by The Surety & Fidelity Association of American (Lenore S. Marema & Daniel Wanke)
--Federal Studies of Mortgage Broker Bonds Will be Conducted Next Year
In this session of Congress, SFAA worked with the National Association of Mortgage Brokers (NAMB) on a provision that would require correspondent lenders and mortgage brokers to post a surety bond in order to participate in the FHA mortgage insurance and loan programs instead of the existing audited financial statements and minimum net worth requirements. This work was done in connection with the FHA Reauthorization Act in H.R. 1852, which passed the House earlier this year with the new bond requirement in the bill, but went no further in the Senate.
As the problems in the mortgage industry worsened, and the House started its work on a housing bill, H.R. 3221, it included some provisions from H.R. 1852 in its new bill, but not the new bond requirement. Instead, the House version of H.R. 3221 would have required the Comptroller General to conduct a study of the participation of mortgage brokers; and correspondent lenders in the mortgage insurance programs of the FHA. Specifically, the House bill requires a study of the extent to which the financial audit and net worth requirements impede participating in the FHA program; the effectiveness of the financial audit and net worth requirements in protecting the Mutual Mortgage Insurance Fund; the extent and effectiveness of the supervision and quality control of mortgagees in FHA programs; the extent to which allowing a mortgage broker to post a bond in lieu of the financial audit and net worth requirements would increase participation by mortgage brokers; and the extent to which allowing a surety bond would protect the Mutual Mortgage Insurance Fund and the impact and cost of such changes on the FHA. The House included a study provision in its housing legislation because ongoing negotiations with the Senate Banking Committee indicated that the Senate wanted a broader review of the regulation of mortgage brokers and was not ready to endorse surety bonding as a regulatory tool for mortgage brokers without further study of all the options. This version of H.R. 3221 passed the House.
The Senate version of H.R. 3221, however, contained a broad requirement for a study of the regulation of mortgage originators. It requires the Secretary of Housing and Urban Development (HUD) to conduct a study within a year for strengthening consumer protections, enhancing examination standards and establishing performance bonding requirements, among other issues, for mortgage originators or institutions that employ such brokers.
The Senate bill also included a comprehensive new system for licensing and regulating mortgage originators. The Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators will create the Nationwide Mortgage Licensing Registry (National Registry). State licensed mortgage originators will have to be state-licensed under new minimum licensing standards that the Senate bill would create for the states. Among the licensing requirements is a net worth or surety bonding requirement. State licensed mortgage originators would have to submit fingerprints for a background check to the National Registry, as well as a credit report. There also are minimum pre-licensing, testing and continuing education for the state licensees. All licensees will get a unique identifier to facilitate electronic tracking of the loan originators and access to the history of their activities by state and federal regulators.
States are given two years to put these minimum licensing requirements in place or HUD would put such a system in place for loan originators from states that are not compliant. If enacted into law, it would mean every state would have to have either net worth or surety bond requirements in place for mortgage brokers in the next two years. Of note is that the study HUD must conduct next year includes establishing performance bond requirements.
The Senate bill also requires the federal banking regulators must maintain a system to register employees of federally regulated depository institutions, who are mortgage loan originators, with the National Registry. Such federal loan originators will have to register, provide fingerprints for a background check and personal history to the National Registry.
In the end, the Senate version of the housing bill became the vehicle in Congress. The House passed the Senate version of H.R. 3221 and the President signed it. The new law contains the mortgage broker provisions, described above, from the Senate bill.
SFAA will provide input into the study of the regulation of mortgage brokers in order to promote an acceptable surety bonding requirement. Since the Administration will change in January, 2009, it remains to be seen if the current Secretary of HUD will begin the study or will leave it to the next Administration. Steve Preston, the former Administrator of the Small Business Administration (SBA), was recently confirmed as the new Secretary of HUD, but his term ends with the current Presidency.
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