AN INDUSTRY FOREVER CHANGED ? Part I by George H. Marentis

by 07 Mar 2009
Over the past couple of years I have been telling my clients, the mortgage broker industry is changing. The industry as we knew it is gone and in order for the mortgage broker to survive we need to be flexible and adapt to the changes. Recently a broker said to me ?Compliance is a waste of time?. This is the type of mentality that needs to change for us and the industry to survive. It came as no surprise when I later found out that this broker was being investigated by a couple of the states he was licensed in and forced to close his doors. As we know, 2008 was a very turbulent year for the financial markets; 2009 will likely be as rough. Look around, our industry, and more specifically the mortgage brokers, are the primary targets of legislators at both the state and federal levels. The housing and mortgage industries were severely impacted and a number of new laws and regulations were enacted ranging from the new Identity Theft ?Red Flag? requirements, new RESPA amendments, Regulation Z changes, new national licensing requirements, and also the controversial Home Valuation Code of Conduct rule. NATIONAL UNIFORM LICENSING (S.A.F.E. Act) A new law was recently passed that establishes standard requirements for the licensing or registration of mortgage originators nationwide. State licensing will be required for all loan originators employed by brokers or lenders and registration will be required for originators employed by depository institutions. The uniform standards require each state to have a system in place by August 1, 2009 or August 1, 2010 if the state legislatures meet biennially. However, a state may be able to get extensions through HUD upon a states good faith effort to meet the Acts requirements. As a requirement, originators will need to provide the FBI with fingerprints for them to complete a background check, take 20 hours of pre-licensure education and provide the NMLSR authorization to pull credit. Additionally, originators will need to pass an exam that will be developed by the Nationwide Mortgage Licensing System and Registry (NMLSR). CONCERNS WITH NATIONAL LICENSING Although the concept of a standard nationwide licensing requirement has its benefits, there are some concerns. Does an originator need to take the 20 hours of pre-licensing education for each state in which he or she originates or just one? Will a passing score on the national exam be transferable to other states? What is the purpose of needing the originators credit report? will there be a minimum credit score requirement? Unfortunately, I don?t have all the answers, but it appears that the exam will be based on two components: a national portion and a state portion. Based on what I have been told, once an originator passes the national component, all that is needed to be completed for each state is the state portion. As for the 20 hours of pre-licensing education, all that is needed is to complete it once and show evidence of successful completion to each state of application. Keep in mind, each state has the authority to require more than 20 hours, so anything above the minimum of 20 hours would need to be completed. HOME VALUATION CODE OF CONDUCT The finalization of the Home Valuation Code of Conduct is just one of many new rules impacting the mortgage industry. This new rule is not legislatively based, but is an agreement between the GSE?s, New York State Attorney General Andrew Cuomo and FHFA. The final version of the Home Valuation Code of Conduct (HVCC) was released on December 23, 2008 and will apply to all single family mortgage loans originated and delivered to Fannie Mae or Freddie Mac with an application date after May 1, 2009. Unless something can be done to stop the implementation of the HVCC before the effective date, the HVCC will create requirements governing appraisal selection, solicitation, compensation, and more. Key provisions of the final rule: ? Only the lender can order appraisals, not the mortgage broker. The lender may use Appraisal Management Companies, or appraisal companies. ? Cannot do additional appraisals, AVM, or BPOs to get a better value. However, It is OK to do them as part of a quality program or if the original appraisal is flawed. ? No ?Comp? Checks. ? Lender must give the homeowner a copy of the appraisal three days before close. ? Payment to the appraiser must come from the lender, the AMC, or the appraisal company. ? No one in the loan process can talk to the appraiser. ? Anyone selecting an appraiser must be independent of the loan process and must be trained and qualified. ? No one employed by the lender or a company owned by the lender can perform an appraisal unless independence can be supported, procedures for adherence to the code are documented, and annual reviews are performed. ? 10 percent of all appraisals must have a quality check done. IMPACT OF THE HVCC? BROKER As for the broker, the code will prohibit direct communication between the broker and appraiser whereby the broker will be prohibited from ordering the appraisal as well as requesting ?comp? checks to estimate value. While these communication issues will slow down the lending process, the requirement for the lender to provide the homeowner with the appraisal three days before close will also put more pressure on the process, ultimately hurting loan closings and turn times, thus, potentially impacting the broker?s cash flow. Aside from not having contact with the appraiser, the ultimate impact to the broker remains unclear. Your thoughts and comments are welcome. LENDER The most significant impact will be on the mortgage bankers/lenders and the ability of lenders to sell off loans to Fannie Mae and Freddie Mac. The lenders will likely need to create new policies and procedures to effectively meet the requirements of ordering appraisals per the HVCC. Additionally, the lenders will need to add to their quality control function or pay a third party auditor to conduct the 10 percent quality control test on appraisals to ensure that their process meets the HVCC standards. Unfortunately, these additional costs could be passed onto the consumer. All members of the lender?s loan production staff are forbidden from selecting, retaining, recommending or influencing the selection of an appraiser. The code defines a lenders loan production staff as Individuals who are involved in origination, underwriting, presenting credit offerings for approval and credit decisions as well as any person who reports to a loan production staff member or is compensated on a commission basis upon the successful completion of a loan. For the quality control testing requirement under the HVCC, the lender agrees to perform quality control tests on at least 10 percent of appraisals, which are randomly selected, and report the findings to the Independent Valuation Protection Institute (IVPI) CONCLUSION The ultimate impact of any of these regulatory changes to the lending industry is unknown. However, as aforementioned, the industry is being targeted as one of the main problems within the financial markets. As an industry, we need to voice our concerns otherwise the increased regulatory burdens will force the mortgage broker out of business and ultimately harm the consumer. George H. Marentis is President/CEO of Compliance Made Simple, LLC, a company that provides licensing and compliance related services to the mortgage lending industry nationwide. For more information see or call 303.859.8550. Mr. Marentis has a Juris Doctorate and over 15 years of mortgage and banking experience ranging from frontline operations, originations to regulatory and legislative compliance. Information provided in this article is not intended to be legal advice and is informational only.


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