States Unveil Mortgage Licensing System

States have a new tool to regulate mortgage companies and access their track records, including information on companies punished in other states for fraud or predatory lending.

The Nationwide Mortgage Licensing System is an online database that will make it easier for states to monitor mortgage companies. If a firm operating in multiple states is sanctioned in one of them, other states will know immediately. And if that firm applies to open in new states, officials will know about the infractions and could deny the company a license.

“The ability to hide a blemish is gone,” said Steven Antonakes, Massachusetts’ state banking commissioner. In the last two years Massachusetts has issued more than 215 enforcement actions against lenders and brokers.

So far, seven states are participating in the registry, which kicked off Jan. 2: Idaho, Iowa, Kentucky, Massachusetts, Nebraska, New York and Rhode Island. Another eight are slated to join by July, and more than 35 states are expected to participate by the end of 2009. By then, the public also will be able to use the portal to see a company’s state record.

All states require that mortgage companies be licensed, though licensing standards vary in each state.

“This will enhance our regulatory supervision over the mortgage industry. … We’re sharing resources, trying to focus our efforts into providing the most bang for the buck,” said Jeffrey Vogel, chairman of the Conference of State Bank Supervisors (CSBS) and the banking commissioner in Wyoming, which will join the registry in July.

The two groups that set up the system, CSBS and the American Association of Residential Mortgage Regulators, say the depository is a one-stop shop where mortgage companies and loan officers can fill out a standardized set of forms to apply for a license in all participating states. For example, if a firm already has information in the registry to operate in New York and wants to open in Kentucky, it only needs to make a few clicks on the Web to apply for a Kentucky license instead of filling out a new set of state-specific forms.

Planning for the database began four years ago, before the mortgage crisis began dominating headlines. The current wave of foreclosures stems partly from shady lending practices in the high-interest subprime loan market. Some unscrupulous lenders hid the true cost of subprime loans, tacked hidden or excessively high fees onto the loans,or included prepayment penalties for borrowers who tried to refinance. Last year, 1.5 million homes entered foreclosure.

The database will include unique identifiers for each company, its branches, owners and loan officials. Similar to Social Security numbers, these identifiers will follow that firm or person throughout the industry. This is to prevent fraudulent loan originators from escaping punishment by moving to another company, companies from changing their names, or owners from setting up new firms to avoid disclosing past infractions.

On the registry’s first day, 289 companies began filing applications, and 55 submitted them. Eventually, the database could grant more than 370,000 licenses to companies, their branches and loan officers.

One group critical of the registry is the National Association of Mortgage Brokers (NAMB) because they say it doesn’t go far enough. The system only oversees state-regulated banks and lenders, not the largest banks that are regulated by the federal government.

“From a consumer standpoint, this isn’t the perfect scenario because if there’s a bad originator out there, they can easily fall through the cracks and work for someone else,” such as a federally regulated bank, said George Hanzimanolis, NAMB’s president. “If this is about consumer protection, there can’t be an argument that anybody should be left out of this.”

He supports a bill the U.S. House of Representatives passed in November that would require state-regulated banks to join the registry, while loan originators at federal banks must register with the system and receive a unique identifier.