The mortgage industry in New York is bracing for a bigger change than slowly shifting interest rates.
New regulations that officially went into effect last January now require mortgage loan originators to register with the New York State Banking Department as part of an effort to cut down on predatory lending practices.
Loan originators, who previously didn’t need to have professional requirements and could ply their trade without state scrutiny, must now be authorized by the banking superintendent to practice at a loan-originating entity. The new rules, which will be formalized by outgoing superintendent Diana Taylor, apply to anyone who solicits, negotiates, explains or finalizes a transaction. However, the department won’t begin enforcing the new rules until it’s able to create and enforce the licensing regiment, which it hopes will be possible by the start of 2008, said department spokeswoman Elizabeth Billet.
Registrants must take 18 hours of education courses every two years, including classes in ethics, to maintain their licenses.
The law targets free agents on the frontlines of small residential mortgage companies who may be more apt to employ predatory lending tactics and bounce around from state to state. Employees of banks, trust companies and credit unions are exempt.
“Consumers presume that there is accountability over the mortgage industry, but there is a higher level of training to become a hairdresser,” said Don Romano, president of Shelter Rock Mortgage in Lake Success, N.Y., and past president of the New York Association of Mortgage Brokers.
In addition to describing their educational and professional experience, applicants’ fingerprints will be kept on file and criminal background checks will be done before a license is granted, Billet said.
The superintendent may deny registration due to prior conviction of a felony connected to loan originating or the revocation of a license in another state that regulates mortgage loan originators.
“The dawn of a new day is upon us,” Douglas Baum, chairman of the New York Association of Mortgage Brokers’ legislative committee, wrote in a newsletter to members of the trade association.
“This law benefits the vast majority of mortgage bankers, mortgage brokers and their employees who operate in a professional manner but are unfairly tarnished by the actions of these rogue brokers.”
Though new employees at small mortgage firms were supposed to register with the state this year, the system is not yet operating. The law gives the superintendent leeway to postpone the new regulations until the department can process the certifications, which it hopes to be able to do by January 1, 2008.
The association of mortgage brokers has lobbied for state oversight for 20 years, said Romano.
“People couldn’t believe that we actually wanted to make more work for ourselves by promoting professionalism,” he said. “It’s unusual, but it’s in every party’s best interest, except the thieves’.”
Billet said that momentum for the law picked up steam over the last five years because of a perception that originators were taking advantage of unsophisticated customers.
“The state wants consumers to understand the products, ensure that the people offering these loans are knowledgeable, and establish a level of transparency,” said Billet. “In the last decade, the subprime market has opened up a smorgasbord of mortgage products and options. Few people request a fixed-rate, 30-year mortgage anymore.”
One of the biggest catalysts for the registration requirement, she said, has been the recent rash of adjustable-rate mortgages, which can fluctuate with interest rate movements. In some cases these loans push the monthly cost of home ownership up drastically, particularly for borrowers who are already paying more for their loans due to prior bad credit.
“The subprime market has created exotic mortgages that are very powerful tools,” said Romano. “But they’re like a chainsaw: if you use it right, it’s a great instrument; if you use it improperly, it’s a bloody mess.”
The position of a registered mortgage loan originator is akin to that of associate agents at real estate companies who work under the supervision of broker-owners, except that the real estate industry is overseen by the New York Department of State rather than the banking department.
Other classes of banking professionals licensed with the state include registered mortgage brokers, licensed mortgage bankers and licensed lenders, who generally oversee mortgage loan originators. Statewide, there are around 3,000 bankers and brokers, but there is no credible count for originators, said Billet.
The banking department is also charged with maintaining an updated list of registrants on its Web site. Every quarter, mortgage companies that employ mortgage loan originators must inform the banking superintendent about any employees who have been dismissed because of unethical conduct.
Those engaging in loan originating before January 1, 2008, must comply with the regulations by 2010. To maintain registration afterwards, MLOs must take 18 hours of education courses every two years for a prescribed period, three hours of which must include instruction in ethical conduct.
“In this business, around 95 percent of what goes on is legitimate, but the other 5 percent tarnishes the industry,” said Richard Nardi, a real estate lawyer at Loeb & Loeb LLP, who is in contact with many prominent mortgage bankers, the vast majority of whom favor the plan.
“Almost all the legitimate groups in this industry are behind it. The only criticism is that it creates a new bureaucracy.”
He also wonders who will provide the courses. “Certainly there will be complaints about the classes, but many professions have continuing education components and it’s not all that horrible,” he said.