State regulators for mortgage bankers and brokers continue to look to credit standing when determining whether originators have the necessary fitness to obtain or retain their licenses. It is time to reconsider whether a loan originator’s license should depend on his or her personal credit.
The Secure and Fair Enforcement for Mortgage Licensing (SAFE) Act provides that a mortgage originator must demonstrate “financial responsibility, character and general fitness, such as to command the confidence of the community and to … operate honestly, fairly and efficiently.” Regulators have further clarified this financial-responsibility standard to include:
- Current outstanding judgments, except judgments solely resulting from medical expenses.
- Current outstanding tax liens, or other government liens and filings.
- Foreclosures with the past three years.
- A pattern of seriously delinquent accounts within the past three years.
These standards for credit analysis were only recommended and were not required by the SAFE Act. They were, however, almost uniformly adopted by the states. Applicants for mortgage originator licenses are regularly denied because of judgments, tax liens, foreclosures, delinquent accounts and low FICO scores. Existing loan originators’ renewals are denied for the same reasons. Some regulators have an informal minimum FICO score while others balance the credit with the circumstances.
Pursuant to the Fair Credit Reporting Act, a credit report may only be used by an employer for employment purposes when the prospective employee, after disclosure, has consented to such use. Several jurisdictions have even taken the position that use of credit reports for employment purposes is prohibited, with specified exceptions.
The California Labor Code, for example, provides that most employers or prospective employers shall not use a consumer credit report for employment purposes. New York City made it an illegal discriminatory practice for employers to use credit history in making employment decisions.
In passing this provision, the New York City Council stated that credit history is “rarely relevant to employment decisions” and that “multiple studies have failed to demonstrate any correlation between an individual’s credit history and their job performance.” At the time of enactment, the only New York law requiring the evaluation of a current or potential employee’s consumer credit history was the licensing provision for mortgage originators.
Unlike criminal background checks, which are commonly reviewed for licensing in many professions, it is rare for a regulatory agency to review a consumer credit report prior to issuing a license for an individual to enter or remain in a profession. Under New York City’s law, for instance, an individual with credit issues can obtain a license there as a lawyer, accountant, doctor and most other professions but not as a mortgage originator.
In fact, a loan originator working for a federally insured bank or subsidiary merely needs to register, and their credit standing does not prevent such registration. What is unique about an originator working for an independent mortgage company that requires regulators to look at their credit? Professionals such as lawyers and accountants regularly receive confidential financial information from their clients. The fact that these professionals are licensed regardless of their credit standing is good reason to not base loan originators’ licenses on their credit standing.
Further, an originator works as an employee under the supervision and control of a licensed mortgage banker or mortgage broker. Safeguards are in place to ensure that the licensed company has the necessary financial condition to originate loans, including surety bonds, financial audits and warehouse-line requirements. It is the company that needs to have the financial ability to originate the loan — not the employees — and state licensing laws provide regulators with the necessary tools to ensure that the company has the proper financial protections.
Shouldn’t states be looking at how this impacts license applicants? The mortgage industry is often warned by regulators that it is not enough to avoid overt discrimination. Instead, they instruct the industry to be sure to not have policies in place that, although racially neutral, have a discriminatory impact. The classic example is that lenders with a minimum loan size may disproportionately impact minority borrowers, and this policy may indeed constitute a fair lending violation based on the fact that it has a disparate impact.
Are these same regulators, by requiring a specified credit profile for loan originators, also having a discriminatory impact on minority applicants and employees? The NYC Commission on Human Rights appears to think so. In its law, the commission notes that consumer credit history on employment decisions disproportionately affects unemployed people, low-income communities, people of color, women, families with children and others.
SAFE Act regulators carve out medical expenses as an acceptable cause for credit issues. There are many other reasons, however, why an individual’s credit could be impaired that have nothing to do with the financial fitness of a loan originator.
Other examples are divorce, property damage from a natural disaster such as a hurricane or loss of employment due to an economic downturn. One such financial calamity impacting a loan originator’s credit could lead to nonrenewal of their license since most states check credit on an annual basis. This would prevent the originator from continuing to close loans, there-by worsening his or her economic spiral and preventing licensure going forward.
The ongoing COVID-19 crisis has caused us to reconsider much in today’s society. This is a good time to look at the use of credit reports when determining the financial fitness of a mortgage originator. Instead of the originator’s credit standing, regulators should focus on the individual’s performance in originating loans, a much more relevant criterion. ●