In 2010, all 50 states were required to implement the SAFE Act, with a compliance deadline of December 31, 2010.  With the passing of this deadline, individuals acting as Mortgage Loan Originators who are either California Department of Real Estate (DRE) licensed real estate brokers or salespeople, or are employed by a lender licensed by the California Department of Corporations, must complete a 20 hour approved course for the initial application, 8 hours of continuing education for renewal, pass the SAFE MLO test, and undergo a background check.  Applicants begin by completing the extensive Nationwide Mortgage Licensing System, or NMLS, application.  For anyone coming from a broker-dealer background, this application will look familiar, as it is the equivalent of FINRA’s form U-4 or U4.   For individuals who are applying to be mortgage loan originators, it is called the MU4 or MU-4.

For those who have passed the coursework and test, challenges may arise in background checks.  In addition to a criminal record background check, the SAFE Act requires that all applicants permit their credit to be checked as well.  Regulators will be looking for bankruptcies, unsatisfied liens, judgments, and other evidence of prior financial mismanagement.  Currently, these cases are reaching the legal departments of the DRE and DOC, and may result in the first litigated administrative MLO endorsement cases.

The SAFE Act contains certain prohibitions for issuance of the endorsement.  If an applicant has been ever convicted of a felony involving fraud, dishonesty, breach of trust, or money laundering, they cannot get an MLO endorsement.  Also, the SAFE Act bars issuance of an MLO endorsement if someone has been convicted of any felony within the prior seven years.  Apparently, individuals who have criminal records, but are not barred from issuance of the MLO endorsement by these rules, will be evaluated on a case-by-case basis, just as they are for any state occupational licenses. 

Also, the SAFE Act requires applicants to submit to credit checks to determine if an applicant has demonstrated "financial responsibility, character, and general fitness such as to command the confidence of the community and to warrant a determination that applicants will operate honestly, fairly, and effectively".  So how bad must your credit be to run afoul of the SAFE Act?  No one will exactly know until these cases are litigated.  It seems likely that if someone’s credit is bad enough, the licensing agency will want to see an explanation of the misfortune that occurred.  Clearly, the person whose credit was trashed due to medical bills will do better than a compulsive gambler.  Also, credit can be cleaned up.  NMLS websites actively encourage applicants to check their credit first and clean up their credit reports before applying.  

Review of credit reports by state agencies to make licensing decisions is a new, and uncomfortable area.  The poor credit criteria draws a correlation between financial mismanagement and dishonesty that is a difficult analogy.  My suspicion is that absent unsatisfied judgments or liens that cast an applicant in an appalling light, this criteria alone, without some prior criminal misconduct, will be a difficult standard to apply to deny the endorsement.