In response to the foreclosure epidemic and the global economic crisis that erupted in 2008, devastating the real estate markets and forcing banking institutions to cut lending or even close their doors, Congress passed legislation to establish more government oversight of individual mortgage loan originators, with the outcome of increased consumer protection.

Primarily, the law set forth objectives for a Nationwide Mortgage Licensing System (NMLS) for the residential mortgage industry. The SAFE Act requires that all residential mortgage loan originators must be either federally registered or state-licensed. A mortgage loan originator employed by a federally insured depository institution or any credit union or an owned and controlled subsidiary that is federally supervised must be federally registered. All other mortgage loan originators, without exception, must be state licensed.

All state licensed and federally registered mortgage loan originators must be registered with the NMLS, which is maintained by the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators.

Striving for Uniformity Among the 50 States

At the time of the law's passage, state systems varied greatly. The SAFE Act required the states to have a licensing and registration system in place by either July 31, 2009 (for states whose legislatures meet annually) or July 31, 2010 (for states whose legislatures meet biennially). For either of these deadlines, the U.S. Department of Housing and Urban Development (HUD) offered to extend the deadline if HUD determined that a state is making a good faith effort to establish a state licensing law that meets the minimum requirements of the SAFE Act.

By January 2010, 43 states, the District of Columbia, and Puerto Rico had adopted NMLS. But HUD recognizes that in many states, individuals currently performing loan originations may not be able to meet the educational, testing, and background check requirements by the time required regulations become effective. In addition, HUD is aware that some states already require licensure of loan originators.

In those states that have adopted NMLS all individuals acting as a residential mortgage loan originator (RMLO) must create an account in NMLS, and have filed or file a Form MU42 through NMLS with the state regulatory agency. Filing deadlines depend on the type of license required.

NMLS Requirements and Your Responsibilities

What do you have to do? In addition to certain other requirements, all MLOs need to file a Form MU4 through NMLS with the their state s Division of Banking. The applicant as a state-licensed loan originator must furnish certain information to the NMLS including fingerprints for a criminal background check and personal history and experience. Minimum standards for license issuance includes:

• Never having had a revocation of loan originator license;
• Never having had a felony conviction involving an act of fraud, dishonesty, or a breach of trust, or money laundering (no other types of felonies seven years prior to application);
• Demonstration of financial responsibility;
• Completing pre-licensing education reviewed, and approved by the NMLS (at least 20 hours);
• Passing a written test developed and administered by the NMLS (at least 75% correct answers out of minimum 100 questions).
• States must include a minimum net worth requirement or surety bond requirement for applicants, or have had the applicant pay into a state fund.

The SAFE Mortgage Loan Originator Test

Some requirements (such as no felony conviction and no license revocation) are straightforward: either you can comply, or you can t. What s bringing fear and trembling to the hearts of MLOs nationwide is the SAFE Mortgage Loan Originator Test. All MLOs must pass the test, which is comprised of two components: a state component and a national component. MLOs must pass each component with a score of 75% or higher prior to renewal for 2011. The SAFE Act exam covers topics including federal law and regulation, fair lending issues, consumer protection, instruction on fraud, ethics, and the nontraditional marketplace.

To date, industry sources place the failure rate at anywhere from 30% to a whopping 70% for first-time takers. As part of the SAFE Act licensing requirements, the Act requires that all new mortgage loan originator applicants must complete 20 hours of NMLS-approved Pre-licensure Education (PE) and annual Continuing Education (CE). You d think that 20 hours of instruction should make the test a breeze. Apparently results depend upon the quality of the program.

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