In the years before the current economic collapse, it seemed as though everyone was getting in on the subprime mortgage frenzy. Usually, it wasn’t difficult. In many states, individuals selling mortgage loans did not need to obtain licenses or meet any special training requirements. Once hired by a mortgage company, they were free to write loans for a commission. But now, the federal Secure and Fair Enforcement (SAFE) for Mortgage Licensing Act, part of the Housing and Economic Recovery Act (HERA) of 2008, is beefing up the rules.
The act sets a deadline of today for most states to put in place a licensing and registration system for mortgage loan originators — and those systems must meet minimum federal standards. (States with legislatures that meet biennially have until July 31, 2010). “Loan originators,” according to industry jargon, are people who take loan applications or negotiate the terms of a loan for compensation or gain.
The new minimum federal standards for loan originators require at least 20 hours of pre-licensing education and eight hours of continuing education yearly, a 75 percent or better score on a national mortgage licensing exam, an independent credit report, and a criminal background check. Some states will have even tougher requirements. The loan orginators will need to be registered in one central database: the National Mortgage Licensing System (NMLS).
The minimum federal standards replace what had been a crazy quilt of state rules. A license in New Jersey, for instance, required testing but no formal education, while Nevada and Maryland licenses called for education but no test, and Minnesota, Nebraska, and Virginia didn’t give out licenses at all, according to a survey from the Conference of State Bank Supervisors. In 12 states and the District of Columbia, no criminal background check was required.
“It was very easy for an individual to migrate from company to company or from state to state or jurisdiction to jurisdiction when they [were accused of] unscrupulous and fraudulent actions and not be easily detected by companies or regulators,” said Bill Matthews, President of the State Regulatory Registry, which owns and operates the National Mortgage Licensing System. Under the new system, an individual’s professional history will be easily searchable.
If cooperative regulation is the answer to the mortgage industry’s woes, then it may materialize just in time: the new licensing requirements come amid reports that suspected mortgage fraud is on the rise. As PaperTrail reported earlier this month, mortgage fraud is often tied to nontraditional lending practices — subprime, Option ARM, and Alt-A loans show up frequently in such schemes — that have fed a struggling housing market.
But Uriah King, senior policy associate at the Center for Responsible Lending, notes that the new rules may be limited in their effect.
“States like North Carolina, Ohio, California, Florida…states hit hardest by the foreclosure crisis — they have had licensing requirements, including continuing education and background checks, for years,” he said “It’s not a bad apple problem. There are systemic problems in the marketplace.”
While well-intentioned, King said, the SAFE Act misses the point. “Instead of dealing with the causes of the foreclosure crisis directly,” he said, “50 states were arguing over the minutiae of a really complex bill.”