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   ARTICLE   |   From Scotsman Guide Residential Edition   |   October 2008

The Golden State Sets the Gold Standard

The new national mortgage-licensing act was inspired in part by California’s strict regulations

The Golden State Sets the Gold Standard

This past June, the FBI and the U.S. Department of Justice announced that 406 defendants were charged in 144 mortgage-related fraud cases between March 1 and June 18. The FBI estimates that these cases resulted in about $1 billion in losses.

Further, the bureau’s 2007 Mortgage Fraud Report indicates that even though the total dollar loss from mortgage fraud is not known, mortgage-related suspicious-activity reports filed during fiscal year 2007 totaled more than $813 million.

With this and other factors adversely affecting the housing industry, perhaps it was not surprising that President George W. Bush signed the Housing and Economy Recovery Act of 2008 into law this past July. The housing bill includes the Secure and Fair Enforcement for Mortgage Licensing Act of 2008, also known as the S.A.F.E. Mortgage Licensing Act.

The act -- designed to establish a national mortgage-licensing system and registry for the residential mortgage industry -- was based in part on California’s licensing and education requirements, which the state’s Department of Real Estate (DRE) regulates.

The S.A.F.E. Mortgage Licensing Act’s underlying goal is to create a system under which mortgage originators are required to act and to perform in consumers’ best interests. In addition to strict licensing and education standards, the new system will facilitate the collection and distribution of consumer complaints to state and federal regulators.

Following the gold standard

Many of the S.A.F.E. act’s main stipulations take a page from California’s rules.

According to a 2007 Reason Foundation study on occupational-licensing trends, California requires licensure for 177 diverse occupations. Licensure for real estate agents and mortgage originators through California’s DRE is just one of the licenses on record in the state.

Further, the state’s mortgage-originator-licensing and -education requirements are regarded as some of the toughest in the nation. For instance, California is one of only a handful of states that require an ethics course for its continuing-education standard. Likewise, the S.A.F.E. Mortgage Licensing Act requires that ethics be included in continuing education.

The act defers to California in other spots, as well. It mimics the state’s DRE in pre-licensure education, testing standards, fingerprints and background information and requires each state to implement a state recovery fund.

California’s licensing also has requirements for age, residency, criminal history, entry-level education and testing. In addition, the state has established requirements for continuing education, which include courses not only in ethics but also in state law, agency, trust-fund handling, fair housing and risk management, with a mandated minimum of 18 hours of consumer-protection courses.

Knowing the requirements

For states that don’t handle broker licensing as California does, there are several unanswered questions inherent in the recently passed national legislation. Further, states have begun discussions regarding how and when to implement the new requirements.

States with annual legislatures must comply within one year; states with biennial legislatures have two years to comply.

The first step, though, is in knowing who must register under the S.A.F.E. Mortgage Licensing Act.

A number of parties are included in the licensing requirements. These include:

  • Federal banking agencies, which include the Federal Reserve System’s board of governors, the U.S. Office of the Comptroller of the Currency, the Office of Thrift Supervision director and the Federal Deposit Insurance Corp.;
  • Depository institutions, including credit unions; and
  • Loan originators, defined as individuals who take a residential mortgage loan application and who offer or negotiate terms of a residential mortgage loan for compensation or gain.

The act requires that each state initiate a system that will assign a “unique identifier” number to each registered loan officer. Once issued, this number will create a permanent identification record for originators and will be assigned via protocols established by the Nationwide Mortgage Licensing System and Registry (NMLSR) and the federal banking agencies. This system will aid electronic tracking of each loan originator and will provide public access to employment history, public records, and any adjudicated disciplinary and enforcement actions against an individual loan originator that has occurred in any state.

Finally, the act distinguishes between “registered loan originators” and “state-licensed loan originators.”

A registered loan originator is an individual who meets the outlined requirements and definition of a loan originator and who is an employee of a depository institution, of a depository institution regulated by a federal banking agency or of an institution regulated by the Farm Credit Administration.

A state-licensed loan originator is one who is not an employee of any of these institutions and who is licensed by a state or by the U.S. Department of Housing and Urban Development secretary.

Both registered and state-licensed loan originators must register as a loan originator and maintain a unique identifier through the NMLSR before engaging in business. In addition, they must obtain and renew their listing as a member of the national loan-originator registry annually or secure a license and register as a state-licensed loan originator.

Other requirements include undergoing background checks, fingerprints, credit report and information relating to any administration, civil or criminal findings by any government jurisdiction. Also, states must adopt and enforce minimum standards for licensing and registration of state-licensed loan originators.

In addition, registrants must have at least 20 hours of pre-licensing education and testing with a passing score of at least 75 percent through NMLSR-approved courses. Similar to California’s state requirements, the national continuing-education requirements include state and federal law, ethics, fraud, consumer protection, fair-lending issues and lending standards for nontraditional-mortgage products.

•  •  •

The S.A.F.E. Mortgage Licensing Act of 2008 is intended to provide a comprehensive solution for the mortgage industry. Like California’s strict licensing, its aim in part is to require loan originators to act in consumers’ best interests and hopefully, to deter future mortgage fraud.


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