Are State Licensing Requirements for Reverse Originators Becoming Too Strict?

Since the passage of the SAFE Act of 2008, mortgage originators have faced background and credit checks as components of the licensing process. Now, some lenders say, they are having a hard time with those basic requirements in light of the down economy.

Under the Nationwide Mortgage Licensing System (NMLS) applicants must meet background and credit requirements in order to obtain or renew licensing. While those requirements have reached a level of uniformity across the nation, it can come down to a state-by-state judgment call as to whether an originator’s application can move forward. And as NMLS has ramped up efforts, some lenders say the current requirements are too tough.

While they support the licensing process—a background check and a credit check, 20 hours of pre-licensed education, and a test with national and state-specific material—they think the process has become too stringent at a time when the economy has taken its toll on many individuals.

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“They’re getting more difficult and strict,” says Paul Fiore, head of sales at American Advisors Group. “When I struggle with it, is when states have taken stances against people who don’t have anything on their record, but because they’ve had financial hardships, they have trouble getting licensed.”

This has become much more prevalent in the last three to six months, Fiore says, noting that many more people today have been hit financially with the economic downturn, which could lead to credit issues. This could pose a problem for lenders who are already licensed but may be unable to renew their license after a subsequent poor credit report.

“If you hire experienced people who have been in financial services industry, very few are sitting there with sterling credit,” he says, adding that the reverse industry is much harder now than it ever was.

However, the background and credit checks are important, says Bill Matthews, president and CEO of State Regulatory Registry, which owns and operates the NMLSR. If a loan officer is involved in a financial transaction with someone else, he needs to have demonstrated through his background and credit that he is qualified, Matthews says.

Both existing and new licensees must provide the NMLS with authorization to pull a credit report, although individual states can determine whether or not a new credit report will be pulled at renewal. The NMLS guidelines cater to the types of transactions loan officers conduct, he says.

“If they have a felony conviction in the last seven years, they can’t hold a license,” says Matthews. “If the felony conviction is of a financial related crime, they’re banned for life.”

The credit component is fairly straightforward except for what Matthews calls a “gray area.” While outstanding tax liens or bankruptcies are unacceptable, there are some credit issues that the system will address on an individual basis.

For those who have bad credit and are behind on bills, child support, or alimony, perhaps due to the economic climate, he continues, their cases can be evaluated individually, and they may be given a conditional license that depends on their performance throughout the next six months.

While the guidelines may be restrictive, some lenders say they can’t be careful enough in terms of their new employees. Network Funding, for example, considers these tests standard practice in the hiring process of each prospective employee, regardless of whether or not they’ve applied to a position requiring licensing.

“It’s especially important in the reverse side when you’re dealing with a protected class like senior homeowners,” says David Cook, head of Network Funding’s reverse mortgage division. “A lot of fraudulent activity is performed by people who don’t belong in the business.”

Network Funding exercises caution when it comes to subpar credit reports because financially desperate people may not make ethical decisions, Cook says.

“If someone is really down and out, and they’re financially strapped, those are the folks that you have to be very careful about, in regards to taking advantage of a situation, maybe in a way that’s not straightforward,” he says.

While he thinks the licensing requirements are necessary, Cook expressed some concern regarding credit checks on lenders in his company for license renewals, as well as filling continuing education requirements.

“I can visualize where we may have credit issues coming up,” says Cook. “I would suspect we’ll have a few that just won’t get their continuing education done in time. If they let their license expire, or don’t renew for any reason, we have to terminate.”

However, Network Funding does give some leeway when it comes to questionable credit reports.

“We’ll allow them to send in a letter of explanation,” Cook says. “Just looking at a credit report shouldn’t be a final decision maker, but it certainly contributes to a lot of it.”

Many states share this attitude and will consider the circumstances relevant to an applicant’s credit, says Matthews.

“If you’ve had a bankruptcy because of a health situation or medical bills, that has nothing to do with your financial responsibility,” he says. “If you owe liens because of real estate speculation, that would be a good example of not being financially responsible.”

Written by Alyssa Gerace

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  • I just took my 10th state specific test for my 10th additional license this year and all the states are looking for the same thing…sound loan officers that show signs of financial responsibility and honesty. Matthew reiterates:  “If the felony conviction is of a financial related crime, they’re banned for life.” I personally don’t see anything wrong with this. Why do we want these types of felons among our ranks? While most of us are honest and sound we can’t deny many shady people joined our business looking to make a fast buck. This  thinning of the herd is not at all a bad thing in my opinion.

    • Mr. Lyles,
       
      You are right.  Licensing was a very necessary step. 
       
      However, it is odd that there are two separate levels of approval.  All originators should be subject to exactly the same licensing requirements and fees.  It is shameful that bank originators can hide incompetence behind registration.  This is not to say all bank originators are incompetent (because they are NOT) but it is to say that those bank originators who are incompetent can hide that incompetence behind registration.  The banks certainly are not administering a testing system anything close to that created by the NMLS.  
       

    • Mr. Lyles,
       
      You are right.  Licensing was a very necessary step. 
       
      However, it is odd that there are two separate levels of approval.  All originators should be subject to exactly the same licensing requirements and fees.  It is shameful that bank originators can hide incompetence behind registration.  This is not to say all bank originators are incompetent (because they are NOT) but it is to say that those bank originators who are incompetent can hide that incompetence behind registration.  The banks certainly are not administering a testing system anything close to that created by the NMLS.  
       

  • I think its great that the folks who were a 1/3 component to our nations current banking debacle are precluded from being able to originate.  The State rules are so inconsitant.  Many a Mortgage Banker or Lawyer, aor anyone has had a DUI.  Most of these folks never re-offend.  Yet I know a lad still waiting for his NLMS for a DUI.  Yet I know a broker who lost his DRE License, who got an NLMS approval.  It does not make sense.

    I have run into Refi prospects whose Originator of a reverse through them into an Annuity as well.  They were paid $400.00 per month, when TENURE income would have been $1200.  I think a High Bar is good, but a case as an 18 year old High School kid of malicous mischief, a college DUI, is really a stretch  for disaproval of someone who went on to get their masters degree.

    There are folks in California who are 290 Registrants (Mentally Disordered Sex Offenders) and have to register because of a public indescresion in the 1950’s with their then to be wife of 60 years.

    Its simply common sense.  Now my question would be, is it a Bankrupcy that Preclues you, or being in Bankrupcy?  Have had a a tax Lien, or a current one?  That being said, I guess I need to get my quarterly estimates in!

    • Greg,
       
      You make some great points.  Even though there will still be some inequities, there needs to be some fine tuning in the licensing area.  No licensing system can be entirely fair but it can be better.

    • Greg,
       
      You make some great points.  Even though there will still be some inequities, there needs to be some fine tuning in the licensing area.  No licensing system can be entirely fair but it can be better.

  • James, I agree with you. It is time to complete the flushing of these individuals from our industry, although, I believe that it has been more of an issue on the forward side.
    I would like to throw this out…I have been hiring some very educated, talented and seasoned originators who have been with exempt institutions for many years originating reverse mortgages. We are a state regulated banking firm. When these people finish with NMLS and state licensing they ask me” What was that all about? My career is in the reverse mortgage industry. I have never originated nor do I ever want to originate a forward mortgage. There were only 2 very simple questions on all those tests having to do what I do..reverse mortgages.” This only reinforces my belief that these are 2 distinct industries. Yes, there are similarities, but there are far more dissimilarities. There should be separate licensing! I would suggest that seniors who have reverse mortgages that should not …worked with an originator who was primarily on the forward side and did it for commission only and with little to no knowledge about the product other tan which one paid the most. The insurance industry has separate licensing for life, health, annuities, and property/casualty. The securities industry separate for mutual funds, variable annuities, general securities, etc.. As important a financial planning tool and lifeline for seniors as reverse mortgages have become, it is time for us to stand on our own and be recognized as “somewhat similar but definitely different” from the rest of the mortgage industry. As far as the cost of licensing…speak to your state legislators. Don’t kid yourself…its all about revenue. Comments?    

    • Mr. Kegan,
       
      I agree with much of what you have to say except that I had one-half as many questions on my NMLS exams about reverse mortgages.  All kidding aside, this is an important issue.
       
      Back in late 2006, some of us were pushing NRMLA to put together an exam for its credential which could be used by the states for licensing examination purposes.  It took NRMLA too long to develop the CRMP exam to try successfully to wage that war.
       
      As you probably know, the AICPA, also a trade organization, writes the exam used by the states in qualifying state licensed CPAs.  So having NRMLA do the same is not without precedence.  There would probably have to be some adjustment for state specific questions.
       
      The whole process of getting the states to allow separate testing would have been far simpler back in 2008, 2009, and 2010 than it would be today.  There is no reason not to move forward on the issue but the costs of lobbying could be astronomical.

    • Mr. Kegan,
       
      I agree with much of what you have to say except that I had one-half as many questions on my NMLS exams about reverse mortgages.  All kidding aside, this is an important issue.
       
      Back in late 2006, some of us were pushing NRMLA to put together an exam for its credential which could be used by the states for licensing examination purposes.  It took NRMLA too long to develop the CRMP exam to try successfully to wage that war.
       
      As you probably know, the AICPA, also a trade organization, writes the exam used by the states in qualifying state licensed CPAs.  So having NRMLA do the same is not without precedence.  There would probably have to be some adjustment for state specific questions.
       
      The whole process of getting the states to allow separate testing would have been far simpler back in 2008, 2009, and 2010 than it would be today.  There is no reason not to move forward on the issue but the costs of lobbying could be astronomical.

    • Amen!! I have originated reverse mortgages for nearly 15 years and work for a company which originates forward mortgages. The company, to it’s credit strongly encourages the LO’s to refer reverse leads to me. Occasionally however I’ll get a call from one of them who wants to originate a reverse himself. He or she will tell me that they know all about reverse mortgages, in fact originated a couple of them when Wells Fargo would pay a referral fee if the originator did some of the legwork. In one such case recently, the LO was surprised to hear that the loan was FHA insured.
      There was a day (a good day) when this niche was special and the people involved really knew what they were talking about and really cared for the senior. When HUD bowed to Countrywide and changed the longstanding rule that required the LO to do a face to face application, this segment of the industry started going down hill.
      Not only do we need to separate the licensing (and by the way, maybe have some sort of enforcement ability to deal with on the street reverse mortgage offenders), we also need to separate the folks at HUD so the rulemakers have some sort of on the ground experience with seniors. Maybe some HUD folks would care to sit in with a 90 year old who is forced to sign his/her name through painful arthritis about 60 times. Sorry, I get a little worked up. Most folks who have specialized for a while will get worked up. We aren’t here for the sole purpose of making a buck like most of the newcomers and we care about what we do.   Jerry Gilmour

  • Jim, I would be interested in Peter Bell’s thoughts on this subject and I would like everyone to know that I am not trying to open Pandora’s box here; however, I do feel strongly about the need for separate licensing or perhaps the need for some additional layering of mandatory education, testing or…? Certainly worth discussing among professionals that have chosen this as their career and are interested in keeping it viable and in not having their borrowers influenced or poached by under trained interlopers. What say all? 

  • Jim, I would be interested in Peter Bell’s thoughts on this subject and I would like everyone to know that I am not trying to open Pandora’s box here; however, I do feel strongly about the need for separate licensing or perhaps the need for some additional layering of mandatory education, testing or…? Certainly worth discussing among professionals that have chosen this as their career and are interested in keeping it viable and in not having their borrowers influenced or poached by under trained interlopers. What say all? 

    • Mr. Kegan,

      While I cannot represent the current position of Mr. Peter Bell, one must question where NRMLA should be focusing its strained resources.  Maybe this is an issue for the Coalition or the MBA section on reverse mortgages.

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