(August 15, 2011) A new rule adopted by U.S. Department of Housing and Urban Development (HUD) setting the minimum standards that states must meet to comply with the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act) in licensing mortgage loan originators includes a broad exemption for lawyers engaged in the practice of law.
The ABA had urged HUD to include such a provision in the final rule.
The ABA responded by letter to a draft HUD rule in March that proposed a limited exemption for attorneys representing clients in connection with the negotiation of a residential mortgage loan with a warning that the draft language “could undermine both the confidential attorney-client relationship and the ability of state courts to supervise and discipline lawyers effectively.”
The ABA letter argued that the proposed language was too narrow because the exemption was limited to circumstances where an attorney negotiates the terms of a residential mortgage loan as an “ancillary” matter to the attorney’s representation of the client.
ABA Government Affairs Director Thomas Susman noted that “a lawyer who is retained by a client to negotiate a residential mortgage loan owes the same fiduciary duties to the client, including duties of loyalty, regardless of whether the lawyer’s negotiation services are central or ancillary to the representation.”
The SAFE Act was enacted into law on July 30, 2008, as part of the Housing and Economic Recovery Act of 2008. It is designed to enhance consumer protection and reduce fraud by establishing minimum standards for the licensing and registration of state-licensed mortgage loan originators. SAFE also mandates the creation of a Nationwide Mortgage Licensing System and Registry (NMLSR), and encourages all states to provide for a licensing and regulatory regime for all residential mortgage loan originators.
While the states are charged with enacting licensing standards that meet the requirements of the SAFE Act, overall responsibility for interpretation, implementation, and compliance was delegated to HUD. However, these duties are being transferred to the new Consumer Financial Protection Bureau (CFPB) established by the Dodd-Frank Act.
The final rule explains the criteria that will be used to determine whether a state has put in place a system for licensing and registering mortgage loan originators as required by the SAFE Act. The rule does so by clarifying the meaning of “engaging in the business of a loan originator,” which determines whether an individual must be licensed, and the rule also provides that certain activities do not amount to engaging in the business of a loan originator.
HUD has determined that a licensed attorney will not be deemed to be engaging in the business of a mortgage loan originator, and hence will not be subject to licensing, registration, and regulation under the SAFE Mortgage Licensing Act, if the attorney’s activities are: (1) part of the practice of law as determined by the applicable state supreme court (or other state governing body responsible for regulating the practice of law); (2) carried out within an attorney-client relationship; and (3) in compliance with all applicable laws, rules, ethics and standards.
In the final rule, HUD also said it would defer to the new Consumer Financial Protection Bureau (which assumed responsibility for enforcing the SAFE Act starting in mid-July 2011, pursuant to the Dodd-Frank Act) for a determination of the related issue of which individuals will be covered under the SAFE Act for helping consumers to modify mortgages.
By Tom Solberg
, Media Relations Coordinator, State Bar of Wisconsin
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