Legal Issues & Regulatory Compliance Conference 2011

Washington, D.C.

Workshop 4: State Law Developments

Mary M. Pfaff Conference of State Bank Supervisors

John D. Socknat
Patton Boggs LLP

Discussion Topics
I. SAFE Act Update Overview HUD Final Rule Federal Banking Agencies Final Rule State Differences Deeper Dive NMLS Issues / Considerations Multi-State Exams

II.

III.

Other Licensing Issues Loan Modification Foreclosure Rescue / Assistance Short Sale Appraisal Management Company Servicing Issues / Foreclosure Prevention

IV.

I. SAFE Act Overview

SAFE Act requires HUD to determine whether state laws meet SAFEs minimum requirements for loan originator licensing and to establish a backup to NMLSR. HUD granted rulemaking authority? HUD states that the Final Rule: sets forth the minimum standards for the state licensing and registration of residential mortgage loan originators, requirements for operating the [NMLS], and HUDs Federal responsibilities pursuant to the SAFE Act. HUD also proposes to clarify or interpret certain statutory provisions that pertain to the scope of SAFE Act licensing requirements.

I. SAFE Act HUD Rule

Final Rule Issued June 30, 2011 Rule Effective August 29, 2011 All Authority Transferred to CFPB July 21, 2011 CFPB_SAFEAct_Inquiries@cfpb.gov

I. SAFE Act HUD Rule

General Policy:
Activities determine SAFE Act coverage -- Engaged in the business of a loan originator HUD has no statutory authority to: -- grant specific exemptions -- set a de minimis exemption Sets minimum standards Use of Commentary and Appendix

I. SAFE Act HUD Rule

Engaged in the business of a loan originator

An individual in a commercial context and habitually or repeatedly: Takes a residential mortgage loan application and Offers or negotiates the terms of a loan for compensation or gain. Commercial Context- Purpose of obtaining profit Habitualness- Individual or provider of funds

I. SAFE Act HUD Rule

Key Provisions Definitions Loan Originator
take an application and offer or negotiate terms of a loan for compensation or gain; OR Represent to the public, through advertising or other means (business cards, marketing materials, signs, rate sheets, etc.), that can or will take an application or offer or negotiate terms.

Significantly expands definition vs.

SAFE Act - take an application AND offer or negotiate. Banking Agencies Final Rule - take an application AND offer or negotiate. Model Act - take an application OR offer or negotiate terms (but without expanding definitions of application and offer or negotiate (see below)).
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I. SAFE Act HUD Rule

Definitions (continued)
Application 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. Not defined in SAFE Act or Model Act. Offer or negotiate includes recommending, referring, or steering a borrower or prospective borrower to a particular lender or set of loan terms per duty or incentive. Not defined in SAFE Act or Model Act. Employee - an individual whose manner and means of performance of work are subject to the right of control of, or are controlled by, a person AND whose compensation is reported on a W-2 issued by the controlling person.
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I. SAFE Act HUD Rule

Definitions (continued) Loan processors and underwriters are exempt as long they do not represent to the public that can or will perform loan originator activities.

Loan Processor or Underwriter = perform clerical or support duties at the direction of and subject to the supervision and instruction of licensed or registered mortgage loan originator.
SAFE Act - subject to supervision and instruction of a person licensed or exempt from licensing.
Person = natural person, corporation, company, LLC or partnership Rule Commentary and Appendix

Independent contractor loan processors and underwriters are not exempt because, by definition, they dont perform duties at the direction of and subject to the supervision of a licensed/registered MLO. Independent contractor loan processors and underwriters must be licensed. [Federal SAFE Act]
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I. SAFE Act HUD Rule

Who is not required to be licensed in the Rule? Real estate brokers, unless compensated by lender, broker or loan originator. Processors and underwriters who work at the direction of and under supervision of a licensed/registered loan originator. Employees of government agency or housing finance agency. Employees of bona fide non-profit organization. W-2 employees of depository institutions.

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I. SAFE Act HUD Rule

What about: Licensed attorneys, unless compensated by lender, broker or loan originator. Loan originators who work only on behalf of immediate family members. Loan originators in connection with selling homes they occupy. Housing counselors Employees of manufactured home retailers Individuals engaged in loan modifications (refinances) See Commentary and Appendix

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I. SAFE Act HUD Rule

RECAP - Who is a Loan Originator under the Rule?
Anyone who takes an application, which includes receiving an indication that a consumer wants to be solicited for a loan. Anyone who offers or negotiates terms of a loan, which includes recommending or referring a lender or loan terms. Lead generators? Parties to a marketing agreement? Independent contractor (i.e., non W-2 employee) loan processors and underwriters. W-2 employee loan processors and underwriters who do NOT work at the direction of and subject to the supervision and instruction of a licensed loan originator. Servicer loss mitigation personnel. Third party loss mitigation personnel. Loan originators in connection with selling homes they own but do not occupy.

Non W-2 employees of depository institutions.

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I. SAFE Act
Key Provisions (continued) Minimum loan originator license requirements Never had a license revoked. Never convicted of, or pled guilty or nolo contendere to, a felony. any in 7 years proceeding application at any time if involves an act of fraud, dishonesty, a breach of trust, or money laundering.
State law determines what is a felony. Expunged felonies are subject to this restriction, but pardoned felonies are not.

Financial responsibility, character and general fitness. 20 hours pre-licensing education. National exam - 75% score. Net worth or surety bond. Fingerprints/background check. Personal history information, including credit report.

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I. SAFE Act HUD Rule Other considerations:

HUD reviewed the Model SAFE Act developed by CSBS/AARMR and advised that a state that adopts its provisions will be presumed to have met the applicable minimum requirements of the SAFE Act. But what about the changes, additions, etc. contained in the Final Rule? State Law can go beyond SAFE

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I. SAFE Act Federal Banking Agencies Final Rule Federal Banking Agencies: Required to develop system for registering the employees of: Depository institutions Owned-and-controlled subsidiaries FCA-regulated institutions. Contracted with NMLS Final Federal Rule in July 2010: Mortgage loan originator" is an individual who: (i) Takes a residential mortgage loan application; and (ii) Offers or negotiates terms of a residential mortgage loan for compensation or gain.
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I. SAFE Act Federal Banking Agencies Final Rule

Modifications and Assumptions Final Federal Rule expressly excludes individuals engaged in modifications and assumptions, since those transactions generally do not involve taking an application or result in a new loan. Definition of Employee Common law agency doctrines right-to-control test, IRS rules for determining W-2/1099. Acting within scope of employment. Employees who act as mortgage loan originators for a bank and for a nondepository subsidiary of a bank holding company that is not a subsidiary of a depository institution is subject to both the federal and state regimes.
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I. SAFE Act Federal Banking Agencies Final Rule

De Minimus Exemption Based only on LOs volume (not institutions aggregate volume). An employee of an Agency-regulated institution who has: Never been registered or licensed through the NMLS as a mortgage loan originator; and Who has acted as an LO for 5 or fewer loans during the last 12 months. Prohibits engaging in act/practice to evade the limit. Effective Date: July 29, 2011

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I. SAFE Act Federal Banking Agencies Final Rule

Owned and Controlled Subsidiaries OCC Operating subsidiaries are owned and controlled subsidiaries. What about other types of subsidiaries? Credit Unions Federal Rule applies to federally insured credit union and its employees, including volunteers, who act as mortgage loan originators. Also applies to non-Federally insured credit unions/employees, if the appropriate State supervisory authorities enter into a Memorandum of Understanding (MOU) with the NCUA regarding supervision. Credit Union Service Organizations: Loan originators employed by CUSOs, whether owned by a state or a federal credit union, must be licensed under applicable state requirements.

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I. SAFE Act Federal Banking Agencies Final Rule NMLS Registration Issues Subsidiaries and joint ventures Validation process RSSD ID# Primary federal regulator Upcoming Renewal

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I. SAFE Act State Differences

States enacted legislation implementing the SAFE Act. Many states followed Model State Law. Approximately 14 states provide unique definition of loan originator (e.g., solicits loans or applications; assists a borrower in obtaining or applying for loan; prepares loan packages, etc.). Approximately 15 states provide an exemption for loan modification or servicer personnel.

Several states provide delayed deadline for loss mitigation or servicing personnel (e.g., July 2011).
Still waiting for ruling

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I. SAFE Act Deeper Dive: Misc. Issues

Post SAFE Act Changes: New License Types on NMLS Iowa: Real Estate Closing Agents Connecticut and Texas: Loan Processors/Underwriters Licensing of Servicers Montana and Texas Third Party Loan Servicers - Vermont Exempt Company Registration Connecticut, Montana Refine Definitions/Exemptions Attorney exemption Georgia, Montana Seller Financing AL, CO, IL, KY, ME, MS, NH, TN, TX Nonprofits/housing counselors IN, VA
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I. SAFE Act NMLS: Overview

NMLS SRR Organization Chart Conference of State Bank Supervisors (CSBS)
American Association of Residential Mortgage Regulators (AARMR)

Mortgage Advisory Council (MAC)

State Regulatory Registry LLC Board of Managers

SAFE Implementation Working Group (IWG)

Mortgage Testing & Education Board (MTEB)

Mortgage Licensing Policy Committee (MLPC)

NMLS Ombudsman

Industry Development Working Group (IDWG)

Residential Mortgage Regulatory Taskforce (RMRT)

Regulator Development Working Group (RDWG)

Standing & Ad Hoc Working Groups

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I. SAFE Act NMLS: Regulatory Actions

Reporting of State Regulatory Actions SAFE Act Mandate Publicly adjudicated disciplinary and enforcement actions taken by state regulators against companies and individuals. NMLS currently designing functionality, process, and content. Name NMLS ID/License Number Regulatory Action (Type of Order) Case Name/Docket #/Link to Order Additional description (regulator only)
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I. SAFE Act NMLS: The NMLS Record

The NMLS imposes an affirmative obligation that Licensees, including Mortgage Loan Originators, maintain a complete and accurate record. (NMLS as the official system of record.) Licensees that submit information that is not accurate risk punitive action by regulatory agencies.
Few agencies have taken action against licensees with respect to incorrect information, in part because agencies understand that there is a learning curve. As licensees have more time to become familiar with the NMLS, regulatory agencies will expect that licensees understand and meet their obligations under the NMLS. Anticipate heightened scrutiny of licensees, including on their NMLS records.
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I. SAFE Act NMLS: Use of Unique Identifier

Use of the Unique Identifier by Regulatory Agencies The Unique Identifier is a tool that allows regulatory agencies to trace the activities of Mortgage Loan Originators.
State Examinations will utilize software to target loan files with compliance deficiencies. Examiners will be able to cull data to determine whether loans originated by individuals with particular Unique Identifiers demonstrate consistent errors or issues. Targeted Examinations, facilitated by the NMLS and the Unique Identifier, will require increased attention to compliance.
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I. SAFE Act NMLS: Use of Unique Identifier Federal SAFE Rules Apply to Institution and MLOs

FHFA
Require GSEs to obtain NMLS ID # on 1003 HUD FHA Capture of NMLS ID #

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I. SAFE Act Mortgage Call Report Basic Policy Under the SAFE Act, state laws must require all licensees to submit a Mortgage Call Report to the NMLS. Two parts: Financial Information & Mortgage Loan Activity.

Goal uniform financial and activity reporting requirements among the states.
Companies in NMLS that are State licensed, or Employ state licensed mortgage loan originators
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I. SAFE Act Mortgage Call Report

Objectives
Provide enough information for mortgage regulators to effectively supervise licensees: monitor compliance. determine exam schedules. calculate assessments. compile statewide reports on mortgage activity. Reduce or replace individual state annual report requirements. Automate collection and sharing of information. Operate in conjunction with existing NMLS financial statement functionality.
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I. SAFE Act Mortgage Call Report

NMLS Mortgage Call Report broken into two categories:

Standard Mortgage Call Report Quarterly application and closed loan information Annual unaudited financial information Expanded Mortgage Call Report Quarterly expanded application/closed loan/servicing information Quarterly unaudited financial information FNMA/FHLMC/GNMA
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I. SAFE Act Mortgage Call Report

Standard Mortgage Call Report Quarterly Activity Reporting Due 45 days from end of Calendar Quarter Reported on a state by state basis Application Data Closed Loan Data MLO Data Lines of Credit Annual Financial Condition Due 90 Days from companys Fiscal Year End
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I. SAFE Act Mortgage Call Report

Expanded Mortgage Call Report Includes the Quarterly Activity Reporting of the Standard NMLS Mortgage Call Report Added servicing section reported by state Added origination information reported by state Expanded quarterly unaudited financial reporting (not by state) Based on the Mortgage Bankers Financial Reporting Form (MBFRF) currently required by Fannie/Freddie/Ginnie
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I. SAFE Act Mortgage Call Report

All NMLS Mortgage Call Report data is submitted electronically through companys NMLS account

Nothing can be submitted outside NMLS

Manual Entry or XML Upload Options

Ability to combine Manual and XML options for different components

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I. SAFE Act Deeper Dive: Mortgage Call Report

Each licensee will submit one Mortgage Call Report, even if it operates in each of the fifty (50) states and the District of

Columbia
For each jurisdiction in which a licensee conducts business, the licensee creates

state-specific components of the report

The Mortgage Call Report cannot be submitted until all state-specific components are ready for submission
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I. SAFE Act Mortgage Call Report

Due every quarter Q3 Due November 14 Financial Condition Section due in early 2012 for most companies Compliance Rates Q1: 84% Q2: 61% License Deficiencies for Failure to File Data Quality Communications

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II. Multi-State Exam

Goals Protect consumers Ensure safety and soundness Identify and prevent mortgage fraud Seamless, flexible and risk-focused Minimize regulatory burden

Consistency, coordination and communication

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II. Multi-State Exam

Multistate Mortgage Committee (MMC) is the State representative body charged with oversight of uniform and standardized mortgage examination processes and for overseeing multistate exams. Philosophy Uniformity Philosophy of supervision (act as one agency) Approach and methods Results and presentation Modernization Thinking and Technology Effectiveness

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II. Multi-State Exam Multiple states conduct joint exams Single Examiner in Charge (EIC) Single Report of Examination (ROE) Multistate Mortgage Committee (MMC) Schedules Directs Approves
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II. Multi-State Exam MMC Scheduled Exams 2009 Examinations 1 examination 10 states participating PA as EIC state

2010 Examinations 4 examinations Up to 30 states participating EIC states: MI, KS, WA, OH

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II. Multi-State Exam MMC Scheduled Exams 2010 Servicer Examinations Robo-signer exams 8 companies 16 participating states Ongoing into 2011 2011 Examinations 2 examinations underway 30+ states participating EIC states: PA and MA
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II. Multi-State Exam 2011 Scheduled Exams 25 Limited Scope Electronic Exams Transaction level data uploads for a 100% review of the portfolio

Examination results identify: The need for full scope examinations Expanded limited scope examinations Examination complete
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II. Multi-State Exam

Limited Scope Exams Loan data files uploaded to the Regulators Data files run through ComplianceAnalyzer Each state analyzes the results of apparent issues EIC drafts an Executive Summary report for MMC MMC determines next steps
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II. Multi-State Exam

Limited Scope Exams 15 LSE Exams simultaneously launched end of August 28 states and 83 examiners participating

North Carolina rule paved the way Most companies have successfully uploaded data

10 more LSE Exams to follow

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II. Multi-State Exam

Risk Assessment Risk Profiling of Multistate Mortgage Entities
To set MMC exam schedule Pre-assess examination scope Pre-determine examination resources needed

Risk Metrics and Analytics

Derived from quarterly Call Reports Portfolio risk Company Characteristics risk Financial Condition risk Wild Card risk

Assessment Rating
Relative comparison between institutions Not an assessment of the institutions actual risk Not a public number
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II. Multi-State Exam MMC Exam Manual Published July 2011 For use by state examiners, but usable by industry 263 pages of procedures with embedded worksheets and templates

Living document ongoing updates

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III. Other Licensing Developments

Normal Licensing Amendments 23 state laws Loan Modification Foreclosure Rescue / Assistance (consumers)

Short Sale Assistance (lenders)

Appraisal Management Companies

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III. Other Licensing Developments Loan Modification

A number of states require third party loan modification companies to be licensed as lender/broker, debt management company, etc.:
Alabama, Arizona, California (DRE), Colorado, Connecticut, Florida, Idaho, Georgia, Maryland, Minnesota, Nebraska, Nevada, New Hampshire, New Jersey, New York, Rhode Island, Texas, Utah, Virginia, Washington.

State regulators actively pursuing Loan Modsters. States have enacted laws aimed at preventing abuses Prohibit advance fees (e.g., CA) HUD Rule Did not address licensing of servicing individuals State requirements for servicing personnel What activity triggers licensure?

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III. Other Licensing Developments Foreclosure Rescue / Assistance

States have enacted licensing laws aimed at regulating companies that provide foreclosure-related assistance to

consumers.
Nevada- Foreclosure Consultants, Foreclosure Purchasers, Loan Modification Consultants and Persons Performing Covered Services For Compensation (Nev. Rev. Stat. 645F.300 et seq.) Connecticut Debt Negotiation (Ct. Stat. 36a-671 et seq.)
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III. Other Licensing Developments Short Sale Assistance

Do you provide assistance to lenders/servicers in connection with short sales? Communicate with borrowers re: options? Collect information or documentation from borrowers? Identify potential buyers? Consider the following types of licenses: Collection Agency/Debt Collection. Real Estate Broker. Foreclosure Rescue / Foreclosure Consultant. Washington Guidance for Licensees http://www.dfi.wa.gov/cs/pdf/short-sale-guidance.pdf

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III. Other Licensing Developments Appraisal Management Company

Appraisal Management Company: recruit, qualify, verify licensing or certification, and negotiate fees and service level expectations. receive an order for an appraisal and deliver the order to an appraiser. track and determine status of orders for appraisals. conduct quality control prior to delivery. deliver completed appraisal. Generally exempt companies with direct employees and financial institutions subs 2011 legislation enacted in Kentucky, Mississippi, Montana, Nebraska, South Dakota, & Texas. Appraisal trade groups have drafted Appraisal Management Company Registration & Regulation Model Act. Model language on Brokers Price Opinions by real estate licensees.
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III. Other Licensing Developments Appraisal Management Company

Model Act Provisions Registration of Appraisal Management Company.
in-house exempt. de minimus (10) exemption.

Prohibits ownership if any principal has had an appraisal license denied, refused, cancelled or revoked.
Requires identification of controlling person. Requires demonstration that systems in place to ensure that only licensed appraisers are used and comply with Uniform Standards of Professional Appraisal Practice (USPAP). Prohibits coercion or inappropriate influence.

Sets out mechanism for disputes between AMC and appraisers.

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IV. Servicing/Foreclosure Prevention Servicing

Recent State Licensing Requirements Montana Mortgage Company Licensing [H.B. 90; effective 10/1/11] Vermont Third-party loan servicer license (Jan. 2011) Texas Residential Mortgage Loan Servicer Registration (September 1, 2011)

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IV. Servicing/Foreclosure Prevention Servicing

North Carolina Regulations (June 2010):

Rule 702 Loss Mitigation Communications
Acknowledge in writing loss mitigation request w/in 10 business days; identify any information needed from the borrower. Respond to loss mitigation request w/in 30 business days after complete loss mitigation application received. Denial must include reason, contact information for person with authority to reconsider, and contact information for NCCOB.

Rule 703 Cessation of Foreclosure Activity

Must not initiate or further foreclosure proceeding or impose charge while loss mitigation request is pending; certain exceptions.

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IV. Servicing/Foreclosure Prevention Servicing

New York - Part 419 Emergency Regulations (October 2010). 419.2 - duty of fair dealing, includes duty to pursue loss mitigation. 419.6 - crediting payments; late payments. 419.8 - late payment notice w/in 17 days. 419.10 - permissible fees. 419.11 - loss mitigation obligation. 419.12 - quarterly reports. Nevada Regulations impose significant duties on servicers.

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IV. Servicing/Foreclosure Prevention Servicing

State-AG Settlement Negotiations Current status Impact on servicing standards May 10, 2011 GAO Report Mortgage Foreclosures: Documentation Problems Reveal Need for Ongoing Regulatory Oversight Improve documentation policies Ensure adequate oversight and staffing Enhance oversight of third party vendors National Mortgage Servicing Standards
CFPB - on July 21st, the Bureau will receive transferred authority from existing regulators to administer federal consumer financial protection laws. And on that day, mortgage servicing will be one of the CFPBs priorities.
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IV. Servicing/Foreclosure Prevention Foreclosure Prevention

Additional Foreclosure Procedures Preforeclosure notices (AR, AZ, ID, MD, MN, TN, etc.) Prior to issuing notice of foreclosure sale (e.g., 3060 days before), must provide notice of foreclosure avoidance options. In MA, 150 day right to cure payment default; reduced to 90 days if certified good faith effort to negotiate foreclosure alternative. In IL, court must set aside a foreclosure sale if mortgagor shows that he/she applied for HAMP modification or other assistance, and the property was sold in material violation of the program's requirements. In NC, expanded preforeclosure notice requirements to all home loans (previously applied only to subprime loans). Foreclosure stay (e.g., 90 days) for certain members of armed services (IL, NC).
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IV. Servicing/Foreclosure Prevention Foreclosure Prevention

Mediation or Counseling Enacted in many states (CA, CO, CT, DC, IL, MD, MN, NV, VT, etc.) Offered upon notice of delinquency Protection for Tenants in Foreclosed Properties
Successor in interest of foreclosed property with tenants must provide them at least 90 days' written notice to vacate (MD, MN). MA Cannot evict, even for just cause, until 30 days after delivering notice (exceptions for nuisance and illegal activities).
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Thank you! Mary Pfaff

Conference of State Bank Supervisors

Washington, DC MPfaff@csbs.org

John D. Socknat Patton Boggs LLP Washington, DC

jsocknat@pattonboggs.com
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