The federal S.A.F.E. Act “encourages” states to establish minimum standards for uniform license applications and reporting requirements for state-licensed loan originators, in an effort to standardize and more efficiently regulate the nationwide practice of mortgage loan origination. While it provides states with minimum standards, the federal S.A.F.E. Act does not preclude states from imposing tougher standards as long as those standards do not frustrate the purposes of the federal S.A.F.E. Act.

The Minnesota S.A.F.E. Act defines a “mortgage loan originator” (MLO) as “an individual who for compensation or gain or in the expectation of compensation or gain takes a residential mortgage loan application; or offers or negotiates terms of a residential mortgage loan.” Loan processors and underwriters are not considered MLOs, and are prohibited from advertising that they will do anything only an MLO is allowed to do. Applicants for a license must pass a written test and must submit to a background check by the Federal Bureau of Investigation (FBI).

Disputes remain concerning how the federal government will determine whether states are complying with the federal S.A.F.E. Act, so we can expect further developments on this issue in the coming months.

Higher premiums, however, are only one of the insurance industry’s reactions to the current financial conditions. Insurers also are instituting more restrictive terms and conditions, lower limits of liability, higher deductibles, and in some cases, specifically tailored exclusions that eliminate coverage for liability resulting from bankruptcy, bank failures, or claims brought by the Federal Deposit Insurance Corporation. In light of these developments, many financial institutions may find it difficult to retain and attract talented directors and officers at the very moment when such leadership is most needed. In fact, this current talent drain is a continuation of a trend that began in 2002 with the passage of the Sarbanes-Oxley Act.

One factor impacting rates and the availability of D&O insurance is the uncertainty surrounding AIG’s financial condition and future viability. AIG has long been the dominant underwriter of D&O insurance. As banks turn away from AIG for their D&O coverage, they are not finding the competition for their business that one might expect when an industry leader appears vulnerable. On the contrary, banks are facing a shrinking D&O market as several smaller carriers have decided to stop underwriting such coverage, especially for banks and other financial institutions, because the premiums are no longer perceived as worth the potential risk. In turn, those smaller insurers’ withdrawal from the market should only exacerbate the rate at which D&O insurance premiums increase in the ensuing months and years.

Faced with higher premiums for less D&O coverage, companies and their directors and officers should aggressively negotiate the most favorable coverage for their money. To that end, when negotiating new policies or renewals, they should carefully gauge their risk and exposure, and closely review proposed D&O policies, including exclusions, for provisions that could potentially eliminate coverage. If the proposed coverage is insufficient, or if sufficient coverage is only available at unreasonable rates, policyholders should consider alternative ways to maximize coverage and/or minimize risk going forward.

All of those suits presumably support Congress' aggressive financial system reform agenda, including legislation to address mortgage lending practices. Yesterday, the House Committee on Financial Services held a major hearing to review mortgage lending practices and legislation to reform those practices. The chairman of that committee, Barney Frank (D-MA), announced that he plans to move that legislation out of committee this month, with the goal of a full House vote some time in April.