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   ARTICLE   |   From Scotsman Guide Residential Edition   |   October 2008

National Licensing Raises the Bar

The new housing bill implements a system of national loan-originator licensing aimed at curbing abuses

National Licensing Raises the Bar

This past July, President George W. Bush signed into law the Housing and Economic Recovery Act of 2008. It has been characterized as the most significant housing legislation in decades.

The most predominant attention thus far has been on the bill’s impact on mortgage-industry giants Fannie Mae and Freddie Mac. The new law increases regulation and oversight of these two government-sponsored enterprises, now under conservatorship. It also promises significant aid in the form of more-affordable, government-backed loans for struggling homeowners.

Among its goals -- and perhaps of greatest consequence to mortgage brokers -- is the creation of a national licensing system for loan originators via the Secure and Fair Enforcement for Mortgage Licensing Act of 2008, or the S.A.F.E. Mortgage Licensing Act of 2008.

Here’s a look at what you should know about the new licensing requirements.

Right or wrong, much of the blame for the nonprime meltdown has been laid at the feet of mortgage brokers. This is partially why the S.A.F.E. Mortgage Licensing Act of 2008 is intended to increase uniformity, reduce regulatory burden, enhance consumer protection and reduce fraud via a nationwide mortgage-licensing system and registry.

Proponents of the national licensing system cite bad acts on the part of loan originators, ranging from convincing consumers to enter loans far less favorable than promised to outright fraud.

Inclusion of this act in the larger housing-rescue package can be attributed to the efforts of Sen. Mel Martinez, R-Fla., and Sen. Dianne Feinstein, D-Calif., both of whom introduced the measure earlier this year. This past February, Martinez said in a statement that he believed that there’s not enough coordination between state regulators to prevent unscrupulous mortgage originators from continuing to ensnare unsuspecting people in non prime, predatory loans.

Industry groups expressed serious concerns about the national licensing system. In June, the Financial Services Roundtable, the U.S. Chamber of Commerce, the Mortgage Bankers Association and the American Financial Services Association joined others in signing a letter asking Sen. Christopher Dodd, D-Conn., and Sen. Richard Shelby, R-Ala., for a separate floor vote on the licensing language. These groups stated that even though they generally approved of the underlying bill, the licensing standards set forth would be too onerous for brokers, for loan officers, and even for state and federal bank regulators.

Further, the National Association of Mortgage Brokers has criticized the national licensing system on the basis that it is too narrow and doesn’t require all originators to be licensed -- only mortgage brokers. Accordingly, there is a concern that the act will fail to protect consumers effectively because of what has been characterized as the intentional exemption of more than 60 percent of mortgage originators as banks, and their employees are not required to register.

Notwithstanding such concerns, mortgage brokers remain a target, in part, for the recent mortgage crisis.

The basics

The national licensing system does not apply to all mortgage-industry professionals. Rather, it applies only to those who are considered loan originators of residential mortgages.

A loan originator is defined as any individual who takes a residential mortgage loan application and offers or negotiates terms of a residential mortgage loan for compensation or gain.

Individuals who are likely to be considered loan originators include those who, among other things, provide advice on loan terms, prepare loan packages and collect information pertaining to residential loans on behalf of consumers. The act also expressly applies to independent contractors.

Some people are exempt from licensing. Employees of national banks and depository institutions are exempt. In addition, the act does not govern:

  • Those who perform administrative or clerical tasks for loan originators, such as loan processors or underwriters;
  • Those who perform only real estate brokerage activities, such as real estate agents or real estate brokers, as long as they are licensed or registered in accordance with applicable state laws and do not receive compensation from a lender, mortgage broker, loan originator or agent of any of these; or
  • Timeshare plan extensions of credit, as defined in U.S. Code Title 11, Section 101(53D).

Licensing requirements

Loan originators will receive individual identifier numbers and must comply with minimum licensing and registration standards. States, however, may impose standards greater than those set forth in the act.

States must perform background checks on every applicant. This means that applicants must provide fingerprints for state and national criminal-history background checks, in addition to personal history and experience. This includes a credit report and other personal information.

To obtain a license, an individual must:

  • Have not had a loan-originator license revoked in any governmental jurisdiction;
  • Have no felony convictions in the past seven years;
  • Have no felony convictions at all for crimes of fraud, dishonesty, breach of trust or money laundering;
  • Demonstrate financial responsibility, good character and general fitness;
  • Complete pre-licensing education requirements, which include 20 hours of approved courses. These include three hours of federal law and regulations, three hours of ethics and two hours related to lending standards for the nontraditional-mortgage-product marketplace;
  • Pass a written exam with a minimum score of 75 percent; and
  • Meet either a net-worth or surety-bond requirement, or pay into a state fund, as required.

Further, to renew their licenses, individuals must continue to meet minimum licensing requirements and satisfy annual continuing-education requirements of eight hours of approved courses.

The housing bill also mandates that the federal banking agencies, Farm Credit Administration, the U.S. Department of Housing and Urban Development (HUD) secretary, and the Nationwide Mortgage Licensing System and Registry may charge reasonable fees to cover the costs of maintaining and providing access to information. These fees cannot be charged to consumers.

State compliance

Each state must institute an adequate system for licensing and registering loan originators by this coming July. States whose legislatures meet biennially have an additional year. This deadline can be extended for as many as two years if the HUD secretary believes the state is making a good-faith effort.

Thus, states will have, at most, four years to develop an adequate system. Some states have already adopted transition plans that are available online; see www.stateregulatoryregistry.org.

Each state must meet the state-license and registration-application and -issuance requirements, standards for state-license renewal, and state-licensing-law requirements. States also must participate in the nationwide mortgage-licensing system and registry.

If the HUD secretary determines that a given state does not have an adequate system in place, it shall provide for the establishment and maintenance of an adequate system.

The HUD secretary is granted similar authority if it determines at any time that the nationwide mortgage-licensing system and registry fails to meet the act’s requirements and purposes.

In addition to the above provisions, the act limits the liability of the nationwide mortgage-licensing system and registry’s administrators. It also vests authority in HUD’s secretary for summons, examinations, cease-and-desist proceedings and reviews, as well as monetary penalties for violations or failures to comply with the act’s requirements. The maximum penalty for each act or omission is $25,000.

The HUD secretary also must provide annual reports to Congress about the act’s effectiveness, must make legislative recommendations, and must conduct an extensive study regarding the root causes of default and foreclosure. The act calls for a preliminary report six months after enactment and a final report this coming July.

What to expect

The amount of responsibility loan originators should bear for the mortgage crisis is unclear, and it will take years to determine whether the S.A.F.E. Mortgage Licensing Act is an effective solution. Some of the act’s components will be difficult to implement, and confusion likely is inevitable -- particularly for brokers who operate in multiple states in which different licensing thresholds are established.

For example, one state may interpret license revocation differently than another. A license can be revoked for many reasons, including nonpayment of a licensing fee.

Most often, failing to pay a licensing fee because you’ve moved to another state shouldn’t prevent individuals from getting a license to originate loans in their new state.

Likewise, how will the state regulators interpret and implement the requirement that individuals “demonstrate financial responsibility, good character and general fitness such that they can obtain a license? How high will the bar be set?

The federal government must take a strong position in guiding the states in establishment of well-defined standards to avoid the regulatory patchwork with which the industry must now contend.

In the meantime, each state will develop its own set of comprehensive rules and regulations. Likely, questions will arise regarding exactly who is covered by the act, as well as about its enforcement and application in individual cases.

Regardless, there are benefits to a national licensing system. It will:

  • Hold members of the mortgage industry to a higher standard of professionalism;
  • Discourage participation by those who are unable or unwilling to comply with the act’s licensing and good-character requirements; and
  • Provide consumers with the information necessary to make informed decisions with respect to those who represent them.

It also will prevent those few unscrupulous brokers from picking up and moving from state to state, trying to stay a step ahead of state regulators.

Most important, the national licensing system is a first step in the establishment of a uniform national regulatory scheme for mortgage brokers that will replace the patchwork quilt of state regulations that have plagued the industry.


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