What Is the SAFE Act?
The Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act) was enacted on July 30, 2008, and regulates residential real estate mortgage lenders under federal law. This guide talks about what the SAFE Act is and how to make sure you are compliant with it.
The SAFE Act was introduced to solve a primary problem in the mortgage industry, which was that there was little information moving to and between regulators. It was also designed to increase accountability and ensure that consumers can access the employment history of their loan originator and find out if they have had any issues in the past. The Act does this by requiring the registration of residential Mortgage Loan Originators in a nationwide database that allows them to be tracked across different employers and states and allows access to their records.
It also requires that Mortgage Loan Officers and companies have a surety bond to protect their customers, the amount of which goes up with the size of the business.
Both mortgage companies and individual lenders are required to meet the SAFE Act's standards. Specifically, anyone who acts as a Mortgage Loan Originator must have either a federal or state license and registration, including a unique identifier. Nobody can act in this capacity without being registered, and there is no temporary registration or grandfathering.
SAFE Act Requirements for Mortgage Companies
Mortgage companies are required to ensure that their employees register at the federal level. For the purposes of the act, a mortgage company is defined as one of the following:
- A depository institution (including credit unions)
- A subsidiary of a depository institution
- An institution regulated by the Farm Credit Administration
This primarily includes financial institutions, including both banks and credit unions, that fall under federal regulations.
Mortgage companies are required to:
- Ensure that all employees who act as Mortgage Loan Originators are registered through the Nationwide Mortgage Licensing System and Registry (NMLS) and have a unique identification number.
- Adopt written policies and procedures to ensure compliance with the Act.
- Perform annual independent testing of said policies and procedures.
- Ensure that any third parties who act as Mortgage Loan Originators also comply with the SAFE Act. That is, you are responsible for doing your best to ensure that you only work with people who follow the rules.
- Make the identifiers of MLOs available to consumers in a practical way. There must be no charge for accessing identifiers. Identifiers allow consumers to track the employment history of their MLO and any publicly adjudicated disciplinary or enforcement actions against them, and consumers need to be able to access this information before committing to a loan.
- Retain records to ensure that they are in compliance, and make these records available as needed. This includes records related to the employment of MLOs so their history can be tracked.
Note that the unique identifiers are attached to individuals, not the company, and follow that individual through any changes of employer. While individuals have to take care of their own registration, the company can be held responsible for allowing an unregistered individual to act as an MLO and is also responsible for ensuring consumer access to identification numbers.
SAFE Act Requirements for Mortgage Loan Originators
Individual Mortgage Loan Officers must be registered and have a unique identifier. However, the exact details as to how they should register depend on their employment status:
- Employees of mortgage companies should register with NMLS at the federal level.
- All others should register with their state, following the requirements for that state. State registries, however, are still linked toNMLS so that individuals can be tracked across states.
Individual MLOs also need to:
- Pass a written qualification test and take all required education courses.
- Submit to a criminal background check before being licensed. This background check is conducted by the FBI and applicants have to be fingerprinted.
- Submit a credit report to NMLS. This helps identify individuals at risk of engaging in fraud.
- Be ready to provide their identifiers before acting as an MLO, in initial written communication to the consumer, and upon request. In many states they must also provide the identifier on all residential mortgage loan application forms, solicitations, advertisem*nts, and business cards. Fannie Mae and Freddie Mac have other rules for when loan originators must provide their identifiers.
- Renew their registration annually.
- Engage in Continuing Education as needed. This is typically 8 hours a year, but some states may have higher requirements. Continuing Education for these purposes focuses on ethics and ensuring that MLOs are up to date on federal and state law and regulations.
This helps ensure that registered Mortgage Loan Originators meet certain standards of education as well as preventing fraud by disallowing individuals convicted of fraud or theft from acting as MLOs. There is nothing in the Act which prevents states from applying higher standards than the minimum education requirements in the Act, so educational requirements may be somewhat variable.
What are the Federal Registration Requirements Under the SAFE Act?
For MLOs who have to register at the federal level (that is to say employees of covered institutions), the requirement is to register with NMLS.
In order to do so, you need to:
- Provide fingerprints for a criminal history check.
- Authorize NMLS to obtain a credit report.
- Enter their personal record into the NMLS system.
- Complete educational requirements
- Pass a national mortgage test.
Once you are in the registration system and have your unique identifier, you stay in the system under that identifier, even if you change employers or move to a different state. However, states may have slightly different licensing requirements you might need to meet if you move. If you change employment from a federally-covered institution to another position, you will have to meet the state licensing requirements. (Note that some states may use an alternative term, such as “certification,” but this makes no practical difference).
State-licensed Mortgage Loan Originators will also be in the system in their own state and any states in which they might wish to operate. For example, an MLO who lives close to a state border may seek licensure in a neighboring state as well, and in today's connected world, some MLOs may find significant financial benefit to being licensed in multiple states. MLOs should consider meeting higher educational standards than is required if their state only asks for the minimum, as it might make things easier if they choose to move.
SAFE Act Exemptions
There are some exemptions to the SAFE Act. However, states cannot simply exempt MLOs from participating. They may, however, define certain activities as not being the business of a Loan Officer. They can't exempt certain job titles or professions. This prevents states from carving out loopholes that would weaken the protection of the Act.
The state cannot exempt non-profit organizations or their employees, nor can they exempt people who are agents, but not employees, of a federally-regulated institution. Basically, this means that independent contractors have to be state licensed.
In other words, there are very few exemptions to the SAFE Act. They also apply only to state licensure, not to federal registration. The only gray area falls in what constitutes a Loan Originator, and most so-called exemptions are just clarifications. All MLOs must follow the requirements of the SAFE Act.
Why Was the SAFE Act Created?
There are a number of reasons why the SAFE Act was created. Primarily, it was designed to ensure a consistent licensing and registry system. The SAFE Act:
- Allows consumers to be sure that the person establishing their loan is reputable and in good standing. Consumers can access disciplinary action.
- Prevents individuals who have previously been convicted of fraud or similar offenses from acting as MLOs. A person who has had a felony conviction that involved fraud, dishonesty, breach of trust, or money laundering cannot be licensed, nor can somebody who has been convicted of any kind of felony in the last seven years.
- Ensures that state licensing systems meet minimum standards in terms of both Pre-Licensure Education and Continuing Education.
- Implements a national test that must be passed, which includes ethics and federal and state law and regulation.
- Ensures that somebody can't simply move to set up shop in another state to avoid disciplinary action, something which is easy when states have their own systems which are not properly integrated. This is a primary purpose of NMLS.
- Increases consumer confidence by reassuring consumers that they can trust registered MLOs.
The SAFE Act was implemented to improve communication between states and increase protections for borrowers. It ensures that Mortgage Loan Originators meet certain standards of ethical behavior and training and helps keep them accountable so as to reduce mortgage fraud.
