Bar News - September 16, 2011
HUD Issues Final SAFE Act Rule - Now What Do We Do?
By: Connie Boyles Lane
Sept. 23, 2011 update: Legislators Hesitate on NH SAFE Act Revision, NH Business Review
|Connie Boyles Lane
The Department of Housing and Urban Development issued its long-awaited final rule for the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 on June 30, 2011. (See, 76 Federal Register 38464 through 38501.) ("Rule")
Over the course of the summer New Hampshire attorneys have been trying to reconcile the Rule with RSA 397-A. The listserv of the Real Property Section has been active with inquiries about the interpretation of the Rule vs. RSA 397-A. The two provisions at the center of attention are the limited exclusion of attorneys from the onerous licensing requirements of RSA 397-A and the de minimus exception set out in RSA 397-A:4 VI.
At the heart of the confusion is that the Model Act blessed by HUD after the passage of the SAFE Act was integrated into RSA 397-A in 2009 and contains provisions that are now being rejected by HUD. This reversal puts the Banking Department in an awkward position since HUD insisted that states adopt the Model Act in 2009 in order to assure compliance with the SAFE Act.
Adopting language from the Model Act and the proposed rules of HUD (not the final rule), RSA 397-A provides that attorneys cannot represent a loan modification client unless such representation is "ancillary" to another matter of that client, and the statute offers no definition or guidance on what "ancillary" means. HUD’s final rule abandons the concept of "ancillary" altogether, recognizing that "identification of an attorney’s activity as ‘ancillary’ to a representation is unnecessary, so long as the attorney’s activity is in fact regulated" by the NH Supreme Court. (See, p. 38479 of the Rule and Appendix D of the Rule.)
Instead, the Rule focuses on whether the attorney is "in the business" of loan origination. HUD recognizes that attorneys helping clients with loan modifications are engaged in the practice of law, not the business of loan origination. "[I]n requiring the licensing of individuals who ‘engage in the business’ of a loan originator, Congress did not state an intention to regulate activities that constitute the practice of law by a licensed attorney."
Echoing the complaints of the ABA and real estate lawyers in New Hampshire, HUD’s rule recognizes that construing the term "engaging in the business of a loan originator" to encompass activities that constitute the practice of law could have negative consequences, such as interfering with regulation of the practice of law by state supreme courts, undermining important aspects of the attorney-client relationship, and hindering consumers from being able to obtain legal representation in residential mortgage loan transactions. Doing so undermines the statutory purposes of the SAFE Act, which include enhancement of consumer protections and reduction of regulatory burden, HUD said.
It is important to note, however, that HUD has warned attorneys that they cannot hide behind their license to practice law and engage in the loan modification business without complying with the SAFE Act (and RSA 397-A). The trick is to draw the distinction without exposing consumers to attorneys who would abuse this exception.
The Rule contains language that seems to render moot the de minimus exception in RSA 397-A:3 VI (allowing up to 3 loans by an owner in 12-month period), which was effective on July 1, 2011. HUD states repeatedly in the Rule that it is not authorized to provide a de minimus exception. Instead, the correct analysis is to determine whether the person is habitually and repeatedly engaged in the business of loan origination. See, 34.103(b)(i) of the Rule and Appendix B. Based on this analysis, many attorneys feel that relying on the exception in RSA 397-A:3 VI is ill-advised.
Other common questions on the list-serve center on the family relationship of the parties in a loan transaction. While the Rule deleted the specific exception for family members, it preserved the concept in Appendix B of the Rule. Again, the critical analysis is whether the lending party habitually and repeatedly engages in the origination of residential mortgage loans. Unfortunately, HUD did not provide much guidance on how many loans constitutes "habitually" or "repeatedly".
The SAFE Act was designed to enhance consumer protections and reduce fraud in mortgage lending. While the NH Bar Association and the American Bar Association wholeheartedly supported these goals, HUD’s original proposed rule contained overly broad language that imposed excessive federal regulations on lawyers engaged in the practice of law, essentially preventing their representation of clients in loan modification matters.
It is fortunate that HUD has recognized that creating a new overlapping federal layer of regulation on practicing attorneys was unnecessary and that conflicting standards would ultimately hurt their consumer clients.
Unfortunately, RSA 397-A enacted concepts that HUD has now rejected, and we will need to work with the Banking Department to enact reformative legislation and/or regulations to adopt the concepts in the Rule and to insure that consumers can obtain legal representation for loan modifications in New Hampshire.
An ad hoc group of New Hampshire attorneys that has been working with the Banking Department and others in connection with issues related to RSA 397-A since 2009 is attempting to resolve the new issues raised by the Rule. The group includes Ben Frost, Maria Sapienza, Carol Brooks, John MacIntosh and Connie Boyles Lane.
We will keep attorneys posted via the section’s list-serve and updates in the Bar News.
Connie Boyles Lane, former chair of the NHBA Real Property Law Section, is a member of a working group seeking a resolution to the problems caused by RSA 397-A, NH’s version of the SAFE Act. She practices with the law firm of Orr & Reno.