The carnage of the housing crisis and resulting foreclosures have left prospective homebuyers a little wiser and a lot more skittish. Many borrowers are looking at mortgage brokers and lenders with a jaundiced eye. And they’re not the only ones: States and the federal government have been tightening regulations in an effort to ensure brokers are legitimate.
Before the housing crisis, some states had insufficient broker standards in place, while others had little or no means to compensate victims. But that changed as the housing crisis unfolded.
“When mortgage fraud came to light, they decided they needed to revisit why some brokers were licensed in the first place,” says Danielle Rodabaugh, director of educational outreach for SuretyBonds.com.
The federal government got involved as well. As part of the Secure and Fair Enforcement for Mortgage Licensing Act, or SAFE Act, brokers must adhere to applicable federal and state regulations to obtain and maintain a license. States are required to have their own regulations and are protecting consumers against fraudulent practices by requiring brokers to financially increase their skin in the game.
“Most mortgage brokers are small businesses who are members of their local community and who strive to provide the lowest rates and fees possible to their clientele based on their ability to offer competitive pricing from a variety of lenders,” says Valerie Saunders, communications chair for the National Association of Mortgage Brokers.”With the enactment of the SAFE Act, state-licensed mortgage lenders, mortgage broker businesses and loan originators are held to a higher standard through testing, annual continuing education requirements and yearly credit and background checks.”
How are consumers protected?
The federal government has mandated that states protect consumers in 1 of 3 ways, according to Saunders: guaranty funds, surety bonds or minimum net worth requirements for brokers.
Guaranty funds are financed through upfront broker license fees and will pay victims of fraud in the case of broker insolvency. There’s usually a cap on how much will be paid out. Minimum net worth standards are meant to ensure that only the most financially stable brokers are in business. Some states require credit and background checks as often as once a year.
Surety bonds are contracts that bind the broker to state licensing laws. They are less like an insurance policy and more like a line of credit, says Rodabaugh. The states set the amount and term of the bond and can increase the bond amount or revoke it for brokers who fall short on any of the standards.
Before the housing crisis, a bond amount might be as little as $10,000, but since 2008, Rodabaugh says they can go as high as $50,000 or $100,000. Typically, a broker pays 1 percent to 4 percent of the bond amount upon renewal every year or two. A sketchy work history could mean the broker has to pay more or is not approved for the bond, adds Rodabaugh.
Can the consumer actually collect?
Consumers can file a claim to collect on a bond or guaranty fund if there was wrongdoing, but it usually requires the professional to be convicted in a court of law or successfully sued by the borrower, says Rodabaugh. The amount collected may not fully compensate claimants for losses due to broker fraud, especially if there are multiple claims against a bond or a fund.
Rodabaugh says surety bonds and guaranty funds are meant to be preventative, not to pay claims as an insurance company would. “They are used as a ‘weed-out’ method to keep risky brokers out,” she says. That’s why states only want to license brokers who have already met high standards such as net worth requirements, and background and credit checks.
Every state has different requirements for surety bonds or guaranty funds and how to collect, but their main purpose, Saunders agrees, is “to show that the people you’re doing business with know what they are doing and are held to a higher standard.”
Best protection is ‘borrower, beware’
The best way for borrowers to protect themselves against broker fraud is to do some research before working with a broker, says Saunders. The consumer-access website of the Nationwide Mortgage Licensing System, or NMLS, will show which brokers are licensed in every state as well as those who are federally licensed. Borrowers can search the website by individual name or company name. The site will divulge the number of years an individual or firm has held a license and any complaints or court action against them.
Rodabaugh says borrowers can ask a broker to show proof of bonding or licensing and also contact the appropriate state agency to check in an effort to protect against broker fraud. An Internet search of “licensing agency for mortgage lenders” would yield the correct agency. “Whether working with brokers, originators or lenders, not all are required to be bonded in every state,” says Rodabaugh. Consumers need to understand the type of professional they’re working with and what state regulations pertain to their business.
“The main thing is to be aware ahead of time,” she says. “It’s easier to be preventative than to go back for damages.”