A Regulation We Could Actually Use

by 31 Aug 2012

Having by now established in this space my virulent hatred of all things regulatory, I am going to present a heretical idea: there is some regulation that might actually work.  Now, personally, I don’t think it would work better than borrowers actually paying attention to what they are doing when they borrow hundreds of thousands of dollars, but since it is clear that they are going to treat buying a home the same way they treat buying a breakfast sandwich, it is up to us as an industry to at least leave them without excuses when they do something stupid.

Most of the regulatory increases imposed on mortgage professionals over the last few years has focused on registration and licensing.  Almost every state has seen a dramatic increase in licensing requirements, from increases in stringency of background checks – as if someone’s bankruptcy four years ago has anything to do with whether they will do a good job of filling out a 1003 – to fingerprinting, to huge increases in pre-licensing education and continuing education hour requirements.

All of this is then compiled into a national database run by some of the clunkiest and least-intuitive web interfaces in the history of the internet.  It has cost millions of dollars in new fees to loan officers and brokerage firms, and contributed to the exit of over 75% of mortgage professionals since the peak in 2007.   It has essentially forced small brokerages to either close or to consolidate with larger firms; in economic analysis this is always indicative of over-regulation – leading inevitably to downgrades in customer service and satisfaction.  The kicker is, impact on fraud in the industry has been, charitably speaking, nonexistent.  In other words, the government has essentially drained half a million or so jobs out of the mortgage industry to provide ten thousand or so bureaucrats with guaranteed work.  But since this is what the government does, it’s no surprise, and most of us that are left are shrugging our shoulders and trying our best to ignore it, rather than screaming at the insanity of it.

Since the overlords at the CFPB are no doubt reading this and looking through the database for my phone number (it’s at the end of the article, fellas), let me make a constructive suggestion as an olive branch.

Once upon a time, I was 16 years old.  My children do not believe this, but I have photographic proof.  At that tender age, I obtained a driver’s license.  Having now gone through the process three times with my own children, it appears that the requirements for that are pretty much the same as they were 30 years ago.  There is an in-class education requirement, followed by an extensive written test.  And then they issue the license and turn the kid loose.

Of course not.

After the classes and written test, there is a lengthy practice period.  The practice is done partly under parental supervision while the youth has a learner’s permit, and partly in an accredited practical environment, both virtual and live on the road.  Then there is a practical test.  And THEN the kid gets a license.  It’s a system that has worked pretty well for several decades.  Yes, new drivers are not very good and cause accidents, but on the whole, the way the licensing requirements work, people with drivers’ licenses are at least minimally competent to operate motor vehicles.

City First has a corporate plane (don’t get visions of Bruce Wayne’s corporate jet here), and an in-house pilot, Leith “Maverick” Grasteit.  I asked him what the requirements are for obtaining a pilot’s license.  Although they are rather more substantial in terms of hours, they are also broken into two parts: a written, class-based component and a practical, in-the-air component.  No one would expect a pilot to be able to fly an airplane without having actually done so many times under supervision.

Taking an example closer to home, look at appraiser licensing requirements.  Now, I’m going to mostly ignore the fact that appraiser regulations are beyond ridiculous by any possible measure, and forbear to mention that there has never – not one time in recorded history – been any correlation between the length of time one has to sit in class and the amount of fraud one commits once one is turned loose in the field. I’ll simply point out that appraisers have two components of their licensing curriculum as well, a class component and a (massively, cartoonishly oversized) field apprenticeship component.

For mortgage people, well, what we have is a continual ratcheting up of the amount of time we have to spend in class.  I ask those of you that are branch managers or functioning as supervisory personnel: have you detected any improvement, however microscopic, in the quality of loan officering performed by newly minted loan officers since the amount of time they have to spend in class has multiplied by a factor of ten?

The question is rhetorical.  Of course you haven’t.  There is no possible way you could.  Everyone knows that the education and testing components of the licensing requirements are hurdles to be jumped, and spending the time to get an 85% instead of an 80% on the licensing exam is wasted, absolutely wasted time.  The exam has not one blessed thing to do with being a good loan officer.  Knowing whether the Equal Credit Opportunity Act was passed in 1974 or 1874 is totally, completely, and in all other ways irrelevant to doing a good job matching a client to an appropriate loan, or explaining the loan terms in ways that are intelligible (a job made harder by the new GFE, the single stupidest form in the whole ridiculous 70-page packet).

Being a good loan officer doesn’t depend on being able to do an amortization on a calculator.  That’s illegal anyway, because compliance mandates that we use loan origination bloatware to make sure our dates match on our GFE and TIL, and it does all the calculating for us.  It doesn’t depend on knowing the regulations for how many hours an interest rate quote is good for.  It depends on being able to work well with and explain complex terms to actual human beings ... which is no part of the licensing requirements.  Of course.

Let me help out here.  The apparatus for a practical component of the licensing process is already in place, with the Branch Lending Manager license and its subsidiaries.  So do this: get rid of the pre-licensing education requirements altogether.  Keep the test if you must – although I’d change its content – but add a practical component.  Audit the first five loans for every loan officer for their performance, and require the BLM to certify the loan officer’s work and stand behind it.  After six months, a year, whatever, if the loans are good, issue the permanent license.  Presto.  A much higher likelihood of professional competence in your average loan officer.  Once someone gets a permanent license, lenders will have a lot more confidence that this is a person who at least knows how to do the job correctly.

We’ll probably end up here eventually anyway, but without eliminating the other regulations that would become obsolete because of the practical requirement, so perhaps this idea would only make things worse – but it would at least add a real-world component to regulations that are right now both pointless and destructive.


Chris Jones is a branch manager with City First Mortgage Services and a ten-year veteran spanning the best and the worst of times in the industry. He is the author of the book Even Your Mother Won’t Call You Back, a primer on how to use the Six Channels of Marketing to do business more naturally and efficiently (available at www.iamchrisjones.com). Chris arrived in mortgages after careers with tech startups, stockbrokering, and running a presidential campaign. He’s a sought-after speaker and a part-time opera singer, which he insists isn’t as impressive as it sounds. Chris and his wife Jeanette live in Lehi, UT with their eight children.


Should CFPB have more supervision over credit agencies?