Understanding The SAFE Act – Impact On Mortgage Lenders

By Ciprian Morariu Published: March 21, 2024

Before going into what is the SAFE Act, let us investigate the circumstances that led to the passing of this important Act.

The SAFE (Secure and Fair Enforcement for Mortgage Licensing) Act was passed on July 30, 2008. Before the Act came into force, mortgage loan originators functioned under the jurisdiction of state laws.

Apart from the regulation of their work that was at best chaotic, there was no clear reciprocity between jurisdictions. An MLO found doing anything illegal in one state could simply relocate to another state and start working there – no questions asked.

After the collapse of the mortgage-based securities, it fell upon the lawmakers to pass laws that protected the interests of the consumers. There were calls to the government to make drastic and fundamental changes to the way that the mortgage industry worked. It was Senators Mel Martinez and Dianne Feinstein who introduced the SAFE Act in the US Senate which was ultimately passed into law on July 30, 2008.

In this post, we will explore what is the purpose of the SAFE Act, starting from its definition to the loans covered by it.

Key Takeaways

What is the SAFE Act?
- Definition of the SAFE Act
- The Objectives of the SAFE Act
SAFE Act Registration Requirements
- Who Needs to Register Under the SAFE Act?
- Mandatory SAFE Act Registration Steps
- Background Checks and Fingerprint
- Completion of Pre-Licensure Education
- Passing the National and State Exams
Loans Covered by the SAFE Act
- Mortgage Loan Originators and Covered Loans
- FHA, VA, and Conventional Loans: Does the SAFE Act Apply
- Exemptions and Exceptions to SAFE Act Coverage
What is the Purpose of the SAFE Act
- Enhancing Consumer Protection in Mortgage Transactions
- Minimizing Mortgage Fraud and Predatory Lending Practices
- Ensuring Competency and Professionalism Among Mortgage Loan Originators

What Is The SAFE Act

Definition of the SAFE Act

The Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act) was passed into law in the USA on July 30, 2008. The Act was passed to set right a basic problem then prevalent in the mortgage industry. It was the poor flow of information between regulators and residential Mortgage Loan Originators (MLOs). The Act ensured:

Increased accountability of MLOs in case of any discrepancies in loan processing
Consumer access to the work history of MLOs to know if they had any issues in the past.

Both these objectives are met by the Act by mandating that all MLOs register in a nationwide database. It makes tracking of the records and credentials of MLOs easy by employers and regulators.

Further, the Act requires all lenders and financial institutions as well as Mortgage Loan Originators to have a surety bond to protect their customers from any malpractice. The quantum of the bond increases with the growth of their business.

Under this Act, all MLOs should have a unique identifier as well as a federal or state registration and license. Without a permanent registration, MLOs are not allowed to function in the USA.

Before we go any further, a quick word on how to get a mortgage loan originator license. To be a licensed MLO, a person must be at least 18 years old and go through a mortgage licensing course. This can be either in a classroom environment or an MLO course online. After completing this education, the licensing exam must be passed to be eligible for a mortgage loan originator license.

The Objectives of the SAFE Act

Several objectives of the SAFE Act are listed as follows:

Increasing the exchange of information from and to regulators
Tracking MLOs and enhancing accountability in their functioning
Improving consumer protection by implementing anti-fraud measures
Providing consumers with all information about the Mortgage Loan Originators free of cost. This includes the employment history of the MLOs and whether any disciplinary action has been initiated against them.

What Are the SAFE Act Registration Requirements

Who Has To Register Under The SAFE Act

Anybody who works in a lending institution as a Mortgage Loan Originator must be registered under the SAFE Act. They will be issued with a unique identification number and the registration has to be maintained as per the clauses in the Act.

Among other SAFE Act requirements is the responsibility of the lenders to ensure that those working as MLOs with them are registered and have obtained the unique identifier.

Compulsory Registration Steps Under the SAFE Act

It is seen in the SAFE Act requirements mentioned above in this post that all MLOs must have a unique identifier. However, the mode of their registration depends on where they are employed and the type of work they do.

For example, MLOs employed by mortgage lenders must register with the NMLS at the federal level. All other MLOs should register with the state that they are in and follow specific requirements applicable to that state.

However, this does not mean that state-registered MLOs cannot be monitored. All state registries are linked to the NMLS and hence, and hence all MLOs can be tracked regardless of the state they work in.

We will now go into the step-by-step process of mandatory SAFE Act registration requirements.

Background Checks and Fingerprints

Mortgage Loan Originators must maintain high standards of honesty and integrity. Hence, before being awarded a license, they must submit their fingerprints to the FBI for verification of any past criminal records. In this connection, their credit report must be submitted to the NMLS also. It helps to identify aspiring MLOs who are likely to commit fraud.

Going Through The Pre-licensing Coursework

Aspiring MLOs must go through 20 hours of NMLS-approved pre-licensing coursework to be eligible to sit for the licensing exam. The coursework consists of the following modules:

Federal Law and Regulations (3 hours)
Ethics, Fair Lending, Instruction on Fraud, Consumer Protection (3 hours)
Lending Standards related primarily to nontraditional lending products (2 hours)
Miscellaneous instructions related to mortgage origination (12 hours)

It is not necessary to go through this 20-hour course before taking the National SAFE Test but must be completed before applying for the MLO license.

Passing the Licensing National and State Exams

To be awarded an MLO license, it is necessary to pass the SAFE MLO test consisting of 125 multiple-choice questions. Of the 125, there are 115 scored questions and 10 unscored ones. The questions cover 5 main content areas as follows.

Mortgage-Related Laws (23%)
General Mortgage Knowledge (23%)
Mortgage Loan Origination Activities (25%)
Ethics (16%)
Uniform State Content (13%)

Other SAFE Act Registration Requirements

All MLOs must register themselves and obtain the unique identifier. This unique identifier must be provided to consumers on request and on all written communication. In certain states, MLOs are required to provide this identifier on business cards, solicitations, advertisements, and every mortgage loan application form.

Further, MLOs must annually renew their registration and complete 8 hours of post-licensing education every year. Continuing education ensures that MLOs are updated with the latest laws and regulations governing the mortgage industry.

Through continuing education, the SAFE Act focuses on ethics with provisions for disallowing MLOs who have been convicted of fraud or theft. The standards to be set are left to the states and hence might differ from one another.

Loans Covered By The SAFE Act

Mortgage Loan Originators and Covered Loans

The SAFE Act focuses primarily on all types of “residential mortgage loans” These loans are for family, personal, or household use and are secured by the title deed, mortgage, or any other security related to the property. The land where the dwelling is to be constructed may also be considered as collateral for the mortgage loan.

Covered loans for mortgages include lien loans, refinancings, home equity lines of credit, and reverse mortgages.

FHA, VA, and Conventional Loans: Does the SAFE Act Apply?

FHA and VA-guaranteed loans are all part of residential mortgage loans though with some differences.

For people with a low credit score and a small down payment, an FHA-insured loan is the best bet because other loans will not be available to them. However, the interest rate will be higher than conventional loans.
Conventional loans are cheaper and sanctioned to those with a good credit score.
VA-guaranteed loans are sanctioned to current or former military service personnel and are cheaper than other loans.

Since all three fall under the “residential mortgage loan” category, they come under the SAFE Act applicable to Mortgage Loan Originators.

Exemptions and Exceptions To SAFE Act Coverage

There are certain exemptions and exceptions to the SAFE Act where an MLO license is not required in certain non-seller financing transactions.

An employee of a government agency who engages in the functions of a mortgage loan originator along with carrying out the duties of the agency.
An employee of a bona-fide non-profit organization who, along with the duties of the organization engages in the business of a mortgage loan originator.
A volunteer of a bona-fide non-profit organization who is into the business of a mortgage loan originator, working under the direction of the management.

As per the SAFE Act Final Rule, the origination of these mortgage transactions does not require a license.

What Is The Purpose of The SAFE Act

There were several reasons for the SAFE Act to be enacted into law but the main reasons were consumer protection and setting benchmarks for MLOs. Let us check some of them in detail.

Improving Consumer Protection in Mortgage Transactions

This aspect is very important as it allows consumers to be assured that the MLO handling their loan has good standing and can be trusted. They also have access to any disciplinary action that may have been taken against the MLO they are dealing with.

This facility goes a long way to increase customer confidence that their dream housing project is being handled by a licensed MLO.

Curtailing Incidences of Predatory Lending Practices and Mortgage Fraud

The SAFE Act clauses ensure that any person who has been previously convicted of fraud or similar offenses cannot discharge the duties of a mortgage loan originator. An MLO license will not be issued to someone who has a felony conviction for breach of trust, money laundering, fraud, or dishonesty within the last seven years.

Predatory lending practices are also curtailed under the SAFE Act. Previously, before the enactment of the Act, one could commit fraud, move to another state, and set up shop again. This was possible as each state had its own rules that were not integrated and available on one common platform.

This chance, that goes against the interests of the consumers, has been eliminated now with the introduction of the Act and the NMLS.

Improving Professionalism Among Mortgage Loan Originators

The Act lays down benchmarks for the licensing system for MLOs. The pre-licensing coursework and continuation education requirements are strictly monitored so that they conform to the minimum standards required to be an MLO.

Further, the pre-licensing course goes into the details of ethics and federal and state laws so that MLOs can deliver the best and optimized services to consumers.