities that are
performed with some degree of habitualness in order to engage in the
``business'' of a loan originator, HUD is unable to state how
frequently an individual, including an individual providing financing
for the sale of a property, must so act in order to meet the requisite
degree of habitualness.
HUD lacks statutory authority to grant exemptions to licensing
under the SAFE Act. As also discussed later in this preamble, many
commenters sought exemption from licensing under the SAFE Act for
various reasons. HUD has no authority under the SAFE Act to exempt
individuals engaging in the business of a loan originator.
Removal of activities that are not specified in statute as
activities exempt from licensing under the SAFE Act. HUD is removing
from Sec. 3400.103(e), which pertains to individuals who do not need
to be licensed under the SAFE Act, references to individuals who offer
and negotiate terms of a residential mortgage loan with or on behalf of
a family member, an individual who only offers or negotiates terms of a
residential mortgage loan secured by a dwelling that serves as the
individual's residence, and a licensed attorney who only negotiates the
terms of a residential mortgage loan on behalf of a client as an
ancillary matter to the attorney's representation of a client. HUD's
position remains that these activities do not constitute engaging in
the business of a loan originator and are not subject to licensing
under the SAFE Act. HUD believes that the inclusion of these activities
in the regulation as activities not covered by the SAFE Act triggered
the high volume of comments that addressed issues such as how many
residences an owner may sell and finance before the owner may need to
be licensed under the SAFE Act, and what HUD means by ``immediate
family member.'' Accordingly, a discussion of these activities, which
includes examples of activities that do not fall under SAFE Act
coverage, as well as activities that serve as examples of activities
that do fall under SAFE Act coverage, has been moved to an Appendix of
this final rule. This approach is consistent with that of the Federal
banking agencies in their SAFE Act final rule, which included an
analogous appendix that address activities that do or do not subject an
individual to SAFE Act requirements.
Activities, not the label of the transaction or professional title
of an individual, determine SAFE Act coverage. As also discussed later
in this preamble, many commenters submitted the titles of various
professions and asked whether such professions had to be licensed under
the SAFE Act. It is the activities that an individual undertakes, not
the individual's title, that determines coverage under the SAFE Act. If
one is engaged in the business of a loan originator, then regardless of
what other title one may have, the individual is subject to licensing
under the SAFE Act.
Deferral to the Bureau for a determination of coverage of
individuals involved in material mortgage modifications. The final rule
does not include licensing of those individuals engaged in material or
significant modifications to residential mortgage loans or those
individuals working as third-party loan modification specialists.
Although HUD considered licensing of such individuals, and specifically
solicited comment on coverage of loan modifications that result in
material modifications to homeowners' mortgages, HUD, in this final
rule, does not define ``loan originator'' or ``business of a mortgage
loan originator'' to include individuals who engage in loan
modifications or are third-party loan modification
[[Page 38468]]
specialists. HUD leaves to the Bureau the issue of whether such
individuals should be licensed under the SAFE Act. HUD notes that the
new Bureau has independent authority under the Dodd-Frank Act to
regulate loan modification and loan servicing practices.
However, it is important to note that those individuals involved in
refinance transactions are subject to licensing under the SAFE Act. A
refinancing results in a new loan, not a modified loan.
Appendix of activities that constitute or do not constitute
``engag[ing] in the business of a loan originator.'' As noted earlier,
HUD includes in this final rule an appendix that provides examples of
activities that would subject an individual to licensing under the SAFE
Act, or that do not fall under coverage of the SAFE Act.
Technical and additional clarifying changes. In addition to the
clarifications highlighted above, this final rule also includes
technical and minor clarifying changes to certain definitions and
provisions. These changes are in response to ambiguities raised by
commenters, and are further discussed below in section IV of this
preamble. Among them are technical changes to the regulatory provisions
clarifying ``takes an application,'' ``offers or negotiates,''
``employee,'' ``state,'' the requirement to pass a test after a lapse
of a loan originator license of five or more years, the requirement to
authorize the NMLSR to obtain required information, and the full name
of the accreditation program for state supervisory authorities. A
definition is provided for the term ``origination of a residential
mortgage loan,'' which is, in turn, included in the definition of
``loan processor or underwriter.''
Section 30.69 is also revised to clarify that HUD would not impose
civil money penalties for violations of state law, in a state where HUD
has established a system for the licensing and registration of loan
originators.
IV. Discussion of Public Comments
A. The Comments, Generally
The public comment period on this proposed rule closed on March 5,
2010, and HUD received 5,132 public comments in response to the
December 2009 proposed rule. Comments were submitted by individuals;
state regulatory agencies; other units of state and local government;
industry associations; mortgage-lending institutions; mortgage loan
servicers; nonprofit housing counseling, lending, and community
development organizations; broker-dealers that employ financial
advisors; manufactured housing retailers, lenders, and community
owners; and attorneys and law firms. The overwhelming majority of the
comments were directed to various types of residential mortgage loan
transactions and asked HUD to clarify whether the individuals involved
in those transactions are required to be licensed under the SAFE Act.
This Section IV of the preamble sets out significant comments raised by
the public commenters and HUD's responses to these comments, and
identifies where HUD has made technical changes to the regulations as
set forth in the proposed rule.
B. Key Definitions: ``Taking an Application,'' ``Offers or
Negotiates,'' ``Compensation or Gain,'' and ``Engaging in the Business
of a Loan Originator''
Comment: More detailed or revised definitions are needed for key
terms that determine whether an individual is covered. Several
commenters requested that HUD elaborate on its definitions of ``takes
an application,'' ``offers or negotiates,'' and ``for compensation or
gain.'' Commenters stated that without further refinement, these terms,
as presented in the proposed rule, capture or appear to capture: (1)
Activities that are not loan origination activities, or (2) individuals
who are not loan originators. A number of commenters asserted that the
proposed definition changes the statutory definition of ``loan
originator,'' which requires that an individual take a residential
mortgage loan application and offer or negotiate the terms of a
residential mortgage loan for compensation or gain, into an ``or''
definition, thus requiring satisfaction of only one of the two prongs
noted above. Another commenter stated that HUD should not include the
provision that an individual engages in the business of a loan
originator by representing to the public that such an individual can or
will perform the activities of a loan originator.
With respect to the term ``takes an application,'' a commenter
stated that the definition of ``application'' needs to be more precise
to clarify that taking an application does not encompass the mere
physical handling or transmitting of a completed form to a lender.
Another commenter stated that HUD should clarify that the ``and'' in
the proposed definition of ``application'' is conjunctive; that is, an
application consists of both the request for an offer of a loan and the
information about a borrower that is customary or necessary. Another
commenter stated that deciding whether to extend an offer of credit, or
``influencing'' the decision of another, is not part of the origination
function and could be viewed as inappropriate for a loan originator.
This commenter states that taking an application and collecting
information from the applicant that will be used to determine whether
or not to grant the mortgage loan should be the only stated factors in
proposed Sec. 3400.103(c)(1). Another commenter urged HUD to withdraw
its interpretation of the term ``application'' set forth in the
proposed rule, and instead retain the definition of ``application''
that is found in the Real Estate Settlement Procedures Act (RESPA),
Regulation X (24 CFR 3500.2).
With respect to the term ``offers or negotiates,'' commenters
identified activities that occur in the context of the manufactured
housing retail industry or other contexts and asked HUD to clarify that
they do not constitute offering or negotiating, such as: (a) The mere
sharing of general information about a financing source; (b) acting as
a conduit between the homebuyer and the financing source without
engaging in specific discussion of financing options from a particular
funding source; (c) discussing hypothetical financing options, i.e.,
options not related to a specific financing source; (d) presenting a
spectrum of options; (e) giving the homebuyer a list of available
financing sources without recommending any of the sources; (f)
discussing a buyer's ability to afford a home; (g) discussing various
alternative financing options; (h) presenting or discussing generic
facts sheet or generic rate sheets; and (i) closing personal property
transactions. The commenters reasoned that these activities are not
covered because under HUD's proposed first prong in the provision on
``offer[ing] or negotiate[ing],'' an individual can present loan terms
to a borrower for acceptance only if the terms are capable of being
accepted under contract law. The commenters stated that similarly,
under HUD's proposed second prong in the provision on ``offer[ing] or
negotiate[ing],'' an individual communicates with a borrower to reach a
mutual understanding only if the activity amounts to achieving
mutuality under contract law.
Several commenters believed that the proposed provisions clarifying
the terms ``offer[ing] or negotiate[ing]'' left too much ambiguity or
risked coverage of activities that the commenters believed should not
be covered. Commenters specifically questioned HUD's proposed third
prong, which provided that an individual offers or negotiates terms of
a residential mortgage loan by referring the prospective borrower to a
particular
[[Page 38469]]
lender or set of loan terms in accordance with a duty to or incentive
from any person other than the prospective borrower. Some commenters
worried that under this third proposed prong, licensing requirements
could be triggered by a casual conversation in which an individual
recommends a lender, by indicating the name of a lender on the
individual's business card, or implying generically that a particular
lender may be able to meet a prospective borrower's needs. Another
commenter stated that HUD's third prong does not cover a manufactured
home retailer who forwards an application to a limited number of
lenders, and that the duty or incentive refers only to duties to or
incentives from a financing source, and not to a commission that the
individual may receive as a result of selling the home.
With respect to the term ``for compensation or gain,'' as in the
case of the comments submitted on ``taking an application,'' and
``offers or negotiates,'' commenters generally did not offer a
definition for this term but offered examples of activities that the
commenters believe should fall outside of the scope of ``for
compensation or gain.'' Some commenters stated that ``for compensation
or gain'' requires a nexus between the compensation or gain and the
``offering or negotiating activity, or should include only a commission
that is contingent on the closing of a loan or sale, and not salary.
Commenters stated that the following should be clarified as not
constituting activities that are undertaken ``for compensation or
gain'' under the SAFE Act: (a) A salesperson's commission for the sale
of a manufactured home to the extent that the commission is the same in
a cash transaction and in a financed transaction; and (b) any benefit
that is the same in a financed transaction as in a cash transaction.
Other commenters recommended that the term ``for compensation or gain''
be defined to exclude an employee of a 501(c)(3) or government
organization that will receive no gain or benefit from the transaction.
The majority of commenters who provided suggestions on how these
terms should be revised or clarified did so in the context of various
categories of professions that should be excluded from coverage under
the SAFE Act.
HUD Response: The definitions of ``tak[ing] a residential mortgage
loan application,'' ``offer[ing] or negotiate[ing] terms of a
residential mortgage loan,'' and ``for compensation or gains'' largely
determine whether or not a particular individual is subject to
licensing requirements, and HUD specifically solicited comment on the
definitions provided in the proposed rule.
Takes an application. HUD's proposed rule provided that
``application'' includes any request from a borrower, however
communicated, for an offer (or in response to a solicitation of an
offer) of residential mortgage loan terms, as well as the information
from the borrower that is typically required in order to make such an
offer. The proposed rule provided that HUD views the phrase ``tak[ing]
an application'' to mean receipt of an application for the purpose of
deciding whether or not to extend the requested offer of a loan to the
borrower, whether the application is received directly or indirectly
from the borrower. HUD stated that it generally would not be possible
for an individual to offer or negotiate residential mortgage loan terms
without first receiving the request from the borrower, as well as the
information typically contained in a borrower's application.
Accordingly, the provision retained in Sec. 3400.103(c)(1) of this
final rule, which provides that an individual takes an application,
whether he or she receives it ``directly or indirectly'' from the
borrower, means that an individual who offers or negotiates residential
mortgage loan terms for compensation or gain cannot avoid licensing
requirements merely by having another person physically receive the
application from the prospective borrower and then pass the application
to the individual.
HUD disagrees that this clarification converts the statutory two-
pronged ``and'' definition into an ``or'' definition that is met by
satisfying only one prong. (The commenter may be confusing the Model
State Law with HUD's proposed rule.) Instead, the clarification merely
prevents subversion of the SAFE Act's licensing regime through use of a
``straw man,'' and recognizes that it is the act of offering or
negotiating residential mortgage loan terms for compensation or gain in
conjunction with receipt of an application that subjects an individual
to licensing requirements. An individual who merely takes an
application, but never offers or negotiates loan terms, is not required
to be subject to licensing by the SAFE Act. Similarly, a person who
makes an offer of loan terms without ever receiving, directly or
indirectly, an application from the borrower, is not required to be
covered by the SAFE Act.
The proposed rule also provided that HUD interprets the term
``takes a residential mortgage loan application'' to exclude an
individual whose only role with respect to the application is
physically handling a completed application form or transmitting a
completed form to a lender on behalf of a prospective borrower. This
interpretation is consistent with the definition of ``loan originator''
in section 1503(3)(A)(ii) of the SAFE Act, and with HUD's above
discussion of ``takes an application.''
Organizational change. The corresponding provision, regarding
``administrative or clerical tasks,'' has been moved to Sec.
3400.103(e)(4) in this final rule for organizational clarity. It is
HUD's view that the provisions in the final rule clearly exclude these
activities, and that changes requested by some commenters for further
clarification are unnecessary.
HUD agrees with a commenter's observation that an application
consists of both the request for an offer of loan terms and the
information about the borrower, as more specifically provided in the
definition. HUD's view is that this is made clear by the definition's
use of the word ``and.'' HUD also agrees that a loan originator's
duties generally do not include ``deciding'' whether to offer credit,
and that use of the word ``influencing'' could be read to imply an
activity that is generally not appropriate for a loan originator.
Rule clarification. To clarify that this was and is not HUD's
intended meaning, Sec. 3400.103(c)(1) is revised slightly to clarify
that the application is received for the purpose of ``facilitating a
decision'' whether to extend an offer.
Offers or negotiates. HUD advised in the proposed rule that it
views the terms ``offers or negotiates'' broadly. HUD views these terms
as encompassing interactions between an individual and a borrower with
respect to prospective loan terms where the individual is likely to
seek to further his or her own interests or those of a third party.
Accordingly, the proposed rule, in Sec. 3400.103(c)(2), stated that
the terms include interactions that are typical between two parties in
an arm's length relationship to facilitate the formation of a contract,
such as presenting loan terms for acceptance by a prospective borrower
and communicating with the borrower for the purpose of reaching an
understanding about prospective loan terms. The proposed rule
specifically clarified that the third prong of ``offers or negotiates''
encompasses actions by an individual that make a prospective borrower
more likely to accept a particular set of loan terms or an offer from a
particular lender, where the individual may be influenced by a duty to
or incentive from any party other than the borrower. Such actions may
be functionally equivalent to and have the same effect on the
borrower's decision
[[Page 38470]]
as a direct offer or negotiation, but without the borrower's knowledge
or understanding that other options may be available. HUD generally
agrees with the commenters' observation that HUD's proposed first prong
of the provision clarifying ``offers or negotiates,'' under which an
individual presents, for acceptance by a borrower, residential mortgage
loan terms, has similarities with an extension of an offer under
contract law.
Rule clarification. However, to prevent any confusion that might
arise as a result of this analogy, HUD is clarifying in this final rule
that the offer need not be capable of acceptance at the time it is
presented, as an offer typically would be under contract law.
As the Federal banking agencies clarified in their final rule, the
loan terms presented may be conditional or subject to additional
verification, and other steps may remain in completing the loan
process. (See, e.g., Appendix A to subpart F of Part 34--Examples of
Mortgage Loan Originator Activities, paragraph (b), at 75 FR 44687-88.)
In addition, the individual typically lacks authority to bind the
entity that would provide the prospective loan, which is another
distinction from an agent-principal relationship under contract law.
Rule clarification. To clarify these distinctions, this final rule
provides at Sec. 3400.103(c)(2)(i)(A) that under the first prong, an
individual presents the loan terms for ``consideration'' rather than
for ``acceptance'' by a borrower. To prevent any misunderstanding that
the prong covers an individual who presents merely generic or
illustrative loan terms for general consideration by the borrower, this
final rule further clarifies that the individual must present
``particular'' residential mortgage loan terms. Through this change,
HUD intends to cover the presentation of loan terms that are identified
as being prospectively available from one or more lenders to similarly
situated prospective borrowers.
Similarly, HUD generally agrees with the commenters' observation
that the proposed second prong of the provision clarifying ``offers or
negotiates,'' under which an individual communicates with a borrower
for the purpose of reaching an understanding about prospective loan
terms, is analogous to communications between parties to a prospective
transaction that have the purpose of reaching ``mutuality,'' as under
contract law.
Rule clarification. Accordingly, HUD is clarifying at Sec.
3400.103(c)(2)(i)(B) that the purpose of such communications is
``mutual understanding.'' However, the individual need not have
authority to alter the rate in the course of such communications, and
this second prong can be satisfied by communicating with the purpose of
reaching mutual understanding, even if such understanding is never in
fact achieved.
With these clarifications, HUD agrees that in general, the
following activities described by the commenter--(a) the mere sharing
of general information about a financing source; (c) discussing
hypothetical financing options, i.e., options not related to a specific
financing source; (e) giving the homebuyer a list of available
financing sources without recommending any of the sources; (f)
discussing a buyer's ability to afford a home; (h) presenting or
discussing generic facts or generic rate sheets; and (i) closing
personal property transactions--would not be covered under ``offers or
negotiates.'' Whether the commenter's examples of the following
activities--(b) acting as a conduit between the homebuyer and a
financing source without engaging in specific discussion of financing
options from a particular funding source; (d) presenting a spectrum of
options; and (g) discussing of various alternative financing options--
would be covered would require additional facts and analysis under the
provisions, as explained above. For example, ``acting as a conduit
between the homebuyer and a financing source'' could constitute a mere
administrative task, if the activity consists of merely physically
handling or faxing a document in accordance with the unsolicited
request of the borrower or of a licensed loan originator, or it could
constitute taking an application or offering or negotiating loan terms,
depending on the facts and circumstances.
HUD disagrees with the commenters who characterized as
inappropriate the proposed third prong, which provides that an
individual offers or negotiates terms of a residential mortgage loan by
referring the 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 cautions that each of the
prongs clarifying ``offers or negotiates'' must be read in conjunction
with the statutory and regulatory provision that an individual must
also ``take an application'' and that there must be a nexus between the
two activities. An individual's generic referral to or recommendation
of a particular lender, divorced from any receipt and consideration by
the individual of the prospective borrower's application (i.e., his or
her request and information that is customary in a decision on whether
to extend an offer of loan terms), would not likely trigger the third
prong. Instead, it would be triggered by an individual's referral to a
particular lender or set of loan terms in conjunction with the
individual's receipt and consideration of the information received from
the borrower.
Properly understood in this context, the third prong is simply a
specific application of the first prong, under which an individual
directly presents for the borrower's consideration particular loan
terms that are identified as being available from one or more lenders
to similarly situated borrowers. The third prong merely clarifies that,
just as with ``taking an application,'' the individual cannot avoid
applicability of the SAFE Act by bifurcating the function; e.g., by
directing the prospective borrower to another individual or entity that
will reveal the details of the terms that the first individual has
identified as prospectively available to similarly situated borrowers.
However, the third prong is further qualified to provide that it
applies only to an individual who performs the described function in
accordance with a duty to or incentive from a person other than the
prospective borrower. This qualification ensures that it does not
inadvertently cover individuals who merely provide advice to
prospective borrowers in a wholly charitable or disinterested manner.
Accordingly, coverage of the commenter's example of a manufactured
home retailer who forwards an application to a limited number of
lenders would require additional facts and analysis. HUD understands
that there may be a limited number of such lenders that serve a
particular geographical area, and even fewer that provide financing for
a particular class of transaction. While HUD disagrees with the
commenter's assertion that the referenced ``duty to or incentive from''
refers only to duties to, or incentives directly from a financing
source, the inquiry would not end there. Even if an individual faced
the prospect of earning a commission or other incentive in connection
with the sale of the home, coverage would depend on whether the range
of prospective lenders to whom the individual forwarded the application
was shaped by, or was ``in accordance with,'' the commission or other
incentive. If the individual forwarded the application to all
prospective lenders known to the individual to provide prospective
financing, or a fair sampling of them that is not skewed based on such
incentives, then the individual would likely not be covered.
[[Page 38471]]
For compensation or gain. With respect to the term ``for
compensation or gain,'' the proposed rule defined this term in Sec.
3400.103(c)(2) to include any circumstances in which an individual
receives or expects to receive anything of value in connection with
offering or negotiating terms of a residential mortgage loan. The term
would not be limited to payments that are contingent upon closing a
loan. HUD agrees that there must be some nexus between the receipt of
money or anything of value and the activity that constitutes offering
or negotiating, since HUD has provided that the former must be ``in
connection with'' the latter. However, HUD disagrees that ``for
compensation or gain'' should be defined to cover only those
transactions that involve a commission that is contingent on the
transaction. HUD construes the term broadly to ensure that consumers
receive the full protection of the licensing requirements of the SAFE
Act, and HUD notes that the Federal banking agencies have followed the
same approach in their final rule. (See, e.g., Appendix A to subpart F
of Part 34--Examples of Mortgage Loan Originator Activities, paragraph
(c)(1), at 75 FR 44688.) An individual who acts as a loan originator
purely as a volunteer, such that the individual does not receive or
expect to receive anything of value in connection with offering or
negotiating terms of a residential mortgage loan, is not subject to
SAFE Act licensing requirements.
Accordingly, the example of 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.'' However, as discussed above,
physically handling an application or other documents or engaging in
generic discussions do not necessarily constitute offering or
negotiating and, accordingly, may not subject the individual to
coverage even if they would otherwise be acting for compensation or
gain. Similarly, as discussed below, HUD's analysis of whether
employees of certain bona fide nonprofit organizations and government
agencies are subject to coverage depends on considerations other than
whether they undertake activities ``for compensation or gain.''
Rule clarification. For purposes of clarification, HUD adds to
Sec. 3400.23 (Definitions), a definition for ``for compensation or
gain,'' which cross-references to the discussion of this term in Sec.
3400.103(c)(2)(ii).
Engaging in the business of a loan originator. HUD disagrees with
the commenters who asserted that HUD may not define ``engag[ing] in the
business of a loan originator'' to include representing to the public
that an individual can or will perform the services of a loan
originator. HUD is aware that a version of a bill that preceded
enactment of the SAFE Act contained a similar provision in the
definition of ``loan originator,'' and that the SAFE Act as enacted did
not include the provision in the definition of ``loan originator.''
Congress opted to provide that the test that determines whether an
individual is subject to licensing requirements is different from
merely whether one meets the definition of a ``loan originator.''
Rather, one must ``engage in the business of a loan originator.''
HUD declines to ignore this distinction and instead construes the
statute's undefined provision in a common-sense manner. As further
discussed below, in consideration of applicability of the SAFE Act to
government agencies and certain bona fide nonprofit organizations, it
is possible for one's activities to meet the literal definition of a
loan originator without amounting to ``engag[ing] in the business of''
a loan originator. Concomitantly, as is the case in the regulation of
other professions such as the practice of law and medicine, this final
rule provides that an individual may ``engage in the business of a loan
originator'' by representing to the public that one can provide the
services of a loan originator, even if the individual is lying,
otherwise fails to provide such services, or has not yet done so. HUD's
position is that the SAFE Act does not require a state supervisory
authority to sit idly by until such an individual actually receives all
of a prospective borrower's confidential and financial information,
disseminates it, and presents loan terms to the borrower, before the
individual becomes subject to licensing or enforcement actions.
Organizational change. Similar to the approach taken by the Federal
banking agencies in their rulemaking, this final rule includes an
Appendix that provides examples of activities of someone who is engaged
in the business of a loan originator.
C. Scope of State Licensing Requirements and the Definition of
``Employee''
1. Comment: Community banks should be distinguished from
nondepository mortgage lenders. A commenter states that community banks
should be distinguished from nondepository mortgage lenders because
community banks are already highly regulated and are more invested in
the communities they serve.
HUD Response: The SAFE Act distinguishes between depository
institutions and nondepository mortgage lenders. The SAFE Act requires
the licensing and registration, or just registration, of anyone who
engages in the business of a loan originator. The determination of
whether a loan originator falls under the Federal banking agencies
rules for registration of loan originators, or the requirements for
state licensing and registration of loan originators, is determined by
whether or not the individual is an employee of a depository
institution or subsidiary of a federally regulated depository
institution, as that term is defined in the Act. (See 12 U.S.C.
5102(2), incorporating the definition of ``depository institution''
from section 3 of the Federal Deposit Insurance Act (FDI Act), and
including credit unions.) Therefore if an institution (such as a
community bank, as cited by the commenter) meets the definition of a
depository institution under the FDI Act, then an individual who meets
the definition of a loan originator and is an employee of that
institution would be subject to the registration requirements under the
final rule recently issued by the Federal banking agencies, rather than
the licensing and registration requirements of this final rule.\7\
---------------------------------------------------------------------------
\7\ HUD notes that some employees of federally regulated
institutions may also be subject to the state licensing and
registration regime. For example, employees who act as mortgage loan
originators for a bank and a nondepository subsidiary of a bank
holding company that is not a subsidiary of a depository institution
would be subject to both the Federal and state regimes.
---------------------------------------------------------------------------
2. Comment: HUD's provision of a default definition of ``employee''
and deference to any definition provided by the Federal banking
agencies--support and opposition. The majority of commenters who
commented on the definition of ``employee'' supported HUD's approach of
providing a default definition of ``employee'' while subjecting the
default definition to any binding definition promulgated by the Federal
banking agencies for purposes of the SAFE Act. One industry association
stated that HUD should not cede authority to the banking agencies to
craft any definition they determine appropriate.
Other commenters urged HUD to alter its default definition to
provide that an ``employee'' includes an independent contractor who is
a loan originator for a federally regulated depository institution.
Some commenters suggested
[[Page 38472]]
that the definition be expanded to include only independent contractors
who are exclusive agents of a federally regulated banking institution.
One commenter supported the default definition's ``right to control''
test, but urged HUD to clarify that the W-2 form on which an
individual's income must be reported is to be issued by the person with
the right to control the individual. Others urged HUD to eliminate the
W-2 requirement from its definition. One commenter asserted that
because one bank has extensive in-house training for its independent
contractor loan originators, who are subject to performance review and
discipline by the bank, such state licensing would be unnecessary.
HUD Response: HUD is maintaining, in this final rule, its approach
of providing a default definition of employee and then subjecting that
definition to any binding definition issued by the Federal banking
agencies. HUD's approach ensures that there is no gap or overlap
between the jurisdictions of state supervisory authorities or confusion
over which jurisdiction governs a loan originator.
Under the terms of this final rule, a state must require an
individual who engages in the business of a loan originator to be state
licensed, unless the individual meets HUD's definition of an employee
of a federally regulated depository institution or of such an
institution's federally regulated subsidiary, a credit union, or Farm
Credit System institution. The Federal banking agencies final rule
states that ``Pursuant to section 1503(11) of the SAFE Act, Agency-
regulated institutions and their employees who are acting within the
scope of their employment with the Agency-regulated institutions are
not subject to State licensing or registration requirements for
mortgage loan originators.'' \8\ Should the Federal banking agencies
provide a different binding definition, then individuals who meet that
definition will be subject to registration as loan originators, and
other loan originators will be subject to state licensing. While HUD's
default definition reflects HUD's views about how to best define
employee and thereby delineate state supervisory authorities'
jurisdiction, HUD's view is that it is more important to ensure that
there are no gaps, overlap, or confusion concerning which jurisdiction
applies to a given individual.
---------------------------------------------------------------------------
\8\ See Federal banking agencies final rule published on July
28, 2010, at 75 FR 44657, column 3, footnote 1.
---------------------------------------------------------------------------
As stated earlier in this preamble, it is HUD's position, as it was
for the Federal banking agencies in their rulemaking, that the common
law ``right to control'' test and the W-2 income reporting requirements
are important elements in determining who is and who is not an
employee. Use of both elements is common in Federal agency practice,
including HUD's practice under other programs. The depository
institution's right to control the manner and means of all the loan
originators work (not just those activities expressly governed by
Federal banking agency regulations) is an important provision in the
definition. It ensures that if a federally regulated depository
institution does not have the right to control and is not responsible
for every aspect of a loan originator's interactions with a consumer,
then the consumer whose financial well-being is at stake will be
assured that the loan originator has satisfied the more rigorous state
licensing requirements, which include character and fitness, education,
and testing. The W-2 requirement is important to ensure that state
supervisory authorities are able to readily and efficiently determine
which loan originators are subject to their state licensing
requirements, and which are not, without having to undertake an
extensive analysis for each individual under common law doctrine.
Although the Federal banking agencies have not provided a
definition of employee in their regulatory text, they stated in the
preamble to their final rule (language which HUD cited earlier in this
preamble) that they intend ``employee'' to have the common law meaning
that includes the ``right to control'' test. They also stated that the
Internal Revenue Service uses the same test to determine whether an
individual is an employee and, accordingly, whether an institution must
file a W-2 form for the individual. The Federal banking agencies
provide for registration only of loan originators who are employees of
the institutions they regulate. If HUD were to follow the suggestion of
some commenters by defining ``employee'' more broadly than the meaning
intended by the Federal banking agencies, such as by including
independent contractors or exclusive agents, then the anomalous result
would be that such individuals would be subject to neither state
licensing requirements nor the Federal banking agency registration
requirements.
The Federal banking agencies are in a better position than HUD to
evaluate whether the activities of an independent contractor working on
behalf of a depository institution they regulate are subject to
sufficient control and regulation such that consumers would be as
protected as if such an individual is subject to state licensing. In
the event they define ``employee'' to include such individuals, HUD's
definition by its own terms defers to such a banking agency definition.
Rule clarification. As also noted earlier, HUD agrees with the
commenter's suggested language clarifying that the W-2 form must be
provided by the person that has the right to control the individual.
The suggested language clarifies HUD's intended meaning, and HUD has
made the suggested change in the definition of ``employee'' in Sec.
3400.23.
3. Comment: Each banking agency may promulgate its own definition.
Several commenters asked HUD to clarify that each Federal banking
agency retains authority to define the term ``employee'' for
institutions subject to its jurisdiction, rather than jointly through
the Federal Financial Institutions Examination Council (FFIEC).
HUD Response: The SAFE Act provides for the Federal banking
agencies, jointly through the FFIEC, to develop the rules for
registering employees of depository institutions and their federally
regulated subsidiaries. Such an approach to promulgating regulations
helps ensure for uniformity and clarity regarding which individuals are
subject to registration and which are not, and HUD's definition is
phrased accordingly. Although HUD defers to the Federal banking
agencies to determine whether the SAFE Act permits each agency to
promulgate disparate definitions of the term ``employee,'' HUD notes
that the Federal banking agencies have affirmed that they all intend
``employee'' to have the common law meaning that is also used for
purposes of W-2 reporting. (See Federal banking agencies final rule at
75 FR 44664.)
D. Individuals Requiring Licensing Under the SAFE Act
1. Comment: Exclude seller financing of several seller-owned
properties from SAFE Act mortgage licensing. A significant portion of
the comments submitted on HUD's SAFE Act proposed rule pertained to the
issue of a property owner selling and financing the sale of his or her
own property. Many of the comments were duplicative of one another,
making the same or similar point why individuals who provide seller
financing should not be subject to licensing under the SAFE Act. The
following provides the various issues and situations pertaining to
seller financing raised by the commenters, and
[[Page 38473]]
for which clarification was sought with respect to licensing coverage
or noncoverage under the SAFE Act.
Commenters identified special situations where licensing should not
be required, including: Retirees selling a limited number of investment
properties; heirs selling an inherited property; sales of vacant lots;
sales of homes in floodplains; property transfers resulting from
divorce and health issues; sales required by natural disasters; the
sale of a former residence; the sale of a home of a relative going into
assisted care; persons who take back a deferred purchase money mortgage
in connection with the sale of residential real property owned by, and
titled in the name of, those persons; investors who provide a service
to the community by providing a housing option that buyers could not
otherwise obtain; home renovators who perform a valuable service by
improving homes and making them available to communities; entities
whose primary function is the acquisition, improvement, and sale of
residences through seller-financed mortgages; and any person or company
that originates and services a loan for which that person or company
holds the note and does not resell the loan in the open market.
Commenters stated there are negative tax consequences to not being
able to finance the sale of investment properties. One commenter stated
that section 453 of the Internal Revenue Code allows for the
incremental reporting of gain using the installment sale method. The
commenters stated that this option may no longer be available for
residential investment properties if HUD's proposed rule is not
clarified to exclude owner extended financing (of these properties). A
commenter stated that in the case of tax foreclosure properties, many
banks will not lend on the properties for the first 2 years after the
foreclosure sale so that owner financing is the best way to sell them.
Commenters stated that requiring seller-financers to become
licensed will hamper the recovery of the housing market or harm the
economy. Some commenters stated that there is a high percentage of
unsold homes on the market and that many buyers are having difficulty
obtaining financing from banks and institutional lenders; some of these
commenters specified that an estimated 4.5 percent of Americans own
three or more properties, many purchased solely as investment
properties, that 40 percent of non-owner occupied residences are mobile
homes, which are more difficult to sell with bank financing, and that
approximately 5 percent of homes in the United States are for sale or
for lease, stating that seller financing may be key to liquidating this
inventory. Commenters stated that approximately 10 percent of home
sales are some form of seller financing.
Commenters stated that seller financing could help revitalize
declining neighborhoods, and that the liquidity of the investor market
depends on seller financing, and that without this exit strategy,
distressed properties will not be purchased but will sit and decay,
depressing neighborhoods and home values. A commenter stated that the
rule will place property owners at risk of prosecution, of financial
penalties, and of court revocation of equitable agreements, if they
finance the sale of their own property. Some commenters stated that
owner financing of nonowner-occupied properties encourages employment
for tradesmen to fix the properties, provides an opportunity for older
people who may want to move to get equity from their houses, and allows
workers who may have to move a way to quickly sell their houses.
Other commenters asked that individuals be allowed to use seller
financing without being licensed for some limited number of properties
in addition to their personal residence. Commenters proposed limited
exceptions to the proposed rule, such as including investment
properties (or a limited number of such properties) in the exclusion
from licensing; allowing sales of specified numbers of seller-financed
properties without licensing, ranging from 5 to 20 properties;
exempting sellers who occasionally provide financing, with one
commenter mentioning 8 or fewer properties in any 12-month period; and
allowing seller financing for a limited period of time, up to 5 years,
while some commenters suggested shorter periods such as 6 to 12 months,
at the end of which the loan would have to be transferred to a
traditional lender; this would give the buyer time to repair credit and
arrange bank financing. A commenter stated that there should be an
exemption for sellers who provide financing for a vacation home, second
home, or rental property even if they never resided in the home, where
the financing is provided for the purpose of rehabilitating and
flipping the property for resale. As precedents for this proposal, this
commenter cited the Truth in Lending Act (TILA) and its implementing
Regulation Z, RESPA, and several state laws.
Other commenters suggested that seller financing should be allowed,
but with safeguards for the buyer, such as an interest rate ceiling, a
clear summary of payment terms and totals, training materials on
mortgage loans, or a summary of best practices, that would be required
to be provided to the borrower. A commenter stated that instead of this
regulation, HUD should create a grievance committee for buyers who have
been defrauded and punish individuals and reverse bad contracts. A
commenter stated that HUD should set legal guidelines for all
residential mortgages, whether institutional or not, to ensure that the
mortgage contract and the buyer meet the same criteria institutional
lenders must follow, with some ``wiggle room'' for a seller that
institutions will not handle because of their internal guidelines. A
commenter suggested that the rule should require a half-day class on
the pros and cons of seller financing. Another commenter stated that
there should be a full disclosure of the nature of the loan in all
origination documents, and litigation against predatory or negligent
lenders should be a ``black and white issue'' so that lenders are
forced to disclose their full intentions and expected outcomes with
complete transparency.
HUD Response: As an initial statement, HUD confirms the commenters'
observation that a ``residential mortgage loan'' includes an
installment sales contract, which the commenters advise is frequently
involved in seller financing. ``Residential mortgage loans,'' as
defined by section 1503(8) of the SAFE Act, refers to typical financing
mechanisms such as mortgages and deeds of trusts. In addition, the SAFE
Act definition also includes ``other equivalent consensual security
interest on a dwelling (as the term `dwelling' is defined by section
103(v) of TILA) or residential real estate upon which is constructed or
intended to be constructed a dwelling,'' which has the potential for
including a broad range of other financing mechanisms. For the purposes
of this rule, ``equivalent consensual security interests'' specifically
include installment sales contracts, consistent with the treatment by
many states of such contracts in the same manner as mortgages and
purchase money mortgages offered by sellers of residential real estate.
While there is no formal recorded lien held by the provider of
financing, the fact that the seller holds title to the property until
the contract has been paid in full is the practical equivalent of a
lien for purposes of the SAFE Act and its purposes and is comparable to
the status of a mortgage in a state that follows title
[[Page 38474]]
theory under mortgage law. Inclusion of installment sales contracts in
the scope of the definition of ``residential mortgage loan'' is also
consistent with section 103(w) of TILA and 12 CFR 226.2(a)(24) of the
Federal Reserve Board's implementing regulations (Regulation Z), both
of which include in the definition of ``residential mortgage
transaction,'' a purchase money security interest arising under an
installment sales contract.
As a second matter, HUD notes that nothing in the SAFE Act rule
prohibits an individual property owner from financing the sale of his
or her own property, nor does the SAFE Act require an individual to
become a licensed loan originator in order to provide financing in the
sale of his or her property. It is equally important to note that who
owns a property and who is selling a property is not determinative in
deciding who is subject to licensing by the SAFE Act and who is not.
The SAFE Act requires that an individual who engages in the business of
a loan originator with respect to the financing be licensed.
Accordingly, it is the individual who has the described interaction
with the borrower or prospective borrower in regard to the financing
who is subject to licensing, not the funding source, that is subject to
SAFE Act licensing. A seller financing the sale of his or her own
property completely avoids the issue of licensing by retaining the
services of a licensed loan originator and having that individual carry
out the functions that constitute engaging in the business of a loan
originator.
While the SAFE Act does not exclude from licensing sellers who
finance the sale of properties they own, it is HUD's position, as
stated earlier in this preamble, that, absent evidence to the contrary,
the sale and financing of one's own residence, vacation home or
property, or inherited property, such as through an installment sales
contract, does not constitute engaging in ``the business of a loan
originator'' and therefore generally would not require licensure under
the SAFE Act. As HUD stated in the proposed rule, the frequency with
which a particular seller provides financing to a buyer to facilitate
the sale of the seller's own residence is so limited that Congress
could not have intended to require such sellers to obtain loan
originator licenses. The final rule affirms this point by adding the
concept of habitualness or repetition expressly into Sec. 3400.103(b)
of the rule. HUD recognizes, as stated earlier in this preamble, that
the difficulty for states is with a situation raised by many commenters
where a property owner is providing seller financing in conjunction
with sales of his or her own properties in such numbers and perhaps at
such frequency that the owner appears to be engaged in the business of
a loan originator. While the fact that the seller has not lived in the
properties being sold would make it more likely that financing is
provided in order to obtain a profit, and would therefore make it more
likely that a commercial context is present, the infrequency with which
a particular seller undertakes such actions, combined with the fact
that it is the individual who is providing the financing (rather than a
business entity that regularly provides financing), may mean that the
requisite habitualness needed to constitute engag[ing] in the
``business'' of a loan originator is absent. On the other hand, for
example, a builder who repeatedly acts as a loan originator in the
course of selling homes he or she has constructed would almost
certainly satisfy the requirements of a commercial context and
habitualness or repetition and, accordingly, would be subject to SAFE
Act licensing requirements.
Rule change and clarification. HUD removes from Sec. 3400.103(e)
(which pertains to individuals not required to be licensed by states)
reference to individuals who offer or negotiate terms of a residential
mortgage loan only on behalf of an immediate family member of the
individual and reference to an individual who only offers or negotiates
terms of a residential mortgage loan that is secured by a dwelling that
served as the individual's residence. HUD will move reference to
individuals engaged in these activities to the Appendix that is being
added to this final rule, which provides examples of individuals who
should and should not be licensed under the SAFE Act.
With respect to the issue of favorable tax treatment, the fact that
a loan originator must be licensed does not, as far as HUD is aware,
prevent anyone from taking advantage of favorable tax treatment, as
suggested by a commenter. An individual who wants to sell using the
installment sale method, if allowed under state law, may become
licensed or work with a licensed loan originator. As far as foreclosure
properties are concerned, states can take such situations into account
when determining, for example, fees for licensing.
With respect to the suggestions to establish borrower safeguards in
lieu of loan origination licensing, nothing in the SAFE Act suggests
that Congress intended to substitute borrower safeguards for licensing
of loan originators. Additionally, HUD notes that the SAFE Act is
designed to establish the minimum requirement for the licensing of
individuals, not entities. Therefore, licensing requirements for
entities are outside of the scope of the SAFE Act.
2. Comment: Exclude financing of mobile/manufactured homes,
recreational vehicles, and house boats from SAFE Act mortgage
licensing. Some commenters cited mobile home, house boat, and
recreational vehicle sales as a special category of transactions that,
because of the difficulties of obtaining bank financing in that
industry, should be exempt from any requirement for individual sellers
offering financing to be licensed. Commenters stated that mobile home
sellers should not be included in licensing requirements, because many
state laws treat these loans as chattel mortgages and traditional
mortgage requirements do not apply, the manufactured home industry is
in decline and requiring licensing would hurt it more, many
manufactured home sellers do a minimal amount of business, and many
manufactured home sellers do nothing more than transmit paperwork
between the buyer and lender.
Other commenters suggested that there should be an exception for
sales in small manufactured housing communities because it is difficult
to obtain institutional loans, because such communities often deal in
very few sales per year, and because the staff often has to discuss
loan terms with buyers. A commenter stated that sometimes the
manufactured housing community itself acquires title to a manufactured
home and needs to be able to carry back a chattel mortgage in order to
be able to resell it.
Another commenter stated, to the contrary of the preceding
comments, that there should be no exemption in the manufactured housing
context, because the financing available to manufactured home
purchasers today is through ``captive'' loan programs offered by home
dealers or community owners. The commenter further stated that since
these homes are not considered real property in most states, no RESPA
disclosures are required, no appraisal based on comparables takes
place, and no realtor advises the buyer, and that these factors
underscore the importance of buyers dealing with licensed and trained
professionals.
Other commenters stated that originating five or fewer manufactured
home loans per year should be exempt; one of these noted that the
Federal banking agency rule exempts five or
[[Page 38475]]
fewer originations per year. Some commenters stated that an individual
``infrequently'' helping consumer obtain a home loan should be exempt
from SAFE Act coverage.
HUD Response: As noted in a response to an earlier comment, the
SAFE Act defines the term ``residential mortgage loan'' to mean ``any
loan primarily for personal, family, or household use that is secured
by a mortgage, deed of trust, or other equivalent consensual security
interest on a dwelling (as defined in section 103(v) of the TILA) or
residential real estate upon which is constructed or intended to be
constructed a dwelling (as so defined).'' (See section 1503(8) of the
SAFE Act.) Section 103(v) of TILA defines the term ``dwelling'' as
follows: ``a residential structure or mobile home which contains one to
four family housing units, or individual units of condominiums or
cooperatives.'' Section 103(v) of TILA is implemented in Regulation Z,
at 12 CFR 226.2(a)(19), which states as follows: ``Dwelling means a
residential structure that contains 1 to 4 units, whether or not that
structure is attached to property. The term includes an individual
condominium unit, cooperative unit, mobile home, and trailer, if it is
used as a residence.'' HUD does not have authority to alter the meaning
of ``dwelling'' in section 103(v) and its implementing regulations.
Accordingly, an individual engaging in the business of a loan
originator with respect to a loan that is to be secured by a
manufactured home, mobile home, recreational vehicle, house boat, or
trailer that is to be used as a residence is subject to licensing under
the SAFE Act. Even if a state categorizes loans secured by such
residential structures as chattel mortgages, the SAFE Act covers these
loans and such states must ensure that individuals engaging in the
business of a loan originator with respect to these loans are licensed
under the SAFE Act. As discussed above under Section B, ``Key
Definitions: `Taking an Application,' `Offers or Negotiates,'
`Compensation or Gain,' and `Engaging in the Business of a Loan
Originator,' the determination of whether an individual involved in the
sale of a manufactured home is covered by the SAFE Act depends upon the
particular activities of the individual.
In regard to the request for a de minimis exemption for
manufactured home loans, as noted in HUD's response to the earlier
comments on seller financing, HUD has no authority to establish a de
minimis exemption for individuals who are engaged in the business of a
loan originator. Unlike the provisions of the SAFE Act applicable to
the Federal banking agencies, section 1505 of the SAFE Act, which
involves state registration and licensing, makes no allowance for any
de minimis exception.
3. Comment: Individuals involved in loan modification do not engage
in the business of a loan originator under the SAFE Act. HUD
specifically requested comment on whether individuals who perform loan
modifications that involve offering or negotiating loan terms that are
materially different from the original loan require licensing under the
SAFE Act. The Federal banking agencies, in their proposed rule, also
specifically requested comment on whether the definition of ``mortgage
loan originator'' should cover individuals who modify existing
residential mortgage loans, engage in approving loan assumptions, or
engage in refinancing transactions and, if so, whether these
individuals should be excluded from the definition.
While a few commenters submitted that individuals engaged in
mortgage loan modification and assumption transactions should be
subject to SAFE Act mortgage licensing, the majority of commenters on
this issue stated that these individuals should not, and do not, fall
under SAFE Act coverage. In general, they stated that mortgage loan
modifications and assumptions are very different from mortgage loan
originations, and that employees engaged in these transactions do not
meet the SAFE Act's definition of mortgage loan originator.
Specifically, several commenters indicated that these employees do not
take residential mortgage loan applications because, the commenters
asserted, an ``application'' implies a new loan. Some commenters argued
that they do not negotiate the terms of a new residential mortgage
loan, because the institution or investor sets the parameters for
permissible modifications and the individual has no authority to alter
the terms of permitted modifications. Similarly, commenters stated that
modification programs, including the Administration's Home Affordable
Modification Program (HAMP), are highly prescriptive and that terms are
derived by using a set percentage of gross income that applies to every
borrower. Some commenters stated that in a modification the terms of a
mortgage loan are not negotiated but are merely adjusted based on
calculations that accommodate the borrower and mitigate the investor's
losses. Other commenters stated that in a modification, an existing
loan is renegotiated with the goals of mitigating any loss to the
institution and, in the case of modifications, providing the borrower
with a more affordable payment option or other type of modification or,
in the case of assumptions, replacing the party responsible for
repaying the mortgage loan.
Some commenters stated that some form of safeguard needs to be in
place to protect homeowners seeking modifications, but that licensing
is excessive. Commenters stated that if servicers and loss mitigation
specialists had to be licensed, the costs would be high. Commenters
stated that the cost to license one person in all 50 states, according
to the American Financial Services Association, would be approximately
$27,000. The cost of compliance for a company with 500 employees would
therefore be approximately $13.5 million. Licensure would also alter
the organization of loan modification activity (e.g., first-available
agent), requiring that the company direct individuals to employees
licensed in the state of the individual seeking the modification.
Commenters also stated that the courses and examinations required to be
licensed have little relevance to the tasks associated with loan
modification.
Commenters indicated that their employees who engage in
modifications and assumptions do not ever originate mortgage loans, and
that modifications and assumptions are performed in different
departments of the institution. Commenters also noted that applying the
SAFE Act's requirements to employees engaged in loan modifications and
assumptions could significantly hamper loan modification efforts.
HUD Response: HUD appreciates the many comments submitted on this
issue. HUD recognizes the competing concerns raised by this issue--the
need to ensure that homeowners undergoing material modifications to
their mortgages (i.e., generally modifications that can include a
change in interest, principal, and term of loan) are assisted by
individuals of integrity, experience, and competency, and the need to
avoid burdening such individuals and possibly deterring assistance to
troubled homeowners by placing additional requirements on loan
modifiers at the very time their assistance to provide material
modifications to troubled homeowners is in significant demand.
HUD therefore has determined not to address this issue in this
final rule, but to defer to the Bureau. If the Bureau determines that
individuals engaged in modifications of loans should be required by
states to be licensed under the SAFE Act, the Bureau may determine that
it has authority to
[[Page 38476]]
impose such licensing requirements. As noted earlier in this preamble,
the Bureau also has independent authority under the Dodd-Frank Act to
regulate individuals who engage in loan modifications and loan
servicing. States may also determine that such individuals are required
to be licensed under the terms of state legislation.
The decision to defer the issue of licensing of mortgage
modifications and assumptions to the Bureau does not affect HUD's
determination that refinances are covered by the SAFE Act. The Federal
banking agencies, in their final rule, also provide that refinance
transactions are covered by the SAFE Act.
4. Comment: Exclude from SAFE Act coverage third-party loan
modification specialists. In the preamble to HUD's proposed rule, HUD
also sought comment on whether third-party loan modification
specialists, who offer to act as intermediaries between borrowers and
their existing lenders to negotiate modifications to existing loan
terms, should be required to be licensed under the SAFE Act. While
several commenters expressed support for licensing of third-party loan
modification specialists, others were opposed to these proposals. Some
commenters argued that third-party loan modification specialists should
be covered if they receive compensation directly from the borrower or
if they are employed by for-profit entities, but not if they are
employed by nonprofit, HUD-approved housing counseling agencies.
HUD Response: HUD appreciates the many comments submitted on this
issue of coverage of third-party loan modification specialists. As with
loan modifications generally, HUD is leaving to the Bureau to decide
whether such individuals are covered by the SAFE Act and should be
licensed under the SAFE Act.
5. Comment: Clarify whether certain financial advisors are subject
to SAFE Act loan originator licensing. Commenters representing
securities broker-dealer companies urged HUD to withdraw the third
prong defining what is included in ``offers or negotiates'' (i.e.,
referring or steering a borrower to a particular lender or set of
terms) because, combined with some states' ``or'' definition of loan
originator, it would arguably subject some companies' financial
advisors to the SAFE Act's requirements. The commenters stated that
financial advisors, as part of their employment, routinely refer
clients to mortgage lenders affiliated with the advisors' companies,
though the advisors do not take applications. The commenters state that
licensing of financial analysts who undertake the described activities
goes well beyond the intent of the SAFE Act and would bring no benefit,
because financial advisors are already licensed and required to pass
tests that are directly relevant to their work. The likely result is
that securities brokerage firms would cease their limited marketing
activity of informing their customers of the availability of home
financing options. Commenters stated that financial advisors who merely
make their customers aware of (or refer to) a lender should not be
considered loan originators under the SAFE Act.
HUD Response: As explained in the above discussion of comments on
the meaning of ``offers or negotiates,'' HUD declines to withdraw the
third prong of its proposed definition. However, as also discussed
above, HUD cautions that each of the prongs clarifying ``offers or
negotiates'' must be read in conjunction with the statutory and
regulatory provision that an individual must also ``take an
application.'' An individual's generic referral to or recommendation of
a particular lender, divorced from any receipt and consideration by the
individual of the prospective borrower's application (i.e., his or her
request for an offer of loan terms and information that is customary in
a decision on whether to extend an offer of loan terms), would not
likely trigger the third prong. Determination of whether the SAFE Act
requires licensing of individuals described by the commenter would
depend, in part, on whether the individual takes an application, either
directly or indirectly, from the borrower or prospective borrower in
conjunction with making the referral.
HUD reiterates that this final rule interprets and implements the
SAFE Act. HUD does not purport to interpret state laws, which may
exceed the requirements of the SAFE Act, even if the state law uses
language identical to that found in the SAFE Act. Accordingly, HUD
cannot issue a blanket statement that all financial advisors are
subject or are not subject to licensing under the SAFE Act. The
activities of the individual financial advisor would need to be
examined to determine whether the individual is engaged in the business
of a loan originator, as a loan originator is defined in the SAFE Act
and this rule.
6. Comment: Clarify the exclusion of real estate brokerage
activities. A commenter asked whether a licensed real estate
practitioner, who would otherwise be exempt from licensing, but
receives a real estate commission from a lender selling property owned
due to foreclosure or otherwise, loses the exemption from the loan
originator registration requirements. Other commenters asked whether
HUD's discussion of loan modifications, which may involve a write-down
of principal, means that short sales would be covered.
HUD Response: Section 1503(3)(A)(iii) of the SAFE Act definition of
loan originator exempts individuals performing real estate brokerage
activities ``unless the person or entity is compensated by a lender, a
mortgage broker, or other loan originator or by any agent of such
lender, mortgage broker, or other loan originator; * * *.'' Without
additional information, it is difficult for HUD to provide a definitive
response to this question. However, the scenario described by the
commenter would appear to be one in which ``the person or entity is
compensated by a lender,'' and thus not included in the exemption for
real estate brokerage activities. The fact that the lender is the owner
of the property being sold and financed is not sufficient to fall under
the exception for real estate brokerage activities provided by the SAFE
Act.
Nonetheless, even if an individual does not meet the requirements
of the exemption for real estate brokerage activities, as a result of
receiving compensation from the lender, it must still be determined
whether the individual meets the definition of engaging in the business
of a loan originator. In particular, it would have to be determined
whether the individual ever ``takes an application'' and ``offers or
negotiates terms of a residential mortgage loan'' (as opposed to the
terms of a sale) within the meaning of the SAFE Act.
7. Comment: Government employees working in mortgage loan-related
areas should be exempt from SAFE Act coverage. Commenters stated that
there should be an exemption for employees of state and Federal
agencies who provide mortgage loans to consumers from resources
appropriated by the Federal or state government (including housing
finance agencies (HFAs)), or who engage in loan origination as part of
their government employment. A commenter stated that individuals
employed by or under the direct supervision of state or local
government agencies that deliver consumer programs, including
affordable mortgages, closing cost assistance, down payment loans, and
home equity loans, should not be covered. Commenters stated that
Federal employees administering Federal housing loan programs and
public housing homeownership programs should be exempt.
[[Page 38477]]
Commenters stated that HUD should clarify in its final rule that
municipal employees originating loans with Community Development Block
Grant (CDBG) or HOME Investment Partnership (HOME) funds are not
covered under the SAFE Act, and cited either the government source of
the money or the existing extensive regulations in these programs. Some
commenters stated that whenever an entity funds residential mortgage
loans with government funds, that activity should be exempt.
Several commenters stated that, in the governmental context,
``compensation or gain'' under the SAFE Act should not include
repayment of administrative costs paid by Federal, state, or local
governmental agencies to offset costs incurred by grantees or
contractors in carrying out government-funded affordable housing
programs. Other commenters stated that ``compensation or gain'' should
not include wages or hourly compensation of government workers
administering housing programs. A state housing and community
development agency recommended that HUD clarify the terms
``compensation or gain'' to exclude administrative costs paid out by
Federal, state, or local governmental agencies to offset costs incurred
by grantees or contractors in carrying out government-funded affordable
housing programs. Some commenters stated that the definition of
``compensation or gain'' should exclude anything of value, including
reasonable administrative fees retained by government agencies, costs
to reimburse for the provision of services, or that future servicing
income be excluded from the definition of ``compensation or gain.'' A
commenter stated that such exclusion should apply to all foreclosure
prevention, downpayment assistance, and property improvement financing
activities.
Another commenter suggested that an element of the definition of
``takes a residential mortgage loan application'' in Sec.
3400.103(c)(2)(i)(A) be revised to ``Presents for acceptance by a
borrower or prospective borrower residential mortgage loan terms of a
non-governmental residential mortgage.''
HUD Response: As discussed earlier in this preamble, HUD agrees
that employees of Federal, state, and local governments and HFAs
providing various forms of housing assistance do not ``engage in the
business'' of a loan originator, because they do not act in a
commercial context. Rather, these employees act in a public or
government context, and are not covered by the SAFE Act.
HUD's determination is based on the distinction that even if an
individual's activities are those described in the SAFE Act's
definition ``loan originator,'' they may nonetheless not constitute
``engag[ing] in the business of a loan originator,'' which is the
statutory standard for activities that a state is required to subject
to state licensing. Specifically, the activities may not arise to
``engage[ing] in the business'' of a loan originator if they take place
in a wholly public or government context, rather than in a commercial
context. To ensure that all of the individual's actions in the course
of acting as a loan originator are subject to the control of the agency
or housing finance agency and are consistent with the agency's public
or government mission, the individual must be an employee of the
agency. Furthermore, if the employee acts as a loan originator in a
commercial context in addition to his or her activities undertaken as
an employee of the governmental agency or housing finance agency, the
individual must be licensed under the SAFE Act.
Some commenters have suggested that HUD's determination of whether
the SAFE Act covers governmental employees should turn on the meaning
of ``for compensation or gain,'' and sought to exclude the receipt of
certain kinds of remuneration from the meaning of ``for compensation or
gain.'' However, as discussed above, HUD construes ``for compensation
or gain'' broadly and does not view as relevant distinctions about how
payments or prospective payments are described or characterized by the
payor or payee. HUD's determination that the SAFE Act applies to
individuals who act as loan originators in a commercial context makes
the distinction requested by the commenters unnecessary. In addition,
it is HUD's position that the ``for compensation or gain'' test under
the definition of ``loan originator'' plainly includes compensation or
gain received (or expected to be received) by an individual.
Accordingly, characterizations of payments made by a borrower or by a
government entity to the individual's employer are not dispositive of
whether the individual offers or negotiates residential mortgage loan
terms for compensation or gain.
8. Comment: Exclude from coverage individuals who undertake loan
origination for nonprofit organizations. Commenters stated that
501(c)(3) nonprofit organizations that help low- and moderate-income
individuals obtain financing to purchase homes would not be able to
continue to provide such assistance if their loan originators had to be
licensed under the SAFE Act. Commenters stated that such nonprofit
organizations cannot utilize third-party brokers to originate their
loans due to liability issues and that any training required to be
provided to loan originators will not address the special financial and
planning needs of low-income borrowers. Commenters asserted that the
SAFE Act's licensing requirements are onerous and threaten the ability
of nonprofit organizations to engage in loan modification and mortgage
brokering, thus depriving low-income people of these services.
Commenters requested that HUD exempt all nonprofit organizations
engaged in loan origination for low-income individuals and families
that do not receive compensation for originating loans, and therefore,
that such organizations be excluded from the definition of ``mortgage
loan originator'' according to HUD's own interpretation of the SAFE
Act. Commenters stated that these organizations have a fundamentally
different mission than the commercial residential mortgage industry
that the SAFE Act was meant to regulate. The commenters stated that
these organizations produce affordable housing with limited resources
and that compliance with the SAFE Act would be unduly burdensome. Other
commenters suggested that organizations that act in the borrower's best
interest to originate home loans for low-income households be exempt
from SAFE Act's provisions, which would impose additional burdens on
these lenders. Another commenter stated that HUD's discussion in the
Commentary about noncommercial activities also applies to the lending
activities of bona fide nonprofit organizations that fulfill a public,
rather than commercial, purpose. The commenter suggested factors that
HUD may consider in distinguishing nonprofit organizations that truly
perform a public service from those that may have a commercial interest
and have a commercial context to their loan origination transactions:
section 501(c)(3) status, loan terms and rates offered to a borrower,
compensation structure of the organization's employees, whether fees
are charged to a borrower, whether the organization in fact earns a
profit, whether financial literacy programs are provided along with
loans, whether employees are trained, and whether the organization's
primary purpose is to serve the public by helping low- to moderate-
income borrowers.
HUD Response: As stated earlier in this preamble, HUD has
determined that employees of a bona fide nonprofit organization are
outside of the range of individuals that the SAFE Act requires
[[Page 38478]]
states to subject to licensing requirements. The regulatory text
provides a definition of bona fide nonprofit organization that adopts
many of the factors suggested by the commenters to distinguish a bona
fide nonprofit organization from other organizations. HUD's
determination is based on the distinction that even if an individual's
activities are equivalent to those in the SAFE Act's definition ``loan
originator,'' they may nonetheless not meet the statutory requirement
that one must ``engage in the business'' of a loan originator, in order
for a state to be required to subject the individual to state
licensing. Specifically, the activities may not arise to ``engage[ing]
in the business'' of a loan originator if they take place in a wholly
public or charitable context, rather than in a commercial context, as
is the case with employees of government organizations and bona fide
nonprofit organizations.
Regulatory change. Accordingly, this final rule adds a definition
of ``bona fide nonprofit organization'' that provides that a state
supervisory authority may determine that an organization is a bona fide
nonprofit organization, under criteria specified in the definition. The
criteria include an examination of the mortgage terms offered to the
borrower by an employee of a bona fide nonprofit organization and
whether such terms are favorable to borrowers.
If the nonprofit organization meets the criteria in HUD's
definition, then the organization's employees who act as loan
originators would not be engaging in the ``business'' of a loan
originator, and therefore would not be subject to state licensing.
HUD's definition of ``loan originator'' provides that in determining
whether a nonprofit organization is a bona fide nonprofit organization,
a state supervisory authority must consider, at a minimum, the
following: Federal tax exempt status, purpose, incentive structure,
manner of operation, and loan products offered.
Finally, HUD reiterates that individuals, not entities, are subject
to licensure under the SAFE Act. Therefore, any requirement in state
law for the licensure of entities involved in loan origination is
outside the scope of and not affected by the SAFE Act and this final
rule.
9. Comment: Exclude housing counselors from SAFE Act coverage. Many
commenters requested that HUD exempt from coverage of the SAFE Act
individuals engaged in housing counseling activities. One commenter
stated that there should be a definition distinguishing the roles of
loan originators and housing counselors. Other commenters expressed
concern about HUD's discussion in the proposed rule of the
applicability of SAFE Act licensing to third-party loan modification
specialists. These commenters worried that the result would be that a
housing counselor could not contact the existing lender on behalf of a
troubled borrower in order to pursue or follow up on a loan
modification.
Commenters recommended that the definition of loan originator
explicitly exclude a counselor assisting a borrower in filling out an
application, or an educator providing general information about loan
applications, including helping borrowers understand their credit
report. A commenter also recommended that the definition exclude lender
personnel who address a homebuyer education class about how
applications are reviewed and evaluated. Other commenters stated that
individuals who are employed by a nonprofit and tax-exempt credit
counseling organization that is approved or seeking approval for
housing counseling by HUD (under 24 CFR part 214) are not covered,
while individuals such as foreclosure consultants or individuals
working for for-profit debt relief service providers should be covered.
Commenters expressed concern that even though the housing
counselors do not take applications or offer or negotiate mortgage
terms, state agencies use highly fact-based and unpredictable analyses
and may determine that they are covered, absent a statement to the
contrary by HUD. A commenter asked HUD to clarify that a lender
contributing to a homebuyer education class sponsored by a HUD
counseling agency are not direct contributions to ``loan originator''
but rather to the education of future borrowers.
HUD Response: HUD reiterates its lack of authority under the SAFE
Act to exempt individuals engaged in the business of a loan originator.
However, an individual engaging solely in traditional housing
counseling services generally does not ``take a residential mortgage
application and offer or negotiate terms of a residential mortgage loan
for compensation or gain'' within the meaning of the SAFE Act, and this
final rule and therefore would not have to be licensed under the SAFE
Act.
HUD has emphasized that it is the substance of an individual's
activities, and not the label, profession, or job title of the
individual that determines whether an individual is engaged in the
business of a loan originator. Therefore, if a housing counselor is in
fact engaged in the business of a loan originator, then despite the
individual's professional label as a housing counselor, the individual
must be state licensed.
In general, traditional housing counseling activities, such as
those described in 24 CFR part 214, do not involve either taking a
residential mortgage loan application or offering or negotiating
residential mortgage loan terms for compensation or gain within the
meaning of the SAFE Act and this final rule. For example, 24 CFR 214.3
describes the provision of counseling or advice to individual clients
on how to overcome specific obstacles to achieving a housing goal, as
well as educational classes on the home-buying process and other
topics. In addition, 24 CFR 214.300 describes referrals to local,
state, and Federal resources.
On the other hand, it is possible that some housing counselors
engage in additional activities that could subject the housing
counselor to SAFE Act licensing requirements. For example, the
activities of a housing counselor who acts as an intermediary between a
borrower or prospective borrower and a financing source, or who
presents to a prospective borrower particular loan terms identified as
being prospectively available from one or more lenders to similarly
situated prospective borrowers, may in some circumstances constitute
taking a residential mortgage loan application or offering and
negotiating terms of a residential mortgage loan. (See Section B of
this preamble, Key Definitions: ``Taking an Application,'' ``Offers or
Negotiates,'' ``Compensation or Gain,'' and ``Engaging in the Business
of a Loan Originator,'' above.) As further discussed in Section B,
merely advising or assisting a prospective borrower to properly
complete a loan application, faxing documentation upon a borrower's
request, or following up to ensure documentation has been received
would not amount to taking an application. Similarly, a mere referral
to another provider of resources would not likely amount to offering or
negotiating, absent other factors as provided in this final rule.
Furthermore, even if the activities of a housing counselor constitute
taking a residential mortgage loan application and offering or
negotiating residential mortgage loan terms for compensation or gain
within the meaning of the SAFE Act and this final rule, a state may
determine that the housing counselor's employer is a bona fide
nonprofit organization, as discussed above in this preamble under
Section D.8. Alternatively, the housing counselor's employer may be a
government agency or housing finance agency. If so, the individual
would not be ``engaging in the business'' of a loan originator and,
[[Page 38479]]
accordingly, a state would not have to require licensing of the
individual.
Finally, in accordance with HUD's decision to defer to the Bureau
on whether modifications of existing loans should be covered under the
SAFE Act or otherwise, this final rule would not affect a housing
counselor who contacts an existing lender on a behalf of a borrower in
connection with the modification of an existing loan.
10. Comment: Clarify exclusion of attorneys from SAFE Act coverage.
A commenter requested that HUD expand upon and clarify the proposed
rule's provision pertaining to the SAFE Act's inapplicability to ``a
licensed attorney who only negotiates the terms of a residential
mortgage loan on behalf of a client as an ancillary matter to the
attorney's representation of the client * * *''. The commenter
requested a definition of the term ``ancillary,'' especially with
respect to attorneys' representation of clients in loan modification
matters. The commenter stated that it appears that such attorneys would
need to be licensed as loan originators. An additional clarification is
requested for ``licensed attorney,'' as well as a discussion of whether
employees working under an attorney's supervision are exempt from the
licensing requirement.
Another commenter stated that the ``carve out'' for attorneys is
not broad enough. The commenter stated that often an attorney will be
in the negotiation process in ways that are more than ``ancillary'' to
the representation of a client. In fact, the negotiation of the loan
may be the primary reason for the involvement of the attorney. Both
commenters recommended that attorneys be completely exempt from
licensing under the SAFE Act.
Other commenters stated that licensed attorneys and those acting
under their direction to provide effective legal representation to
their clients in connection with the negotiation or modification of
residential mortgage loans (regardless of whether the representation is
ancillary or central to the transaction) should be exempt from SAFE Act
coverage. Another commenter stated that a lawyer owes the same
fiduciary and confidentiality duties to the client whether or not the
attorney's representation is ``central'' or ``ancillary,'' and argued
that the narrow exemption proposed by HUD will adversely affect many
lawyers and their ability to represent their clients effectively.
Another commenter submitted that the definition of ``loan originator,''
which includes someone who negotiates terms of a mortgage for gain,
would allow HUD and state agencies to regulate legal advice and other
core legal services.
HUD Response: HUD's proposed rule did not provide an exemption for
attorneys who engage in loan origination activities, but rather
recognized that the core functions of an attorney, such as providing
legal advice and drafting legal documents, do not typically include
acting as a loan originator. The proposed provision sought to
recognize, however, that attorneys may from time to time negotiate the
terms of a residential mortgage loan with a prospective lender on
behalf of a client as an ancillary matter to the attorney's
representation of the client. HUD stated that, for example, an attorney
might assist a client in the origination of a new or refinance loan, or
loan modification, as an ancillary matter to the attorney's
representation of the client in a divorce. HUD emphasized that the
attorney's duties to the client require the attorney to further only
the client's interest and that an attorney's activities in such cases
would normally be distinguishable from those of a loan originator.
HUD recognizes that state authorities traditionally regulate the
practice of law, rather than actions by the Federal Government. Leis v.
Flynt, 439 U.S. 438, 442 (1979). The issue of whether a Federal statute
may be interpreted as extending to activities that have traditionally
been regulated by the states rather than the Federal Government
(including the general practice of law by attorneys) has been the
subject of significant legal controversy, especially when the statute
does not expressly provide for extending Federal regulation into the
traditionally state-regulated field. (See, e.g., Milavetz, Gallop, &
Milavetz, P.A, v. United States, 130 S. Ct. 1324, 1332-33 (2010); BFP
v. Resolution Trust Corp., 511 U.S. 531, 543 (1994); Will v. Mich.
Dep't. of State Police, 491 U.S. 58, 65 (1989); American Bar
Association v. Federal Trade Commission, 430 F.3d 457, 471-72 (DC Cir.
2005). In requiring the licensing of individuals who ``engage in the
business'' of a loan originator, Congress did not state an intention to
regulate activities that constitute the practice of law by a licensed
attorney. HUD is concerned that construing ``engaging in the business
of a loan originator'' to encompass activities that constitute the
practice of law could have negative consequences, such as interfering
with regulation of the practice of law by state supreme courts,
undermining important aspects of the attorney-client relationship,
including the attorney-client privilege, and hindering consumers from
being able to obtain legal representation in residential mortgage loan
transactions.\9\ Accordingly, doing so would undermine the statutory
purposes of the SAFE Act, which include enhancement of consumer
protections and reduction of regulatory burden. However, HUD is equally
concerned about individuals who engage in the business of a loan
originator escaping SAFE Act licensing requirements simply because they
happen to be licensed as an attorney or work for a licensed attorney.
The referenced provision in the proposed rule was HUD's initial
approach to balancing these competing concerns, but HUD has determined
that identification of an attorney's activity as ``ancillary'' to a
representation is unnecessary, so long as the attorney's activity is in
fact regulated by the state supreme court or other state authority as
part of the practice of law.\10\ Therefore, as explained in Appendix D
of the rule, to the extent a licensed attorney undertakes activities
that are covered by the statutory definition of ``loan originator,''
such activities do not constitute ``engage[ing] in the business of a
loan originator,'' provided that: (1) Such activities are considered by
the state's court of last resort (or other state governing body
responsible for regulating the practice of law) to be part of the
authorized practice of law within the state, (2) such activities are
carried out within an attorney-client relationship, and (3) the
attorney carries them out in compliance with all applicable laws,
rules, ethics, and standards.
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\9\ Congress identified very similar concerns in setting forth
the Consumer Financial Protection Bureau's authorities, which will
include implementation of the SAFE Act, when it enacted the Dodd-
Frank Act. (See 156 Cong. Rec. E1347-49 (July 15, 2010).) In
enacting the Dodd-Frank Act, however, Congress declined to provide
any further clarity as to whether or not the SAFE Act is intended to
apply to attorneys engaged in the practice of law. Section 1027(e)
of the Dodd-Frank Act prohibits the Bureau from exercising any
supervisory or enforcement authority with respect to any activity
engaged in by an attorney as part of the practice of law, but also
provides that this limitation on the Bureau does not apply ``to the
extent that an attorney is otherwise subject'' to certain existing
consumer laws, including the SAFE Act.
\10\ The legislative history of the Dodd-Frank Act reflects a
desire to achieve a similar balance in emphasizing a determination
``to avoid any possible overlap between the Bureau's authority and
the practice of law,'' but also clarifying that activities of an
attorney or an individual working for an attorney that fall outside
the practice of law must not be shielded from regulation by the new
Bureau. 156 Cong. Rec. E1347-49.
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Rule change and clarification. HUD removes from Sec. 3400.103(e)
(which pertains to individuals not required to be licensed by states)
reference to a
[[Page 38480]]
licensed attorney. In light of the considerations discussed above, HUD
will move reference to licensed attorneys to the Appendix that is being
added to this final rule. Accordingly, further elaboration or
clarification of ``ancillary matters'' engaged in by a licensed
attorney is no longer necessary.
11. Comment: Other requested exclusions from coverage. Commenters
stated that there should be exclusions from coverage for the following:
Individuals originating loans to buyers who lack capacity to meet
institutional lender criteria; small, nondepository lenders who have
good legal compliance records; FHA direct endorsement lenders;
wholesale account executives who are not acting as loan originators;
mortgage insurers; and Spanish-speaking loan originators in Puerto
Rico, because many applicable legal concepts do not apply in Puerto
Rico and because the loan originator exam is given in English only. One
commenter said that states should be allowed to develop an expedited
process for individuals who possessed a valid loan originator license
or equivalent license prior to enactment of the SAFE Act.
A local government agency stated that there should be additional
exemptions under the SAFE Act for the following persons, who are exempt
under state mortgage licensing law: persons acting as fiduciaries with
Internal Revenue Code-qualified employee pension-benefit plans, persons
acting in a fiduciary capacity conferred by authority of a court of
competent jurisdiction, and employees of corporate instrumentalities of
the Federal Government who are not required to be registered.
In contrast to these comments, a commenter stated that the target
of the regulation should be private escrow officers who often do not
have the requisite training or experience and who are not insured or
bonded.
HUD Response: The SAFE Act requires licensing and registration of
any individual who engages in the business of a loan originator as
defined in the Act, and, as HUD has already noted, HUD does not have
authority to grant exemptions for individuals covered by the SAFE Act.
The fact that a buyer may lack capacity does not render his or her loan
originator exempt from licensing requirements of the SAFE Act.
With respect to a Spanish loan originator exam for use in Puerto
Rico, nothing in the SAFE Act or HUD's regulation precludes Puerto Rico
from using such an exam, provided it is approved by the NMLSR. With
respect to an expedited process, states can expedite or otherwise
reduce the burdensomeness of the process for individuals registered
under a predecessor loan originator licensing law, so long as a state
supervisory authority finds that there is sufficient evidence that all
of the requirements for licensing and registration, including the
educational requirements, of the SAFE Act are met. However, nothing in
the SAFE Act would allow for any exception to the basic statutory
requirements of the Act.
With respect to exclusions for various fiduciaries, HUD reiterates
that it has no authority to exempt covered individuals, but urges
states to apply the statutory criteria, as clarified by this rule, to
determine whether the cited individuals are in fact engaged in the
business of a loan originator.
In the case of employees of a federally chartered corporation that
does not meet the definition of a housing finance agency, loan
origination activities would be covered by the SAFE Act. With respect
to escrow officers, the issue, again, is whether such individuals are
engaged in the business of a loan originator as defined in the SAFE
Act. Coverage is determined by the activities rather than by the
professional title of the individual involved.
12. Comment: De minimis exemption requested. A commenter encouraged
HUD to follow the recommendation of the Federal banking agencies and
consider a de minimis exception. The commenter noted that the Federal
banking agencies, in their draft final rule, provide that a person who
does not regularly or principally function as a loan originator, for
example has acted as a loan originator for five or fewer residential
mortgage loans in the past 12 months, is not subject to the SAFE Act.
HUD should also consider exempting small manufactured housing
communities that may take very few applications in a 12-month period.
HUD Response: As discussed above, the SAFE Act authorized the
Federal banking agencies to provide a de minimis exemption for
individuals engaged in the business of a loan originator, but did not
grant such authority to HUD.
E. Other Definitions
1. Comment: Revise the definition of ``State.'' A commenter stated
that the definition of ``State'' should be revised by removing the
reference to the Trust Territory of the Pacific Islands.
HUD Response: Although the term ``State'' is defined in the SAFE
Act to include the ``Trust Territory of the Pacific Islands,'' HUD has
removed reference to the Trust Territory of the Pacific Islands since
this is no longer a U.S. territory or jurisdiction and HUD therefore
has no jurisdiction to enforce compliance with the SAFE Act.
2. Comment: Expand definition of ``family.'' A commenter stated
that the term ``immediate family member'' in Sec. 3400.103(e)(4)
should be revised to state simply ``family member'' and be defined to
include an individual's spouse, child, child's spouse, parent, sibling,
grandparent, grandchild, or grandchild's spouse. The commenter stated
that the result of such a change would be to expand the category of
relatives to whom, or on whose behalf, an individual may offer or
negotiate loan terms without having to be subject to state licensing
requirements.
HUD Response: Since HUD is no longer including in Sec. 3400.103(e)
reference to individuals who are not statutorily exempt from licensing
under the SAFE Act, there is no longer a need to define ``family.''
F. License Eligibility: Felonies
1. Comment: Felony conviction within 7 years limits employment
opportunities. Several commenters stated that the prohibition on
issuing licenses to individuals who have been convicted of felonies
within the preceding 7 years, even felonies that are unrelated to
fraud, may significantly limit employment opportunity.
HUD Response: Section 1505(b)(2) of the SAFE Act explicitly
prohibits the issuance of a license to an applicant who has been
convicted of a felony within 7 years prior to submission of an
application. This limitation is a statutory restriction, so elimination
of the requirement is beyond the scope of HUD's authority.
2. Comment: Pardoned convictions are not generally treated as legal
nullities. A commenter disagreed with HUD's assertion that pardoned
convictions are generally treated as legal nullities. The commenter
states that this is a misunderstanding, citing case law, and asserts
that a pardon merely relieves legal disabilities and stigma that result
from convictions. The commenter also notes that other Federal agencies
have taken an approach to state relief that differs from HUD's, and
questions the policy implications of limiting HUD relief to pardons.
The commenter recommends that HUD withdraw Sec. 3400.105(b)(2)(ii) of
the proposed rule, or that it expand it to include other forms of state
relief, similar to the provision in the Federal Firearms Act, 18 U.S.C.
921(a)(20). Other commenters suggested that Sec. 3400.105(b)(2)(i) be
removed and the effect of expungement
[[Page 38481]]
of a felony should be determined by the states. Several industry
associations state that HUD should simply repeat the minimum
requirements and leave it to the states to determine how they are to
treat expungements. However, HUD could urge uniform treatment. Other
commenters suggested that due to significant state oversight of the
expungement process, expungements should receive the same treatment as
pardons under the Act. A commenter states that in many states, an
expungement is viewed to completely eliminate the occurrence of the
criminal incident, as well as any punishment incurred as a result of
the act. As raised by one commenter, in some states the submission of
an expunged conviction could cause the individual to incur state
sanctions. The commenter urged HUD to adopt FDIC's policy with regard
to expunged and juvenile convictions as provided in the FDIC Statement
of Policy for Section 19 of the FDIC Act, 63 FR 66177 (Dec. 1, 1998).
HUD Response: The case law cited by the commenter provides that a
pardon relieves the convicted from punishment for the conviction rather
than eliminating any issue of guilt for the underlying conduct. The
case law further states that the pardoning of a conviction does not
prohibit a state from evaluating whether the conduct that led to the
conviction renders the individual unfit for the profession in question,
so long as denial is not based on the mere fact of a conviction alone.
Section 3400.105(b)(2)(ii) has been revised to provide that in the case
of a pardoned conviction, the fact of the conviction alone does not
automatically disqualify the individual under the SAFE Act's felony
provisions at 12 U.S.C. 5104(b)(2). A state supervisory authority,
however, may still consider the conduct underlying the conviction when
it makes the required determination of financial responsibility,
character, and general fitness. Therefore, under HUD's final rule, a
state will not be required to provide that a pardoned conviction
renders an individual ineligible for licensing. HUD leaves that
determination to the states.
Additionally, HUD will not consider an expunged conviction to
render an individual ineligible to be licensed under the SAFE Act. In
general, an expungement is viewed to completely eliminate the
conviction in the eyes of the law and to prevent further legal
consequences of the conviction. As raised by one commenter, in some
states the submission of an expunged conviction could cause the
individual to incur state sanctions. Section 3400.105(b)(2) is revised
accordingly. As in the case of pardoned convictions, the revised
regulatory provision does not prohibit a state that becomes aware of
the conduct that led to the conviction from evaluating whether the
conduct renders the individual unfit for the profession in question.
Rule change. To reflect this distinction, Sec. 3400.105(b)(2) is
revised to provide that pardoned and expunged convictions do not ``in
themselves'' render an individual ineligible.
3. Comment: Question of authority to create any exemption for
disqualification of individuals with felony convictions. A commenter
questioned HUD's authority to create any exemption under section 1505
regarding the categorical disqualification of individuals with felony
convictions. The commenter noted that the SAFE Act does not provide
authority to HUD to create an exemption to the unambiguous ban in
section 1505(b)(2), and HUD does not claim any inherent authority to
create one. Some commenters suggested that the exemption section should
either be removed from the rule or modified in some way, such as by
seeking authority for a legislative waiver to be triggered by an
application from a state licensing board.
HUD Response: HUD is not exercising any exemption authority, but
rather seeks to clarify meaning to terms used in the SAFE Act to ensure
that the type of licensing contemplated by the SAFE Act is instituted
as uniformly as possible across the states. Expunged and pardoned
convictions are often not considered to be disqualifying convictions or
convictions of record under analogous requirements governing other
professional licensing and consumer protection regimes. As stated in
response to an earlier comment, HUD's position is that pardoned and
expunged convictions do not ``in themselves'' render an individual
ineligible.
G. License Eligibility: Credit Reports, Credit Scores, Financial
Responsibility, and Character and Fitness
1. Comment: Authorize NMLS to obtain credit report. A commenter
stated that the proposed rule should be revised at the final rule stage
to allow applicants to authorize NMLS to obtain a credit report and
information on administrative, civil, or criminal findings.
HUD Response: Rule change. In the final rule, HUD has revised Sec.
3400.105(h) to allow applicants to submit authorizations for NMLS to
obtain credit reports and records of administrative, civil, and
criminal findings. This revision reflects the specific requirements of
section 1505(a) of the SAFE Act.
2. Comment: Credit scores should not be a licensing requirement.
Some commenters stated that credit scores should not be a requirement
for licensing, or should not be determinative of license eligibility.
HUD Response: The SAFE Act requires license applicants to authorize
the NMLS to obtain an independent credit report of the applicant. The
final rule reflects this requirement. If a credit report includes a
credit score, a state supervisory authority may decide that it is
appropriate to consider the score and other information in the credit
report as factors in its overall character and fitness determination.
3. Comment: Public release of credit reports will subject
individuals to identity theft. One commenter expressed concern that if
credit reports are made public, individuals could be vulnerable to
identity theft.
HUD Response: HUD is maintaining its approach to confidentiality of
information in the final rule, in Sec. 3400.3. This approach is
consistent with section 1512 of the SAFE Act, which addresses the
applicability of state and Federal privacy laws to materials submitted
to state regulators and the NMLSR. The SAFE Act does not provide for
public disclosure of an individual's credit report or credit score. The
information that the SAFE Act requires to be made available to the
public includes employment history and publicly adjudicated
disciplinary and enforcement actions.
4. Comment: Testing requirements need to be clarified. One
commenter stated that proposed rule's description of testing
requirements is ambiguous. First, the commenter noted that the number
of times an individual may retake a licensing test is unclear. Second,
the commenter indicated that language covering retesting for loan
originators with lapsed licenses is ambiguous, in that an individual
with a lapsed license is not a ``state licensed loan originator,'' but
rather a ``formerly'' state licensed loan originator.
HUD Response: HUD is maintaining the restrictions on the timing of
retests in the final rule. HUD agrees that the SAFE Act is confusing on
this point, in that it states under ``Initial Retests'' that an
individual may ``retake a test three consecutive times,'' with each
consecutive test occurring at least 30 days after the preceding test,
but then under ``Subsequent retests'' states that after failing three
consecutive ``tests,'' the individual must wait 6 months
[[Page 38482]]
before retaking the test. HUD resolved this confusion in the proposed
rule by providing in Sec. 3400.105(e)(2) that an individual may take a
test three times (i.e., the first taking plus two retests), with each
retest occurring at least 30-days after the preceding test. If the
individual fails three consecutive tests, the individual must wait 6
months before taking the test again. (That is, the third ``retake''
must satisfy both the individual 30 day waiting period of SAFE Act
section 1505(d)(3)(B) and the 6-month waiting period of section
1505(d)(3)(C), which is to say it cannot occur until after a 6-month
waiting period.) HUD believes that the rule is clear on the number of
times a test can be taken.
Rule change. To address the second comment, HUD has modified the
language covering retesting for loan originators with lapsed licenses.
Additionally, the regulatory text of the proposed rule inadvertently
omitted reference to time spent as a registered loan originator and the
final rule inserts such reference. In the final rule, Sec.
3400.105(e)(3) provides that if a ``formerly'' state licensed loan
originator fails to maintain a valid license for 5 years or longer, and
not taking into account any time during which the individual is a
registered loan originator, the individual must retake the test and
achieve a test score of not less than 75 percent correct answers.
5. Comment: Provide flexibility with respect to credit for
continuing education courses. A commenter stated that the final rule
should authorize state officials to allow continuing education courses
to be credited for the previous year when an applicant seeks to renew
his or her license during an authorized license reinstatement period.
The commenter notes that this would match provisions in the CSBS/AARMR
Model State Law.
HUD Response: In order to avoid any confusion that may have arisen
from the phrasing of the subject provision in the proposed rule, HUD is
revising the language in the final rule to include the statutory
language and then provide additional clarifying language.
Rule change. Accordingly, Sec. 3400.107(b) now provides that a
state must provide that ``a state-licensed loan originator may only
receive credit for a continuing education course in the year in which
the course is taken.'' HUD understands the statutory provision to mean
that a state-licensed loan originator who fails to meet the continuing
education requirements before the expiration of his or license may not
renew his or her license until he or she meets the requirement. That
is, the loan originator cannot renew his or her license based on a
promise to take the required classes in a future year, on the theory
that it does not matter when the classes are taken, so long as they are
taken at some point. Similarly, the provision means that an individual
cannot claim that excess classes taken in a past year relieve the
individual of having to take classes required for a future year.
Rule clarification. Accordingly, Sec. 3400.107(b) now also
clarifies that ``a state-licensed loan originator may not apply credits
for education courses taken in one year to meet the continuing
education requirements of subsequent years.'' Provided that a state
does not permit an individual to renew his or her license prior to
taking the required continuing education classes, HUD does not believe
the provision prohibits a state from allowing an individual to make up
a deficiency from a past year by taking classes in a present or future
year.
H. Reciprocity and Promoting Uniformity
Comment: Permit or require recognition of other state licensing of
loan originators. Several commenters suggested that HUD should permit
or require recognition of the licensure of other states to facilitate
competition and ultimately lower consumer costs, without compromising
the standards demanded under the SAFE Act. Commenters also noted that
HUD should call for uniformity in its rules and require in the rules a
regular process of consultation with trade associations and state and
Federal regulators to develop solutions where uniformity is lacking.
HUD Response: HUD's final rule does not require reciprocity, given
the current variability in state laws. The SAFE Act sets the minimum
requirements for the licensing of ``loan originators'' and does not
allow HUD to preempt any state law requirements or to establish a
maximum requirement. This final rule provides that a state must require
an individual to obtain and maintain a license from that state in order
to engage in the business of a loan originator with respect to any
dwelling or residential real estate in that state. This final rule
further provides that in order to grant a license to an individual, the
state might find that the individual has satisfied the minimum
eligibility requirements. HUD believes this approach is consistent with
the SAFE Act's preference that states implement their respective
licensing regimes and the SAFE Act's establishment of minimum, rather
than preemptive and uniform requirements. The approach also avoids
incentivizing a ``race to the bottom'' among states. However, this
final rule does not limit the extent to which a state may take into
consideration or rely upon the findings made by another state in
determining whether an individual is eligible under its own laws.
HUD will seek to promote uniform minimum standards in accordance
with its overall responsibility for interpretation, implementation, and
compliance with the SAFE Act. However, the SAFE Act's preference that
states implement and enforce licensing, combined with the absence of
preemptive authority over states that opt to exceed the minimum
requirements, means that there will inevitably be a diversity of
approaches among states. HUD has worked extensively with the CSBS and
AARMR in this process, and will remain accessible to state regulators,
other Federal regulators, and trade associations.
I. State Agency Performance Standards and Other Minimum Requirements
1. Comment: Not all state authorities will be able to participate
in the NMLSR. Commenters stated that not all states or state
authorities that oversee mortgage lending participate in the NMLSR.
Therefore, Sec. 3400.113(a)(1) should be revised to reference
``applicable supervisory authorities,'' or to require that all
authorities participate in the NMLSR. One commenter suggested that HUD
consider a system that could be tracked by Freddie Mac/Fannie Mae and
individual lenders using CHUMS and SAR ID numbers given to underwriters
by FHA and the Department of Veterans Affairs and tied to individual's
Social Security Numbers and tracked through Neighborhood Watch for
default trends, etc.
HUD Response: The SAFE Act provides in section 1508 that, in a case
where ``the Secretary determines that a state does not have in place by
law or regulation a system for licensing and registering loan
originators that meets the requirements of sections 1505 and 1506 and
subsection (d) of this section, or does not participate in the
Nationwide Mortgage Licensing System and Registry,'' HUD shall provide
for a system of licensing and registration of loan originators
operating in the state. Thus, the statute requires the use of the NMLSR
or a HUD-established backup system for loan originator licensing and
registration, rather than miscellaneous local authorities. In addition,
section 1508(d) of the SAFE Act establishes the minimum requirements
that a state licensing law must meet. Because HUD
[[Page 38483]]
must implement the SAFE Act as enacted, HUD declines to adopt the
commenters' alternate suggestions. In regard to the use of the term
``applicable supervisory authority,'' HUD notes that the SAFE Act uses
the term ``a state loan originator supervisory authority.'' HUD does
not construe this statutory term to mean that a state may have only one
supervisory authority, or that if it has multiple such supervisory
authorities supervising various categories of loan originators, only
one supervisory authority must comply with the SAFE Act.
2. Comment: HUD should recognize that examinations on the level of
the mortgage company may satisfy the requirement to examine and
investigate loan originator licensees. A commenter states that many
states conduct examinations on a company level and that such
examinations include examinations of the company's loan originators.
HUD should recognize that this approach satisfies the requirement to
examine loan originators at Sec. 3400.113(a)(4).
HUD Response: HUD agrees that nothing in the SAFE Act or this final
rule requires dual or separate examinations of loan originators, if a
state already examines loan originators in the course of examining
companies, provided that the state's approach ensures that no loan
originators are systematically left out of the scope of examinations.
3. Comment: Reports of condition may be submitted at the company
level. A commenter observed that the SAFE Act requires ``licensees'' to
submit reports of condition (call reports), rather than ``loan
originators.'' Since ``licensee'' is not defined in the SAFE Act, the
commenter states that it should be understood to refer to companies and
asks HUD to recognize that call reports may be submitted at the company
level.
HUD Response: HUD understands that reports of condition, or ``call
reports,'' are customarily produced and submitted to regulators at the
company level. The only persons who are subject to licensing under the
SAFE Act are individuals, not companies. Accordingly, this final rule
requires states to require licensed loan originators (i.e., the only
``licensees'' under the SAFE Act) to ensure that loans that close as a
result of the loan originator's activities ``are included'' in the
reports of condition that ``are submitted'' to the NMLSR. HUD believes
this language permits and even anticipates that the reports are
submitted by a person other than the loan originator, such as at the
company level. The regulatory provision at Sec. 3400.111(f) requires
states to impose responsibility for inclusion of loans in the report on
the individual loan originator, but it does not prohibit a state from
imposing concurrent or even primary responsibility for the inclusion
and submission on a company, provided that the state's approach ensures
that no loan originator's closed loans are systematically left out of
the reporting requirement.
J. Delayed Effective Date or Moratorium on Enforcement
Comment: Provide for significant delayed effective date for
regulations. Commenters asked HUD to delay the effective date of the
proposed regulations or to approve a temporary moratorium on
enforcement. Some commenters requested moratoriums for specific
industries on a national basis. As justifications for a delay or
moratorium, commenters referenced the timing of HUD's regulations, the
barriers to compliance facing particular industries, and the need to
amend state laws. Some commenters requested expanding proposed rule
Sec. 3400.109(d), which allows states to delay the effective date for
persons solely performing certain loan modifications, to include
persons conducting loan modifications outside the Making Home
Affordable program.
HUD Response: HUD is maintaining the proposed rule's approach to
the approval of delays in the effective date of state requirements.
Under the proposed rule, a state may request a later effective date by
demonstrating that a substantial number of loan originators, or a
particular class of loan originators, will face unusual hardship. HUD
believes this process will appropriately address hardships faced by the
concerned industries. The process is also consistent with the SAFE
Act's goal of establishing state-based mortgage licensing systems.
However, HUD recognizes there has been uncertainty regarding the
meaning of certain terms that affect the scope of the SAFE Act's
coverage, and that coverage of certain classes of individuals may not
have been determinable prior to the issuance of this final rule. To the
extent this final rule clarifies coverage of individuals who previously
did not have a reasonable basis for determining whether they were
covered, HUD will work with states to establish reasonable time frames
for implementing coverage of such individuals, and for such individuals
to meet eligibility requirements.\11\ Section 3400.109(c) of this final
rule provides a method for states to request extensions for such
individuals or classes of individuals. As stated above, a state may
request a delayed effective date by demonstrating that a substantial
number of loan originators, or a particular class of loan originators,
will face unusual hardship in meeting SAFE Act requirements.
Additionally, HUD's ability to grant extensions for good-faith efforts
to comply with SAFE Act requirements may have applicability.
---------------------------------------------------------------------------
\11\ See HUD's Frequently Asked Questions on this issue at
http://hud.gov/offices/hsg/rmra/safe/sfacimpdel.pdf.
---------------------------------------------------------------------------
Rule change. HUD is withdrawing the proposed delayed effective date
for loan originators participating in the Home Affordable Modification
Program (HAMP). That delay was proposed in combination with HUD's
inclination to cover material modifications of existing residential
mortgage loans. In accordance with HUD's decision to defer to the new
Bureau on the question of covering material modifications, the delayed
effective date for loan originators participating in the HAMP program
is unnecessary. In addition, the proposed rule's dates by which states
were to require individuals to obtain licenses have since passed.
Accordingly, the dates for such compliance in Sec. 3400.109(a) and (b)
have been replaced with the effective date of this final rule. As
discussed above, however, Sec. 3400.109(c) provides for the
possibility of extended compliance dates for individuals who could not
reasonably have anticipated that they would be covered until
publication of this final rule.
K. HUD's Regulation and Review of States for Compliance
1. Comment: HUD must prohibit states from exceeding the SAFE Act's
minimum requirements. Some commenters asked HUD to ensure that states
not overreach their SAFE authority by, for example, imposing licensing
requirements that go beyond the SAFE Act's minimum requirements by
using credit reports to make licensing decisions.
HUD Response: As discussed previously, the SAFE Act establishes
minimum standards for licensing of loan originators, and does not
prohibit states from exceeding these requirements.
2. Comment: Expand enforcement procedures for states'
noncompliance. A commenter suggested that HUD expand the proposed
regulations to include
[[Page 38484]]
additional informal and formal procedures for states in noncompliance.
HUD Response: HUD's regulation at Sec. 3400.115 provides many
procedural safeguards, including notification to a state if it is in
noncompliance, publication in the Federal Register of the initial
finding of noncompliance, and an opportunity for comment of a period of
no less than 30 days. Any state, like other members of the public,
would have the chance to submit written comments and could request a
meeting as well. In addition, HUD's final determination of
noncompliance would include the rationale for its determination in
response to issues raised in the comments.
Finally, the absence of a provision for an informal procedure in
the regulations does not mean that HUD would simply follow the formal
procedure upon any suggestion of noncompliance. On the contrary, HUD
anticipates that it would make reasonable attempts to work with a state
to help bring it into compliance before proceeding with the formal
procedures. The absence of regulations governing such an informal
approach maximizes flexibility for the state and HUD in attempting to
bring about full compliance. For example, such procedures could include
informal telephone communications, meetings, letters, or other
approaches.
3. Comment: Revise Sec. 3400.101 pertaining to HUD's determination
of a state's compliance with the SAFE Act. A commenter stated that the
phrasing of Sec. 3400.101 makes it appear to be a foregone conclusion
that HUD will determine that a state's licensing system does not meet
the minimum standards. The commenter recommended that this section be
rephrased to ``procedures HUD will follow to determine whether or not
``a state has in place a system.''
HUD Response: HUD has not adopted the suggested rephrasing of Sec.
3400.101. It is not HUD's intent to imply that it presumes state
systems are not in compliance. Rather, the language comports with the
statutory provision that HUD is authorized to act when it determines
that a state is not in compliance. The SAFE Act does not provide for
HUD to make formal, affirmative determinations of compliance.
4. Comment: Good-faith effort to meet compliance may be satisfied
by a state commitment to make a good-faith effort. A commenter urged
HUD to revise Sec. 3400.115(d) to provide that HUD may grant a state a
24-month period to come into compliance upon a state's commitment to
make a good-faith effort, in addition to HUD's finding that the state
is in fact making a good-faith effort to come into compliance.
HUD Response: HUD declines to make the suggested change, in part
because it is difficult to predict the range of circumstances under
which a state supervisory authority, legislative committee chair
person, other legislator, or other state official might purport to be
making a commitment on behalf of a state. However, this decision does
not mean that a commitment alone will never constitute a good-faith
effort. HUD understands that in some cases compliance may be achieved
through administrative means by the state supervisory authority, while
in other cases compliance may require that steps be taken by multiple
actors in the state's executive, legislative, and even judicial
branches. HUD will consider a commitment made by a state official along
with all the facts and circumstances to determine whether such a
commitment and any steps already taken amount to a good-faith effort to
comply.
5. Comment: HUD's authority to regulate states under the SAFE Act
is limited. A number of commenters state that HUD's authority over
states is limited to specific sections of the SAFE Act. Several
commenters state that HUD's review of state compliance is limited to
sections 5104 (licensing and registration requirement), 5105 (state
application and issuance procedures), and 5107(d) [sic] of SAFE. Other
commenters identified the three sections as 5105, 5106 (standards for
state license renewal), and 5108(d) (state licensing law requirements).
These commenters state that, as a result, HUD does not have authority
to approve or deny state definitions of loan originators or exclusions
for individuals traditionally regulated by the states, and that HUD
does not have authority to preempt states in this area. States have the
right to interpret the SAFE Act to create their own exceptions and
exclusions.
One commenter states that HUD's authority with regard to loan
originator licensing would not be triggered until such time as a state
failed to comply within the afforded timeline, and such authority would
be limited to the scope of these three sections of the SAFE Act.
Accordingly, the commenter, along with others, stated that HUD does not
have authority to define the scope of state provisions regarding loan
originator licensing or to deny exclusions from such provisions as set
forth by the states.
Several commenters, including banking trade associations, stated
that HUD may only: (1) Provide a backup licensing and registration
system if a state fails to do so, (2) establish a backup tracking
system if the NMLSR fails to do so, and (3) determine whether a
particular state's system meets the minimum SAFE Act requirements. The
``purpose'' provisions of the rule should expressly state HUD's role of
reviewing compliance with minimum standards and should not indicate
that HUD has overall responsibility for interpretation, implementation,
and compliance with the SAFE Act. The rule should also state that HUD
will only evaluate states to determine whether the minimum statutory
requirements have been met.
Some commenters stated that HUD violated the Administrative
Procedure Act and its own rules on rulemaking, in that the agency did
not provide an opportunity for public comment before it issued its own
Commentary and Frequently Asked Questions (FAQs).
HUD Response: HUD disagrees with the assertion that it may not
enforce, interpret, or issue regulations clarifying, for example, terms
that are defined outside of 12 U.S.C. 5103, 5104, and 5107(d) (i.e.,
SAFE Act sections 1504, 1505, and 1508(d)). If the assertion were true,
it would mean that a state could, for example, interpret the definition
of ``loan originator'' (which is used in section 1504 in the course of
providing which individuals are subject to licensing requirements) so
narrowly that no individual would be covered. Under the commenter's
theory, HUD would be powerless to act in such a situation, or to issue
regulations in advance clarifying the meaning of ambiguous terms that
HUD must rely on in carrying out its statutory obligations under the
SAFE Act.
HUD also disagrees that it violated the Administrative Procedure
Act in posting the Commentary and Frequently Asked Questions, without
following prior notice and comment procedures. The Commentary and
Frequently Asked Questions provided guidance on HUD's interpretations
and tentative views at the time, in anticipation of approaching
deadlines. Notice and comment procedures apply to legislative rules.
The Commentary and Frequently Asked Questions were not legislative
rules.
L. NMLSR Requirements
Comment: Consider alternative systems to NMLSR or additional
systems. A commenter recommended that HUD consider a system that could
be tracked by Freddie Mac and Fannie Mae and individual lenders using
CHUMS and SAR ID numbers given to underwriters by FHA and the
Department of Veterans Affairs and tied to individual's Social Security
Numbers
[[Page 38485]]
and tracked through Neighborhood Watch for default trends, etc.
Other commenters cited concerns with the NMLSR with respect to the
manufactured housing industry. The commenters stated that in the
manufactured housing industry, at least three types of entities must
employ loan originators: Personal property-only finance lenders, retail
sellers of manufactured homes, and owners of manufactured housing
communities. These entities typically hold sales finance company
licenses, installment loan licenses, or retail seller licenses. The
commenters stated that because NMLSR does not include these licenses in
its system, these entities are unable to sponsor their employees.
Commenters encouraged HUD to address the NMLSR flaw by creating an
exempt status to allow these personal property finance lenders, retail
sellers, and community owners to sponsor their loan originator
employees. The commenters state that this is a fatal flaw in the NMLSR.
Another commenter stated that one of the concerns with the NMLSR is
that under this system, only originators involved with real property
mortgages are able to register. The commenter states that HUD should
expressly confirm that all originators, including chattel-only lenders,
will be able to register within the NMLSR.
Other commenters expressed concern with the privacy offered by the
NMLSR. The commenters stated that HUD's final rule should clarify that
the SAFE Act does not require the release of home address, Social
Security Number, or other private information on originators.
Commenters stated that the requirement for this information could lead
to identity theft and harassment of loan originators. HUD should make
it clear that those who misuse or fail to safeguard this data will be
subject to severe penalties.
These commenters also supported HUD's proposed rule requiring
financial oversight of the NMLSR and HUD's collection, and making
public audited financial statements concerning the NMLSR's operations.
Another commenter encouraged HUD to consider establishing a mortgage
origination standards board, comprised of members from the various
segments of the industry that are engaged in loan origination, to
establish standards for the NMLSR's approval of education courses and
other licensing requirements. The commenter also suggested that HUD
require an independent review of the design and effectiveness of the
NMLSR Web site and its user interface to ensure that the system is
intuitive and easily navigable by all users.
HUD Response: HUD believes it is too early in the implementation of
the SAFE Act to consider an alternative system to the NMLSR. States and
CSBS and AARMR are all at a point or near the point of commencing full
implementation of the requirements of the SAFE Act. More time is needed
to evaluate how the NMLSR works before consideration should be given to
alternative systems.
With respect to the types of licenses that the NMLSR includes, the
SAFE Act charges that NMLSR track ``loan originators.'' If an
individual is licensed by the state in which he or she engages in the
business of a loan originator, then the individual will be entered in
the NMLSR. With respect to the concern that the NMLSR only accepts loan
originators working for certain categories of companies, HUD notes that
some states have created designations in the NMLSR for ``exempt
company'' registrations, so that companies that are not required to be
licensed under state law may nonetheless sponsor its loan originators
in the system.
On the issue of confidentiality, the SAFE Act establishes a high
bar to maintain the confidentiality of information that is in the
NMLSR. The SAFE Act provides that except as otherwise provided in the
SAFE Act, any requirement under Federal or state law regarding the
privacy or confidentiality of any information or material provided to
NMLSR, and any privilege arising under Federal or state law (including
the rules of any Federal or state court) with respect to such
information or material, shall continue to apply to such information or
material after the information or material has been disclosed to the
system. The SAFE Act further provides that such information that is
subject to privilege or confidentiality shall not be subject to
disclosure under any Federal or state law governing the disclosure to
the public of information held by an officer or agency of the Federal
Government or the respective state agency, nor shall the information be
subject to subpoena or discovery or admission into evidence, except
where such information is subject only to privilege held by NMLSR or
HUD. Finally the SAFE Act provides that any state law, including any
state open record law, relating to disclosure of confidential
supervisory information or any information that is of the type entered
in NMLSR, shall be superseded by section 1512 of the SAFE Act to the
extent that the SAFE Act provides less confidentiality or a weaker
privilege.
Rule change. However, with respect to confidentiality, and
specifically data security, which is addressed in Sec. 3400.305, HUD
revises the regulatory language that states that if there is a
reasonable belief that a security breach of the NMLSR has occurred,
notification of such breach must be provided as soon as practicable,
rather than in a reasonable amount of time as the proposed rule stated.
Additionally, the proposed rule, in the regulatory text,
inadvertently omitted reference to AARMR in Sec. 3400.305 and Sec.
3400.307, and the final rule inserts such reference.
With respect to the issue of establishing an NMLSR oversight board,
HUD believes there is value in establishing such a board but defers to
the Bureau on this matter.
M. Loan Processors and Underwriters
Comment: More specificity is needed regarding supervision of loan
processors and underwriters. Commenters asked HUD to clarify the SAFE
Act's requirement that loan processors or underwriters be supervised by
a state-licensed loan originator or a registered loan originator.
Commenters stated that the SAFE Act is ambiguous with respect to
individuals who do not act as originators as defined in the statute,
but who supervise loan processors and underwriters. Commenters stated
that the rule should clarify that the statutory requirement is met if
company procedures provide that licensed or registered loan originators
supervise and instruct loan processors on the individual loans the loan
originator is involved with, even though the loan processors and
underwriters may report to their own administrative supervisors, who do
not engage in loan origination activities and are not licensed or
registered loan originators.
Other commenters stated that the rule should clarify that, under
Sec. 3400.23 of the proposed rule, as long as the state-licensed loan
originator directs, supervises, and instructs the loan processor, he or
she is not required to be the loan processor's immediate or direct
supervisor. Another commenter questioned how this provision, if not
clarified, would affect contractors, because contractors would be
employees as to the loan originator but under contract to the broker or
lender. The commenter stated that requiring ``direct supervision'' in
the case of a contract processor would be detrimental to the
processor's ability to provide an arms' length transaction. The loan
originator could direct the processor to do things that the SAFE Act
would prevent the loan originator from doing.
[[Page 38486]]
Another commenter states that the direct supervision requirement could
conflict with some state laws.
Commenters stated that, as a result of this requirement,
jurisdictions are requiring processing companies, underwriting
companies, and staffing companies that provide these services to become
licensed brokers. The commenters expressed concern that contract
processors may close down because of the expense of becoming licensed
in multiple jurisdictions; furthermore, if an individual obtains a loan
originator license under a sponsoring broker, the individual is limited
to working only with that broker, which defeats the purpose of working
as a contract processor. A similar concern was expressed by a commenter
about small processing companies that may be forced out of the business
because of the cost of meeting licensing requirements.
Other commenters concurred with HUD's proposal that loan processors
or underwriters who perform only clerical or support duties and do so
at the direction of and subject to the supervision and instruction of a
licensed or registered loan originator do not need to be licensed. The
commenters stated that the rule should also make clear that processors
and underwriters who are not directly supervised by individual loan
originators but provide clerical or support duties do not need to be
licensed and registered. They stated that this exclusion should be
extended to processors or underwriters who do not work under the direct
supervision of a loan originator, i.e., contractors, because the Home
Valuation Code of Conduct (HVCC) and business practices require that
firewalls should be established with these processors to prohibit undue
influence on processors. They stated that, for clarity purposes, the
rule should provide that the language means that ``loan processors and
underwriters must support the origination function. Specific direction
and supervision may be subject to appropriate company protocols to
protect the integrity of the loan process and consumers.''
A commenter stated that it is unclear from the statute and
regulation whether an individual salesperson who gathers information
from a potential customer (thereby meeting the definition of ``loan
processor or underwriter'') would be required to be licensed or have
his or her supervisor become licensed. Another commenter asked that HUD
clarify how the direct supervision requirement would apply to contract
companies or lenders that use overseas labor to process and underwrite
loans. Another commenter suggested that HUD expand the definition of
``clerical and support duties to include submitting to automated
electronic loan origination programs information common for the
processing of underwriting or a residential mortgage loan and
communicating to potential borrowers the results of the automated
electronic loan origination programs.'' The commenter also recommended
that HUD clarify in the definition of independent contractor, that an
individual performs his or her duties ``at the direction of and subject
to the instruction of an individual who is * * * exempt under Sec.
3400.103(e)(7)'' when such individual is required to and does hold
himself or herself out as a representative of a Federal agency-
regulated lender that must follow the loan origination guidelines of
such institution.
One commenter supported the requirement for contract processors and
underwriters to be licensed because the requirement that such third
parties be supervised by loan originators, rather than licensed
themselves, can ``create a potentially treacherous environment for
consumers and subjects the institution itself to questionable
practices.'' The commenter stated that all mortgage-related activities
should be under the supervision of the regulator. The commenter also
asked that HUD clarify that the phrase ``the origination of a
residential mortgage loan'' in the definition of ``loan processor or
underwriter'' means ``all residential mortgage loan related activities
from the taking of a residential mortgage loan application through the
completion of all requires loan closing documents and funding of the
loan.''
HUD Response: HUD does not have authority to subject to licensing
those activities not subject to licensing under the SAFE Act nor to
exempt from licensing those activities clearly subject to licensing
under the SAFE Act. Loan processors and underwriters are clearly not
covered by licensing under the SAFE Act when such individuals perform
clerical or support duties at the direction of and subject to the
supervision and instruction of either a state-licensed loan originator
or a registered loan originator. The SAFE Act defines what constitutes
clerical or support duties and makes clear that the principal factor
that distinguishes them from ``administrative or clerical tasks'' (the
performance of which, alone, does not subject an individual to
licensing requirements) is whether the individual performs any analysis
at all of the information for the purpose of either processing or
underwriting the loan. HUD believes that the definition of clerical or
support duties is thorough and sufficient and does not require
elaboration. Nothing in the definition of ``clerical or support''
duties excludes the performance of these duties electronically.
The major issue raised by the commenters pertains to the issue of
supervision. Nothing in the SAFE Act or this final rule requires that
the requisite licensed or registered loan originator be the loan
processor or underwriter's direct or immediate supervisor. At the same
time, the SAFE Act's usage of functional terms (i.e., ``at the
direction of and subject to the supervision and instruction of [a loan
originator]'') make clear that there must be an actual nexus between
the licensed or registered loan originator's direction, supervision,
and instruction and the loan processor or underwriter's performance, as
opposed to a mere nominal relationship on an organizational chart.
Under the SAFE Act, a loan processor or underwriter is not subject
to licensing requirements if he or she performs his or her duties at
the direction of and subject to the supervision and instruction of
``a'' state-licensed loan originator or registered loan originator.
Even with respect to states that require processing or underwriting
companies to be licensed or independent contractor licensees to be
associated with a single company, the SAFE Act deals only with
licensing of individuals. In the case of loan processors or
underwriters, the SAFE Act requires supervision by an individual who
holds a SAFE Act-compliant loan originator license or who is a
registered loan originator. An individual who performs only clerical or
support duties and is an employee of a company that provides processing
or underwriting services is not required to be licensed so long as he
or she is supervised by a licensed or registered loan originator from
that company. Any state requirement for such a company to hold a
license, or for a loan processor or underwriter to have a relationship
with only one company licensee, is beyond the scope of the SAFE Act and
this final rule. A single licensed or registered loan originator may be
able to effectively direct, supervise, and instruct multiple loan
processors or underwriters, possibly even those in overseas locations,
depending upon all of the facts and circumstances. HUD believes state
supervisory authorities are well suited to evaluate operations and
organizational structures to determine whether the SAFE Act's
functional requirement for a licensed or registered loan originator's
direction, supervision,
[[Page 38487]]
and instruction of a loan processor or underwriter is met.
HUD finds the statutory and regulatory language with respect to
loan processors and underwriters is clear. Although HUD believes it
should be clear that ``origination of a residential mortgage loan'' in
the final rule's definition of ``loan processor or underwriter''
includes all phases in a loan origination, through the closing and
funding of the loan, HUD has added a definition of ``origination of a
residential mortgage loan'' to ensure there is no confusion. In
addition, HUD has included a discussion in Appendix C of when loan
processors or underwriters may be required to be licensed under the
SAFE Act.
Rule change: In Sec. 3400.23 (Definitions), HUD adds the following
definition: ``Origination of a residential mortgage loan, for purposes
of the definition of loan processor or underwriter, means all
residential mortgage loan-related activities from the taking of a
residential mortgage loan application through the completion of all
required loan closing documents and funding of the residential mortgage
loan.''
Rule change: In addition, consistent with HUD's determination that
individuals providing origination services in certain charitable or
government transactions do not engage in the ``business'' of a loan
originator, HUD is clarifying that individuals who act only as loan
processors or underwriters and only with respect to these same
transactions are not subject to the SAFE Act's licensing requirements.
The clarification is provided in Sec. 3400.103(e)(3)(ii).
N. Other Definitions and Issues
1. Comment: Establish Web site for housing counselors. A commenter
suggested that there should be one national certification and a Web
site for counselors to reference various state regulations.
HUD Response: HUD is charged with implementing the SAFE Act with
respect to individual loan originators. In that respect, a national
certification or Web site for housing counselors is outside HUD's
authority under the SAFE Act and beyond the scope of this rule.
2. Comment: Preempt duplicative state laws. Because of the SAFE
Act, many states have amended their definition of ``mortgage loan'' in
state mortgage lending laws to include personal property finance
transactions. As a result, individuals and entities that provide such
financing are now subject to dual regulation, both under laws that
target sales finance and installment loans (e.g., where, for example, a
state views manufactured housing as personal property and a state
requires licensing for personal property transactions in addition to
licensing as a mortgage loan originator under the SAFE Act). Commenters
asserted that dual regulation is unfair and leads to duplication and
inconsistency between charges and disclosures required under the two
regimes. In addition, commenters stated that HUD should guide states to
reconsider the application of their amended laws to focus on
individuals, not entities, in accordance with the intent of the SAFE
Act.
HUD Response: Under the SAFE Act, individuals acting as loan
originators must meet its licensing and registration requirements, even
if they are also subject to other laws, such as state or local laws
regulating personal property finance transactions. The SAFE Act
establishes only the minimum standards for licensing individuals
engaged in the business of a loan originator. It does not address
licensing of individuals or entities under other laws. The licensing or
dual regulation of the individual or entity is an issue of state law
and not subject to HUD's rules under the SAFE Act.
3. Comment: HUD's rule does not address federalism implications. A
commenter stated that under the section on Executive Order 13132,
``Federalism,'' HUD did not sufficiently address the federalism issues
raised by the proposed rule. The commenter stated that specifically,
the proposed rule, without justification or explanation, restricts
states' ability to legislate and enact laws that are not inconsistent
with the U.S. Constitution or existing Federal law. The commenter
stated that it is the responsibility of each individual state to
implement a system of licensing and registering loan originators that
complies with the letter and spirit of the SAFE Act without directly
conflicting with or impeding the achievement of congressional
objectives or intent in enacting the legislation. The commenter stated
that because HUD failed to comply with Executive Order 13132 in issuing
the proposed rule, HUD should withdraw this rule.
HUD Response: HUD disagrees with the commenter's characterization
of the rule. The licensing requirements in HUD's rule are those
established by the SAFE Act. As required by the SAFE Act, the
regulation simply sets minimum standards for the licensing and
registration of loan originators, and has no additional federalism
implications.
4. Comment: HUD's rule triggers an unfunded mandate. A commenter
stated that HUD's proposed rule, under the section discussing the
Unfunded Mandates Reform Act (UMRA), states that Title II of the
Unfunded Mandates Reform Act of 1995 (2 U.S.C. 1531- 1538) establishes
requirements for Federal agencies to assess the effects of their
regulatory actions on state, local, and tribal governments and the
private sector. In issuing the proposed rule, the commenter stated that
HUD failed to comply with the requirements of Title II of the Unfunded
Mandates Reform Act. The commenter stated that no mention was made of
the significant impact that will be felt by state agencies that are
forced to re-process and re-license current loan originator licensees
in order to be in compliance with the proposed rule. Additionally, the
commenter stated that the proposed rule failed to account for the
impact that will be felt within the competitive market for mortgage
loans and among small businesses when states are unable to process
applications for new loan originator licenses quickly enough, and when
long-time originators are forced to suspend their business activities.
HUD Response: The Unfunded Mandates Reform Act (UMRA) of 1995
requires agencies to ``assess the effects of Federal regulatory actions
on State, local, and tribal governments, and the private sector (other
than to the extent that such regulations incorporate requirements
specifically set forth in law).'' (Emphasis added.) Since HUD's SAFE
Act regulation simply implement requirements ``specifically set forth
in law,'' the assessment of effects by the agency is not required.
Although this rule does not have the effects on State, local, and
tribal governments within the meaning of UMRA, the SAFE Act statutory
provisions do have such effects. HUD addresses the impacts of the
statutory provisions of the SAFE Act in its statement on Executive
Order 12866 that appears later in this preamble, and in addressing the
designation of the rule as being economically significant. As HUD notes
in its Executive Order 12866 statement, notwithstanding a determination
by HUD and OMB that it is the statute, not HUD's rule, which has a
significant economic impact, the rule is designated economically
significant because the rule, in codifying the provisions of the SAFE
Act in regulation, reflects the economic significance of the statute
and should have a designation reflective of the impact of the statute
on the economy.
5. Comment: Additional time for public comment should have been
[[Page 38488]]
provided. A commenter stated that additional time for public comments
should be allowed.
HUD Response: HUD's regulations on rulemaking at 24 CFR 10.1
specify that it is the policy of HUD to allow not less than 60 days for
public comment. In the case of this rulemaking, the proposed rule was
published on December 15, 2009 (74 FR 66548), and the original 60-day
deadline ended on February 16, 2010. On February 17, 2010, at 75 FR
7149, HUD published a notice extending the public comment until March
5, 2010. During the public comment period, more than 5,000 comments
were received. HUD believes that the public has had adequate
opportunity to comment on the rule and has done so.
IV. Findings and Certifications
Executive Order 12866, Regulatory Planning and Review
The Office of Management and Budget (OMB) reviewed this rule under
Executive Order 12866 (entitled, ``Regulatory Planning and Review'').
OMB determined this rule to be an ``economically significant regulatory
action'' under section 3(f)(1) of the Order, based on the costs of
compliance with requirements imposed directly by the SAFE Act, and
based on costs that have already been incurred and would be incurred
notwithstanding issuance of any rule by HUD. Neither HUD nor OMB
determined that this rule adds to these statutory requirements, to the
cost of compliance with these statutory requirements, or to any costs
to or effects on the economy (including costs to consumers, industries,
government agencies, or regions, or effects on competition, employment,
investment, productivity, innovation, or competitiveness) of the
statutory requirements. Notwithstanding a determination by HUD and OMB
that it is the statute, not this rule, which has a significant economic
impact, OMB designates the rule economically significant because the
rule, in codifying the provisions of the SAFE Act in regulation,
reflects the economic significance of the statute, and should bear a
designation reflective of the impact that the SAFE Act has on the
economy.
Executive Order 12866 provides for agencies to assess the potential
costs and benefits of regulatory actions reviewed by OMB under the
executive order. However, as just noted, this rule does not add to the
effects of the SAFE Act on any person or entity, and in itself
therefore imposes no costs, nor creates any benefits, nor causes any
transfers. As HUD has previously stated, this rulemaking was not
required to implement the licensing requirements of the SAFE Act. The
SAFE Act contained no mandate for HUD to issue regulations, or any
indication that states must wait for HUD regulations before commencing
compliance with the statutory licensing requirements of the SAFE
Act.\12\ The SAFE Act licensing requirements imposed on states were
self-executing requirements.
---------------------------------------------------------------------------
\12\ In contrast, see section 1507 of the SAFE Act, which
required the Federal banking agencies to jointly, through the
Federal Financial Institutions Examination Council, and together
with the Farm Credit Administration, develop and maintain a system
for registering employees of a depository institution, employees of
a subsidiary that is owned and controlled by a depository
institution and regulated by a Federal banking agency, or employees
of an institution regulated by the FCA as registered loan
originators with the NMLSR. These Federal agencies were mandated to
develop and implement such a system one year from the date of
enactment of the SAFE Act.
---------------------------------------------------------------------------
Section 1508 of the SAFE Act directs states to comply with its
licensing requirements no later than one year after the date of
enactment of the SAFE Act, or 2 years in the case of a state whose
legislature meets only biennially. The SAFE Act allowed HUD to extend
the deadline for states making good-faith efforts to achieve compliance
with the SAFE Act. In addition, the SAFE Act imposed on HUD certain
duties, including to oversee and enforce states' compliance with the
SAFE Act, and to assure that the NMLSR continues to meet its purposes
of the SAFE Act. Additionally, section 1508 of the SAFE Act provides
for HUD to establish a SAFE Act licensing and registration system (a
backup system) in any state that fails to establish and maintain a SAFE
Act licensing and registration system. Accordingly, HUD initiated
rulemaking to clarify certain statutory terms and provisions to assist
states in complying with the SAFE Act, and to establish the minimum
licensing standards that HUD would apply if HUD had to establish a
backup system in any state. HUD did not propose, through this
rulemaking, to implement a backup system that would exceed the minimum
standards of the SAFE Act.
All 50 states, the District of Columbia, the Virgin Islands, Puerto
Rico, and Guam have now enacted SAFE Act licensing laws.\13\ At this
time, HUD does not expect to have to enforce the SAFE Act by
establishing a backup licensing system in any state. Nor does this
regulation impose any requirements on covered individuals beyond those
requirements imposed by the statute. This regulation is thus not
expected to alter the affects of the SAFE Act on any person or entity,
so HUD is not imposing any costs or creating any benefits or transfers
through this regulation. In the unlikely event that a state fails to
enforce its SAFE Act licensing system, HUD (or the successor agency)
will have to assume that state's responsibilities, in which case costs,
benefits, and transfers will result from this rule, because a state's
failure to enforce a SAFE Act licensing system will have caused HUD to
undertake enforcement responsibilities.
---------------------------------------------------------------------------
\13\ See the Web site of the Conference of State Bank
Supervisors, reporting on the status of compliance by states with
the SAFE Act at http://www.csbs.org/news/press-releases/pr2010/Documents/pr-060110.pdf. In addition, HUD is continuing to work with
the remaining jurisdictions to achieve full compliance with the SAFE
Act.
---------------------------------------------------------------------------
The principal benefits of the SAFE Act include the enhanced
protection of consumers and of the housing finance system as a whole by
ensuring that covered loan originators meet minimum standards for
integrity and competence nationwide. Standards for integrity include
the requirement that individuals not have committed certain crimes and
that they must be found to have demonstrated financial responsibility,
character, and fitness. Standards for competence include the
requirement that individuals must complete educational requirements and
pass a test on mortgage origination and consumer protection laws, as
well as other topics. One benefit of these standards is expected to be
a reduction in the incidence of loan originators misrepresenting or
mischaracterizing the features and obligations of residential mortgage
loans that they offer to prospective borrowers. Such a reduction is one
measure that is important in reducing the likelihood of borrowers
accepting loans with predatory features or with obligations that they
do not understand or cannot afford, which, in turn, can be expected to
reduce the likelihood of future loan defaults and foreclosures. The
SAFE Act requires accountability at the level of the individual loan
originator, to ensure that problematic loan originators cannot escape
all consequences for their actions simply by moving on to another
brokerage or lending entity, whether in the same state or in another
state. For example, loan originators whose actions result in revocation
of their licenses in a given state become ineligible for licensure in
all states.
Another benefit of the SAFE Act is that its minimum standards
increase uniformity among states (compared with the range of state
regulatory frameworks prior to the enactment of the SAFE Act) and
establishes a nationwide registry with standardized unique identifiers
and procedures, while at the same time maintaining regulation of loan
[[Page 38489]]
originators at the state level and permitting states to exceed the
minimum requirements as they deem appropriate. This rule enhances the
benefits of the SAFE Act by providing increased clarity to statutory
terms that many states and public commenters have found to be
ambiguous, and that largely determine which individuals are required to
be subject to state licensing. This increased clarity is expected to
reduce the likelihood that individuals who are not in fact required by
the SAFE Act to be licensed will unnecessarily undergo the process and
expense of seeking licensure, and that states will unnecessarily take
enforcement actions against individuals who are not required by the
SAFE Act to be licensed.
Although this rule has no economic impact on regulated parties, in
accordance with OMB's direction and the provisions of OMB Circular A-4
on Regulatory Analysis, HUD is providing an analysis of the estimated
costs of the SAFE Act against a ``pre-statutory baseline'' in an effort
to bring transparency and more fully inform the public about the costs
of the requirements imposed by the statute. As discussed above, this
rule does not add any requirements or increase costs of compliance
beyond those imposed by the statute. While the SAFE Act sets minimum
licensing standards for loan originators, states may establish
standards that are higher than the statutory minimum. Additionally,
states establish their own fees to cover the costs of maintaining the
licensing and registration system. HUD does not set, guide, or regulate
the fees imposed by states in connection with a SAFE Act licensing and
registration system. Therefore, given the variation in state standards,
the variation in fees that states may set for licensing, and the number
of loan originators that may be doing business in each state, it is not
possible for HUD to currently estimate what the costs of the SAFE Act,
as actually implemented by the several states, would be. Therefore, to
comply with OMB's direction and OMB Circular A-4, HUD provides below an
analysis of the counterfactual situation where ``no'' state or
territory implemented SAFE Act-compliant licensing requirements for
loan originators (and/or repealed pre-existing statutes that met the
SAFE Act requirements), and HUD (or its successor agency, the Consumer
Financial Protection Bureau) was responsible for enforcing the minimum
requirements in the SAFE Act, as codified by this rule, for the entire
country.
Estimate of Costs if HUD Were Required To Establish a Backup SAFE
Act Licensing System. The Congressional Budget Office (CBO) provided an
estimate of the costs of implementation and compliance with the SAFE
Act, prior to its passage, on both the individual residential mortgage
loan originators and on the states that were required to establish SAFE
Act-compliant laws. CBO's analysis assumes a uniform application of the
minimum requirements of the SAFE Act as would be the case if HUD's rule
were found necessary to implement because states did not establish SAFE
Act-compliant registration systems. In its June 8, 2008, cost estimate
report on the SAFE Act, under the heading of ``Changes in Revenues and
Direct Spending,'' CBO stated in relevant part as follows with respect
to the SAFE Act.
Nationwide Registry for Licensing Fees and Spending. Since 2004,
the Conference of State Bank Supervisors (CSBS) and the American
Association of Residential Mortgage Regulators (AARMR) have
developed a nationwide licensing system for the residential mortgage
industry. The system began operations in January 2008 and currently
includes participation by agencies in eight states; the registry is
expected to be available to the public sometime during 2009. As of
May 2008, agencies in 40 states and in Puerto Rico and the District
of Columbia have signed statements of intent to participate in the
nationwide system. Both the CSBS and AARMR anticipate that agencies
in the remaining 10 states will eventually commit to participating
in the system.
Assuming that all the states participate and meet the minimum
standards that would be established by this legislation, CBO does
not expect HUD to develop its own national registry, though HUD
would conduct some monitoring and oversight of the emerging
voluntary system.
Enacting this legislation would impose a new requirement on loan
originators to register with a nationwide registry and would
authorize the assessment of fees for the cost of that registration.
Although private entities are currently developing and maintaining a
registry, participation in that system is voluntary. Under this
legislation, participation by loan originators would become
mandatory (that is, a loan originator would have to register to be
state-licensed), and HUD would have the authority to enforce that
requirement. Thus, CBO expects that the NMLSR would be acting as an
agent of the Federal government; consequently, the cash flows
associated with the NMLSR's regulatory and assessment authorities
should be recorded in the Federal budget. Because the fees paid to
NMLSR by loan originators would be approximately equal to the
amounts some loan originators are currently paying or would pay the
registry overseen by CSBS and AARMR under current law, taxable
incomes of the loan originators and other entities in the economy
would not change significantly under the bill.
The legislation would increase Federal revenues by authorizing
the NMLSR to collect assessments from loan originators (that is,
individual loan officers, branches of lending institutions, and
lending companies). Based on information from the CSBS, CBO
estimates that those individuals and entities would likely be
charged an initial fee and an annual fee. Moreover, fees could be
reduced over time as expenses decrease and more loan originators
register with the system.
Based on fee schedules for similar activities and assuming that
more than 300,000 entities and individuals would register with the
NMLSR over the next five years, CBO estimates that $137 million in
fees would be collected by the NMLSR over the 2009-2018 period.
(Emphasis added.)
Funds collected through such assessments would be spent without
further appropriation to develop and maintain the registry system,
and thus, the expenditures would be classified as direct spending.
CBO estimates that the NMLSR would spend about $120 million over the
2009-2018 period. (See http://www.cbo.gov/ftpdocs/93xx/doc9366/Senate_Housing.pdf at pages 13-14.)
With respect to cost to the private sector, in CBO's report, under
the heading of ``Estimated Intergovernmental and Private-Sector
Impact,'' CBO stated in relevant part as follows:
Registry of Originators of Mortgage Loans. The bill also would
impose a mandate on the mortgage finance industry by requiring
originators of mortgage loans to register with a national
registration system and authorizing the assessment of fees for the
cost of that registration. Private entities are currently developing
and maintaining a voluntary registration system. CBO estimates that
about $70 million in fees would be collected over the 2009-2013
period under the bill. However, the direct cost to register with a
nationwide registry for some loan originators would be approximately
equal to the amounts they are currently paying under the voluntary
registration system. Therefore, CBO expects that the incremental
cost of complying with the mandate would be small. (See http://www.cbo.gov/ftpdocs/93xx/doc9366/Senate_Housing.pdf at page 17.)
Finally, CBO's report refers to a previous CBO cost estimate
report, issued November 9, 2007, on H.R. 3915, the Mortgage Reform and
Anti-Predatory Lending Act of 2007, which was the legislation on which
the SAFE Act was based. In its June 2008 report, CBO states that ``Both
H.R. 3915 and the Senate legislation [that corresponded to H.R. 3915]
include nearly identical provisions that would establish a nationwide
licensing system for the residential mortgage industry. As a result,
the cost estimates associated with the proposed system are identical.''
(See http://www.cbo.gov/ftpdocs/93xx/doc9366/Senate_Housing.pdf at
page 18.) CBO's November 9, 2007, report can
[[Page 38490]]
be found at http://www.cbo.gov/ftpdocs/88xx/doc8804/hr3915.pdf.
HUD uses the 5-year cost estimate of the national registration
system directly above, and one-half of the 10-year estimates cited
previously to produce a range of estimates for the economic cost of
producing and maintaining the national registration system for 5 years
(although the lack of detail prevents HUD from applying separate
discount rates to these estimates): $60 million to $70 million.
As noted above, the CBO report estimated that 300,000 entities and
individuals would register with the NMLSR over the next 5 years,
meaning that such entities and individuals would be licensed or
registered under the SAFE Act licensing law in the state or states in
which such individuals or entities engage in the residential mortgage
loan business. CSBS and AARMR, which submit an annual report to
Congress, stated in their June 10, 2010, report to Congress, which
described SAFE Act licensing activities and results as of the end of
Calendar Year 2009, stated that NMLS reported 134,731 state licenses
from 33 participating states. Since all states have now enacted SAFE
Act licensing laws, that number is expected to be higher when CSBS and
AARMR issue their report on 2010 activities and results to Congress in
the summer of 2011. (See ``States Report to Congress'' at http://www.aarmr.org/.) The number of 134,731 individual licenses as of the
end of Calendar Year 2009 reflects only a partial total of all
potential SAFE Act registrants, but also may reflect reductions in
total employment of loan originators associated with the recent
economic crisis and changes in the loan origination industry. For the
remainder of this analysis, HUD will assume a range of theoretically
affected loan originators eventually registered under the SAFE Act of
150,000 to 300,000 nationwide.
Integrity Mortgage Licensing, a mortgage licensing service that
assist mortgage companies with meeting national and state licensing
requirements, provides, on its Web site, \14\ an overview of the
requirements of the SAFE Act, as implemented by the states and, with
respect to fees and costs that an individual residential mortgage loan
originator may be required to pay, provides in relevant part as
follows:
\14\ See http://www.integritymortgagelicensing.com/mortgage-licensing-news/the-safe-mortgage-licensing-act/.
---------------------------------------------------------------------------
Twenty (20) hours of education is one of the major requirements
[of the SAFE Act]. In order to get a license, a mortgage loan
originator must complete 20 hours of pre-licensing education that is
offered by an approved education provider. * * * The course will
usually cost around $299 to $399. (Emphasis added.) * * *
Also, eight (8) hours of continuing education is required each
year to renew your license. * * *
The SAFE Act also requires that MLOs complete a test to obtain a
mortgage loan originator license. To comply with this requirement,
the states have worked together to make a National Test component
that covers Federal laws and regulations for mortgage origination.
This test is only required to be passed once for all states.
However, each state has also developed its own state-specific test
component. So the National Test component and the State Test
component must be completed to obtain a license. Any states where
you have done previous testing to obtain a loan originator license
prior to these new requirements may allow you to certify those past
tests to meet this new requirement. The National Test component
would still be required, but you could be exempt from having to take
the state test. The National Test component costs $92 and the State
Test components cost $69 each. The components only need to be passed
once to obtain the license and never need to be taken again. And
make sure to study for the tests. Only Sixty-Seven Percent (67%) of
applicants are passing the National test component. (Emphasis
added.)
Each state is required under the SAFE Act to complete a criminal
background check on MLO License applicants. To implement this there
is a Federal fingerprinting that can be paid for when you submit an
MLO License application. When fingerprints are taken, they are sent
to the FBI and the FBI reviews them and puts together a report of
any criminal convictions that match your record. These criminal
background check reports are then sent to the state to review.
Because the Federal fingerprinting only checks the FBI database,
some states have decided to also require their own fingerprinting
that would check their state criminal database. So you will
definitely have to complete the Federal Fingerprinting once, but you
also may have to complete a state fingerprinting requirement in some
states. The Federal fingerprinting costs $39 and the state
fingerprinting ranges from $25 to $60. (Emphasis added.)
While the SAFE Act clearly establishes a minimum training and
licensing requirement for mortgage loan originators, what is less clear
is the extent to which this minimum requirement goes beyond what may
have been required by states prior to the SAFE Act, or to the extent it
comes in addition to education requirements the industry imposes on
itself to ensure that employees are competent to originate mortgage
loans. The training required by the SAFE Act is to ensure that mortgage
loan originators operate ethically, competently, and in compliance with
other Federal (and state) regulations. Such training would be needed
with or without enactment of the SAFE Act, so the question is whether
the minimum SAFE Act training requirements exceed those the market
finds necessary to produce ethical and competent loan originators
knowledgeable of the regulatory environment in which they operate.
CBO's report, in fact, stated that many loan originators were already
subject to licensing and training fees by their states, and therefore
the transition to the requirements imposed by the SAFE Act, and the
costs associated with complying with its requirements would not be
significantly different from licensing fees and training costs already
in place in the states. For purposes of this analysis, HUD assumes that
the incremental training requirements that would be imposed if HUD's
rule imposing minimum SAFE Act requirements was binding in all states
range from 0 to 20 hours for initial licensing, and from 0 to 8 hours
for annual continuing education requirements. Since no estimates are
available for the cost of the 8-hour annual refresher course, HUD
estimates that they will cost about half the price of the 20-hour
initial registration course as cited by Integrity Mortgage Licensing
($150 to $200).
If HUD were required to establish a licensing system, in accordance
with this rule, because no state implemented a SAFE Act-compliant
licensing statute, the educational course that Integrity Mortgage
Licensing estimates at $299 to $399 would apply, as would the national
test fees reported estimated at $92. According to the NMLS Activity
Report, the average number of state registrations per mortgage loan
originator is 1.8.\15\ If HUD were required to establish a licensing
system, it would need to account for variations among state laws, and
for certifying loan originators' knowledge of state mortgage lending
laws. To the extent that states could be grouped according to common
legal structures and a single test would qualify a mortgage loan
originator in all of the states in the group, a HUD-run national
registration system would have a lower average number of separate state
registrations per mortgage loan originator. HUD therefore demonstrates
the costs of and average of: One state test for the low estimate (state
test cost of $69, total national and state test costs of $161); 1.8
state tests for the high estimate ($124, total $216); and 1.4 state
tests for the primary estimate ($97, total $189).
---------------------------------------------------------------------------
\15\ NMLS Activity Report, March 26, 2011: 99,787 unique
individuals hold 181,157 state licenses.
---------------------------------------------------------------------------
HUD assumes that the national fingerprinting and background check
[[Page 38491]]
cost estimated by Integrity Mortgage Licensing would apply ($39), but
that separate state fingerprinting and background check costs would not
be present if HUD were the sole SAFE Act registrar.
HUD has no basis for estimate of the total time spent by loan
originators to prepare for and take the national and state tests, and
submit fingerprints. For purposes of this analysis, HUD demonstrates
the costs for a loan originator candidate taking only one state exam at
12 hours, that these time costs rise with the number of state tests
required proportionally to the total fees for testing and
fingerprinting, and that time in such activities is valued at $75 per
hour.\16\ HUD assumes the failure rate on the national test found by
Integrity Mortgage Licensing of 33 percent applies and that anyone who
fails their tests does not retake the training or the tests.
---------------------------------------------------------------------------
\16\ Harold Bunce, Alastair McFarlane, William J. Reid, and Kurt
Usowski, ``The Impact of Mortgage Disclosure Reform under RESPA,''
Cityscape, 11 (2): 117-136. The figure used in the analysis for 2008
was $72 per hour, which has the same purchasing power as $74.73 in
2011.
---------------------------------------------------------------------------
HUD has no basis for estimating the rate of turnover among mortgage
loan originators. For purposes of this analysis, HUD demonstrates the
costs for annual new licensing rates of 5, 10, and 15 percent at a
constant steady state number of mortgage loan originators. Turnover has
an impact on continuing education estimates because new entrants will
not require refresher training during the year that they enter the
profession.
The table below presents low, primary, and high estimates of the
cost of complying with the minimum SAFE Act statutory requirements in
the counterfactual case of no state implementing any SAFE Act-compliant
licensing requirements for mortgage loan originators, and HUD being
charged with enforcing the minimum SAFE Act requirements as codified by
this rule.
Costs of Minimum SAFE Act Requirements
----------------------------------------------------------------------------------------------------------------
Cost item Low estimate Primary estimate High estimate
----------------------------------------------------------------------------------------------------------------
A. Registration System: Set-up and 5-year Maintenance..... $60,000,000 $68,200,000 $70,000,000
B. Mortgage Loan Originators Licensed..................... 150,000 225,000 300,000
C. Mortgage Loan Originator License Applicants (= B/0.67). 223,881 335,821 447,761
D. SAFE-Certified 20-hour Training Course................. $299 $349 $399
E. Incremental Licensing Training Time Requirement 0 10 20
Relative to Market (hours)...............................
F. Opportunity Cost of Incremental Training (E hours @ $75 $0 $750 $1,500
per hour)................................................
G. National and State Licensing Test...................... $161 $189 $216
H. National Fingerprinting and Background Check........... $39 $39 $39
I. Opportunity Cost of Time for Test Preparation, Test $900 $1,026 $1,148
Taking, and Fingerprinting (increasing with state test
requirements @ $75 per hour).............................
J. Total Cost to Loan Originators of Initial Registration $313,209,519 $790,186,813 $1,478,282,942
= C*(D+F+G+H+I)..........................................
K. SAFE Certified 8-hour Refresher Training............... $150 $175 $200
L. Incremental Refresher Training Time Requirement 0 4 8
Relative to Market (hours)...............................
M. Opportunity Cost of Incremental Training (L hours @ $75 $0 $300 $600
per hour)................................................
N. Total Annual Cost to Loan Originators of Refresher $21,375,000 $96,187,500 $204,000,000
Training = B*(1-Q)*(K+M).................................
O. 5 Years Refresher Training Discounted at 7%............ $87,641,720 $394,387,741 $836,440,277
P. 5 Years Refresher Training Discounted at 3%............ $97,891,241 $440,510,585 $934,260,266
Q. Annual Replacement Rate of Loan Originators............ 5% 10% 15%
R. Annual New Licensing Attempts = B*Q/0.67............... 11,194 33,582 67,164
S. Annual Cost of New Licensing Attempts = R*(D+F+G+H+I).. $15,660,406 $79,018,446 $221,741,946
T. 5 Years Annual New Licensing Attempts Discounted at 7%. $64,210,757 $323,991,230 $909,185,758
U. 5 Years Annual New Licensing Attempts Discounted at 3%. $71,720,074 $361,881,345 $1,015,513,184
V. Total 5-Year Cost of SAFE Act Discounted at 7% = $525,061,996 $1,576,765,784 $3,293,908,977
A+J+O+T..................................................
W. Total 5-Year Cost of SAFE Act Discounted at 3% = $542,820,834 $1,660,778,743 $3,498,056,392
A+J+P+U..................................................
X. Annualized Cost over 5 Years at 7%..................... $128,057,735 $384,558,502 $803,353,748
Y. Annualized Cost over 5 Years at 3%..................... $118,527,411 $362,638,631 $763,816,604
----------------------------------------------------------------------------------------------------------------
It is reiterated here that the above table is not an estimate of
the costs of this rule, and should in no way be construed as such.
Rather, the above estimates are for the costs that would be imposed by
HUD to fulfill the statutory requirements of the SAFE Act if no state
implemented any SAFE Act-compliant statute (or repealed pre-existing
statutes that met the SAFE Act's requirements). As stated previously
all 50 states, the District of Columbia, the Virgin Islands, Puerto
Rico, and Guam have enacted SAFE Act licensing laws. Individual state
requirements may exceed those that would be in place under HUD's rule
if states had not implemented SAFE Act-compliant mortgage loan
originator registration systems, but an estimate of the actual cost of
the SAFE Act as implemented by the several states is beyond the scope
of this analysis.
However, section 1516 of the SAFE Act requires an annual report to
Congress on the effectiveness of the SAFE Act's provisions, including
legislative recommendations, if any, for strengthening consumer
protections, enhancing examination standards, streamlining
communication among all stakeholders involved in residential mortgage
loan origination and processing, and establishing performance-based
bonding requirements for mortgage originators or institutions that
employ such brokers. The annual reports to be submitted to Congress
this year, and more importantly, in the succeeding years, after the
SAFE Act licensing system is in full implementation across the country,
will yield better information about the costs, as well as benefits of
this nationwide statutory licensing system.
The docket file for this rule is available for public inspection
between the hours of 8 a.m. and 5 p.m. weekdays in the Regulations
Division, Office of General Counsel, Department of Housing and Urban
Development, 451 7th Street, SW., Room 10276, Washington, DC 20410-
0500. Due to security measures at the HUD Headquarters building, please
schedule an appointment to review the docket file by calling the
Regulations Division at
[[Page 38492]]
202-708-3055 (this is not a toll-free number). Persons with hearing or
speech impairments may access the above telephone number via TTY by
calling the toll-free Federal Relay Service at 800-877-8339.
Congressional Review of Final Rules
As provided in HUD's statement under Executive Order 12866
(Regulatory Planning and Review), OMB determined that this rule is an
economically significant rule and therefore also a ``major rule'' as
defined in Chapter 8 of 5 U.S.C., based on the cost of compliance with
requirements that were already imposed by Congress in the SAFE Act
statute prior to the issuance of this rule. This rule therefore
provides for a 60-day delayed effective date and will be submitted for
congressional review in accordance with this chapter.
Regulatory Flexibility Act
The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) generally
requires an agency to conduct a regulatory flexibility analysis of any
rule subject to notice and comment rulemaking requirements, unless the
agency certifies that the rule will not have a significant economic
impact on a substantial number of small entities. The SAFE Act, which
establishes minimum licensing requirements for loan originators, is
largely directed to individuals who are loan originators as defined by
the SAFE Act. The SAFE Act requires each individual to be licensed and
registered under its requirements. With respect to the SAFE Act
licensing standards, HUD is not, through this rule, establishing or
implementing these licensing requirements, because the SAFE Act made
these requirements self-implementing. Rather, through this rule, HUD
codifies, in regulation, the SAFE Act minimum licensing standards, and
to codify those clarifications and interpretations that HUD already has
issued through Web site postings. HUD is, however, establishing
regulations reflecting its oversight responsibilities under the SAFE
Act. The codification of the licensing standards, together with HUD's
oversight regulations, will provide a convenient location for regulated
parties and interested individuals to reference SAFE Act requirements.
Because the SAFE Act is not directed to entities, large or small, but
to individuals, and because this rule is directed to HUD's oversight
responsibilities, the undersigned certifies that this rule will not
have a significant economic impact on a substantial number of small
entities.
Environmental Impact
This rule does not direct, provide for assistance or loan and
mortgage insurance for, or otherwise govern or regulate, real property
acquisition, disposition, leasing, rehabilitation, alteration,
demolition, or new construction, or establish, revise, or provide for
standards for construction or construction materials, manufactured
housing, or occupancy. Accordingly, under 24 CFR 50.19(c)(1), this rule
is categorically excluded from environmental review under the National
Environmental Policy Act (42 U.S.C. 4321).
Executive Order 13132, Federalism
Executive Order 13132 (entitled ``Federalism'') prohibits, to the
extent practicable and permitted by law, an agency from promulgating a
regulation that has federalism implications if the rule either imposes
substantial direct compliance costs on state and local governments and
is not required by statute, or preempts state law, unless the relevant
requirements of Section 6 of the Executive Order are met. This rule
merely implements the statutory requirements of the SAFE Act and does
not have federalism implications beyond those in the Act. This rule
does not itself impose substantial direct compliance costs on state and
local governments or preempt state law within the meaning of the
Executive Order.
Unfunded Mandates Reform Act
Title II of the Unfunded Mandates Reform Act of 1995 establishes
requirements for Federal agencies to assess the effects of their
regulatory actions on state, local, and tribal governments and the
private sector. Section 201 of Title II limits the assessment to
enforceable duties imposed by the regulation and excludes duties that
``incorporate requirements specifically set forth in law.'' This rule
does not add to the duties of states or individuals set forth in the
SAFE Act statute, but instead clarifies classes of activities and
individuals that are subject to the SAFE Act's statutory requirements.
Accordingly, the costs identified by HUD above under the section
``Executive Order 12866, Regulatory Planning and Review'' are the costs
of HUD's and individuals' compliance with the SAFE Act's statutory
requirements in the counterfactual situation in which HUD were to
implement licensing systems in all 50 states. Because this final rule
does not add to the incorporated requirements specifically set forth in
law, it is not subject to the requirements of UMRA.
List of Subjects
24 CFR Part 30
Administrative practice and procedure, Grant programs--housing and
community development, Loan programs--housing and community
development, Mortgages, and Penalties.
24 CFR Part 3400
Licensing, Mortgages, Registration, Reporting and recordkeeping
requirements.
For the reasons stated in the preamble, HUD amends 24 CFR part 30
and adds a new 24 CFR part 3400, as follows:
PART 30--CIVIL MONEY PENALTIES: CERTAIN PROHIBITED CONDUCT
0
1. The authority citation for part 30 continues to read as follows:
Authority: 12 U.S.C. 1701q-1, 1703, 1723i, 1735f-14, and 1735f-
15; 15 U.S.C. 1717a; 28 U.S.C. 2461 note; 42 U.S.C. 1437z-1 and
3535(d).
0
2. Add Sec. 30.69 to subpart B to read as follows:
Sec. 30.69 SAFE Mortgage Licensing violations.
(a) General. HUD may impose a civil penalty on a loan originator
operating in any state that is subject to a licensing system
established by HUD under 12 U.S.C. 5107 and in accordance with subpart
C of 24 CFR part 3400, if HUD finds that such loan originator has
violated or failed to comply with any requirement of the SAFE Act, the
provisions of 24 CFR part 3400, or an order issued under the authority
of 12 U.S.C. 5113(c).
(b) Maximum amount of penalty. The maximum amount of penalty for
each act or omission described in paragraph (a) of this section shall
be $25,000.
0
3. Add part 3400, to read as follows:
PART 3400--SAFE MORTGAGE LICENSING ACT
Sec.
3400.1 Purpose.
3400.3 Confidentiality of information.
Subpart A--General
3400.20 Scope of this subpart.
3400.23 Definitions.
Subpart B--Determination of State Compliance With the SAFE Act
3400.101 Scope of this subpart.
3400.103 Individuals required to be licensed by states.
3400.105 Minimum loan originator license requirements.
[[Page 38493]]
3400.107 Minimum annual license renewal requirements.
3400.109 Effective date of state requirements imposed on
individuals.
3400.111 Other minimum requirements for state licensing systems.
3400.113 Performance standards.
3400.115 Determination of noncompliance.
Subpart C--HUD's Loan Originator Licensing System and HUD's Nationwide
Mortgage Licensing and Registry System
3400.201 Scope of this subpart.
3400.203 HUD's establishment of loan originator licensing system.
3400.205 HUD's establishment of nationwide mortgage licensing system
and registry.
Subpart D--Minimum Requirements for Administration of the NMLSR
3400.301 Scope of this subpart.
3400.303 Financial reporting.
3400.305 Data security.
3400.307 Fees.
3400.309 Absence of liability for good-faith administration.
Subpart E--Enforcement of HUD Licensing System
3400.401 HUD's authority to examine loan originator records.
3400.403 Enforcement proceedings.
3400.405 Civil money penalties.
Appendix A to Part 3400--Examples of Mortgage Loan Originator
Activities
Appendix B to Part 3400--Engaging in the Business of a Loan
Originator: Commercial Context and Habitualness
Appendix C to Part 3400--Independent Contractors and Loan Processor
and Underwriter Activities That Require a State Mortgage Loan
Originator License
Appendix D to Part 3400--Attorneys: Circumstances That Require a
State Mortgage Loan Originator License
Authority: 12 U.S.C. 5101-5116; 42 U.S.C. 3535(d).
Sec. 3400.1 Purpose.
(a) This part implements HUD's responsibilities under the Secure
and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act) (12
U.S.C. 5101-5116). The SAFE Act strives to enhance consumer protection
and reduce fraud by directing states to adopt minimum uniform standards
for the licensing and registration of residential mortgage loan
originators and to participate in a nationwide mortgage licensing
system and registry database of residential mortgage loan originators.
Under the SAFE Act, if HUD determines that a state's loan origination
licensing system does not meet the minimum requirements of the SAFE
Act, HUD is charged with establishing and implementing a system for all
loan originators in that state. Additionally, if at any time HUD
determines that the nationwide mortgage licensing system and registry
is failing to meet the SAFE Act's requirements, HUD is charged with
establishing and maintaining a licensing and registry database for loan
originators.
(b) Subpart A establishes the definitions applicable to this part.
Subpart B provides the minimum standards that a state must meet in
licensing loan originators, including standards for whom a state must
require to be licensed, and sets forth HUD's procedure for determining
a state's compliance with the minimum standards. Subpart C provides the
requirements that HUD will apply in any state that HUD determines has
not established a licensing and registration system in compliance with
the minimum standards of the SAFE Act. Subpart D provides minimum
requirements for the administration of the Nationwide Mortgage
Licensing System and Registry. Subpart E clarifies HUD's enforcement
authority in states in which it operates a state licensing system.
Sec. 3400.3 Confidentiality of information.
(a) Except as otherwise provided in this part, any requirement
under Federal or state law regarding the privacy or confidentiality of
any information or material provided to the Nationwide Mortgage
Licensing System and Registry or a system established by the Secretary
under this part, and any privilege arising under Federal or state law
(including the rules of any Federal or state court) with respect to
such information or material, shall continue to apply to such
information or material after the information or material has been
disclosed to the system. Such information and material may be shared
with all state and Federal regulatory officials with mortgage industry
oversight authority without the loss of privilege or the loss of
confidentiality protections provided by Federal and state laws.
(b) Information or material that is subject to a privilege or
confidentiality under paragraph (a) of this section shall not be
subject to:
(1) Disclosure under any Federal or state law governing the
disclosure to the public of information held by an officer or an agency
of the Federal Government or the respective state; or
(2) Subpoena or discovery, or admission into evidence, in any
private civil action or administrative process, unless with respect to
any privilege held by the Nationwide Mortgage Licensing System and
Registry or by the Secretary with respect to such information or
material, the person to whom such information or material pertains,
waives, in whole or in part, in the discretion of such person, that
privilege.
(c) Any state law, including any state open record law, relating to
the disclosure of confidential supervisory information or any
information or material described in paragraph (a) of this section that
is inconsistent with paragraph (a), shall be superseded by the
requirements of such provision to the extent that state law provides
less confidentiality or a weaker privilege.
(d) This section shall not apply with respect to the information or
material relating to the employment history of, and publicly
adjudicated disciplinary and enforcement actions against, loan
originators that is included in the Nationwide Mortgage Licensing
System and Registry for access by the public.
Subpart A--General
Sec. 3400.20 Scope of this subpart.
This subpart provides the definitions applicable to this part, and
other general requirements applicable to this part.
Sec. 3400.23 Definitions.
Terms that are defined in the SAFE Act and used in this part have
the same meaning as in the SAFE Act, unless otherwise provided in this
section.
Administrative or clerical tasks means the receipt, collection, and
distribution of information common for the processing or underwriting
of a loan in the mortgage industry and communication with a consumer to
obtain information necessary for the processing or underwriting of a
residential mortgage loan.
American Association of Residential Mortgage Regulators is the
national association of executives and employees of the various states
who are charged with the responsibility for administration and
regulation of residential mortgage lending, servicing, and brokering,
and dedicated to the goals described at http://www.aarmr.org.
Application means a request, in any form, for an offer (or a
response to a solicitation of an offer) of residential mortgage loan
terms, and the information about the borrower or prospective borrower
that is customary or necessary in a decision on whether to make such an
offer.
Clerical or support duties:
(1) Include:
(i) The receipt, collection, distribution, and analysis of
information common for the processing or underwriting of a residential
mortgage loan; and
(ii) Communicating with a consumer to obtain the information
necessary for the processing or underwriting of a loan, to the extent
that such communication
[[Page 38494]]
does not include offering or negotiating loan rates or terms, or
counseling consumers about residential mortgage loan rates or terms;
and
(2) Does not include:
(i) Taking a residential mortgage loan application; or
(ii) Offering or negotiating terms of a residential mortgage loan.
Conference of State Bank Supervisors (CSBS) is the national
organization composed of state bank supervisors dedicated to
maintaining the state banking system and state regulation of financial
services in accordance with the CSBS statement of principles described
at http://www.csbs.org.
Employee:
(1) Subject to paragraph (2) of this definition, means:
(i) An individual:
(A) Whose manner and means of performance of work are subject to
the right of control of, or are controlled by, a person, and
(B) Whose compensation for Federal income tax purposes is reported,
or required to be reported, on a W-2 form issued by the controlling
person.
(2) Has such binding definition as may be issued by the Federal
banking agencies in connection with their implementation of their
responsibilities under the SAFE Act.
Farm Credit Administration means the independent Federal agency,
authorized by the Farm Credit Act of 1971, to examine and regulate the
Farm Credit System.
Federal banking agencies means the Board of Governors of the
Federal Reserve System, the Comptroller of the Currency, the Director
of the Office of Thrift Supervision, the National Credit Union
Administration, and the Federal Deposit Insurance Corporation.
For compensation or gain. See Sec. 3400.103(c)(2)(ii).
Independent contractor means an individual who performs his or her
duties other than at the direction of and subject to the supervision
and instruction of an individual who is licensed and registered in
accordance with Sec. 3400.103(a), or is not required to be licensed,
in accordance with Sec. 3400.103(e)(5), (e)(6), or (e)(7).
Loan originator. See Sec. 3400.103.
Loan processor or underwriter, for purposes of this part, means an
individual who, with respect to the origination of a residential
mortgage loan, performs clerical or support duties at the direction of
and subject to the supervision and instruction of:
(1) A state-licensed loan originator; or
(2) A registered loan originator.
Nationwide Mortgage Licensing System and Registry or NMLSR means
the mortgage licensing system developed and maintained by the
Conference of State Bank Supervisors and the American Association of
Residential Mortgage Regulators for the licensing and registration of
loan originators and the registration of registered loan originators or
any system established by the Secretary of HUD, as provided in subpart
D of this part.
Nontraditional mortgage product means any mortgage product other
than a 30-year fixed-rate mortgage.
Origination of a residential mortgage loan, for purposes of the
definition of loan processor or underwriter, means all residential
mortgage loan-related activities from the taking of a residential
mortgage loan application through the completion of all required loan
closing documents and funding of the residential mortgage loan.
Real estate brokerage activities mean any activity that involves
offering or providing real estate brokerage services to the public
including--
(1) Acting as a real estate agent or real estate broker for a
buyer, seller, lessor, or lessee of real property;
(2) Bringing together parties interested in the sale, purchase,
lease, rental, or exchange of real property;
(3) Negotiating, on behalf of any party, any portion of a contract
relating to the sale, purchase, lease, rental, or exchange of real
property (other than in connection with providing financing with
respect to any such transaction);
(4) Engaging in any activity for which a person engaged in the
activity is required to be registered as a real estate agent or real
estate broker under any applicable law; and
(5) Offering to engage in any activity, or act in any capacity,
described in paragraphs (1), (2), (3), or (4) of this definition.
Residential mortgage loan means any loan primarily for personal,
family, or household use that is secured by a mortgage, deed of trust,
or other equivalent consensual security interest on a dwelling (as
defined in section 103(v) of the Truth in Lending Act) or residential
real estate upon which is constructed or intended to be constructed a
dwelling (as so defined).
Secretary means the Secretary of Housing and Urban Development.
State means any State of the United States, the District of
Columbia, any territory of the United States, Puerto Rico, Guam,
American Samoa, the Virgin Islands, and the Commonwealth of the
Northern Mariana Islands.
Unique identifier means a number or other identifier that:
(1) Permanently identifies a loan originator;
(2) Is assigned by protocols established by the Nationwide Mortgage
Licensing System and Registry and the Federal banking agencies to
facilitate electronic tracking of loan originators and uniform
identification of, and public access to, the employment history of and
the publicly adjudicated disciplinary and enforcement actions against
loan originators; and
(3) Shall not be used for purposes other than those set forth under
the SAFE Act.
Subpart B--Determination of State Compliance with the SAFE Act
Sec. 3400.101 Scope of this subpart.
This subpart describes the minimum standards of the SAFE Act that
apply to a state's licensing and registering of loan originators. This
subpart also provides the procedures that HUD follows to determine that
a state does not have in place a system for licensing and registering
mortgage loan originators that complies with the minimum standards.
Upon making such a determination, HUD will impose the requirements and
exercise the enforcement authorities described in subparts C and E of
this part.
Sec. 3400.103 Individuals required to be licensed by states.
(a) Except as provided in paragraph (e) of this section, in order
to operate a SAFE-compliant program, a state must prohibit an
individual from engaging in the business of a loan originator with
respect to any dwelling or residential real estate in the state, unless
the individual first:
(1) Registers as a loan originator through and obtains a unique
identifier from the NMLSR, and
(2) Obtains and maintains a valid loan originator license from the
state.
(b) An individual engages in the business of a loan originator if
the individual, in a commercial context and habitually or repeatedly:
(1)(i) Takes a residential mortgage loan application; and
(ii) Offers or negotiates terms of a residential mortgage loan for
compensation or gain; or
(2) 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 activities
described in paragraph (b)(1) of this section.
(c)(1) An individual ``takes a residential mortgage loan
application'' if the individual receives a residential
[[Page 38495]]
mortgage loan application for the purpose of facilitating a decision
whether to extend an offer of residential mortgage loan terms to a
borrower or prospective borrower (or to accept the terms offered by a
borrower or prospective borrower in response to a solicitation),
whether the application is received directly or indirectly from the
borrower or prospective borrower.
(2) An individual ``offers or negotiates terms of a residential
mortgage loan for compensation or gain'' if the individual:
(i)(A) Presents for consideration by a borrower or prospective
borrower particular residential mortgage loan terms;
(B) Communicates directly or indirectly with a borrower, or
prospective borrower for the purpose of reaching a mutual understanding
about prospective residential mortgage loan terms; or
(C) Recommends, refers, or steers a borrower or prospective
borrower to a particular lender or set of residential mortgage loan
terms, in accordance with a duty to or incentive from any person other
than the borrower or prospective borrower; and
(ii) Receives or expects to receive payment of money or anything of
value in connection with the activities described in paragraph
(c)(2)(i) of this section or as a result of any residential mortgage
loan terms entered into as a result of such activities.
(d)(1) Except as provided in paragraph (e) of this section, a state
must prohibit an individual who is an independent contractor from
engaging in residential mortgage loan origination activities as a loan
processor or underwriter with respect to any dwelling or residential
real estate in the state, unless the individual first:
(i) Registers as a loan originator through and obtains a unique
identifier from the NMLSR, and
(ii) Obtains and maintains a valid loan originator license from the
state.
(2) An individual ``engages in residential mortgage loan
origination activities as a loan processor or underwriter'' if, with
respect to a residential mortgage loan application, the individual
performs clerical or support duties.
(e) A state is not required to impose the prohibitions required
under paragraphs (a) and (d) of this section on the following
individuals:
(1) An individual who performs only real estate brokerage
activities and is licensed or registered in accordance with applicable
state law, unless the individual is compensated directly or indirectly
by a lender, mortgage broker, or other loan originator or by an agent
of such lender, mortgage broker, or other loan originator;
(2) An individual who is involved only in extensions of credit
relating to timeshare plans, as that term is defined in 11 U.S.C.
101(53D);
(3) An individual who performs only clerical or support duties and:
(i) Who does so at the direction of and subject to the supervision
and instruction of an individual who:
(A) Is licensed and registered in accordance with paragraph (a) of
this section, or
(B) Is not required to be licensed in accordance with paragraph
(e)(5); or
(ii) Who performs such duties solely with respect to transactions
for which the individual who acts as a loan originator is not required
to be licensed, in accordance with paragraph (e)(2), (e)(6), or (e)(7)
of this section;
(4) An individual who performs only purely administrative or
clerical tasks on behalf of a loan originator;
(5) An individual who is lawfully registered with, and maintains a
unique identifier through, the Nationwide Mortgage Licensing System and
Registry, and who is an employee of
(i) A depository institution;
(ii) A subsidiary that is:
(A) Owned and controlled by a depository institution; and
(B) Regulated by a Federal banking agency; or
(iii) An institution regulated by the Farm Credit Administration;
(6)(i) An individual who is an employee of a Federal, state, or
local government agency or housing finance agency and who acts as a
loan originator only pursuant to his or her official duties as an
employee of the Federal, state, or local government agency or housing
finance agency.
(ii) For purposes of this paragraph (e)(6), the term ``employee''
has the meaning provided in paragraph (1) of the definition of employee
in Sec. 3400.23 and excludes the meaning provided in paragraph (2) of
the definition.
(iii) For purposes of this paragraph (e)(6), the term ``housing
finance agency'' means any authority:
(A) That is chartered by a state to help meet the affordable
housing needs of the residents of the state;
(B) That is supervised directly or indirectly by the state
government;
(C) That is subject to audit and review by the state in which it
operates; and
(D) Whose activities make it eligible to be a member of the
National Council of State Housing Agencies.
(7)(i) An employee of a bona fide nonprofit organization who acts
as a loan originator only with respect to his or her work duties to the
bona fide nonprofit organization, and who acts as a loan originator
only with respect to residential mortgage loans with terms that are
favorable to the borrower.
(ii) For an organization to be considered a bona fide nonprofit
organization under this paragraph, a state supervisory authority that
opts not to require licensing of the employee must determine, under
criteria and pursuant to processes established by the state, that the
organization:
(A) Has the status of a tax-exempt organization under section
501(c)(3) of the Internal Revenue Code of 1986;
(B) Promotes affordable housing or provides homeownership
education, or similar services;
(C) Conducts its activities in a manner that serves public or
charitable purposes, rather than commercial purposes;
(D) 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;
(E) Compensates its employees in a manner that does not incentivize
employees to act other than in the best interests of its clients;
(F) 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
(G) Meets other standards that the state determines are
appropriate.
(iii) A state must periodically examine the books and activities of
an organization it determines is a bona fide nonprofit organization and
revoke its status as a bona fide nonprofit organization if it does not
continue to meet the criteria under paragraph (e)(ii) of this section;
(iv) For residential mortgage loans to have terms that are
favorable to the borrower, a state must determine that the terms are
consistent with loan origination in a public or charitable context,
rather than a commercial context.
(f) A state must require an individual licensed in accordance with
paragraphs (a) or (d) of this section to renew the loan originator
license no less often than annually.
Sec. 3400.105 Minimum loan originator license requirements.
For an individual to be eligible for a loan originator license
required under Sec. 3400.103(a) and (d), a state must require and
find, at a minimum, that an individual:
(a) Has never had a loan originator license revoked in any
governmental
[[Page 38496]]
jurisdiction, except that a formally vacated revocation shall not be
deemed a revocation;
(b)(1) Has never been convicted of, or pled guilty or nolo
contendere to, a felony in a domestic, foreign, or military court:
(i) During the 7-year period preceding the date of the application
for licensing; or
(ii) At any time preceding such date of application, if such felony
involved an act of fraud, dishonesty, a breach of trust, or money
laundering.
(2) For purposes of this paragraph (b):
(i) Expunged convictions and pardoned convictions do not, in
themselves affect the eligibility of the individual; and
(ii) Whether a particular crime is classified as a felony is
determined by the law of the jurisdiction in which an individual is
convicted.
(c) Has demonstrated financial responsibility, character, and
general fitness, such as to command the confidence of the community and
to warrant a determination that the loan originator will operate
honestly, fairly, and efficiently, under reasonable standards
established by the individual state.
(d) Completed at least 20 hours of pre-licensing education that has
been reviewed and approved by the Nationwide Mortgage Licensing System
and Registry. The pre-licensing education completed by the individual
must include at least:
(1) 3 hours of Federal law and regulations;
(2) 3 hours of ethics, which must include instruction on fraud,
consumer protection, and fair lending issues; and
(3) 2 hours of training on lending standards for the nontraditional
mortgage product marketplace.
(e)(1) Achieved a test score of not less than 75 percent correct
answers on a written test developed by the NMLSR in accordance with 12
U.S.C. 5105(d).
(2) To satisfy the requirement under paragraph (e)(1) of this
section, an individual may take a test three consecutive times, with
each retest occurring at least 30 days after the preceding test. If an
individual fails three consecutive tests, the individual must wait at
least 6 months before taking the test again.
(3) If a formerly state-licensed loan originator fails to maintain
a valid license for 5 years or longer, not taking into account any time
during which such individual is a registered loan originator, the
individual must retake the test and achieve a test score of not less
than 75 percent correct answers.
(f) Be covered by either a net worth or surety bond requirement, or
pays into a state fund, as required by the state loan originator
supervisory authority.
(g) Has submitted to the NMLSR fingerprints for submission to the
Federal Bureau of Investigation and to any government agency for a
state and national criminal history background check; and
(h) Has submitted to the NMLSR personal history and experience,
which must include authorization for the NMLSR to obtain:
(1) Information related to any administrative, civil, or criminal
findings by any governmental jurisdiction; and
(2) An independent credit report.
Sec. 3400.107 Minimum annual license renewal requirements.
For an individual to be eligible to renew a loan originator license
as required under Sec. 3400.103(f), a state must require the
individual:
(a)(1) To continue to meet the minimum standards for license
issuance provided in Sec. 3400.105; and
(2) To satisfy annual continuing education requirements, which must
include at least 8 hours of education approved by the NMLSR. The 8
hours of annual continuing education must include at least:
(i) 3 hours of Federal law and regulations;
(ii) 2 hours of ethics (including instruction on fraud, consumer
protection, and fair lending issues); and
(iii) 2 hours of training related to lending standards for the
nontraditional mortgage product marketplace.
(b) A state must provide that a state-licensed loan originator may
only receive credit for a continuing education course in the year in
which the course is taken, and that a state-licensed loan originator
may not apply credits for education courses taken in one year to meet
the continuing education requirements of subsequent years. A state must
provide that an individual may not meet the annual requirements for
continuing education by taking an approved course more than one time in
the same year or in successive years.
(c) An individual who is an instructor of an approved continuing
education course may receive credit for the individual's own annual
continuing education requirement at the rate of 2 hours credit for
every one hour taught.
Sec. 3400.109 Effective date of state requirements imposed on
individuals.
(a) Except as provided in paragraphs (b) and (c) of this section, a
state must provide that the effective date for requirements it imposes
in accordance with Sec. Sec. 3400.103, 3400.105, and 3400.107 is no
later than August 29, 2011.
(b) For an individual who was permitted to perform residential
mortgage loan originations under state legislation or regulations
enacted or promulgated prior to the state's enactment or promulgation
of a licensing system that complies with this subpart, a state may
delay the effective date for requirements it imposes in accordance with
Sec. Sec. 3400.103, 3400.105, and 3400.107 to no later than August 29,
2011. For purposes of this paragraph (b), an individual was permitted
to perform residential mortgage loan originations only if prior state
law required the individual to be licensed, authorized, registered, or
otherwise granted a form of affirmative and revocable government
permission for individuals as a condition of performing residential
mortgage loan originations.
(c) HUD may approve a later effective date only upon a state's
demonstration that substantial numbers of loan originators (or of a
class of loan originators) who require a state license face unusual
hardship, through no fault of their own or of the state government, in
complying with the standards required by the SAFE Act and in obtaining
state licenses within one year.
Sec. 3400.111 Other minimum requirements for state licensing systems.
(a) General. A state must maintain a loan originator licensing,
supervisory, and oversight authority (supervisory authority) that
provides effective supervision and enforcement, in accordance with the
minimum standards provided in this section and in Sec. 3400.113.
(b) Authorities. A supervisory authority must have the legal
authority and mechanisms:
(1) To examine any books, papers, records, or other data of any
loan originator operating in the state;
(2) To summon any loan originator operating in the state, or any
person having possession, custody, or care of the reports and records
relating to such a loan originator, to appear before the supervisory
authority at a time and place named in the summons and to produce such
books, papers, records, or other data, and to give testimony, under
oath, as may be relevant or material to an investigation of such loan
originator for compliance with the requirements of the SAFE Act;
(3) To administer oaths and affirmations and examine and take and
preserve testimony under oath as to any
[[Page 38497]]
matter in respect to the affairs of any such loan originator;
(4) To enter an order requiring any individual or person that is,
was, or would be a cause of a violation of the SAFE Act as implemented
by the state, due to an act or omission the person knew or should have
known would contribute to such violation, to cease and desist from
committing or causing such violation and any future violation of the
same requirement;
(5) To suspend, terminate, and refuse renewal of a loan originator
license for violation of state or Federal law; and
(6) To impose civil money penalties for individuals acting as loan
originators, or representing themselves to the public as loan
originators, in the state without a valid license or registration.
(c) A supervisory authority must have established processes in
place to verify that individuals subject to the requirement described
in Sec. 3400.103(a)(1) and (d)(1) are registered with the NMLSR.
(d) The supervisory authority must be required under state law to
regularly report violations of such law, as well as enforcement actions
and other relevant information, to the NMLSR.
(e) The supervisory authority must have a process in place for
challenging information contained in the NMLSR.
(f) The supervisory authority must require a loan originator to
ensure that all residential mortgage loans that close as a result of
the loan originator engaging in activities described in Sec.
3400.103(b)(1) are included in reports of condition submitted to the
NMLSR. Such reports of condition shall be in such form, shall contain
such information, and shall be submitted with such frequency and by
such dates as the NMLSR may reasonably require.
Sec. 3400.113 Performance standards.
(a) For HUD to determine that a state is providing effective
supervision and enforcement, a supervisory authority must meet the
following performance standards:
(1) The supervisory authority must participate in the NMLSR;
(2) The supervisory authority must approve or deny loan originator
license applications and must renew or refuse to renew existing loan
originator licenses for violations of state or Federal law;
(3) The supervisory authority must discipline loan originator
licensees with appropriate enforcement actions, such as license
suspensions or revocations, cease-and-desist orders, civil money
penalties, and consumer refunds for violations of state or Federal law;
(4) The supervisory authority must examine or investigate loan
originator licensees in a systematic manner based on identified risk
factors or on a periodic schedule.
(b) A supervisory authority that is accredited under the Conference
of State Bank Supervisors-American Association of Residential Mortgage
Regulators Mortgage Accreditation Program will be presumed by HUD to be
compliant with the requirements of this section.
Sec. 3400.115 Determination of noncompliance.
(a) Evidence of compliance. Any time a state enacts legislation
that affects its compliance with the SAFE Act, it must notify HUD. Upon
request from HUD, a state must provide evidence that it is in
compliance with the requirements of the SAFE Act and this part,
including citations to applicable state law, and regulations;
descriptions of processes followed by the state's supervisory
authority; and data concerning examination, investigation, and
enforcement actions.
(b) Initial determination of noncompliance. If HUD makes an initial
determination that a state is not in compliance with the SAFE Act, HUD
will notify the state and will publish, in the Federal Register, a
notice providing HUD's initial determination and presenting the
opportunity for public comment for a period of no less than 30 days.
This public comment period will allow the residents of the state and
other interested members of the public to comment on HUD's initial
determination.
(c) Final determination of noncompliance. In making a final
determination of noncompliance, HUD will review additional information
that may be offered by a state and the comments submitted during the
public comment period described in paragraph (b) of this section. If
HUD makes a final determination that a state does not have in place by
law or regulation a system that complies with the minimum requirements
of the SAFE Act, as described in this part, HUD will publish that final
determination in the Federal Register.
(d) Good-faith effort to comply. If HUD makes the final
determination described in paragraph (c) of this section, but HUD finds
that the state is making a good-faith effort to meet the requirements
of 12 U.S.C. 5104, 5105, 5107(d), and this subpart, HUD may grant the
state a period of not more than 24 months to comply with these
requirements. If an extension is granted to the state in accordance
with this paragraph (d), then HUD will provide an additional initial
and final determination process before it determines that the state is
not in compliance and is subject to subparts C and E of this part.
(e) Effective date of subparts C and E. The provisions of subparts
C and E of this part will become effective with respect to a state for
which a final determination of noncompliance has been made upon:
(1) The effective date of HUD's final determination with respect to
the state, pursuant to paragraph (c) of this section, unless an
extension had been granted to the state in accordance with paragraph
(d) of this section; or
(2) If an extension had been granted to the state in accordance
with paragraph (d) of this section, the effective date of HUD's
subsequent final determination with respect to the state following the
expiration of the period of time granted pursuant to paragraph (d) of
this section.
Subpart C--HUD's Loan Originator Licensing System and Nationwide
Mortgage Licensing and Registry System
Sec. 3400.201 Scope of this subpart.
The SAFE Act provides HUD with ``backup authority'' to establish a
loan originator licensing system for any state that is determined by
HUD not to be in compliance with the minimum standards of the SAFE Act.
The provisions of this subpart become applicable to individuals in a
state as provided in Sec. 3400.115(e). The SAFE Act also authorizes
HUD to establish and maintain a nationwide mortgage licensing system
and registry if HUD determines that the NMLSR is failing to meet the
purposes and requirements of the SAFE Act for a comprehensive
licensing, supervisory, and tracking system for loan originators.
Sec. 3400.203 HUD's establishment of loan originator licensing
system.
If HUD determines, in accordance with Sec. 3400.115(e), that a
state has not established a licensing and registration system in
compliance with the minimum standards of the SAFE Act, HUD shall apply
to individuals in that state the minimum standards of the SAFE Act, as
specified in subpart B, which provides the minimum requirements that a
state must meet to be in compliance with the SAFE Act, and as may be
further specified in this part.
[[Page 38498]]
Sec. 3400.205 HUD's establishment of nationwide mortgage licensing
system and registry.
If HUD determines that the NMLSR established by CSBS and AARMR does
not meet the minimum requirements of subpart D of this part, HUD will
establish and maintain a nationwide mortgage licensing system and
registry.
Subpart D--Minimum Requirements for Administration of the NMLSR
Sec. 3400.301 Scope of this subpart.
This subpart establishes minimum requirements that apply to
administration of the NMLSR by the Conference of State Bank Supervisors
or by HUD. The NMLSR must accomplish the following objectives:
(a) Provides uniform license applications and reporting
requirements for state-licensed loan originators.
(b) Provides a comprehensive licensing and supervisory database.
(c) Aggregates and improves the flow of information to and between
regulators.
(d) Provides increased accountability and tracking of loan
originators.
(e) Streamlines the licensing process and reduces the regulatory
burden.
(f) Enhances consumer protections and supports anti-fraud measures.
(g) Provides consumers with easily accessible information, offered
at no charge, utilizing electronic media, including the Internet,
regarding the employment history of, and publicly adjudicated
disciplinary and enforcement actions against, loan originators.
(h) Establishes a means by which residential mortgage loan
originators would, to the greatest extent possible, be required to act
in the best interests of the consumer.
(i) Facilitates responsible behavior in the mortgage marketplace
and provides comprehensive training and examination requirements
related to mortgage lending.
(j) Facilitates the collection and disbursement of consumer
complaints on behalf of state and Federal mortgage regulators.
Sec. 3400.303 Financial reporting.
To the extent that CSBS maintains the NMLSR, CSBS must annually
provide to HUD, and HUD will annually collect and make available to the
public, NMLSR financial statements, audited in accordance with
Generally Accepted Accounting Principles (GAAP) promulgated by the
Federal Accounting Standards Advisory Board, and other data. These
financial statements and other data shall include, but not be limited
to, the level and categories of funds received in relation to the NMLSR
and how such funds are spent, including the aggregate total of funds
paid for system development and improvements, the aggregate total of
salaries and bonuses paid, the aggregate total of other administrative
costs, and detail on other money spent, including money and interest
paid to reimburse system investors or lenders, and a report of each
state's activity with respect to the NMLSR, including the number of
licensees, the state's financial commitment to the system, and the fees
collected by the state through the NMLSR.
Sec. 3400.305 Data security.
(a) To the extent that CSBS, AARMR, or their successors, maintain
the NMLSR, CSBS, AARMR, and their successors, as applicable, must
complete a background check on their employees, contractors, or other
persons who have access to loan originators' Social Security Numbers,
fingerprints, or any credit reports collected by the system.
(b) To the extent that CSBS, AARMR, or theirs successors, maintains
the NMLSR, CSBS, AARMR, and their successors as applicable, must keep
and adhere to an appropriate information security and privacy policy.
If the NMLSR forms a reasonable belief that a security breach has
occurred, it shall notify affected parties, as soon as practicable,
including HUD, any loan originators or registrants whose data may have
been compromised, and the employer of the loan originator or
registrant, if such employer is also licensed through the system.
Sec. 3400.307 Fees.
CSBS, AARMR, or HUD, as applicable, may charge reasonable fees to
cover the costs of maintaining and providing access to information from
the Nationwide Mortgage Licensing System and Registry. Fees shall not
be charged to consumers for access to such system and registry. If HUD
determines to charge fees, the fees to be charged shall be issued by
notice with the opportunity for comment prior to any fees being
charged.
Sec. 3400.309 Absence of liability for good-faith administration.
HUD or any organization serving as the administrator of the
Nationwide Mortgage Licensing System and Registry or a system
established by HUD under 12 U.S.C. 5108 and in accordance with subpart
C, or any officer or employee of HUD or HUD's designee, shall not be
subject to any civil action or proceeding for monetary damages by
reason of the good-faith action or omission of any officer or employee
of any such entity, while acting within the scope of office or
employment, relating to the collection, furnishing, or dissemination of
information concerning persons who are loan originators or are applying
for licensing or registration as loan originators.
Subpart E--Enforcement of HUD Licensing System
Sec. 3400.401 HUD's authority to examine loan originator records.
(a) Summons authority. HUD may:
(1) Examine any books, papers, records, or other data of any loan
originator operating in any state which is subject to a licensing
system established by HUD under subpart C of this part; and
(2) Summon any loan originator referred to in paragraph (a)(1) of
this section or any person having possession, custody, or care of the
reports and records relating to such loan originator, to appear before
a HUD representative at a time and place named in the summons and to
produce such books, papers, records, or other data, and to give
testimony, under oath, as may be relevant or material to an
investigation of such loan originator for compliance with the
requirements of the SAFE Act.
(b) Examination authority--(1) In general. If HUD establishes a
licensing system under 12 U.S.C. 5107 and in accordance with subpart C
of this part for any state, HUD shall appoint examiners for the
purposes of ensuring the appropriate administration of the HUD
licensing system.
(2) Power to examine. Any examiner appointed under paragraph (b)(1)
of this section shall have power, on behalf of HUD, to make any
examination of any loan originator operating in any state which is
subject to a licensing system established by HUD under 12 U.S.C. 5107
and in accordance with subpart C of this part, whenever HUD determines
that an examination of any loan originator is necessary to determine
the compliance by the originator with minimum requirements of the SAFE
Act.
(3) Report of examination. Each HUD examiner appointed under
paragraph (b)(1) of this section shall make a full and detailed report
to HUD of examination of any loan originator examined under this
section.
(4) Administration of oaths and affirmations; evidence. In
connection with examinations of loan originators operating in any state
which is subject
[[Page 38499]]
to a licensing system established by HUD under 12 U.S.C. 5107, and in
accordance with subpart C of this part, or with other types of
investigations to determine compliance with applicable law and
regulations, HUD and the examiners appointed by HUD may administer
oaths and affirmations and examine and take and preserve testimony
under oath as to any matter in respect to the affairs of any such loan
originator.
(5) Assessments. The cost of conducting any examination of any loan
originator operating in any state which is subject to a licensing
system established by HUD under 12 U.S.C. 5107 and in accordance with
subpart C of this part shall be assessed by HUD against the loan
originator to meet the Secretary's expenses in carrying out such
examination.
Sec. 3400.403 Enforcement proceedings.
(a) Cease and desist proceeding. (1) If HUD finds, after notice and
opportunity for hearing in accordance with subpart A of part 26, that
any person is violating, has violated, or is about to violate any
provision of the SAFE Act, the provisions of this part, or a provision
of state law enacted or promulgated under the SAFE Act, to which the
person is subject and with respect to a state that is subject to a
licensing system established by HUD under 12 U.S.C. 5107 and in
accordance with subpart C of this part, HUD may publish such findings
and enter an order requiring such person, and any other person that is,
was, or would be a cause of the violation, due to an act or omission
the person knew or should have known would contribute to such
violation, to cease and desist from committing or causing such
violation and any future violation of the same provision, rule, or
regulation.
(2) The order authorized by paragraph (a)(1) of this section may,
in addition to requiring a person to cease and desist from committing
or causing a violation, require such person to comply, or to take steps
to effect compliance, with such provision or regulation, upon such
terms and conditions and within such time as HUD may specify in such
order.
(3) Any order issued under paragraph (a)(1) of this section may, as
HUD determines appropriate, require future compliance or steps to
effect future compliance, either permanently or for such period of time
as HUD may specify, with such provision or regulation with respect to
any loan originator.
(b) Hearing. The notice instituting proceedings in accordance with
paragraph (a) of this section shall establish a hearing date not
earlier than 30 days nor later than 60 days after the date of service
of the notice unless an earlier or a later date is set by HUD with the
consent of any respondent so served.
(c) Temporary order--(1) Issuance of a temporary order. Whenever
HUD determines that the alleged violation or threatened violation
specified in the notice instituting proceedings in accordance with
paragraph (a) of this section, or the continuation thereof, is likely
to result in significant dissipation or conversion of assets,
significant harm to consumers, or substantial harm to the public
interest prior to the completion of the proceedings, HUD may enter a
temporary order requiring the respondent to cease and desist from the
violation or threatened violation and to take such action to prevent
the violation or threatened violation and to prevent dissipation or
conversion of assets, significant harm to consumers, or substantial
harm to the public interest as HUD determines appropriate pending
completion of such proceedings.
(i) The order authorized by paragraph (c)(1) of this section shall
be entered only after notice and opportunity for a hearing, unless HUD
determines that notice and hearing prior to entry would be
impracticable or contrary to the public interest.
(ii) The temporary order authorized by paragraph (c)(1) of this
section shall become effective upon the date of service upon the
respondent and, unless set aside, limited, or suspended by HUD or a
court of competent jurisdiction, shall remain effective and enforceable
pending the completion of the proceedings.
(2) Review of temporary orders--(i) Review by HUD. At any time
after the respondent has been served with a temporary cease-and-desist
order pursuant to paragraph (c)(1) of this section, the respondent may
apply to HUD to have the order set aside, limited, or suspended. If the
respondent has been served with a temporary cease-and-desist order
entered without a prior hearing before HUD, the respondent may, within
10 days after the date on which the order was served, request a hearing
on such application, and HUD shall hold a hearing and render a decision
on such application at the earliest possible time.
(ii) Judicial review. (A) Within 10 days after the date the
respondent was served with a temporary cease-and-desist order entered
with a prior hearing before HUD or within 10 days after HUD renders a
decision on an application and hearing under paragraph (b) of this
section, with respect to any temporary cease-and-desist order entered
without a prior hearing before HUD, the respondent may apply to the
United States district court for the district in which the respondent
resides or has its principal place of business, or for the District of
Columbia, for an order setting aside, limiting, or suspending the
effectiveness or enforcement of the order, and the court shall have
jurisdiction to enter such an order.
(B) A respondent served with a temporary cease-and-desist order
entered without a prior hearing before the Secretary may not apply to
the court, except after a hearing and decision by HUD on the
respondent's application under paragraph (c)(2)(i) of this section.
(C) The commencement of proceedings under paragraph (b) of this
section shall not, unless specifically ordered by the court, operate as
a stay of HUD's order.
(d) Authority of the secretary to prohibit persons from serving as
loan originators. In any cease-and-desist proceeding under this
section, HUD may issue an order to prohibit, conditionally or
unconditionally, and permanently or for such period of time as HUD
shall determine, any person who has violated this title or regulations
thereunder, from acting as a loan originator if the conduct of that
person demonstrates unfitness to serve as a loan originator.
Sec. 3400.405 Civil money penalties.
HUD may impose civil money penalties on a loan originator operating
in any state which is subject to a licensing system established by HUD
under 12 U.S.C. 5107 and in accordance with subpart C of this part, as
provided in 24 CFR 30.69.
Appendix A to 24 CFR Part 3400
Examples of Mortgage Loan Originator Activities
This Appendix provides examples to aid in the understanding of
activities that would cause an individual to fall within or outside
the definition of a mortgage loan originator under this part 3400.
The examples in this Appendix are not all inclusive. They illustrate
only the issue described and do not illustrate any other issues that
may arise. For purposes of the examples below, the term ``loan''
refers to a residential mortgage loan as defined in Sec. 3400.23 of
this part.
Taking a Loan Application. Taking a residential mortgage loan
application within the meaning of Sec. 3400.103(c)(1) means receipt
by an individual, for the purpose of facilitating a decision whether
to extend an offer of loan terms to a borrower or prospective
borrower, of an application as defined in Sec. 3400.23 (a request
in any form for an offer, or a response to a solicitation of an
offer, of residential mortgage loan terms, and the information about
the borrower or
[[Page 38500]]
prospective borrower that is customary or necessary in a decision
whether to make such an offer).
(a) The following are examples to illustrate when an individual
takes, or does not take, a loan application:
(1) An individual ``takes a residential mortgage loan
application'' even if the individual:
(i) Has received the borrower or prospective borrower's request
or information indirectly. Section 3400.103(c)(1) provides that an
individual takes an application, whether he or she receives it
``directly or indirectly'' from the borrower or prospective
borrower. This means that an individual who offers or negotiates
residential mortgage loan terms for compensation or gain cannot
avoid licensing requirements simply by having another person
physically receive the application from the prospective borrower and
then pass the application to the individual;
(ii) Is not responsible for verifying information. The fact that
an individual who takes application information from a borrower or
prospective borrower is not responsible for verifying that
information--for example, the individual is a mortgage broker who
collects and sends that information to a lender--does not mean that
the individual is not taking an application;
(iii) Only inputs the information into an online application or
other automated system; or
(iv) Is not involved in approval of the loan, including
determining whether the consumer qualifies for the loan. Similar to
an individual who is not responsible for verification, an individual
can still ``take a residential mortgage loan application'' even if
he or she is not ultimately responsible for approving the loan. A
mortgage broker, for example, can take a residential mortgage loan
application even though it is passed on to a lender for a decision
on whether the borrower qualifies for the loan and for the ultimate
loan approval.
(2) An individual does not take a loan application merely
because the individual performs any of the following actions:
(i) Receives a loan application through the mail and forwards
it, without review, to loan approval personnel. HUD interprets the
term ``takes a residential mortgage loan application'' to exclude an
individual whose only role with respect to the application is
physically handling a completed application form or transmitting a
completed form to a lender on behalf of a borrower or prospective
borrower. This interpretation is consistent with the definition of
``loan originator'' in section 1503(3) of the SAFE Act.
(ii) Assists a borrower or prospective borrower who is filling
out an application by explaining the contents of the application and
where particular borrower information is to be provided on the
application;
(iii) Generally describes for a borrower or prospective borrower
the loan application process without a discussion of particular loan
products; or
(iv) In response to an inquiry regarding a prequalified offer
that a borrower or prospective borrower has received from a lender,
collects only basic identifying information about the borrower or
prospective borrower on behalf of that lender.
Offering or Negotiating Terms of a Loan. The following examples
are designed to illustrate when an individual offers or negotiates
terms of a loan within the meaning of Sec. 3400.103(c)(2) and,
conversely, what does not constitute offering or negotiating terms
of a loan:
(a) Offering or negotiating the terms of a loan includes:
(1) Presenting for consideration by a borrower or prospective
borrower particular loan terms, whether verbally, in writing, or
otherwise, even if:
(i) Further verification of information is necessary;
(ii) The offer is conditional;
(iii) Other individuals must complete the loan process;
(iv) The individual lacks authority to negotiate the interest
rate or other loan terms; or
(v) The individual lacks authority to bind the person that is
the source of the prospective financing.
(2) Communicating directly or indirectly with a borrower or
prospective borrower for the purpose of reaching a mutual
understanding about prospective residential mortgage loan terms,
including responding to a borrower or prospective borrower's request
for a different rate or different fees on a pending loan application
by presenting to the borrower or prospective borrower a revised loan
offer, even if a mutual understanding is not subsequently achieved.
(b) Offering or negotiating terms of a loan does not include any
of the following activities:
(1) Providing general explanations or descriptions in response
to consumer queries, such as explaining loan terminology (e.g.,
debt-to-income ratio) or lending policies (e.g., the loan-to-value
ratio policy of the lender), or describing product-related services;
(2) Arranging the loan closing or other aspects of the loan
process, including by communicating with a borrower or prospective
borrower about those arrangements, provided that any communication
that includes a discussion about loan terms only verifies terms
already agreed to by the borrower or prospective borrower;
(3) Providing a borrower or prospective borrower with
information unrelated to loan terms, such as the best days of the
month for scheduling loan closings at the bank;
(4) Making an underwriting decision about whether the borrower
or prospective borrower qualifies for a loan;
(5) Explaining or describing the steps that a borrower or
prospective borrower would need to take in order to obtain a loan
offer, including providing general guidance about qualifications or
criteria that would need to be met that is not specific to that
borrower or prospective borrower's circumstances;
(6) Communicating on behalf of a mortgage loan originator that a
written offer has been sent to a borrower or prospective borrower
without providing any details of that offer; or
(7) Offering or negotiating loan terms solely through a third-
party licensed loan originator, so long as the nonlicensed
individual does not represent to the public that he or she can or
will perform covered activities and does not communicate with the
borrower or potential borrower. For example:
(i) A seller who provides financing to a purchaser of a dwelling
owned by that seller in which the offer and negotiation of loan
terms with the borrower or prospective borrower is conducted
exclusively by a third-party licensed loan originator;
(ii) An individual who works solely for a lender, when the
individual offers loan terms exclusively to third-party licensed
loan originators and not to borrowers or potential borrowers.
For Compensation or Gain.
(a) An individual acts ``for compensation or gain'' within the
meaning of Sec. 3400.103(c)(2)(ii) if the individual receives or
expects to receive in connection with the individual's activities
anything of value, including, but not limited to, payment of a
salary, bonus, or commission. The concept ``anything of value'' is
interpreted broadly and is not limited only to payments that are
contingent upon the closing of a loan.
(b) An individual does not act ``for compensation or gain'' if
the individual acts as a volunteer without receiving or expecting to
receive anything of value in connection with the individual's
activities.
Appendix B to 24 CFR Part 3400
Engaging in the Business of a Loan Originator: Commercial Context and
Habitualness
An individual who acts (or holds himself or herself out as
acting) as a loan originator in a commercial context and with some
degree of habitualness or repetition is considered to be ``engaged
in the business of a loan originator.'' An individual who acts as a
loan originator does so in a commercial context if the individual
acts for the purpose of obtaining anything of value for himself or
herself, or for an entity or individual for which the individual
acts, rather than exclusively for public, charitable, or family
purposes. The habitualness or repetition of the origination
activities that is needed to ``engage[e] in the business of a loan
originator'' may be met either if the individual who acts as a loan
originator does so with a degree of habitualness or repetition, or
if the source of the prospective financing provides mortgage
financing or performs other origination activities with a degree of
habitualness or repetition. This Appendix provides examples to aid
in the understanding of activities that would not constitute
engaging in the business of a loan originator, such that an
individual is not required to obtain and maintain a state mortgage
loan originator license. The examples in this Appendix are not all
inclusive. They illustrate only the issue described and do not
illustrate any other issues that may arise under part 3400. For
purposes of the examples below, the term ``loan'' refers to a
``residential mortgage loan'' as defined in Sec. 3400.23 of this
part.
Not Engaged in the Business of a Mortgage Loan Originator. The
following examples illustrate when an individual generally does
[[Page 38501]]
not ``engage in the business of a loan originator'':
(a) An individual who acts as a loan originator in providing
financing for the sale of that individual's own residence, provided
that the individual does not act as a loan originator or provide
financing for such sales so frequently and under such circumstances
that it constitutes a habitual and commercial activity.
(b) An individual who acts as a loan originator in providing
financing for the sale of a property owned by that individual,
provided that such individual does not engage in such activity with
habitualness.
(c) A parent who acts as a loan originator in providing loan
financing to his or her child.
(d) An employee of a government entity who acts as a loan
originator only pursuant to his or her official duties as an
employee of that government entity, if all applicable conditions in
Sec. 3400.103(e)(6) of this part are met.
(e) If all applicable conditions in Sec. 3400.103(e)(7) of this
part are met, an employee of a nonprofit organization that has been
determined to be a bona fide nonprofit organization by the state
supervisory authority, when the employee acts as a loan originator
pursuant to his or her duties as an employee of that organization.
(f) An individual who does not act as a loan originator
habitually or repeatedly, provided that the source of prospective
financing does not provide mortgage financing or perform other loan
origination activities habitually or repeatedly.
Appendix C to 24 CFR Part 3400
Independent Contractors and Loan Processor and Underwriter Activities
That Require a State Mortgage Loan Originator License
The examples below are designed to aid in the understanding of
loan processing or underwriting activities for which an individual
is required to obtain a SAFE Act-compliant mortgage loan originator
license. The examples in this Appendix are not all inclusive. They
illustrate only the issue described and do not illustrate any other
issues that may arise under this part 3400. For purposes of the
examples below, the term ``loan'' refers to a residential mortgage
loan as defined in Sec. 3400.23 of this part.
(a) An individual who is a loan processor or underwriter who
must obtain and maintain a state loan originator license includes:
(1) Any individual who engages in the business of a loan
originator, as defined in Sec. 3400.103 of this part;
(2) Any individual who performs clerical or support duties and
who is an independent contractor, as those terms are defined in
Sec. 3400.23;
(3) Any individual who collects, receives, distributes, or
analyzes information in connection with the making of a credit
decision and who is an independent contractor, as that term is
defined in Sec. 3400.23; and
(4) Any individual who communicates with a consumer to obtain
information necessary for making a credit decision and who is an
independent contractor, as that term is defined in Sec. 3400.23.
(b) A state is not required to impose SAFE Act licensing
requirements on any individual loan processor or underwriter who,
for example:
(1) Performs only clerical or support duties (i.e., the loan
processor's or underwriter's activities do not include, e.g.,
offering or negotiating loan rates or terms, or counseling borrowers
or prospective borrowers about loan rates or terms), and who
performs those clerical or support duties at the direction of and
subject to the supervision and instruction of an individual who
either: Is licensed and registered in accordance with Sec.
3400.103(a) (State licensing of loan originators); or is not
required to be licensed because he or she is excluded from the
licensing requirement pursuant to Sec. Sec. 3400.103(e)(2) (time-
share exclusion), (e)(5) (federally registered loan originator),
(e)(6) (government employees exclusion), or (e)(7) (nonprofit
exclusion).
(2) Performs only clerical or support duties as an employee of a
mortgage lender or mortgage brokerage firm, and who performs those
duties at the direction of and subject to the supervision and
instruction of an individual who is employed by the same employer
and who is licensed in accordance with Sec. 3400.103(a) (State
licensing of loan originators).
(3) Is an employee of a loan processing or underwriting company
that provides loan processing or underwriting services to one or
more mortgage lenders or mortgage brokerage firms under a contract
between the loan processing or underwriting company and the mortgage
lenders or mortgage brokerage firms, provided the employee performs
only clerical or support duties and performs those duties only at
the direction of and subject to the supervision and instruction of a
licensed loan originator employee of the same loan processing and
underwriting company.
(4) Is an individual who does not otherwise perform the
activities of a loan originator and is not involved in the receipt,
collection, distribution, or analysis of information common for the
processing or underwriting of a residential mortgage loan, nor is in
communication with the consumer to obtain such information.
(c) In order to conclude that an individual who performs
clerical or support duties is doing so at the direction of and
subject to the supervision and instruction of a loan originator who
is licensed or registered in accordance with Sec. 3400.103 (or, as
applicable, an individual who is excluded from the licensing and
registration requirements under Sec. 3400.103(e)(2), (e)(6), or
(e)(7)), there must be an actual nexus between the licensed or
registered loan originator's (or excluded individual's) direction,
supervision, and instruction and the loan processor or underwriter's
activities. This actual nexus must be more than a nominal
relationship on an organizational chart. For example, there is an
actual nexus when:
(1) The supervisory licensed or registered loan originator
assigns, authorizes, and monitors the loan processor or underwriter
employee's performance of clerical and support duties.
(2) The supervisory licensed or registered loan originator
exercises traditional supervisory responsibilities, including, but
not limited to, the training, mentoring, and evaluation of the loan
processor or underwriter employee.
Appendix D to 24 CFR Part 3400
Attorneys: Circumstances that Require a State Mortgage Loan Originator
License
This Appendix D clarifies the circumstances in which the SAFE
Act requires a licensed attorney who engages in loan origination
activities to obtain a state loan originator license and
registration. This special category recognizes limited, heavily
regulated activities that meet strict criteria that are different
from the criteria for specific exemptions from the SAFE Act
requirements and the exclusions set forth in the regulations and
illustrated in other appendices of part 3400.
SAFE Act-Compliant Licensing Required: An individual who is
engaged in the business of a loan originator as defined in Sec.
3400.103 of this part and who happens to be a licensed attorney, but
whose loan origination activities are not all of the following: (1)
Considered by the state's court of last resort (or other state
governing body responsible for regulating the practice of law) to be
part of the authorized practice of law within the state; (2) carried
out within an attorney-client relationship; and (3) accomplished by
the attorney in compliance with all applicable laws, rules, ethics,
and standards.
SAFE Act-Compliant Licensing Not Required: A licensed attorney
performing activities that come within the definition of a loan
originator, provided that such activities are: (1) Considered by the
state's court of last resort (or other state governing body
responsible for regulating the practice of law) to be part of the
authorized practice of law within the state; (2) carried out within
an attorney-client relationship; and (3) accomplished by the
attorney in compliance with all applicable laws, rules, ethics, and
standards
Dated: June 17, 2011.
Robert C. Ryan,
Acting Assistant Secretary for Housing--Federal Housing Commissioner.
[FR Doc. 2011-15672 Filed 6-29-11; 8:45 am]
BILLING CODE 4120-67-P