Mortgage industry strengthened by new licensing & education law.

Just like doctors, lawyers, police officers and teachers, mortgage loan originators in New York now will be subject to strict regulations, thanks to the Mortgage Loan Originator Registration Bill that was overwhelmingly passed by the New York Legislature. It became effective on January 1, 2007 and it is a great step forward for the mortgage industry.

The two main parts to the new law--licensing and educational requirements--make it both effective and efficient. Greg Krauza, president of the New York Association of Mortgage Brokers, told the New York Times that his organization has been pushing for the passage for fifteen years. Reputable originators throughout the state have also been encouraging bank regulators to enforce stricter regulations on the mortgage industry, which includes approximately 20,000 mortgage brokerage operations across the country.

The first part of the law requires mortgage loan officers who work for brokerages and mortgage banks to register with the State Department of Banking. This will bring increased integrity and loan officer accountability to our industry, under the new law loan officers at mortgage brokerages must pass an extensive background check to weed out those with recent felony convictions or financially oriented misdemeanors, such as credit-card fraud. In the past, if a loan officer committed fraud or engaged in illegal activity, it was the registered company that was held liable. That meant many fraudulent loan officers would jump from company to company, without recourse.

After Ohio implemented a licensing requirement, almost ten percent of its loan officers were not allowed to write loans because they had been convicted of felony crimes or misdemeanors involving financial misconduct. Now New York will have a similar system in place, with a legalized process, to see if a loan originator has any felony convictions or has been banned from other states from doing business. This will greatly help the character and integrity of loan officers and carry over to the industry as a whole.

The second major component to the law, an educational requirement, is another positive for our industry. In the past, there were no educational classes required. That often meant someone could start taking applications without even knowing the terms or the meaning of the sensitive financial information they were requesting from consumers. The new law requires each new mortgage loan officer in New York to initially complete 18 hours of industry education. This is great news for American consumers--80 percent of whom use mortgage brokers when purchasing a new home--who should be offered a more informed loan originator to provide them with better answers to their questions.

In addition, once registered, loan officers must complete 18 hours of educational courses biennially, including three hours of required instruction in ethical conduct in the area of mortgage loan originating or lending. This continuing educational requirement recognizes that laws, regulations and practices concerning the mortgage industry keep changing, and that mortgage bankers and brokers need to keep informed of these changes. This will be a big plus for everyone.

Will the new law improve the industry in our state? Yes, if similar laws in other states are any indication of its success.

Many states around the country, including New Jersey and Connecticut, have already passed similar licensing requirements. Connecticut has no education requirement for mortgage brokers, while New Jersey requires prospective brokers to pass a test on federal and state mortgage practices and laws, among other topics.

Nationally, the Conference of State Bank Supervisors is also boosting the mortgage industry by creating a single repository for the names of licensed mortgage officers, including details of any legal actions taken against them. That database will be made public in 2008.

There was no better time to pass this groundbreaking New York law that will benefit the majority of mortgage bankers, brokers and their employees who operate in a professional manner, but who are unfairly tarnished by the actions of rogue bankers. After all, new statistics on growing fraud in the industry are shocking: Mortgage fraud is one of the fastest growing white-collar crimes, according to the F.B.I., with reports more than quadrupling since 2001. Fraud costs lenders more than $1 billion a year, the F.B.I pointed out in a recent report.

Although the law took effect January 1, 2007, the Banking Department has up to 2 years to implement its systems to accommodate necessary changes. In the meantime, I'd like to congratulate those who have been actively involved in this nearly two-decade-long effort to improve and strengthen our industry.

The securities and finance industries have had background checks, finger-printing and registration for many years, and this is something that we are also glad to have now.

Ensuring the highest standards of personal and professional conduct will help our industry grow and prosper.

BY JEFFREY GUARINO, MANAGING DIRECTOR, GOTHAM CAPITAL MORTGAGE CORP.