Originally posted 8/31/07
Although I said I had a two part series on the mortgage industry, I thought I would sneak a short Part III in on licensing.
Many industries are controlled and regulated by local, state or federal mandated licensing: doctors, attorneys, building contractors, nurses, stock brokers, and real estate agents. All these professions and many more have some form of licensing requirement that usually require some form of education component and testing to obtain and maintain an active license. Most licensing is handled by the states with each state having its own requirements for obtaining and maintaining a valid professional license.
In the mortgage industry there are no standard rules nationwide for licensing companies or their originators—i.e. loan officers, or those who actually take and process mortgage applications. While the Department of Housing and Urban Development (HUD) has requirements and regulations for brokers and lenders who wish to originate and fund HUD loans (FHA and VA), and all activity falling under the Real Estate Settlement Procedures Act (RESPA), all other lending is subject to the licensing requirements of the state where the loan is being funded. The licensing laws to originate, broker and/or fund mortgages in Idaho are different from the requirements in New Jersey, which differ from California and so on. While there is a National Association of Mortgage Brokers that is a trade association with a code of ethics and best lending practices for its members, it has no national regulatory powers. As well mortgage brokers have trade associations in every state (in California it is the California Association of Mortgage Brokers), with input through their government affairs committees but otherwise no regulatory powers.
In California there are two licensing options for mortgage originators: Department of Corporations (DOC) or Department of Real Estate (DRE). I will deal with the DRE licensing first.
Under the Department of Real Estate there are two levels of license, a Broker’s license (which I hold) and a Salesperson’s license. An individual with a salesperson’s license must work for and have their license attached to a Broker. Any real estate company or mortgage broker licensed by the DRE has one individual’s license which is responsible for all the licensed activity of that company. If I owned DeeCees LB Realty and had sales people everyone representing buyers and sellers (a licensed activity) would have to have either a salespersons or brokers license and register their affiliation with the DRE, as well I would be the “responsible officer” for the company and all their activity would be my responsibility. The DRE does not allow a corporate veil for malfeasance and holds one individual ultimately responsible for company activities.
A mortgage broker in California licensed by the Department of Real Estate must therefore has one individual licensed as a Broker and every individual working in the capacity of a mortgage originator or loan officer—or anyone who is quoting interest rates—must have at minimum a salesperson’s license. Further, the DRE and RESPA requirements mandate that all mortgage brokers in California licensed under the DRE must provide a detailed disclosure of charges and fees paid to the mortgage broker, including by not limited to processing fees, origination fees, points and any rebates from the lender. This disclosure must also indicate if the applied for mortgage contains pre-payment penalties, an adjustable component, a balloon payment and the interest rate on the loan. If there are any changes to the terms or fees received by the broker between application and funding the borrower must be provided with an updated and accurate disclosure statement that coincides with the terms on the final loan documents.
So if an individual is working with a mortgage originator who is operating under a DRE license they can: a) verify the license on the DRE website b) expect and require a detailed disclosure for all the fees associated with the transaction including compensation to the broker and c) know that there is one individual, the Broker listed on the DRE site, to whom they can go with any complaints or comments should they feel the originator they are working with is not handling their transaction properly or ethically. While this licensing does not eliminate fraud or malfeasance on behalf of the originator or the Broker if he or she is crooked, overall it allows for accountability and responsibility through the DRE who if violations are found may punish the Broker and licensed individuals with fines, suspension or loss of license.
The other license through which mortgages may be transacted in California is under a license from the Department of Corporations. These licenses are a bit harder to obtain as they have requirements of net worth for the corporation and also mandate how originators are paid (i.e. W2 v. 1099). Licensees under the DOC are exempt from many of the disclosure requirements imposed by the DRE; most notably originators working for companies licensed by the DOC do not need to be individually licensed.
When an individual is speaking with a mortgage originator or loan officer who works for a company lending under a DOC license that individual is not specifically licensed to transact mortgages. The individual is an employee of the bank or institution for whom he or she works. The originator is not subject to specific suspension or forfeiture of a license for acting in bad faith or misrepresentation because he or she is not licensed. The consumer may file a complaint against the individual with the manager of the office, or even with the DOC, but there is no official sanction that may come down on the individual, instead if enough complaints are filed and the company investigated it, the company, may face fines from the DOC.
Further, loans originated under a DOC license do not require disclosures of profit or fees paid to the lender and/or originator; making it very easy to hide rebates paid to originators for higher rate mortgages, differentiation of origination fees paid to the originator versus discount points paid to purchase a lower rate, or extra fees charged not relevant to the transaction but used to pad the revenue generated.
So there exists in California, and many other states, a system that allows one segment of the mortgage industry to operate with little oversight or regulation over individuals who also do not need to disclose to the consumer the revenue earned on the transaction. There also exists a segment of the mortgage industry where individuals follow strict licensing, regulatory and compliance requirements and must disclose in detail revenues paid and earned in the transaction. Even though this is the case it is the mortgage brokers who are the brunt of most of the negative attitudes in the industry. Not to say that there are not many who deserve such criticism, but after twenty years in the industry I know it is unjustly slanted to one particular segment.
For many years I have advocated much stricter licensing requirements in California and throughout the United States for individuals in the real estate industries. It is too easy to obtain a license from the Department of Real Estate which then allows the individual licensee to handle transactions that involve the most important asset for all families: their home. From real estate agents, to mortgage originators to those involved in the escrow segment of the industry the current process and requirements to handle transactions involving tremendous sums of money and people’s primary assets are too readily attainable. It requires rigorous education and testing to obtain a Series 7 license to become a stock broker, it requires rigorous education and testing to pass a Bar Exam and become a licensed attorney, it requires simple education and testing to obtain a real estate license in California and in most of the United States.
Unfortunately this ease of licensing will not change for some time if ever because of the tremendously effective lobbying of the Realtor® state and national associations. Easily obtainable licenses allow them to employ thousands of part-time agents who have low margin expenses and high margin profits when they close transactions. Unfortunately the easy licensing requirements for real estate industries, or no license requirements for banks and direct lenders, allows too many individuals who do not have the capacity to properly handle the nature of the transactions to participate in the industry.
Before Congress or State Legislatures begin to add more and more regulations and disclosures to our industry (the standard mortgage application package is already 28 pages in California—seems to pretty thoroughly disclose everything to me) I strongly feel they should deal with the licensing of those who participate not only in the mortgage part of the industry but also the real estate agency segment of the industry. Once they have effectively dealt with this issue and allowed several years to pass to monitor the effectiveness they can properly evaluate any other regulations that may be needed.