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FHA Gets Into the SAFE Act

by Peter G. Miller
December 23rd, 2009

Among the many bills passed recently has been the Secure and Fair Enforcement Mortgage Licensing Act of 2008, also known as the SAFE Act. This dandy little piece of legislation is the starting point of something new, an effort to raise the quality of loan officers nationwide.

The SAFE Act, says HUD, “is designed to enhance consumer protection and reduce fraud by encouraging states to establish 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.”

Now HUD, for its part, wants to assure that loan officers who originate FHA mortgages are covered under the SAFE Act.

Nationwide Protection

In other words, if you have a loan officer who screws large numbers of borrowers in one state he or she cannot get back in business by simply moving to another state. The reason is that the nationwide registration system only issues one license number per loan officer.

The SAFE Act is not a bad idea and more importantly you can see how it can be expanded to establish actual obligations for loan officers under federal law, something which is now missing. For instance, under today’s federal rules loan officers have no obligation to get the best price and terms for borrowers. Since most loans are originated by national lenders and their subsidiaries borrowers have no protection against price gouging under federal standards.

Borrower Protections

You can see what HUD is trying to do by changing FHA guidelines. It essentially is establishing FHA loan requirements to protect borrowers, a process which is both needed and long-overdue.

The long-term goal is to produce an obvious standard for loan officers, a fiduciary obligation under federal rules to serve the best interests of a borrower. Is the lending industry opposed to such an obligation? You bet.

“Some have proposed,” said Harry Dinham in 2007, the then president of the National Association of Mortgage Brokers, “that a fiduciary duty standard should be implemented and mortgage originators and their loan officers should act in the ‘best interests’ of the consumer. NAMB remains opposed to any proposed law, regulation or other measure that attempts to impose a fiduciary duty, in any fashion, upon a mortgage broker or any other originator.

“Simply put, a mortgage broker should not, and cannot, owe a fiduciary duty to a borrower. The consumer is the decision maker, not the mortgage broker,” according to Dinham.

Well, maybe it’s not so simple. Maybe when people are told they should hire Smith but not Jones so they can get the best rates and terms for an FHA mortgage that Smith will actually be required to deliver what was promised.

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