NMLS — Then, Now, And To Come

Where It All Began

“In the early 2000s, preceding the financial crisis, it became apparent that there were a lot of activities in the mortgage industry that really weren’t up to par,” CSBS President and CEO Jim Cooper says. “The way LOs were licensed was inconsistent throughout the country. In some cases bad actors were getting moved from one state to another.”

Cooper was on the CSBS Board of Directors at that time, when predatory lending, fraud, abusive practices, and the consolidation of large banks were all cause for distress.

“Leaders of the organization really recognized the need to increase the professional standards for mortgage loan originators and have a more comprehensive approach to supervision,” he says. “One of the ways they approached that idea is through this multi-state licensing system we now call the NMLS. It really was in response to a need from the states.”

But not everybody was on board with the proposal right away. In fact, it faced resistance from state regulators and large companies with multi-state operations.

By 2005, the CSBS had formed two task forces to examine the legislative and regulatory steps that would need to take place in order to make NMLS a reality. A group of industry leaders was mustered to provide input in the process. Development meetings continued for a full year as officials mulled over funding, state adoption, and system fees.

“We had a lot of opposition and we had to convince our members, consumer groups, industry groups, Congress, and others that this was a good idea,” Gavin Gee, former CSBS chairman and retired director of the Idaho Dept. of Finance said in “The Making of NMLS,” a podcast series the CSBS published in July.

Nine guests included Bill Matthews, former executive VP of CSBS, and the late Ryan, whose recording was made before his passing.

Matthews in particular recalled how an industry blacklist was being widely circulated before NMLS, fanning out the dirty deeds of LOs with criminal records and bad reputations.

Fuel To The Fire

The financial crisis that began at the end of 2006 was “a galvanizing event” for NMLS, according to its founders.

Residential construction began declining in 2006. By 2007, mortgage asset losses strained financial markets and what is now known as the Great Recession came to be.

In July 2008, Congress enacted the Secure and Fair Enforcement for Mortgage Licensing Act, (SAFE) making it illegal to operate as a residential mortgage loan originator without a license.

Within 18 months of the act’s passage, every U.S. state had adopted the NMLS.

“It really raised the standards nationally for MLOs,” Cooper says. “It impacts hundreds of thousands of LOs in the country and sets a standard for professionalism that is important.”

Licensees were suddenly required to pass a criminal background check and demonstrate that they possessed the character and financial fitness to take on the responsibilities being an MLO entailed. Applications and their statuses became public knowledge, as did regulatory actions and consumer complaints.

“When I first learned about what CSBS was doing I thought, Wow! This is really revolutionary,” CSBS Executive VP of Products and Solutions Vickie Peck recalls.

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A mortgage industry veteran, Peck worked with MLOs and companies obtaining licenses in each state.

“What a time saver first of all; to be able to apply online, fill out an application and submit it to one state or all 50 states for that matter,” she says. “Prior to the passage of the Safe Act, some states licensed MLOs and others didn’t, so someone could commit a bad act in one state and other states would never know. NMLS has become a really useful tool and from an industry standpoint it’s really streamlined the process.”

Since Then

Bob Niemi, chairman of the American Association of Residential Mortgage Regulators’ Industry Advisory Council, says the coordination of systems and verifications across the U.S. had the greatest impact on business as a whole.

“Where it has gone from those initial days to where it is now — to allow mortgage originators and company owners to apply online and get their licensing information entered and their background checks and credit reports verified; to allow their licenses to be issued by multiple states at the same time is pretty dramatic,” says Niemi, who works as director of government affairs for Weiner Brodsky Kider PC. “It is not without some challenges but it has grown over the years and come so far from those first five years.”

Residential lending before it was basically the Wild West.

“Today — compared to 15, 20 years ago — the mortgage industry is much more standardized and I think consumers can have confidence in the process and the regulation and supervision of MLOs and the companies that employ them,” Cooper points out.

He and most other industry professionals don’t know what the mortgage industry would look like today if NMLS or something like it never existed.

“It is hard to imagine where we would be without it,” Cooper says. “It has a high public benefit and has brought a much more streamlined process to what can be a complicated endeavor.”

Since it was born, several improvements have enhanced The System.

“Electronic surety bonds can be managed through NMLS now and there’s no notary seal required anymore; that streamlined things,” Peck explains. “The temporary authority to operate was a big lift. We also moved the environment from an on-premise base to the cloud. That allows us to enhance, improve and modernize the system more efficiently, which we’re in the process of doing now.”

A Significant Asset Class

As of the second quarter of 2023, Americans owe $12.01 trillion on about 83.4 million mortgages, according to the Federal Reserve. That accounts for 70.6% of all consumer debt in the U.S.

“The stream of commerce associated with mortgage loan origination and investment is really important to the economy,” Cooper says. “State regulators take the responsibility of licensing and supervising nonbanks very seriously. Consumer access gives people the opportunity to go in and verify their MLOs are properly licensed in the states where they’re doing business and don’t have enforcement actions against them. It provides a really important service to protect consumers and preserve the functioning of the market.”

The CSBS Board of Directors has been focused on establishing common standards and practices to improve efficiency in regulation and supervision. This is a process members refer to as network supervision.

“We have a mandate under the SAFE Act to be the provider for MLO licensing,” Cooper adds. “We want to prioritize that work and make as many improvements as possible.”

More To Come

An NMLS modernization initiative is underway, with changes expected as soon as 2024.

“The look and feel, navigation, will all be improved,” Peck says. “User feedback is really important to us, and so understanding the experience, engaging users as we’re making changes will happen. We’ll be doing some outreach to the industry and will rely on originators and their companies to give us feedback on if the improvements we’re making are going to be of value or if we need to look at things a little bit differently. We’re starting that work this fall.”

This is not the first time the CSBS has launched a modernization initiative for the NMLS and it may not be the last.

“I think coordinating all the regulator and industry requests across not just mortgage but all the other license types supported by the NMLS is a very big project,” Niemi points out. “The biggest challenge is just trying to coordinate all the different internal projects and components that make up what we see as users as the NMLS.”

One of the first focus areas will be addressing “pain points” in the system. These are issues that keep its call center ringing, like the password reset and self help functions.

“We will be working on development, but nothing will go into production until next year. That’s when users can actually start to see changes to the system,” Peck says.

She and Cooper laugh when they ponder what NMLS will look like in 20 years.

“The goal would be automatic review and approval,” Peck says. “We’re not there yet but I do think the enhancements we’ll be making over the next few years will get us much closer to that.”

Another goal is to make the system more data-driven to support state regulators and others. Improved flexibility, capability, user functionality, efficiency, and transparency will all play a role in this undertaking.

“Part of the modernization effort is to preserve what works well and improve the things we can,” Cooper says. “We don’t want to change what works.”

State financial regulators, commissioners, policymakers, and CSBS staff offer more insights on NMLS as well as the history and future of finance in the CSBS podcast, Simply Stated-All Things Finance. Check it out at https://simplystated.csbs.org.