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   ARTICLE   |   From Scotsman Guide Residential Edition   |   August 2019

Scrutiny is Overdue on Mortgage Licensing

Congress should examine whether SAFE Act protects borrowers while being competitively fair

Eleven years ago, Congress passed the Secure and Fair Enforcement for Mortgage Licensing Act, popularly known as the SAFE Act. Adopted in the wake of concerns about some mortgage loan originators steering borrowers to risky or predatory loans, this legislation created a national registry of loan originators so that crooks couldn’t just move from one state to another, change their business name and start over again.

The SAFE Act also imposed extensive new licensing requirements for all loan originators who work at independent mortgage banks (commonly referred to as IMBs). These include passing the SAFE Act basic qualifications test, submitting to an independent back-ground check, completing 20 hours of pre-licensing courses and finishing eight hours of continuing education mortgage and ethics courses each year.

Unfortunately, the SAFE Act exempted the roughly 400,000 registered mortgage loan originators who currently work at banks and other depository institutions from all of these requirements. This effectively created an exemption from basic consumer protections and imposed a comparative cost burden on independent mortgage banks.

Unfair burden

This has created problems for nonbanks trying to recruit loan originators working at banks. It takes time to pass the SAFE Act test, background check and pre-licensing courses that only apply to loan originators at nonbank lenders. This made bank loan originators reluctant to move to nonbanks, because of the lost income during the time it takes to complete these requirements.

This prompted Congress last year to enact transitional licensing legislation — authorizing an interim period where a bank loan originator could move over and work for a nonbank while they completed these more rigorous requirements. While helpful, this does not really address either the client protections or other competitive differences that the SAFE Act created.

In light of this, it is disappointing that in the 11 years since passage of the SAFE Act, Congress has not really held substantive hearings to assess its impact or effectiveness. Even in the wake of the recent Wells Fargo account scandals, where bank employees created deposit and credit card accounts without customer permission, we still don’t have answers to basic questions such as why loan originators at these large banks are exempt from the basic consumer protections that apply to all nonbanks. Why is this issue important? The simple answer is that the 2010 Dodd-Frank Act created a statutory requirement that all mortgage loan originators must be “qualified.” Yet, remarkably, in implementing this law, the Consumer Financial Protection Bureau (CFPB) did not impose even the most basic requirements on loan originators at banks, such as a requirement to pass the SAFE Act test or to pass an independent background check. 

As a result, there are currently individuals working at banks that are registered and therefore authorized to act as loan originators who have failed (and never passed) the SAFE Act qualifications and ethics test. Moreover, only a small percentage of all legally registered bank mortgage originators have even taken the SAFE Act test.

Of the registered bank mortgage originators that have not taken the test, it is reasonable to project that tens of thousands of them would fail the test if required to take it tomorrow. We have even seen instances where banks recruit loan originators by explicitly citing the lower requirements at banks. This is not good for borrowers.

Qualified standard

Five years ago, the Community Home Lenders Association (CHLA) asked the CFPB to use its Dodd-Frank authority to require that every loan originator pass the basic SAFE Act test, arguing that this was the only logical way to ensure that the statutory requirement that all loan originators are “qualified” is met. 

Individuals in similar fields, such as real estate agents and appraisers, must pass a professional test. Individuals selling insurance or securities in a bank branch also are required to pass a test in those areas. Why are bank mortgage originators exempted?

Worse, the great majority of clients don’t even realize that the loan originator they are working with at a bank likely never passed the SAFE Act test — or may have even failed it. Don’t borrowers, making the largest financial decision in their lives, deserve the confidence that comes with working with a licensed and tested mortgage originator?

Who could be against such basic requirements? There is little regulatory burden. The typical cost of taking the SAFE Act test is about $100 and the time expenditure for the individual is only a few hours.  The employing bank itself incurs no real burden or cost — assuming, that is, that the loan originator is knowledgeable and does not require extensive additional training and courses in order to pass the test.

Cost disparities

In explaining why it declined to impose a SAFE Act test when it implemented the new statutory requirement that all loan originators must be “qualified,” the CFPB stated that: “The Bureau has not found evidence that consumers who obtain mortgage loans from depository institutions . . . face risks that are not adequately addressed through existing safeguards and proposed safeguards in the proposed rule.”  

In fact, we have learned quite a lot since then that calls that conclusion into question. The Wells Fargo accounts scandal shows the competitive pressures that exist at the large banks. We also have seen the Justice Department impose billions of dollars of fines against many of the largest banks for their mortgage practices during the subprime lending period leading up to the 2008 crash. Yet remarkably, it is nonbank lenders that appear to be experiencing heightened scrutiny.  

A majority of states adopted model code legislation established by U.S. Department of Housing and Urban Development (HUD) to implement the SAFE Act. In recent years, we are beginning to see a few of these states going beyond the scope of HUD’s model code standards regarding what actions meet the licensing-requirement threshold of taking an application — such as requiring licensing for work on mortgage loan pre-qualifications or interactions with borrowers where no property has even been identified.

Such SAFE Act creep only adds to the significant cost disparities that already exist between bank and nonbank mortgage lenders. For all these reasons, it just makes sense for the CFPB to examine whether its failure to impose a test requirement is negatively impacting borrowers and take appropriate action.

• • •

We learned a decade ago that cutting corners on mortgage protections can come at a high price. Tightening up on licensing requirements to meet the federal requirement that all loan originators are qualified seems like a small step to address that concern. 


 


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