Recently we reported on a new nationwide system for licensing and regulating mortgage lenders on the state level.

The system, a joint project of the Conference of State Banking Supervisors (CSBS) and the American Association of Residential Mortgage Regulators (AARMR) will include an Internet based central mortgage licensing system which will allow applicants to complete one set of forms and submit them to all states in which they do or wish to do business. According to CBSB/AARMR, not only will the new system streamline the licensing process but it will also allow state regulators to more easily share information about enforcement actions against individuals and companies with their counterparts in other states.

At the time the new system was announced seven states had already adopted the forms and the joint CBSB/AARMR group expected 12 states to utilize the on-line system as soon as it is operative.

Late last week CBSB/AARMR announced that 28 states and the District of Columbia had signed a Statement of Intent indicating they will be participating in the Residential Mortgage Licensing System by the end of 2008.

In signing the statement the 29 state agencies asserted the reasons for state participation:

  • To improve the efficiency and effectiveness of state supervision of the U.S. mortgage market;
  • To fight mortgage fraud and predatory lending that costs consumers and the mortgage industry hundreds of millions of dollars in losses each year;
  • To increase accountability among mortgage industry professionals;
  • To unify and streamline state license processes for mortgage lenders and mortgage brokers.

The state agencies are expected to begin using the system over 2008 and 2009 as the systems full functionality is realized. Additional states have expressed interest in joining the system but are still determining a timeframe.

According to George Kinsel, President of AARMR, "The importance of this initiative is underscored by the number of state agencies indicating their intent to come on the System during the initial phase of development. These states are creating the critical mass necessary for state supervision of the mortgage industry to become more uniform, more efficient, and more effective"

But, also last week the National Association of Mortgage Brokers (NAMB), the national trade association representing the mortgage brokerage industry, released a statement condemning the initiative. NAMB, which claims to represent 27,000 members in 50 states, claimed that the nationwide licensing system is too narrowly focused to effectively protect consumers because it intentionally exempts more than 60 percent of mortgage originators from the proposed registry system.

The president of NAMB, Harry Dinham said that this exemption is a public policy concern because the largest and most recent fines and settlements for abuses within the lending industry have involved lenders and banks. He cited as examples Ameriquest's $325 million settlement in 2005 and Household Bank and Beneficial Finance's $484 million settlement in 2003.

Dinham said "If the goal of this registry is to protect consumers by standardizing license requirements and tracking bad behavior then it should apply to all mortgage originators. As it stands today, thousands of loan originators who work at banks and other financial institutions would not be required to register. This approach puts consumers at risk"

"This flawed system will create a false sense of security for consumers and government agencies because many bad actors will continue to be able to move freely from bank to lender and back again without fear of being detected by the proposed registry."

NAMB stressed that it supports stronger licensing requirements and background checks for all originators. "It is disappointing that the regulatory agencies continue to exempt many in our industry from meeting the requirements advanced by CSBS and AARMR."

He said that NAMB has long-advocated a national licensing standard that is evenly applied to government-regulated banks, credit unions, mortgage bankers, lenders, brokers and all employees of these entities.

In response, Bill Matthews, senior vice president of CSBS said that his organization and AARMR are not excluding anyone from the new licensing system. The new system, he said, will function as a back office outsourcing service for state agencies. It will not make policy for the states but will handle licensing for whomever they wish to regulate. Currently 70 percent of originators are licensed or otherwise regulated by the various states, however, he said that states are precluded by federal law from regulatory activities relating to any federally chartered bank, thrift, or credit union so states cannot license or otherwise regulate mortgage activity by such institutions or their subsidiaries.

44 of the 50 states are licensing through paper applications, Mr. Matthews said, and the new system will allow regulators to upgrade their technology more efficiently and at lower cost.