[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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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