Mortgage Brokers Face Tighter Scrutiny

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"Undocumented” mortgage brokers will be no more after a new ruling by the Federal Reserve that mortgage brokers will have to be fingerprinted and sign into a government registry before they can ply their trade in the U.S.

The new regulations come out of the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (aka the SAFE Act).

According to the Federal Reserve website, the SAFE Act requires residential mortgage loan originators who are employees of agency-regulated institutions to be registered with the Nationwide Mortgage Licensing System and Registry. The Fed describes the registry as being created by the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators. The registry "supports" similar registration of mortgage brokers by individual states by requiring brokers to provide personal information and undergo fingerprinting as part of a comprehensive background check. That review will include a credit check, a criminal background check and licensing tests for mortgage brokers.

Without the background check and without having successfully passed the licensing test, mortgage loan originators will be unable to providing mortgage loans to their customers, says the Federal Reserve.

While the SAFE Act goes into complete effect on Oct. 1, the fingerprinting and the background check requirement may not go into effect until at least Jan. 28, 2011, according to the Fed. “Employees of agency-regulated institutions must not register until the agencies instruct them to do so,” the Federal Reserve said in a statement. “The agencies will provide an advance announcement of the date when the registry will begin accepting federal registrations, and agency-regulated institutions and their applicable employees will have 180 days from that date to comply with the initial registration requirements.

Currently, about one third of U.S. states don’t require mortgage brokers to be licensed, according to Bloomberg Business Week.

Key legislators behind the SAFE Act say that mortgage brokers need to undergo the same rigorous licensing standards that stockbrokers do. “When someone buys 100 shares of stock, they must go through a licensed securities broker,” said Sen. Dianne Feinstein (D-Calif.), cosponsor of the SAFE Act. “Until recently, some purchased their home -- a far more valuable asset -- through an independent mortgage broker or lender who may have had a criminal background or no license at all. This lack of accountability enabled unscrupulous brokers to commit fraud at the expense of unsuspecting homebuyers.”

But there is one mortgage industry group that won’t have to face the scrutiny of license tests  - and it’s a group that seems to curry particular favor from Uncle Sam – big banks. Under the SAFE Act, mortgage brokers employed by federally regulated lenders won’t have to take licensing tests. That means banks like Bank of America (Stock Quote: BAC) and Wells Fargo (Stock Quote: WFC) will save money on test and license requirement training.

According to Inside Mortgage Finance Publications, Bank of America and Wells Fargo comprised 46% of the U.S. residential lending market in the first quarter of 2010. Inside Mortgage adds that 57% of all new mortgages during that quarter were originated by lenders who are exempt from the new federal licensing standards. Critics say they’ll have an unfair advantage by not having their mortgage brokers take a licensing test.

While current numbers are hard to come by, especially as more mortgage brokers leave the industry after the real estate collapse of 2007-2008, a 2004 study by Wholesale Access Mortgage Research & Consulting, Inc., says there are about 53,000 mortgage brokerage companies in the U.S. that employ an estimated 418,700 employees and originate more than 50% of all U.S. residential loans.

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