Milner, Neil, Independent Banker
Mortgage Originator Licensing Law Entails State Action
In the past few months we have witnessed an unprecedented amount of legislation and regulation that changes the way the U.S. financial system operates and is supervised. The "Secure and Fair Enforcement for Mortgage Licensing Act of 2008," or the SAFE Act, is a critical, though often overlooked, measure approved by Congress that will significantly strengthen state supervision of the mortgage industry.
Passed under the Housing and Economic Recovery Act, the SAFE Act requires all residential mortgage loan originators to be licensed or registered through the Nationwide Mortgage Licensing System and Registry (NMLSR).
Loan originators working for banks or their subsidiaries must be registered. The registration process will be determined by the Federal Financial Institutions Examination Council and the Farm Credit Administration. All other mortgage loans must be licensed by the state regulatory agencies. Both registered and licensed loan originators must be on the NMLSR. The registry was developed and is maintained by the Conference of State Bank Supervisors (CSBS) and the American Association of Residential Mortgage Regulators.
To comply, each state must pass legislation to meet the minimum requirements established by the SAFE Act. CSBS, at the behest of our members and in coordination with the U.S. Department of Housing and Urban Development (HUD), drafted a Model State Law that implements the SAFE Act licensing requirements. CSBS will strive to ensure all states are compliant with the law's requirements.
The Model State Law specifically focuses on the licensing requirements for loan originators who work for mortgage brokers and lenders. In most cases, this will be a significant change to the regulatory requirements for these brokers and lenders.
What happens if a state fails to implement all the SAFE Act requirements? In simple terms, such a failure would require HUD to establish an overlaying regulatory regime in which both the state and HUD would regulate each loan originator. CSBS believes this federal overlay would be duplicative and more costly, at it would increase regulatory burden and stymie state regulation and enforcement.
CSBS believes the new supervisory regime that will result from the SAFE Act is necessary for state regulation to keep pace with changes in the market. After all, the residential mortgage industry has changed dramatically over the past two decades, and supervision must keep up.
The dramatic changes that have taken place in the residential mortgage market over the past 20 years have brought a number of benefits: a vast flow of liquidity into the mortgage market, an increase in product choices, a greater availability of credit and a higher rate of homeownership. But they also have brought moral hazard, as the allocation of risk of a mortgage loan default was dispersed through complex contractual agreements that began with the local mortgage broker and ultimately ended with a Wall Street firm or an international investor. This dispersal of risk and commission-based compensation created opportunities and incentives for some actors to engage in lax underwriting and fraudulent practices. …