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The Devil is in the Definition

Paul Donohue
Mar 01, 2010

Do you know who in your organization must be licensed as a “Mortgage Loan Originator?” It’s a vital question that will affect processors, underwriters, how you communicate with your borrowers and how you supervise your employees. The Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act) did away with our old notions of just who must be licensed. On this point, the devil is deep in the definition. The SAFE Act defines a “Mortgage Loan Originator” (MLO) as an individual who, “Takes residential mortgage loan applications” and “Offers or negotiates terms of a residential mortgage loan for compensation or gain.” It broadens the definition further, stating an originator is an individual who “Assists a consumer in obtaining or applying to obtain a residential loan by, among other things, advising on loan terms (including rates, fees and other costs), preparing loan packages, or collecting information on behalf of the consumer.” This seems clear, until you go deeper. Administrative or clerical tasks, are defined to mean the “receipt, collection and distribution of information common for the processing or underwriting of a loan” and “communicating with a consumer to obtain this information.” Clearly, a loan processor or underwriter would not fall under the definition of MLO if they only perform these duties and are employed by a licensed mortgage lender or mortgage broker. But there is a catch … Loan processor or underwriter, is defined as, “An individual who performs these clerical or support duties at the direction of, and subject to the supervision and instruction of, a state-licensed loan originator.” The first class of originators I taught this to had these silly grins, like self-important Cheshire cats. “Do you mean we are in charge of our processors and underwriters?” they asked. “Well, not so fast.” I answered. This means the licensed originator will be held responsible for the work of the processor or underwriter if, in fact, they supervise such activity. The key concept is that a licensee must directly supervise the processor or underwriter or they must be licensed. HUD’s proposed rule The U.S. Department of Housing & Urban Development (HUD) recently extended the public commentary period until March 5 on a proposed rule interpreting responsibilities under the SAFE Act. This rule defines what it means to take an application and broadens the definition of originator, which impacts: ►Loan modification specialists ►Unsupervised processors and underwriters ►Housing counselors or other third parties influencing a consumer’s loan decision ►Independent contractors that perform clerical and support duties HUD interprets the lack of supervision by a licensed originator that triggers the need for a license. Therefore, all processors or underwriters acting as independent contractors must be licensed. A SAFE-Smart tip Look closely at your employed processors and underwriters. To avoid the need for their licensure, be certain they are supervised by a licensed originator. Read HUD’s proposed rule to ensure you’re in compliance ( It may be time for your processor, underwriter or those who supervise them, to become licensed. Be SAFE-Smart out there. Paul Donohue, CRMS is a 23-year industry professional and founder of Abacus Mortgage Training and Education. Paul served on two NMLS working groups, establishing the new national education protocols. Go to to find out more about your obligations for testing, education and licensure, or call (888) 341-7767.
Mar 01, 2010