SAFE mortgage legislation packs regulatory punch

A few years ago, it took little more than a smile to be a mortgage lender.

Which was OK, because if you could smile right back, you got a mortgage.

There were 13,000 people writing home loans in Washington, both fiction and nonfiction. We all know the consequences of the no-doc, liar loan bust: defaults by millions of borrowers, failing banks and, ultimately, the worst recession in many decades.

Well, the pendulum has swung the other way, kind of like a hammer.

Last week, federal regulators published the rules that will implement the Secure and Fair Enforcement for Mortgage Licensing Act of 2008, otherwise known as SAFE. The law is intended to eliminate the fly-by-night mortgage originators who would package Shinola if it would earn them a commission.

Some who keep daylight hours might end up going, as well.

SAFE was enacted in the midst of the financial crisis by an angry Congress. The bill has bite marks.

“I’ve never seen a regulatory statute that’s so detailed,” said Deb Bortner, director of consumer services for the Washington Department of Financial Institutions.

The Federal Deposit Insurance Corp. and other federal regulators will have one set of standards for the institutions they oversee; the states will have similar but different criteria for the institutions they charter.

Every mortgage originator will have to register with a Nationwide Mortgage Licensing System and Registry, which will give them a unique identifier that will stay with them as long as they remain in the business. Consumers must be given those identifiers as a way for them to check the background of the lender they are dealing with.

Included in the information originators will have to provide the registry are fingerprints for criminal background checks. The prints will remain on file with the registry. They will also have to submit detailed financial information, like whether there are any liens against them, any bankruptcies or – sweet justice – a foreclosure.

An originator under financial duress might make loans they might otherwise reject, Bortner said.

She said regulators will take into account extraordinary circumstances that might have brought on individual financial problems, but if a pattern is detected the applicant will be rejected.

A felony is not necessarily a disqualifier, but if the crime involved dishonesty, she said, “then you cannot work here, ever.”

To some extent, she adds, the decision whether an originator can remain in the business will be up to insurers who may be unwilling to bond individuals with more in their file than they would care to underwrite.

The federal rules do not kick in until Oct. 1, and the database will not start accumulating names until early next year. But the deadline in Washington was July 1, and 2,163 of 2,800 applicants made the cut. Many who did not could not pass a test covering mortgage law and ethics or did not have the required training.

As ombudsman for the National Mortgage Lenders System, Bortner said she has taken several calls a week from loan originators who do not know how to comply with the new education and licensing standards. She predicts some nonqualifiers will seek positions where compliance might not be necessary, but adds there will be fewer places to go under the new law.

Bortner said SAFE should give consumers a lot more confidence as they work through the mortgage process. The trade-off will be higher costs.

Liars need not apply.