2101 Wilson Boulevard, Suite 610
Arlington, VA 22201(571) 527-2601
December 10, 2014
High Uniform Standards for All Mortgage Originators
Mr. Richard Cordray
Consumer Financial Protection Bureau
1700 G Street, NW
Washington, DC 20552
Dear Director Cordray:
The Community Home Lenders Association writes to renew our request that the CFPB use its statutory authority, under which all mortgage originators must be “qualified,” to establish high uniform standards for all individuals, including testing, independent background checks, continuing education, and licensing.
In 2008, Congress adopted the SAFE Act, which requires all mortgage originators that work at non-banks to take 20 hours of pre-licensing courses, pass the SAFE Act mortgage competency test, and pass an independent background check prior to doing business with consumers. It also requires all non-bank mortgage originators to complete 8 hours of SAFE Act approved continuing education courses each year.
These basic requirements – licensing, testing, and annual continuing education – apply to virtually all professionals involved in real estate transactions and mortgages, as well as to all individuals at banks that sell securities or insurance. However, mortgage originators that work at banks and other depository institutions are exempt from all of these basic requirements.
In 2010, Congress adopted Section 1402(a)(2) of P.L. 111-203, which requires that every mortgage originator, including those working at banks and other depository institutions, must be “qualified.” This provision augmented the SAFE Act, which had focused on non-banks. It was enacted in the wake of the 2008 housing crisis, in response to clear evidence that problems in subprime markets were not confined to non-banks, but also included major banks, which had generated hundreds of billions of dollars of risky subprime mortgages through MBS securitization and marketed those loans through affiliates.
Unfortunately, the January, 2013 rule that implemented this provision continued the unique exemption that bank mortgage originators enjoy from licensing, testing, an independent background check, and continuing education requirements. That rule merely requires unspecified mortgage training and a non-independent background check, both of which can be carried out in-house by the financial institution.
We believe that it is important – both for the integrity of the profession of mortgage originators and for the consumers that they serve – to have high uniform standards that apply to all mortgage originators, regardless of who they work for, in order to fully protect consumers. At a minimum, bank and other depository institution mortgage originators should be required to pass the SAFE Act mortgage competency test and an independent background check prior to doing business with a consumer, and further to complete 8 hours of annual continuing education commensurate with the SAFE Act.
Exemptions Enjoyed by Bank/Depository Institution Mortgage Originators are Unique
Individuals that work at banks that sell securities products to consumers must be federally licensed, pass a Series 6 or 7 exam, and complete periodic continuing education. Individuals that work at banks that sell insurance to consumers must be licensed in the state they do business, pass a test, and complete periodic continuing education. Yet, individuals that work at banks that do mortgage origination, arguably a product equally important and in need of strong consumer protection, are exempt from these requirements.
Moreover, bank mortgage originators are virtually the only professionals involved in real estate transactions that are not subject to these basic requirements. Specifically:
* Real estate brokers must be licensed, tested, and take annual continuing education in all 50 states.
* Individuals that perform appraisals on mortgage loans must be licensed, tested, and take annual continuing education in all 50 states.
* Individuals that do home inspections must be licensed and tested in 32 states and a majority of states require them to complete periodic continuing education.
* As previously noted, all mortgage originators that work at non-bank mortgage firms must be licensed, pass an independent background check by the state, complete 20 hours of pre-licensing courses, pass a mortgage competency test, and complete at least 8 hours continuing education each year.
Finally, individuals in many other professions have licensing, testing, and continuing education requirements, such as Funeral Directors, Cosmetologists, Barbers, Electricians, Plumbers, and Interior Home Designers.
Thousands of Unqualified Bank Mortgage Originators Work with Consumers
As of April 30, 2014, there were 1,415 individuals working at banks or other depository institutions that failed (and never passed) the SAFE Act test. These individuals are registered as “mortgage originators.” CHLA does not see how individuals who failed the SAFE Act test (testing basic mortgage competency) can meet the statutory requirement that all mortgage originators must be “qualified.”
Moreover, the consumers that do business with mortgage originators that have failed the SAFE Act mortgage competency test are not aware that the individual working with them has failed the test.
The Number of Unqualified Mortgage Originators Serving Consumers is Unknown
Only 15,825 (4%) of the roughly 400,000 bank and other depository institution registered mortgage originators have ever taken the SAFE Act test. Since a test is not required for them, it is speculative as to how many of the remaining 385,000 individuals would fail the SAFE Act test if required to take it.
Extrapolating the 9% SAFE Act test failure rate of the 15,825 individuals who have taken the SAFE Act test over all 400,000 mortgage originators would result in a projection of some 36,000 bank/depository institution mortgage originators who would fail the SAFE Act mortgage competency test if required to take it.
Alternatively, extrapolating the historical 30% first-time failure rate of all individuals over time that have taken the SAFE Act test would result in a projection of some 120,000 bank/depository institution mortgage originators who would fail the SAFE Act mortgage competency test if required to take it.
[As we acknowledge, any projections are speculative. Since a test is not required for depository institution mortgage originators, the standard should be how many individuals could pass the test tomorrow, with no further preparation. The 9% failure rate cited above understates the failure rate for this class of individuals because it includes individuals that failed and later passed the test. The historical overall first-time failure rate may overstate the number of individuals that will fail, as many bank mortgage originators may have the benefit of years of experience; as against that, they may not currently be as prepared for such a test because they are not required, nor do they typically take the 20 hours of SAFE Act pre-licensing courses.]
Bank Settlements are Evidence of Need for Greater Consumer Protection
HERA, the law implementing the SAFE Act, exempted banks from testing and education courses because it was developed in 2008, when a dominant perception was that the subprime housing crisis was primarily caused by unregulated mortgage brokers and non-depository mortgage bankers. It later became apparent that the big banks played a critical role in the housing collapse – developing reckless and anti-consumer mortgage loans through the MBS securitization process, originating them through their network of affiliated mortgage originators, and doing a poor job of foreclosure prevention on their bad loans. Subsequently, Congress adopted the provision in 2010 to require that ALL mortgage originators, including those at banks, must be “qualified.”
CFPB finalized the rule implementing this requirement in January, 2013. In rejecting requirements such as SAFE Act testing and continuing education in that rule, CFPB stated that : “The Bureau has not found evidence that consumers who obtain mortgage loans from depository institutions. . . face risks that are not adequately addressed through existing safeguards and proposed safeguards in the proposed rule.”
The proliferation over the last few years of settlements with banks, which included significant problems with mortgage loan origination, constitute evidence that consumers are not fully protected by the exemption bank mortgage originators enjoy from licensing, testing, and continuing education requirements.
For example, in July of this year, the Department of Justice announced a $7 billion settlement with a major bank for origination of mortgage loans which it knew were destined for default. The bank admitted that it knew that “significant percentages” of sample loans did not comply with underwriting guidelines – including borrower income being exaggerated, resulting in borrowers being placed in a loan product that was beyond their ability to repay.
In 2012, the U.S. Attorney’s Office in the Southern District of New York announced settlements with two banks relating to poor underwriting in the origination of FHA mortgage loans.
The original complaint in the action brought by the federal government and 49 states resulting in the multi-billion dollar National Mortgage Settlement with five major banks, alleges that, “In the course of their origination of mortgage loans in the Plaintiff states, the Banks have engaged in a pattern of unfair and deceptive practices. Among other consequences, these practices caused borrowers in the Plaintiff states to enter into unaffordable mortgage loans that led to increased foreclosures in the States.”
Testing, Independent Background Checks, and CE Requirements Are Not Burdensome
During rulemaking on this provision, the CFPB expressed concern about unnecessary duplication of regulation already carried out by bank regulators. Yet the provisions we are calling for impose an insignificant cost and no real duplication of regulatory burden:
* SAFE Act Test. The one-time cost of taking the test is only around $125, and the test only takes 3 hours. If any individual is truly qualified, preparation for taking the test should be minimal.
* Independent Background Checks. Since bank mortgage originators are already subject to an in-house background check, the cost would merely be the difference between the amount the state charges for an independent test and the bank’s cost of performing this function in-house.
* Continuing Education. The annual cost of paying for 8 hours of continuing education courses, dealing with subjects that include ethics and mortgage laws and regulations, is minimal.
Licensing is Appropriate
Finally, as noted, virtually all other similar professions are licensed, as are all mortgage originators that work at a non-bank. Therefore, we believe it is appropriate for bank and other depository institution mortgage originators to be licensed. We would urge the CFPB to look into its authority under the statute to require licensing for all such individuals, as well as the costs and impact of doing so.
COMMUNITY HOME LENDERS ASSOCIATION
CC: Mr. John Ryan, Conference of State Bank Supervisors