Impelled by concerns about issues including mortgage fraud and predatory lending, a number of states are introducing legislation to create or expand regulation for mortgage brokers.
Colorado and Alaska legislators are considering proposed laws regulating mortgage brokers, and a bill expanding regulation to loan originators as well as brokers was signed into law last Thursday in Washington. Additionally, last July a new law licensing Wyoming mortgage brokers went into effect.
After the Wyoming law went into effect, Colorado and Alaska were the only two states left without licensing laws for mortgage brokers.
Democratic Rep. Valentin “Val” J. Vigil of Colorado said “a huge increase” in mortgage fraud was one of the factors that motivated him to introduce a bill regulating mortgage brokers.
The Federal Bureau of Investigation has said there is a “growing epidemic of mortgage fraud” in the United States, with reported losses from such fraud soaring to more than $1 billion in the fiscal year 2005, up from $429 million in 2004.
The Colorado bill, H.B. 1161, passed the state’s House of Representatives 50-12 and is now under consideration in the state’s Senate. Vigil said the governor has indicated he will sign the bill if it is passed by the Legislature.
If passed, the law would require mortgage brokers to register every three years with the director of Colorado’s Division of Real Estate. Applicants for registration would have to undergo a criminal background check, disclose related administrative discipline taken against them and post a bond of $25,000.
“If your license was repealed for any reason relating to deceit or fraud, your application for registration would be denied,” Vigil said.
Alaska’s proposed licensing law was “to some degree in response to consumer complaints or predatory lending issues,” according to Kevin Breeland, president of the Alaska Mortgage Bankers Association.
“What it really comes down to is accountability,” Breeland said. “Without lenders being licensed in the state of Alaska, if a consumer has a complaint, whether related to predatory lending or servicing issues, the Division of Banking has no recourse. They don’t have the golden hammer,” Breeland said.
Generally, mortgage fraud is seen as crimes perpetrated against lenders in order to bilk financial institutions, whereas predatory lending is more in the consumer realm, and involves unscrupulous lending that takes advantage of unsophisticated home buyers.
Alaska Senate Bill 272, sponsored by Sen. Thomas Wagoner, and its companion bill, House Bill 424, would grant the Alaska Division of Banking and Securities the authority to license, regulate and, if need be, investigate residential mortgage lenders operating in Alaska.
The proposed law, dubbed the Mortgage Broker Registration Act, is similar to the legislation under consideration in Colorado. It would require mortgage brokers to register every three years with the director of the Division of Real Estate in Alaska. Applicants would also have to undergo background checks, disclose relevant administrative discipline taken against them, and post a bond.
The bill is making its way through House and Senate committees, Breeland said.
Washington’s new, expanded regulation for the mortgage industry is a mortgage fraud-fighting action, as well as a way to protect consumers’ interests, according to the president of Washington’s mortgage brokers’ association.
“It (the law) is a way of curbing predatory lending by targeting the practitioner, not the product,” said Adam Stein, president-elect of the Washington Association of Mortgage Brokers.
Washington state already had a licensing law, the Mortgage Broker Practices Act, in place. But the state decided it wasn’t enough, and after passing in the House 89-6 and in the Senate 48 to 0 this year, House Bill 2340 was signed into law by Gov. Christine Gregoire March 9.
Scott Jarvis, director of the Department of Financial Institutions in Washington state, said, “The bill reflects months and months of collaborative work between the DFI and the industry. It gives Washington a modern statutory framework to support the mortgage broker industry and at the same time provides excellent consumer protection.”
“In many states the brokerage – the business itself – and the principal broker of that business are licensed, but not the other brokers,” said Stein. “The designated broker, the person who runs the business, is licensed, but the actual people doing the work are not.”
That’s one of the things the new law addresses, Stein said.
According to Stein, “If they (brokers) don’t have skin at stake, you end up with unethical people who have little to lose. They leave the principal broker holding the bag. The principal broker is responsible for making restitution, but (the broker who worked under him or her) can flee to another state.”
Under the new law, among other things, those brokers are now licensed, and the director of the Department of Financial Institutions has the power to impose fines or order restitution, and to deny, suspend or revoke licenses.
States that go beyond licensing only the designated broker include Texas, Oklahoma, Ohio, Missouri, Illinois, Wisconsin, Utah, Connecticut, Louisiana, Idaho, Oregon, Nevada, Kentucky, Tennessee and others, according to a nationwide poll conducted by the Washington mortgage brokers’ organization in May 2005, Stein said.
The legislation under consideration in Colorado goes beyond licensing only the designated broker. The proposed law would affect every mortgage broker in an office, not just the principal broker, Sponsor Vigil said.
“If I own Vigil’s Mortgage Company and I have 50 mortgage brokers under me, each one of my contractors would have to register,” said Vigil.
Under the legislation under consideration in Alaska, “If you are a mortgage broker in the state of Alaska and you have two or three or four loan officers who work for you, those loan officers do not have to be licensed but the brokerage firm, the company they work for, has to be licensed” if the bill passes, Breeland said.
Tim Doyle, director of government affairs at the Mortgage Bankers Association, said the group has been monitoring “the uptick in state legislative activity” with regard to the mortgage industry for a number of years.
“It (legislative activity) is driven by predatory lending concerns, and increasingly, I think, by the concern about mortgage fraud,” Doyle said.
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