What do you know about your loan officer? Could it be that the nice person carefully writing down your social security number and financial information has committed fraud, is barred from selling loans in another state or never took a mortgage financing class?
The odds are overwhelming that neither you nor anyone else could know such information because until now there hasn’t been a nationwide site or service where you could look. But that’s about to change because registering mortgage loan officers is now the law of the land.
The Secure and Fair Enforcement for Mortgage Licensing Act of 2008, part of the FHA reform bill, sets in place national standards for mortgage loan officers. Prior to the legislation 14 states participated in the voluntary Nationwide Mortgage Licensing System, but under the new rules all states and all loan officers will be part of a mandatory registration system to be established during the coming year.
What’s the value of this system? The short answer is that it’s set up to reduce mortgage fraud and assure that state-licensed loan officers meet minimum educational requirements. But the real story is different: Mandatory registration will potentially allow mortgage investors worldwide to rank loan officer performance — and to refuse deals from those with high levels of foreclosures and delinquencies. Seen another way, the new law makes mortgage lending more transparent, something which will reduce foreclosure rates, cut lender losses and make mortgages more enticing to investors worldwide.
“Across the country we carefully license real estate brokers, lawyers and doctors,” says James J. Saccacio, chief executive officer at RealtyTrac.com, the nation’s largest source of foreclose listings and data. “A system to register loan originators will not only create an important consumer protection, it will also have great value to lenders and mortgage investors.”
Saccacio said that part of the current credit crunch is closely related to investor confidence.
“Most mortgages today are originated locally and then sold worldwide,” said Saccacio. “The sale of residential mortgages allows local lenders to have fresh capital which can then be used to originate more loans. To make this system work there must be investors willing to buy mortgages and mortgage-backed securities. A system that improves the mortgage origination process and keeps out bad loan officers will make loans more attractive to mortgage investors. More investor activity holds down interest rates, and that's good for anyone who wants to finance or refinance a home.”
Under the new rules individuals paid for taking a residential loan application or negotiating home loan rates and terms will have to be registered as loan originators. Each loan officer will have a unique registration number which will be on file in a central depository called the Nationwide Mortgage Licensing System and Registry.
The registration file for each loan officer will be available to state and national regulators and portions of it will be available to the public. Because each loan officer has a single, permanent registration number, it means that a loan officer who loses his license in one jurisdiction will not be able to instantly work in another state just by moving.
No one knows how many individuals with criminal background are now acting as mortgage loan officers — and how many should be barred from lending. A study by the Miami Herald found that just in Florida “from 2000 to 2007, regulators allowed at least 10,529 people with criminal records to work in the mortgage profession. Of those, 4,065 cleared background checks after committing crimes that state law specifically requires regulators to screen, including fraud, bank robbery, racketeering and extortion.” (See: Ex-convicts active in mortgage fraud)
To be on the registry — and thus to be able to make residential loans — an individual will fall into one of two basic classes:
- A registered loan originator is someone who works for a federally-regulated lender such as a national bank, thrift or credit union.
- A state licensed loan originator is someone who works for a state licensed lender such as a mortgage broker or mortgage banker.
Getting on the registry means more than just signing up. You’ll need to provide your fingerprints to the FBI and submit to an extensive background check. You generally won’t be able to get a license if you've been convicted of a felony during the past seven years, however if the crime involved certain crimes such as fraud, a breach of trust or money laundering then the seven-year limit will not apply.
There are other standards and requirements as well, but the basic point is this: Once the system is in place every loan officer will either be registered or out of the home loan business.
“The new law creates an historic opportunity for the states to increase accountability of mortgage professionals and enhance consumer protection,” says Bill Matthews, president and chief executive officer of the State Regulatory Registry. “Through the Nationwide Mortgage Licensing System and Registry, state regulators will have better and timely information about loan originators they regulate. The System will better identify bad actors and mitigate their migration from one state or company to another.”
An Audit Trail
One of the major questions concerning the new system relates to those unique identifiers. Just who will see them? Regulators will certainly be able to check them out, but what about consumers, lenders and investors.
What will likely evolve is a system similar to that used by most state real estate regulators. If you have a real estate license your license information is typically public, including such information as your license number, your place of business, when you were first licensed, and disciplinary actions taken against you and your licensure status — active, inactive, suspended or revoked. Such public records can be found on state regulatory sites and at ARELLO.com, a site operated by the Association of Real Estate License Law Officials.
The new loan officer system is different — and better — because each originator will have only one registration number. The loan officer system is also better for another reason: It can potentially lenders and investors to track the performance of individual loan officers.
Imagine if Fannie Mae or Freddie Mac decided that they will only process mortgages which contain the loan officer's unique identifier. It will then be possible to create performance scores and risk assessment measures similar to credit scores. If a lender sees that .5 percent of Smith’s loans are foreclosed that could result in a high score. If Jenkins has a 5 percent foreclosure rate then his performance score might be so low that his loans could not be sold on the secondary market and Jenkins would likely be forced out of the business.
An important element with such a system is a need for fairness. For instance, it may well be that lender Johnson has a 15-percent foreclosure rate. Normally Johnson’s loans would be unacceptable, however if Johnson worked in a community that had been hit by a tornado then his results would have to be seen in context. He may simply be a good lender in a community that has experienced tough times.
Tagging mortgages with permanent loan officer IDs would make loan originators directly responsible for the mortgages they produce. This hardly seems unfair given that loan officers are paid well for such work. Investors will surely want such information so they can make better pricing and purchasing decisions. Some lenders might only accept home mortgages with a loan officer performance score of 740 (or however the scale is set up), while others will accept a lower score in exchange for a higher rate of interest.
A First Step
While the new licensure bill includes many important features, one missing element is the requirement for a fiduciary obligation, the responsibility of a loan officer to treat borrowers as “clients.” Under the present system, borrowers are regarded as “customers” who are sold products and services by loan officers. Loan officers have no obligation under federal rules to seek the best rates and terms for borrowers. However, as the agent of a borrower — as someone with a fiduciary obligation — a loan officer would have such a responsibility.
Lenders have long opposed fiduciary obligations or suitability standards at the federal level for loan officers, however with a national registration system in place the issue is sure to arise.
A year ago the idea of a national registration system for loan officers was seen as politically impossible, yet now such a system will soon be up and running. In a similar way, the idea that loan officers should have a greater legal obligation than car salesman will likely gain ground as foreclosure numbers grow and lenders continue to face massive losses.
Peter G. Miller is the author of the Common-Sense Mortgage and is syndicated in more than 100 newspapers.