Residential Magazine

The Paradigm and Paradox of Mortgage Licensing

Federal regulators must revisit the rules for bank-based originators

By Taylor Stork

Back in 2008, Congress adopted the Secure and Fair Enforcement for Mortgage Licensing (SAFE) Act in reaction to the adverse market conditions of those days. It was a different time back then, when the local bartender might have given you advice about no-documentation loans because their day job was as a loan officer at the mortgage shop up the road.

The SAFE Act was meant to be a paradigm shift of more laws and regulations to come — most notably the Dodd-Frank Act of 2010, which was designed to protect consumers from financial harm. The theory was simple: If an individual originates mortgages and advises potential borrowers about loan programs, the legislation would require these originators to meet professional standards, including testing, independent background checks and continuing education.

It seemed that mortgage professionals would now be held to the same standards as other housing- and financial-industry professionals, such as real estate agents, insurance agents and financial advisers. Borrowers, meanwhile, would be protected from unqualified mortgage professionals who might steer them into loans they couldn’t afford or that were unnecessarily expensive. This was a win for consumers — or so we believed.

Inconsistent application

The part that many of us missed was that the new rules did not actually apply to all mortgage originators. The SAFE Act requirements applied only to originators working for independent mortgage banks and as mortgage brokers. Those working for banks and other depository institutions were largely given a pass. As a result, the originators who could not meet the SAFE Act standards either left the business entirely or went to work for banks.

Congress soon woke up to the gap between these two groups of originators. In 2010, Dodd-Frank amended the Truth in Lending Act to require that every mortgage originator be “qualified,” including individuals working at banks and other depository institutions. This new rule, however, was not implemented until 2013. More troubling, the Consumer Financial Protection Bureau (CFPB) then exempted these same individuals from the testing, background-check and education requirements by deciding that mere employment by a bank somehow makes a person “qualified.”

This paradox was knowingly created by the CFPB through its rule implementing the congressional requirement for all originators to be qualified. The bureau justified the rule by stating it had not found evidence that consumers who obtain mortgages from depository institutions face risks that are inadequately addressed by existing safeguards or proposed safeguards in the new rule.

Confusing exemption

Pause for a second and think about this. By 2013, we had the full story on the housing and economic crash that led to the Great Recession. Wall Street and large banks played a major role in creating risky mortgages, and their originators marketed these loans to unsuspecting consumers.

Yet the CFPB basically exempted banks and their mortgage originators from any real qualification standards. Depository institutions were merely required to conduct unspecified training and in-house background checks. This is confusing, and creates a clear and evident divide between bank and nonbank originators. They hold the same jobs and do the same work, yet are not treated remotely the same by regulators.

The only explanation that nonbanks have received from the CFPB is that banks have the controls in place to self-regulate their employees. This conclusion, however, has not aged well in light of the Wells Fargo scandal that became public in 2016, in which consumers were charged fees for accounts that were fraudulently opened. These types of activities highlight the risks of poorly supervised bank employees who push products, often under pressure from supervisors or top bank officials to meet sales targets.

Equal standards

To be clear, this is not a call to eliminate regulation. On the contrary, all mortgage originators should meet the same high standards. There should be no exemption, proxy or paradox in the rules.

Consumers don’t deserve fewer protections simply because they are working with a bank. In its simplest form, the definition of a loan originator and the licensing requirements to be one should be universal: the same for banks, nonbanks and brokers.

What is the real-world impact of this disparate treatment? Today, there are thousands of people working as mortgage originators at banks or depository institutions who failed (and never subsequently passed) the SAFE Act test. The overwhelming majority of bank originators have never taken the test. Based on historic pass-and-fail rates, the Community Home Lenders Association projects that tens of thousands of registered bank originators would likely fail the test if forced to take it tomorrow.

Worse, there is no disclosure requirement for a bank or its loan officers. Consumers are unaware that the bank originator sitting across from them (or working from home due to COVID-19 restrictions) has probably not taken a basic mortgage competency and ethics test — or may have even failed it. This is hardly the way to rebuild confidence in a system that failed borrowers and contributed to an economic collapse roughly a decade ago.

As a consumer, ask yourself if you would want to know the qualifications of the person advising and selling you on a mortgage.

Borrower protection

The paradox is puzzling. A bank’s security-desk traders don’t skip out on the Series 6 or Series 7 exams. The individuals who sell insurance through these institutions also require rigorous licensing on a state-by-state basis. 

Mortgage originators at these companies arguably review significantly more of a consumer’s personal information than other types of professionals. They also help to execute transactions that have a much longer-lasting financial impact. The age-old industry proverb calls the purchase and financing of a home “the largest financial transaction of your life.”

As a consumer, ask yourself if you would want to know the qualifications of the person advising and selling you on a mortgage. Wouldn’t you want this person to be demonstrably qualified, with thorough knowledge of loans and ethics?

When a client prepares to close on their home purchase, a mortgage originator who works for a bank is the only individual who is not subject to licensing requirements. Meanwhile, their Realtor, attorney and appraiser, among others, are all licensed, must pass a basic test and are required to do continuing education each year. Even home inspectors need to be licensed in the majority of states.

This huge gap in consumer protection could easily be solved. When the CFPB gave bank originators an exemption, it promised to revisit the issue at a later day. This time has arrived and consumers deserve nothing less. ●


  • Taylor Stork

    Taylor Stork is chief operating officer for Developer’s Mortgage Co. A seasoned business executive and certified mortgage banker, Stork has more than 20 years of experience in the industry and is passionate about enabling homeownership. He is an active member of the Mortgage Bankers Association and the Community Home Lenders Association, and he serves as an advisory council member for the Lenders One mortgage cooperative. He holds a bachelor’s degree in finance from San Diego State University. 

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