The S.A.F.E. Act Puts Non-Depository Institutions at a Disadvantage

The Secure and Fair Enforcement for Mortgage Licensing Act of 2008, otherwise known as the S.A.F.E. Act, requires states to set a minimum standard for the licensing and registration of Mortgage Loan Originators (MLOs). Basically, it set the baseline standard for education and testing requirements for anyone wanting to originate mortgage loans with a state-licensed, non-depository institution (i.e. a non-bank mortgage lender). It also led to the creation of the NMLS (Nationwide Mortgage Licensing System) Registry.

This legislation created some things we can really appreciate. Our industry now has some requirements and filters to help ensure that only those who really understand the origination process are creating home loans for consumers. I fully support this. I do, however, oppose this one very important fact about the S.A.F.E. Act—this regulation only applies to state-licensed, non-depository institutions (non-banks). Individuals who are originating loans for a federally chartered or insured depository institution (a bank) are not required to meet any of the same basic requirements. Actually, I take that back—they are required to perform a criminal background check and pay a registration fee that’s a fraction of the fees we are required to pay for our licenses.

To help you understand, let’s check this comparison table outlining the minimum federal requirements for obtaining your mortgage origination license.

Minimum Requirements Applies to Non-Banks Applies to Banks
20 Hours of Pre-Licensing Education X
8 Hours of Continuing Education Each Year X
State-Specific Test X
National Test X
Criminal Background Check X X
Credit Report Submitted to State Agencies X
Mortgage Originators License X

States are allowed to set higher standards than the minimum requirements set forth in the S.A.F.E. Act—and many states have.  These increased standards also increase the time and cost to become an MLO. Additionally, since every state has unique laws and practices, a state licensed Originator must be licensed in each individual state in order to originate mortgages in that state, yet a bank Originator does not. While this is an important rule that aims at protecting the consumer, the rule does not protect all consumers as it does not apply to all MLOs.  I believe that all consumers should be protected and should conduct business with a fully-licensed, qualified Mortgage Loan Originator.

These minimum requirements not only take time, they also take money. Having the money to complete the required education, testing, and licensing creates a deeper barrier to entry for would-be state licensed Originators versus bank Originators. Let’s also take a look at the monetary investment to obtain your mortgage origination license.

Required Fees Non-Banks Banks
Pre-Licensing Education $399 $0
State-Specific Test $69 $0
National Test $92 $0
Criminal Background Check $39 $39
Credit Report $15 $0
Mortgage Originators License $80-$680 ($200 avg) $30 (Registration Fee)
TOTAL $829 $69

The disparity not only exists in the licensing requirements and the cost between non-banks and banks, but also in the level of expertise and talent. If an individual is unable to pass the test, or cannot afford the education and licensing, he is unable to become an Originator for a non-bank. However, he may apply and, if he is hired, start originating for a bank on day one—without any education, testing, or licensing requirements. What’s more, he or she can originate in all 50 states.

Because of the higher barriers to entry state-licensed, non-depository institutions face, we have been put at a disadvantage in hiring and retaining Mortgage Loan Originators who are actively registered with a federally chartered or insured depository institution. State-licensed MLOs can start originating at their new job with a bank within a few days, but an MLO working for a bank cannot make the transition to a non-bank within the same period of time. He must complete the entire required licensing first. This has caused non-banks to have MLOs on payroll while they finish their license and has caused other MLOs to delay being hired for an extended period of time.

So, what’s the solution? The complete solution is to require federally chartered or insured depository institutions to meet the same minimum requirements as state-licensed, non-depository institutions. However, in order to at least address the disparity that exists in switching between the two, the NMLS has announced that a future update to the system will prevent a bank from seeing an individual’s education and testing information.  This is important because in the past some bank employers would terminate an individual’s employment when they realized the individual was working on becoming licensed, and this type of activity resulted in some individuals being out of work unexpectedly.  The release is expected to occur by July of this year.

Also, The Mortgage Bankers Association (MBA) has proposed that states grant a 120-day transitional license to MLOs wanting to move to a non-bank.  This allows them to continue originating (this time for their new company) while they complete the requirements for their license.  Obviously there are some legal and administrative issues that must be worked out with each state. However, the transitional license that has been proposed by the MBA would help to create a more equal playing field between non-banks and banks, something I fully support—and it will keep originators employed and able to support their families during the licensing process. 

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