This was the question posed by LBPost reader Bob Schilling, who graciously agreed to let me use his question and my response for this post. His question was asked after reading my post last week on Washington Mutual filing to rescind the foreclosure on Congresswoman Laura Richardson’s property in Sacramento. His question was directed to the mortgage industry and crisis in the country. Here is my reply:
Bob:
Sorry it has taken me about a week to get back to you—a little busy trying to keep the business going!
My remedy for the mortgage industry is one I have touted for years but is not very popular within my industry: a national lending license (NLL). I am very much against expanding Federal government and very much in favor of state’s rights; that said, areas of Federal commerce do require more Federal oversight and mortgage lending is an area particularly weak in this department. There is a huge gap between oversight and regulation. Look at the stock markets, they have significant regulation, but they work as efficiently and with as little fraud and deception as they do because of proper oversight; the cornerstone of which is very strict licensing that is difficult to obtain. If lost, the individual is finished in the industry.
In mortgage lending, each state has their own laws regarding licensing. The rules in CO are different than SC are different than CA. Even in our state there are separate licenses—the broker license through the Department of Real Estate (which has its own regulations and disclosures), and the lending license through the Department of Corporations. The DRE license requires all originators working for the broker to also have a DRE license. At our company, Stratis Financial, I am the broker so ultimately responsible for all activity; each of our loan originators has either a DRE salespersons license or a DRE broker’s license. If we obtain licensing through the DOC then our individual originators do not need to be licensed—this is the way Countrywide, Wells Fargo, BofA, etc. operate, their corporation is licensed but not the individual actually interacting with the consumer. So on my side of the fence everyone at the company must be licensed and adhere to the DRE standards and policies; on the other side of the fence anyone can originate a loan. On my side of the fence if there are violations either myself or the originator, or both, can lose a license and can no longer work as a broker originating loans. On the other side of the fence an originator who is, let’s say not of high quality, can move from lender to lender and continue to perpetuate fraud, non-disclosure, etc.
Overseeing all of this is supposedly HUD. We have an annual HUD audit so we can continue to originate and fund FHA mortgages (which are also the bulk of reverse mortgages); plus we are subject to DRE audits. A company that is not originating and funding FHA mortgages must follow HUD guidelines for RESPA and other policies—but is not audited to ensure compliance.
An NLL like I propose would require every individual in the U.S. to have the same license, adhere to the same policies, regulations, disclosures and laws and carry the weight of enforcement. If I perform illegal activity in CA as a broker and lose my NLL, I cannot then move to a direct lender and continue originating loans, nor can I move to another state and originate loans. I am finished in the industry. This would apply to internet lenders, banks, direct lenders and brokers. It would also be somewhat difficult to obtain.
I find it absurd that it is so easy to obtain a license from the California Department of Real Estate, which then allows an individual to be involved in the purchase, sale or finance of real property—including a primary residence. Our industry involves families’ most expensive and important asset—their home—and it is way to easy to obtain a license to be involved. Over the years I have seen more than my share of “professionals” who put those assets at risk, or do not have the ability to properly ensure their clients best interests are protected. It is relatively easy to get a license and then be in a position to funnel equity to oneself or one’s partners. This should not be the case.
Stock traders are handling most families investments and voluntary asset placements; i.e. not their homes. While they do have significant funds and trust in their control for their clients, in the end the funds they are controlling and transacting are, for lack of a better term, discretionary on behalf of the client. Yet stock traders must undergo rigorous testing and licensing to be in this position; while their counterparts in real estate and real estate lending undergo the equivalent of a high school final exam (for which there are prep courses to assist you in passing). Should not the individuals who routinely are involved in transactions involving families’ homes have at least the same licensing requirement as those individuals whose transactions involve stocks and equities?
Our industry has a tremendous amount of dedicated, passionate and committed professionals who handle themselves with integrity and honor; it also has a significant number of users and abusers who are looking to make a buck and do not care about victims or families. It is the latter who would be out of the industry with an NLL.
Why is there no NLL? There are many powerful groups who oppose it. First are the states who feel they might lose some control and power over their local real estate and lending professionals—easy solution, while requiring a national license states can also have their own criteria; secondly for many states they would save millions of dollars if they were to use the NLL standard and remove themselves from the licensing and regulating of mortgage lending.
Second, the real estate sales industry and its professional associations such as the California Association of Realtors and National Association of Realtors would strongly oppose an NLL. Even though an NLL would strengthen the real estate industry and increase consumer confidence in the industry they would oppose it on several grounds; primarily because an NLL would reduce their ability to make more revenue and commissions. Many real estate companies also operate mortgage companies and steer clients into their “in-house” lenders; in doing so they collect the commissions on the sale of real estate and the commissions on the mortgages funded. By having an NLL, these companies must now ensure their mortgage divisions are fully licensed, adding to their cost of doing business and perhaps reducing their employment pool. Since obtaining the NLL would be akin to a college final exam than a high school final exam you can imagine the size of the employment pool capable of passing the exam. For real estate companies the marginal cost of adding another salesperson, or licensee, is very small—perhaps a desk, a phone and some business cards. Because in most states, including California, these individuals can also originate and fund mortgages, with the ease of licensing and the small cost of adding the licensed individual to the company it is easy for real estate companies and brokers to have large numbers of salespersons who can not only transact real estate sales but also real estate financing; any time a business can increase potential revenue at a very small marginal cost it will. With a NLL real estate companies would see their marginal cost of adding licensed personnel to operate their mortgage divisions would go up considerably.
Finally the banks and national lenders strongly oppose any NLL because their personnel throughout the country must now be licensed; in states like California for a lender like Countrywide or Bank of America that can mean tens of thousands of loan originators who must now obtain a NLL. This will cut down on their origination staff and reduce their presence in the market; again it impacts their revenue and costs.
In the beginning an NLL will probably mean a slightly higher cost for the consumer in getting a home loan or mortgage as the supply and demand function hits the market; but given the mechanics and dynamics of mortgage lending the costs will eventually fall to the current market cost of approximately a one point margin for most home loans. In the long term Americans across the country will be able to have confidence in the mortgage broker or lender knowing he or she is highly qualified and strictly licensed. While some cheats and frauds will still be in the industry, their numbers will decline precipitously with a national lending license.
At that is my primary remedy for the mortgage industry, thank you for asking!
Thanks for reading My Front Porch and your comments,
Dennis C Smith
My Front Porch
[email protected]
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