Mortgage brokers need state license to practice

Starting Jan. 1, mortgage brokers and lenders in Colorado will join the ranks that already include lawyers, barbers, boxers, land surveyors and many others.

“For the first time in Colorado, we’re going to have a registration program for mortgage brokers,´ said Jeffery Hier, public information officer for the Colorado Department of Regulatory Agencies.

Per House Bill 06-1161, anyone who brokers a mortgage in Colorado will have to first be registered with the state. Colorado is the 49th state to implement some type of system to register mortgage brokers – Alaska is now the only state with no such requirements.

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Colorado has long required licenses for many professions, ranging from audiologists and optometrists to cosmetologists and outfitters. Recent issues with fraud, lax lending practices and overly creative mortgage programs have led the state to extend registration requirements to mortgage brokers and lenders.

The Department of Regulatory Agencies began accepting online applications for broker registration on Oct. 1. In the first 12 days, just shy of 300 applications were received.

“We’re expecting in the neighborhood of 4,000 to 5,000 (brokers to register),” Hier said.

Before a broker can register with the state, he or she is required to submit fingerprints to the Colorado Bureau of Investigation for a background check. Hier said that the CBI has received about 3,800 requests for background checks as of the first week in October.

The state has been working in conjunction with the Colorado Association Mortgage Brokers and the Colorado Mortgage Lenders Association to encourage people to start the background check process as early as possible.

“The background check is going to be the most time-consuming process,” Hier said, because once the CBI has conducted its check the information is sent to the Federal Bureau of Investigation for an additional screening.

The background checks are designed to weed out any would-be brokers or lenders who have pled guilty to or been convicted of a crime involving fraud, deceit, material misrepresentation, theft or the breach of a fiduciary duty. Hier said that individuals will be eligible for registration five years after a conviction, but will not necessarily be guaranteed a registration.

After the investigation bureaus submit the background checks to the state, the Department of Regulatory Agencies will review any unusual information and decide whether or not to issue the registration.

“There’s been about a dozen that we’ve gotten additional information on, but none that didn’t meet the requirements (for registration),” Hier said.

Industry support, concerns

Industry associations have been supportive of the registration program. In fact, they worked closely with the state to help craft the legislation.

“We wanted to bring some type of responsibility to the mortgage loan industry,´ said Doug Braden, broker with Delta Mortgage in Fort Collins and board member of CAMB.

Braden said that Colorado had become a safe haven of sorts for people who misuse the mortgage lending profession, because those who had their licenses revoked in other states could come here to operate without scrutiny.

“The trend that was driving this (legislation) was that we were in a position where we were losing credibility,” Braden said. “We’re trying to get rid of the people who are in it to make a quick buck.”

At the same time, CAMB and the state wanted to balance security with openness.

“We did not want to make it prohibitive for people to get in the industry,” Braden said.

Because of that, the registration carries no requirements for testing or automatic monitoring of mortgage brokers.

CAMB is fielding questions and concerns its members have about the program. Braden said that a majority of questions have involved the requirement that all brokers secure a $25,000 bond before registering.

The purpose of the bond is twofold. First, a credit and asset check is required to obtain a bond, so brokers’ financial backgrounds will be reviewed. Second, the bond is insurance, of sorts, for consumers. If a broker does not follow through on his or her obligations, the bond guarantees payment on losses of up to $25,000.

Another concern, according to Braden, is that several classes of brokers are exempt from registration, including government employees, bank or credit union employees and Federal Housing Administration-approved lenders.

Braden said he personally does not agree with the FHA exemption. The FHA provides insurance on mortgages made by approved lenders, which protects the lender against losses in the case of a default.

“If loan originators are going to register, we should all have to do it,” Braden said.

The FHA requires approval and recertification in order for a broker to operate as an FHA lender. However, critics of the program say that the lax underwriting requirements as well as programs that allow mortgage applicants to borrow more than the value of their home with little money down are creating foreclosure issues.

Larimer County had a total of 1,063 active FHA mortgages as of Sept. 30, according to a U.S. Department of Housing and Urban Development Web site. Of those loans, 26 were in default and one had been terminated with a claim. In total, 4.66 percent of all FHA loans in Larimer County were either in default or had a claim filed.

Weld County, which now boasts the highest foreclosure rates in the country, had 2,069 FHA mortgages, with 4.87 percent in either default or claim – 76 in default and 26 with claims filed.

Minimal effort to benefit industry

Overall, Braden said most in the industry are happy to see the program put into place.

“I’ve been all for the licensing program,´ said Greeley mortgage lender Rhonda Lesh. “I think it will get rid of the crooks in the industry.”

Lesh has already turned in all of the necessary elements to become registered. She submitted her fingerprints electronically and found a firm to supply her with a surety bond. After that, she completed the online application, which took only 10 minutes.

Lesh said the effort she put into the process was minimal for the benefit to the industry. “What I hope it will alleviate is the people in the business with no conscience at all,” she said.

The biggest problem she sees is unethical brokers making loans that are destined to fail, such as 100 percent, interest only.

Lesh expects that the program will not only weed out those in the industry just to turn a quick profit, but also honest brokers who are struggling with the slowed market.

“There are probably a lot of people right now that are borderline since the industry is so slow anyway,” she said.

Once the program is instituted, the state will maintain a list of registered brokers and will field complaints from consumers. Hier said the Department of Regulatory Agencies will compile the complaints into a report to determine the problems in the industry. The first report will be presented to the general assembly after a year of activity.

The registration program is set to expire July 1, 2011. At that time, it will be reviewed and either continued, discontinued or modified by the legislature.