Thousands of small businessmen and women have been, or are in the process of being put out of business by the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act). The California Department of Real Estate (DRE), for example, the agency responsible for SAFE Act enforcement in the state of California, has ruled last year that Independent Contractor Loan Processors must not only be Nationwide Mortgage Licensing System (NMLS)-licensed, but have a DRE Broker’s License as well. Currently, this writer is not aware of similar interpretations in other states, but since it seems clear that there is considerable interpretive leeway of the SAFE Act requirements from state to state, it is not unreasonable to assume this is also the case in other places. I am very interested to hear where else this interpretation may be required. One of the areas we have seen considerable variance is in credit score and background requirements of mortgage loan originators (MLOs), with some states requiring credit scores of more than 700 and no bankruptcies in order to be licensed.
In California, the Broker's License requirements include having a Salesperson's License and two years of full-time experience in real estate, as well as successfully completing eight college level courses, and passing a very difficult test with an average 40 percent rate of failure. It is a good thing that the Broker's License is challenging to earn, because in the past, it was too easy to obtain, and too many incompetent people became mortgage brokers to the detriment of the industry in general, and consumers particularly. The qualifying requirements were tightened up several years ago after the dot-com bust. This was in response to the large numbers of laid off tech workers, who are well-educated and can easily pass standardized tests, getting their Broker's Licenses to get in on the real estate and mortgage refinance boom. This resulted in the phenomenon of having brokers opening offices and recruiting agents, without ever actually ever having done a real estate sale or mortgage loan origination transaction. Imagine the joy of doing business with these people. However, the vast majority of loan processors never even had a Salesperson's License because they didn't deal with the consumers.
As we are all aware, the loan processor’s function is to perform the back office administrative details, including loan setup, knowledge of underwriting guidelines, opening escrows with title companies, ordering appraisals (until 2009), coordinating inspections, submitting loans to lenders, working with the underwriters, clearing loan and funding conditions, and doing post-closing audit activities. Nowhere in this list of duties is there any requirement of working directly with consumers on any substantial matters. There may have been occasions when a processor would communicate directly with a client to request additional documentation or forward a disclosure, but there never was any licensed activity involved—performing qualifying for the consumer, discussing loan programs, structuring the loan, or quoting rates and fees. These activities were always part of the loan originator’s responsibilities because they were licensed activities, and that's what the LOs are supposed to get paid for.
After the crash of the markets in 2007-2008, many very experienced and competent employed loan processors lost their jobs when mortgage banks and brokerages closed and loan originations dried up. Those who could, subsequently, became self-employed contract processors, providing these services to the surviving small brokerages on a per-loan fee basis. This business arrangement that worked for all parties, as the processors kept doing what they knew how to do and made a living, and the surviving brokerages had access to professional loan processing services without having the full-time employee overhead costs. This business model became and remains the most streamlined and viable for those remaining small brokerages to be able to survive in the post-2007, highly-restrictive lending environment.
Most of these surviving professional processors came into the business in the 1980s and 1990s, straight out of high school or junior college, and this is the only profession they have ever known. It is also true that the vast majority of loan processors are women, with a large percentage of them single parents, being sole providers for their families. The mortgage brokerage and origination business has undoubtedly provided tremendous opportunities for women to become successful, economically independent businesspeople and entrepreneurs. Women represent a majority number of the most successful people in our business, in brokerage ownership, mortgage loan origination, as reps for the wholesale channel, mortgage banking operations and loan processing.
A strong case can be made that the crash of the mortgage business has affected mortgage businesswomen very disproportionately. Why has this issue not been raised until now? Where are the legislators who purport to represent the interests of their women constituents?
The flood of regulations in the past several years is clearly discriminatory against small businesses generally, and women-owned small businesses, specifically. In the rush to punish those "bad' mortgage brokers for crashing the world economy, regulators and politicians have clearly gone too far, again. Time and again in the halls of Congress and the State Legislature, I've heard that legislators judge the benefits of a bill in how much it will annoy the "mortgage guys,” the more, the better. It is high time for Congress and the State Legislatures to refocus their zeal for regulation on the consumer; to deliberately consider if proposed legislation or regulations actually have a tangible benefit to the consumer; and if the consumer will understand and benefit from it. A rising crescendo of protest is taking place nationwide in response to the clear intentions of the legislatures to have regulations just for regulations sake; so they can say, "Look, we did something," irrespective of whether or not their legislation had any actual benefit to the consumer or any unintended consequences. I'll never forget President Obama in his speech announcing the passage of Dodd-Frank saying, "We have ended too big to fail" … right, we all saw how successful that was.
There is no justifiable reason to require the processor to have the same credential as the broker/owner/originator, even if the processor has their own independent business. I can think of no profession where the assistants and support staff are required to have the same licensing as their boss. The paralegal doesn't have to pass the bar, nor does the dental assistant need to be a licensed dentist. A case may be made that processors do require some certification/regulatory expertise, but that would be a very different sort of certificate, not to the onerous levels of a broker's license or NMLS licenses. Also, let us not forget the considerable expense of acquiring those licenses, and the expense of annual continuing education requirements. In California alone, a Broker's License with eight courses and test materials will cost well in excess of $2,000 alone. Add in the other $1,000 in fees, tests and courses for the NMLS, and you have an almost insurmountable barrier to market entry for most people, and a very effective mechanism for eliminating people currently employed in the industry.
As a small business brokerage owner, I can attest this has impacted my business dramatically, having two originators unable to afford the NMLS requirements, and also having a first-class independent contractor loan processor not able to afford to get her Broker's License and NMLS requirements fulfilled. She had to shut her business, and it was only through divine providence that this woman was able to actually get a salaried job as a processor with a brokerage operation that is more than 30 miles away from her home. This woman is a single parent who is the sole provider for her family. Does it benefit the consumer to put her out of business and go on welfare? How many women in the same position were unable to get a salaried job and are forced to provide services under the radar, or worse yet, become unemployed? Is this sorry situation in the best interests of the consumer? Does the consumer benefit from this capricious regulation? I think not.
In the end, we can talk about the unfair impact on women, but let's face it; the SAFE Act is really just another attack on small business in favor of the big banks. All the while, the regulators continue to play wag the dog with the American people, giving the appearance of taking action, rather than actually considering actions that will have a beneficial impact on American consumers that they will understand. Our economic problems are at crisis proportions and an overhaul of attitude towards regulatory policies is long overdue. In this specific instance, I call upon the California DRE to repeal their outrageous, anti-woman, anti-small business arbitrary interpretation of a seriously flawed SAFE Act regulation.
George Duarte, MBA, CMC is broker/owner of Horizon Financial Associates in Fremont, Calif. He has been very active in industry associations and local Chambers of Commerce. He has been a mortgage originator for more than 25 years and may be reached by e-mail at
[email protected].
