Mortgage loan originators will have to be fingerprinted and sign up to a central registry to do business in future, according to final rules issued on Wednesday by the Federal Reserve and other regulators.
The rules are part of the Secure and Fair Enforcement for Mortgage Licensing Act of 2008, also called the S.A.F.E. Act.
They were issued by the Fed, Comptroller of the Currency, Federal Deposit Insurance Corp, Office of Thrift Supervision, Farm Credit Administration and National Credit Union Administration.
Well, isn’t that special! Heartfelt congratulations to my friends in the mortgage origination industry for finally earning the right to be fingerprinted to have a job. You have managed to join all Federal and State employees in that distinction. Now when your electronically-submitted loan application is found to be fraudulent, your prints will be all over that email! There is nowhere to run!
Snark aside, I missed the passage of and the significance of the SAFE Act of 2008. So… I went digging a little bit. What I’ve found convinces me more than ever that federal regulation of real estate agents is not far behind.
That such regulation would also fit into the overall shift in national housing policy, of course, is a given. What might such a scheme look like?
The SAFE Act of 2008
The place to begin is the federal regulation of mortgage professionals, since it’s a hop, skip and a jump from regulating mortgage brokers and originators to regulating real estate brokers and agents.
The Nationwide Mortgage Licensing System (NMLS) has a good overview of SAFE Act that can be found here. And this document (PDF) is a pretty good overview of the mandates contained in SAFE. The major mandates are:
- A “Model State Law” proposed by Conference of State Bank Supervisors (CSBS) and the American Association of Residential Mortgage Regulators (AARMR)
- Federal minimum standards for mortgage originators, overseen and managed by Housing and Urban Development (HUD)
- Nationwide database of mortgage licensees (the NMLS above) that requires registration by all mortgage originators (along with the above-mentioned fingerprints, of course), and provides public access, including via the Internet.
- NMLS-developed national courses and exams for pre-licensing, continuing ed, and licensing.
There are, as you’d imagine, hundreds of details that you’d need a good attorney to review in detail. As I am an attorney only in name, and would not call myself a good one, I’ll skip any legal analysis and just talk big picture.
Basically, every mortgage originator (which includes mortgage brokers) with some small exceptions (non-Federally insured credit unions, it looks like) are required to register with the NMLS. There is a whole list of what information must be submitted in the Final Rules. Consumers will have access to some of that information including via the Internet. A mortgage originator has to provide his “Unique ID” in the NMLS to the consumer — much like California Realtors all have their DRE numbers everywhere. Presumably, the consumer can use that ID number to look the mortgage originator up in the NMLS system.
Plus, some of the teeth, as contained in the Final Rules (Federal Register, Vol. 75, No. 144, p.44661)
The Agencies note that the Federal Housing Finance Agency (FHFA) has directed Fannie Mae and Freddie Mac to require all mortgage loan applications to include the mortgage loan originator’s unique identifier.
No registration, no Fannie/Freddie.
But what’s more interesting is the Model State Law and the accompanying federal examination system administered by the NMLS. The way that Model Laws work is that each State, which is technically a sovereign, is invited to adopt the Model Law to create uniformity across the country. Oftentimes, the State legislatures and agencies may make small tweaks to the Model Law, but for the most part, where a Model Code exists (e.g., Model Criminal Code), the States generally fall in line. As one might expect, the Federal government has ways to be extremely persuasive.
SAFE Act, of course, directs the HUD to review each State’s version of the Model State Law to ensure that the standards contained therein meet the Federal mandates as laid out in the SAFE Act (and for all intents and purposes, the Final Rules of the Agencies). And each State has to license its mortgage people through the national database (NMLS).
Additionally, the NMLS is directed to review and approve coursework for pre-licensing and continuing ed, as well as develop Federal exams and approve exam providers. What is far more likely is that the NMLS will propose a set of coursework and requirements for licensing, and recommend to each State board what to adopt — much like the Model Law.
The likelihood that each state will develop its own licensing exam that is significantly different from the Federal exam is extremely slim.
Therefore, practically speaking, it is safe to say that the mortgage brokerage industry today is now a Federally regulated industry, with Federal standards, Federal registration, and a Federal licensing scheme (although administered by each State).
Why Realtors Are Next
Just because mortgage originators have fallen under Federal regulation doesn’t necessarily mean that real estate brokers and agents will, right? After all, in the recent Housing Bubble and ensuing credit crisis, the mortgage guys were right in the middle of a lot of fraudulent, NINJA loans, and the like driven by greed and stupidity, right? Why should real estate agents get caught up in that?
Well, I find illustrative the following Commentary on the Model State Law by HUD:
The SAFE Act is designed to enhance consumer protection and reduce fraud by encouraging states to establish minimum standards for the licensing and registration of state-licensed mortgage loan originators and for the Conference of State Bank Supervisors (CSBS) and the American Association of Residential Mortgage Regulators (AARMR) to establish and maintain a nationwide mortgage licensing system and registry for the residential mortgage industry for the purpose of achieving the following objectives:(1) Providing uniform license applications and reporting requirements for state licensed-loan originators;(2) Providing a comprehensive licensing and supervisory database;(3) Aggregating and improving the flow of information to and between regulators;(4) Providing increased accountability and tracking of loan originators;(5) Streamlining the licensing process and reducing regulatory burden;(6) Enhancing consumer protections and supporting anti-fraud measures;(7) Providing consumers with easily accessible information, offered at no charge, utilizing electronic media, including the Internet, regarding the employment history of, and publicly adjudicated disciplinary and enforcement actions against, loan originators;(8) Establishing a means by which residential mortgage loan originators would, to the greatest extent possible, be required to act in the best interests of the consumer;(9) Facilitating responsible behavior in the subprime mortgage market place and providing comprehensive training and examination requirements related to subprime mortgage lending;(10) Facilitating the collection and disbursement of consumer complaints on behalf of state mortgage regulators.The new standards, as well as the uniformity and consistency of such standards, directed to be established nationwide by the SAFE Act present a significant step in the effort to increase integrity in the residential mortgage loan market, enhance consumer protections, and reduce fraud. (Emphasis added)
All but one of those objectives (#9) would apply with equal force to real estate agents, who are also licensed by each State as mortgage originators used to be. Uniform licensing requirements? Isn’t this something even some in the industry has been clamoring for? Establishing a means by which residential brokers would, to the greatest extent possible, be required to act in the best interests of the consumer? Isn’t that the point of fiduciary duty of the realtor? Providing increased accountability and tracking of real estate brokers? Seems to me the argument applies with equal force.
Of course, NAR may decide that a Federal licensing scheme and a registration database is a step too far, and wield its considerable political power to oppose such a thing. But is this a battle NAR would even choose to fight?
After all, a number of people within the industry has been asking for higher standards on real estate licensing — a huge part of the “Raise the Bar” (or #RTB) movement wants higher standards, tougher requirements, more education, and so on. Dale Stinton himself has suggested that the industry needs to raise the bar for what it means to be a real estate licensee.
Given the sentiment of some consumers about their realtors, arguing against “greater accountability” for real estate agents strikes me as a difficult hill to climb in any event.
So I am more convinced than ever that we’re going to see some sort of a Federal regulatory scheme for real estate agents.
What That Might Look Like
I believe the regulatory scheme would largely parallel the SAFE Act. HUD and the other Agencies will take the lead. ARELLO, the Association of Real Estate License Law Officials, is the rough equivalent to the CSBS and AARMR, so it will be charged with coming up with the Model State Law. I haven’t researched carefully, but ARELLO might already have one in place, for all I know. ARELLO already runs a database, called the DADB (Disciplinary Action Data Bank) that can easily become the equivalent of the NMLS system, by making participation in it mandatory for all licensees. Like the NMLS registry, the DADB would make some information available to the public at no charge, likely through some sort of a consumer-facing website. At a minimum, such a database would include disciplinary action; it may also end up including some agent performance statistics to help consumers select the right agent.
I expect NAR would support such a move, and assist ARELLO in drafting the Model State Law if one doesn’t currently exist. Such a Model State Law would likely incorporate much of the REALTOR Code of Ethics, as that would tend to show “requiring acting in the consumer’s best interest”.
Presumably, ARELLO would also review and approve the pre-licensing courses as well as the continuing ed courses, and publish Federal examinations and approve testing providers, just like the NMLS does for mortgage. Any state-approved coursework would need to be approved by ARELLO as well, which makes it quite likely that the ARELLO test would become the de facto national real estate licensing exam.
As Fannie/Freddie will require mortgage originators to include their NMLS number in any loan applications, I’d imagine that the National Realtor Number (perhaps the NRDS database would be co-opted by ARELLO?) will be included with just about any document on which a real estate broker hopes to get paid.
All of this is quite in line with the intent of the regulation: uniformity and consistency, nationwide, in real estate professionals.
A couple of wrinkles here that are extremely interesting to consider.
First, “mortgage originator” under the SAFE Act usually refers to an employee of various types of institutions (FDIC-insured banks). Since the real estate agent is not technically an employee of the broker, but a 1099 independent contractor, but the legal duty to the client flows to the broker, it’s quite possible that we’d see a national definition (or re-definition) of who is and is not a real estate broker. Given that some states (such as Colorado, I believe) do not distinguish between brokers and agents, making all licensees a broker, while others have different types of agencies (e.g., Florida has the “transaction agent” concept), I think it quite likely that the national standard would put forth a single definition of a “real estate professional”.
Second, related to that re-definition of a licensee… it isn’t clear to me that the statutory non-employee classification for real estate agents would survive that redefining process. This is probably a long post in and of itself, but briefly, the trend of big legislation recently (e.g., Healthcare, finance reform, SAFE Act, etc.) all rely on employee status for various mandates. In a SAFE Act-like regulatory scheme for real estate agents, if there is a violation or a problem, it isn’t clear who is to be blamed — the licensee or the broker, who is theoretically supervising that licensee and is legally responsible for his/her actions. It would be simpler overall to classify the licensee-agent as an employee of the broker. (Plus, employee status means more taxes for the employer, which the Federal and State governments all desperately need these days.)
To suggest that most brokerage companies in the United States today is not ready for such a change is, I think, an understatement.
Third, the mortgage industry does not to my knowledge have anything like the MLS in the real estate industry. Fannie/Freddie might provide the enforcement teeth for the SAFE Act; for a Realtor-SAFE Act, the MLS will need to be the teeth. How such a scheme might be designed or carried out is beyond my ken right now, but I have a strong feeling that the MLS may be looking at some Federal regulation in the not too distant future, connected to something like the SAFE Act for real estate.
As we close out, remember that this is all speculation at this point, based on looking at the SAFE Act, its contours, its goals and objectives, then thinking about the national housing policy of discouraging homeownership, and various other strands. For all I know, none of this could come to pass.
And even if it were to come to pass, I’m not sure that national regulation would necessarily be a bad thing. I’m undecided on it. After all, it isn’t as if having 50 different rules and regulations is a real positive for the industry, as far as I can tell. Nor is having some 850 different rulesets for each MLS a wondrous benefit either.
Nevertheless, five years ago, I would have thought that a national regulatory scheme for real estate agents was unthinkable. It is not unthinkable now. In fact, I’d suggest it might even be likely before not too long — say 2012 or so.
If you’ve read this far, thank you. And let me know what you think. Is Federal regulation more or less likely within the next two years? And would such a regulation be a good thing overall or a bad thing overall?