THE SAFE MORTGAGE LICENSING ACT

THE SAFE MORTGAGE LICENSING ACT

Title V of P.L. 110-289, the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act),
was enacted into federal law on July 30, 2008. This new federal law allowed states to pass state laws to comply
with SAFE or in the alternative, HUD would take over the regulation of mortgage loan originators. States had
one year to pass legislation requiring the licensure/registration of mortgage loan “originators” (MLOs)
according to national standards. This licensure is required in California when MLOs engage in the making or
arranging of loans primarily for personal, family, or household use that are secured by deeds of trust or
mortgages through a lien on real property when the security property is a dwelling consisting of 1 to 4
residential units. The MLO licensure/registration also applies when the financing arranged is to construct on the
security property the intended dwelling of the borrower (Business and Professions Code Section 10166.01(d)).

Since the early part of the 20th century, real estate brokers have been licensed in California and regulated by the
DRE. Among the activities that a real estate broker is authorized to pursue is the making and arranging of
mortgage loans (as defined) secured directly or collaterally by/through liens on real property (Business and
Professions Code Sections 10131(d) and (e), 10131.1 and 10131.3). Such activities of real estate broker
licensees have long been characterized as mortgage loan brokerage and these licensees are know as mortgage
loan brokers (MLBs).

The SAFE Act established a Nationwide Mortgage Licensing System and Registry (NMLS) in which the states
are required to participate. The DRE is a participating state agency in NMLS. The SAFE Act is designed to
enhance consumer protection and reduce mortgage loan fraud through the setting of minimum standards for the
licensing and registration of state-licensed mortgage loan originators (MLOs). California law was amended to
add several sections to the Business and Professions Code expanding the authority of the DRE to participate in
the NMLS, including the processing and registering of MLOs. The added California law includes requirements
for doing business as an MLO; establishes a one year term for the license endorsement; authorizes application
forms; imposes record keeping and transaction fees; and defines violations of the law and the penalties to be
imposed (Business and Professions Code 10166.01 et seq.).

Applicable California law requires loan processors and underwriters to either function as employees of the real
estate broker (MLB/MLO) or to be separately licensed if providing services as an independent contractor. Each
applicant to become licensed or registered as an MLO must undergo a criminal history and related background
check. Included as part of the prerequisite requirements for the issuance of the endorsement to act as an MLO,
is consideration of previous license discipline, a review of criminal records where the applicant was convicted
of a felony, and whether the felony involved fraud, dishonesty, a breach of trust, or money laundering. Further,
an applicant for the endorsement to act as an MLO must undergo a qualifying written examination, demonstrate
financial responsibility and meet new educational requirements. (Business and Professions Code Sections
10166.03, 10166.04, 10166.05, and 10166.06).

Subsequent to receiving the endorsement required by this law, MLBs/MLOs must file with the DRE business
activity reports, additional reports in the form and content required by the NMLS, and documents establishing
whether continuing education requirements have been met or satisfied. These reports must be filed annually
with the DRE or the NMLS (as appropriate) to renew the MLO endorsement (Business and Professions Code
Sections 10166.07, 10166.08, 10166.09, and 10166.10). MLBs/MLOs are required to maintain and to make
available for inspection, examination, or audit by the DRE documents and records (as defined). The foregoing
inspections, examinations, or audits are substantially broader in authority then to which real estate brokers
(MLBs) would otherwise be subject (Business and Professions Code Sections 10166.11 and 101666.12).

Violations of this law include failing to notify the DRE of the activity of the licensee as an MLO, failing to
obtain the required endorsement to function as an MLO, and otherwise failing to comply with applicable law
(including the Real Estate Law and the SAFE Mortgage Licensing Act). The penalties for violations are
assessed at $50.00 per day for each day written notification has not been received by the DRE of activities
requiring the endorsement or failing to obtain the endorsement up to and including the 30th day after the first
day of the assessment of the penalty and, $100 per day thereafter to a maximum penalty of $10,000 (Business
and Professions Code Section 10166.02).

MLOs who work for an insured depository institution or an owned or controlled subsidiary of the institution or
its holding company (regulated under federal law by a federal banking agency) or a financial institution
regulated by the Farm Credit Administration, are required to register with the NMLS. However, these MLOs do
not require licensing under state law and are not required to sit for examination as a prerequisite to licensure.
MLOs require licensing by the several states are subject to the regulation of the applicable state licensing
agency.

The SAFE Act requires state-licensed MLOs to pass a written qualifying test, to complete pre-licensure
education courses and to take annual continuing education courses (as defined). The SAFE Act also requires
applicants for status as MLOs to submit fingerprints to the NMLS for submission to the FBI to accomplish the
previously mentioned criminal background checks. State-licensed MLOs are required to provide (as part of the
examination or review of financial responsibility) authorization for the NMLS to obtain independent credit
reports and to examine the credit worthiness and financial standing/responsibility of applicants for and to
accomplish renewal as MLOs.