Although the ups and downs of the economic cycle and fluctuating real estate values are familiar to most of us, there is news every day to remind us that the current downturn is very different. While high unemployment and shrinking wealth are common when the economy contracts, the number of foreclosures are surely unprecedented. As we all know, home foreclosures hurt property owners, erode real estate values generally, and also shake consumer confidence.
In addition to its impact on real estate, the current downturn has also tarnished the banking system, which began with a collapse residential mortgage lending some time in 2006. Since that time, we have come to learn that much of the harm done was due to mortgage fraud and lax accountability in the residential mortgage industry. Mortgage fraud includes abuses by those who are employed in mortgage lending, but it also includes inflated property appraisals and borrower misrepresentation, much of which was based upon an overly optimistic view of future growth.
When the level of mortgage fraud which had taken place began to emerge, Congress was flooded with complaints from borrowers about mortgage lender practices, just as a tsunami of foreclosures began to take place. In an attempt to pull the housing market back from the brink of disaster, Congress adopted the Housing and Economic Recovery Act (“HERA”) on July 30, 2008 within which the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (“SAFE Act”) is embedded. The Act uses an exceptionally broad brush to address mortgage fraud and certain practices of mortgage lenders. Although the SAFE Act may be a classic example of every abuse being met with excessive regulatory reaction, it is the law.
The Act’s implementation began with the requirement that each state adopt a licensing scheme for residential “mortgage loan originators.” The Act defines a mortgage loan originator as an individual who takes a residential mortgage loan application and offers or negotiates the terms of a residential mortgage loan for compensation or gain. The federal statute elaborates on the meaning of “taking a loan application” to include “ advising on loan terms (including rates, fees, other costs), preparing loan packages or collecting information on behalf of the consumer with regard to a residential mortgage loan.” During its 2009 rulemaking, the U.S. Separtment of Housing and Urban Development, (“HUD”), extended the definition to include anyone who receives a residential loan application for the purpose of directly or indirectly influencing another (usually the lender) to extend a mortgage loan to a borrower. Bank regulatory agencies overseeing federal institutions that employ originators extended the definition of “taking an application” to include the collection of consumer data for input into an automated system and stated that no application fee need be collected to find an application has been “taken.”
As to further guidance regarding the provision that reads “offers or negotiates the terms of a residential mortgage loan for compensation or gain,” the federal statute is silent, but the bank regulatory agencies have determined that the following activities fall within that provision: (a) presenting mortgage loan terms; (b) discussing mortgage loan terms with a borrower; and (c) fulfilling a duty or incentive, recommending, referring, or steering a borrower to a specific mortgage lender, program, or set of terms. Clearly this interpretation goes beyond the plain meaning of these terms but to run afoul under the federal Act, one must satisfy both the “taking” and the “offer or negotiate” tests.
To implement the Act, the New Hampshire Banking Department (“Department”) amended RSA 397-A to incorporate the Model Act prepared for use by the states. However, the Model Act used the term “or” between the 2 prongs of the test rather than the “and” used by the federal definition, which effectively expands the reach of the New Hampshire Act to require only one prong of the test to be satisfied to fall into the dreaded definition of “mortgage loan originator.”
As a direct result of the New Hampshire Act expanding the number of individuals who fall under the Act, even beyond those that would have been swept up under the expansive federal agency interpretation, many professionals must now decline providing assistance to clients when questions arise regarding mortgage financing. For example, a mortgage loan originator license is now required to advise clients regarding refinancing, use of home equity loans for college tuition payments, or completing an overall debt restructuring secured by residential real estate. With few exceptions, all these activities require licensure. This is very unfortunate, especially during a time when more clients are requesting assistance with their finances, and that inability to provide advice is surely not the intended purpose of the Act.
While the SAFE Act does not apply to commercial real estate and exempts private financing associated with the sale of a primary residence or its sale to a family member, the latter exemptions are very narrow. Others caught in the Act’s web include private mortgage lenders who finance residential properties for borrowers who do qualify under traditional mortgage lending guidelines. Private investors also often purchase deteriorated properties, renovate them, and offer financing as part of the selling package. Unless they are selling a primary residence, the Act requires these individuals to be licensed.
Others who often fall within the definition of mortgage loan originator include those who sell modular or mobile homes to consumers and offer financing packages; the security for which is the real estate on which these improvements are placed. These individuals and entities now require a mortgage originator license. Also included are developers who finance the construction of a new home for a prospective buyer and home improvement contractors who secure excess costs by taking a mortgage on the improved property to assure repayment.
In addition to those identified above, others who find themselves questioning whether they fall within the Act include financial planners, accountants, and those who assist borrowers with mortgage loan modifications. Worse still, many of these professionals are declining providing assistance to consumers because the federal Act’s language is difficult to understand, federal agency interpretations of that language exceed the Act’s plain meaning, and in New Hampshire, the state law has broadened the reach of the federal law. That result is ironic and regrettable, as the Act is intended to protect consumers. While noble in their goals, and some measure of regulation has been needed for a long time, both Congress and the New Hampshire Legislature must revisit the Safe Act to avoid chilling residential mortgage lending more than required and further delaying the slow recovery of the residential real estate market. Just as importantly, clarification of the Safe Act would relieve the uncertainty of professionals whose guidance is very much needed by consumers while the economy continues to recover.
Pat Panciocco is a member of the Real Estate Department at McLane Law Firm. She can be reached at [email protected] or (603) 628-1322. The McLane Law Firm is the largest full-service law firm in the state of New Hampshire, with offices in Concord, Manchester and Portsmouth as well as Woburn, Massachusetts.