Banking Department's Comment Letter on Docket No. FR-5271-P-01 -
SAFE Mortgage Licensing Act; HUD Responsibilities under the SAFE Act
February 25, 2010
Office of General Counsel
Department of Housing and Urban Development
451 7th Street, S.W.
Washington, D.C. 20410-0500
RE: Comments on Docket No. FR-5271-P-01
SAFE Mortgage Licensing Act; HUD Responsibilities under the SAFE Act
Dear Sir or Madam:
While the New York State Banking Department generally supports the comments submitted by the Conference of State Bank Supervisors (CSBS) and the American Association of Residential Mortgage Regulators (AARMR), we are submitting these supplemental comments on the issue of whether HUD should require individuals who engage in loss mitigation or perform loan modifications to be licensed as mortgage loan originators under the S.A.F.E. Act. For the reasons set forth below, we believe that HUD should not require states to license individuals who engage in loan modifications, whether employees of loan servicers, independent third party loan modification companies or non-profit organizations, although states should certainly have the option to do so.
The S.A.F.E. Act was intended to address abusive practices in the origination of mortgages. By its plain language and legislative history, the Act applies to mortgage “loan originators.” The term mortgage origination is commonly understood to mean the origination of a new loan not the modification of an existing loan. The legislative history of the Act is consistent with this meaning and reflects Congress’s intent to address the problems of imprudent origination practices and “predatory lending tactics” that placed “unsuspecting borrowers in mortgages they could not afford.” See, e.g., Feinstein, 1154 Cong. Rec. at 734. The Act itself further demonstrates that it was intended to cover loan origination not loss mitigation. For example, the course and testing requirements pertain to loan origination not loss mitigation. This view is consistent with the draft final rule implementing the S.A.F.E. Act that was recently issued by the federal regulators. See, e.g., FDIC Draft Final Rule, Subpart B to 12 CFR Part 365 Real Estate Lending Standards (Nov. 13, 2009) at 24, available at http://www.fdic.gov/news/board/2009nov12no8.pdf. The federal regulators recognize that because modifications do not “result in the extinguishment of an existing loan and the replacement by a new loan” but rather in the revision of the terms of an existing loan, they do not constitute mortgage originations. As such, under the federal agency draft rule, employees of federally regulated entities engaged in renegotiating existing loans or loan modifications will not be considered mortgage loan originators under the S.A.F.E. Act.
We share the general disappointment and frustration with the slow pace of loss mitigation by many of the major mortgage loan servicers. And, we are distressed by the proliferation of independent third party loan modification consultants who prey on vulnerable homeowners by taking money for services that they fail to provide and that are available for free through professional non-profit housing counselors. Nevertheless, we believe that extending the requirements of the S.A.F.E. Act beyond mortgage loan originators to individuals who were not intended to be covered is not the best means of addressing these problems and may actually undermine current efforts to assist homeowners. Requiring states to license independent loan modification consultants legitimizes an industry that we believe by and large performs no legitimate services. We believe that a better way to deter abusive practices by mortgage loan modification consultants is to restrict their advertising and representations and to prohibit their collection of upfront fees. Indeed, this is the approach that has been adopted by New York and many other states and that was recently proposed by the Federal Trade Commission. See, e.g., New York Real Property Law §296-b; FTC Notice of Proposed Rulemaking, Mortgage Assistance Relief Services, (Feb. 4, 2010), available at http://www.ftc.gov/os/2010/02/100204marsfrn.pdf.
Nor do we believe that HUD should require the licensing of the individual employees of mortgage loan servicers who engage in modifying existing loans. Mortgage loan servicers clearly need to do a better job in overcoming the backlogs and other impediments that currently impede effective loss mitigation efforts. However, change needs to come from the top down. For that reason, New York is currently requiring the licensing of mortgage loan servicers and our department has issued draft proposed regulations that will enhance servicer accountability and consumer protection, including in particular, the handling of delinquencies and loss mitigation. Banking Law 590(2) (b-1); see also draft proposed Mortgage Loan Servicers Proposed Business Conduct Rules -- Part 419 of the Superintendent’s Regulations available at http://www.dfs.ny.us. The S.A.F.E. Act’s fingerprinting, background checks and educational and testing requirements (which focus on loan origination and not loss mitigation) are not necessarily the measures best tailored to improving servicer performance. Particularly at a time when servicers are struggling with an unprecedented number of mortgage delinquencies, requiring the licensing of all individual loss mitigation employees, most of whom follow their servicer’s directives and exercise little autonomy, would be counterproductive to helping those homeowners most in need of loss mitigation assistance. Moreover, since the federal regulators have announced their intent to exempt bank employees engaged in loss mitigation from licensing under the S.A.F.E. Act, requiring employees of non-bank mortgage servicers who engage in identical activities to be licensed will lead to an inconsistent regulatory scheme that creates confusion and unfairly burdens the non-bank servicers.
Finally, we agree with CSBS and AARMR that states should retain the right to exempt bona fide nonprofit housing counselors from the requirements of the S.A.F.E. Act. Nonprofit housing counselors, many of are employed by HUD certified counseling agencies and have received training on a variety of subjects related to lending and foreclosure avoidance through organizations such as NeighborWorks®, have played a critical role in helping borrowers avoid the kind of predatory lending practices the S.A.F.E. Act was designed to prevent. These counselors have helped homeowners nationwide obtain safe, affordable loan products. Indeed, it has been demonstrated that borrowers who have received pre-purchase nonprofit counseling are less likely to become delinquent. Nonprofit housing counselors have also been at the forefront of efforts to combat foreclosures and have been instrumental in helping at risk homeowners negotiate modifications to existing loans. These counselors provide their services for free or at a nominal cost and thus operate free from the financial interests and incentives of commercial mortgage loan originators intended to be covered by the Act.
We appreciate the opportunity to provide these supplemental comments on HUD’s proposed rule and look forward to working with you in implementing the S.A.F.E. Act to enhance mortgage supervision and consumer protection.
Very truly yours,
Jane M. Azia
Director of Non-Depository Institutions and Consumer Protection