Rules Sought on Mortgage Officers

Rules Sought on Mortgage Officers
Bill to require licensing would help curb fraud, backers say
Catherine Reagor ~ The Arizona Republic ~ Feb. 12, 2007

Many of the people in Arizona who help home buyers finance what is often the biggest purchase of their lives are not licensed.

In the rapidly growing mortgage industry, many of these unlicensed people who handle home loans can put consumers at risk.

If home buyers get a bad loan with an exorbitant interest rate and extra fees, they are stuck.

And if unlicensed mortgage officers scam customers or engage in mortgage fraud, it's hard to hold them accountable.

It's estimated that there are as many as 18,000 unlicensed people taking mortgage applications, negotiating rates and getting loan commissions statewide. Many are enticed by the Valley's housing boom, exotic and often risky mortgages and no licensing requirements.

But things could change. If House Bill 2320 is passed, it will require the licensing of most of Arizona's mortgage loan officers and originators and bring more accountability to the industry.

If the legislation becomes law, mortgage officers and originators will have to take a class on the business, pass a test and pay a fee. They also won't be able to have any felony convictions anywhere in the country and will have to report whenever they move to another lender so regulators can track them.

The Department of Financial Institutions, which oversees state banks, credit unions, escrow firms and mortgage brokers and lenders, is backing the bill and would be responsible for regulating mortgage officers.

Complaints have soared from Arizona consumers getting mortgages with hidden fees and prepayment penalties and higher interest rates than promised. Foreclosures are climbing partly because many of those homeowners can't afford their mortgage payments.

Kelly Lewan recently bought a home in north Phoenix's Tatum Ranch. She secured a loan with a 9 percent interest rate and a promise that she could refinance in a few months and cut her payment. She even paid off a prepayment penalty on the loan when she closed.

Now, Lewan is struggling to make her monthly payment, and her mortgage agent isn't returning her calls.

"There are loan officers in Arizona who aren't educated on the business. They make mistakes and put consumers in the wrong loans. And some are committing fraud," said Stan Lund, president-elect of the Arizona Association of Mortgage Brokers.

"This legislation will make mortgage officers more accountable," he added.

Many experienced Arizona mortgage brokers and officers are backing the legislation.

Licensing loophole

The Department of Financial Institutions licenses mortgage brokers, but that is just a fraction of the people handling home loans in Arizona.

Only the official "broker" for a firm must be licensed. So a mortgage brokerage could have 50 employees handling loans, but only one designated broker is licensed. If the mortgage license legislation passes, those 50 loan officers would have to be tested, licensed and regulated, too.

The number of unlicensed mortgage agents in Arizona has shot up in the past five years, industry experts say. Although there are estimates of as many as 18,000, it's impossible to know exactly because there is no way to track them.

As for licensed mortgage brokers, the number has jumped to 1,390 from 775 since 2001. Licensed mortgage lenders have increased in that same time, to 619 from 335.

"We want to regulate anyone who is soliciting loans and getting commissions," said Felecia Rotellini, superintendent of the state Department of Financial Institutions.

"This will help us crack down on bad loans and fraud," she added.

She recently led efforts to start a statewide mortgage fraud task force to tackle a cash-back scam that involves obtaining a mortgage for more than a home is worth and pocketing the extra money. The scam inflates home values and defrauds lenders funding the loans. Separate legislation that would make mortgage fraud a felony subject to 10 years in prison also has been introduced.

More than 30 states have laws licensing mortgage officers.

"The bad mortgage brokers who can't pass tests in other states have gone to Arizona, and some of them couldn't get licenses because they have criminal records," said Richard Hagar, a Washington appraiser who helped that state crack down on fraud and who is a national speaker on the problem.

This is the fourth time backers of regulating mortgage officers have tried to get a law passed. One sticking point has been with such big mortgage lenders as Countrywide and Wells Fargo, which are licensed nationally and have hundreds of mortgage originators in Arizona. Those groups train their loan officers and originators and have strict compliance rules, but they have not wanted to license brokers locally because of the costs. This time they are exempt from the legislation.

"I know of mortgage people working out of their bedrooms and selling stereos on the side. They got into the business six months ago and don't know a lot about it. They can give the industry a bad name," said Rick Allen, a branch manager with the Valley mortgage firm O'Dowd and Associates.

"But the big lenders who are exempt from the legislation are also hiring people without any experience, and those people can also do bad loans."

Separately, mortgage regulators across the country are working to start a database to track all mortgage originators.

'I trusted him'

Most people assume that all mortgage officers are licensed in Arizona and that any loans offered them are legitimate.

Borrowers turn over their Social Security numbers, W2 forms and other personal information to mortgage officers. And those mortgage people can tap big financing for homes.

Lewan said she thought everything was on the up and up when her Valley mortgage officer said she could get a $310,000 loan for a $299,000 home. She said he told her the extra $11,000 could be applied to her debt and she could quickly refinance to get a better loan with a lower rate because her credit record would improve.

But she said most of the $11,000 went to the mortgage broker, and he won't return her calls about the money or help her refinance to reduce her $2,400 monthly payment.

"I called his boss and got nowhere, and neither my broker or his boss are licensed," said Lewan, the single mother of two boys works two jobs, as an interior decorator and at a furniture store.

"I trusted him, and now I can't make my house payment and had no idea getting money back was part of a scam."

She said she is going to file a complaint with the Department of Financial Institutions. But the agency will have no record of the mortgage broker she worked with because he is not licensed.

Regulators and mortgage watchdogs say consumers need to educate themselves more, but licensing brokers will help cut down on the problems.

"So many sales contracts fall out of escrow in the Valley because of incompetent mortgage people," said Mary Gomez, a West Valley real estate agent with Realty Executives. "Real estate agents have to have licenses. Appraisers have to have licenses. All mortgage officers should, too."

Find a real estate agent who works with licensed, ethical and FAIR lenders to find a loan that's right for you.

Search for homes in the Phoenix Historical areas and districts.

Learn the basics and the importance of a quality loan.