So You've Been Preempted-What Are You Going to Do Now?: Solutions for States Following Federal Preemption of State Predatory Lending Statutes

Brigham Young University Law Review, 2004 by Childs, Christopher R

In addition to these structural problems, it is often the case that, unlike banks and other savings institutions that originate mortgage loans, mortgage brokers are not subject to regulation by state or federal agencies.109 Regulation of mortgage brokers, which occurs on the state level, is often uneven or nonexistent.110 Often, even if brokers must be licensed, they are not regulated.111 As of June 2000, although thirty-nine states had some mortgage broker registration requirement and twenty-nine required proof of net worth, only six states required mortgage brokers to pass a competency test.112 Brokers are often undercapitalized and sometimes simply move from state to state after declaring bankruptcy or otherwise facing consequences for making abusive loans.113

Furthermore, the mere fact that a broker is licensed does not mean that sellers of unfair loans are caught, prosecuted, or held accountable for engaging in deceptive and unfair sales tactics. In most states, the licensing and enforcement divisions are ineffective when it comes to stopping predatory sales tactics employed by mortgage brokers. As noted in the Treasury-HUD Joint Report,

[t]he subprime mortgage and finance companies that dominate mortgage lending in many low-income and minority communities, while subject to the same consumer protection laws, are not subject to as much federal oversight as their prime market counterpartswho are largely federally-supervised banks, thrifts, and credit unions. The absence of such accountability may create an environment where predatory practices flourish because they are unlikely to be detected.114

2. What form should state regulation of mortgage brokers take?

The inadequacy of state regulation of mortgage brokers and other loan sellers demonstrates that state policymakers should take thoughtful measures to combat predatory practices. This section suggests some practical solutions that states should consider when enacting regulation targeted at predatory mortgage brokers and other predatory loan sellers.115 States can decrease the rate of abusive lending occurrences among loan brokers by heightening licensing and registration standards for mortgage brokers (including increasing loan officer/originator fitness and competency requirements, requiring proof of adequate capitalization, and increasing or implementing bonding and insurance requirements) and by creating an agency that outlines prohibited acts and contract provisions and enforces violations of such guidelines.116

a. Licensing and registration of mortgage brokers. Although several states require that mortgage brokers and other loan sellers obtain a license or register with the state before originating loans, many do not.117 Aware of this problem in his state, the President of the Illinois Mortgage Bankers Association commented, "It's too easy to get into this business. . . . It's not good that you could be selling paint at Sears one week and originating loans the next."118 Because of the importance of this issue, and the substantial investment borrowers make when purchasing a home, it is imperative that "[residential mortgage loan originators who work directly with the public . . . be educated, honest, and professional."119 Laws must seek to ensure moral and professional competence among those applying to become mortgage brokers. To be effective, licensing laws should require that every mortgage seller be individually licensed and registered.120 States should conduct background investigations to test the ethical fitness of loan originators.121 Licenses should not be issued to loan officers who have been convicted of a felony or crimes involving fraud, who have been involved in unethical activities, or who have had a financial services license revoked due to past unethical conduct.122 Loan officers should be required to pass competency tests that require them to demonstrate the capacity to effectively counsel consumers,123 that test understanding of principles of mortgage ethics and mortgage law, and that otherwise require them to demonstrate familiarity with industry standards and rules.124 These fitness and competency requirements should be imposed upon the principals of mortgage companies as well as upon loan officers working for such companies.125