You may remember reading about the SAFE Mortgage Licensing Act (S.2595) in June 26's MortgageOrb blog titled ‘Do You Originate Loans? Fingerprints, Please.’
The bill, which proposes to create a national licensing system for residential mortgage originators, caught the attention of mortgage professionals, due to one of its more radical components: mandatory submission of fingerprints by loan originators to the FBI. A large segment of people, unsurprisingly, voiced their objection to this rule.
In a letter sent to Sen. Harry Reid, D-Nev., the Competitive Enterprise Institute (CEI), the American Conservative Union, the American Civil Liberties Union and other co-signers wrote: "Most of the lower-level employees targeted in this bill have little to do with the creation of mortgage products in question. And there is little, if any, data connecting risky lending to employees with criminal backgrounds.’
John Berlau, director of the Center for Entrepreneurship at the CEI, was quoted by the Wall Street Journal at the time as calling the rationale for the fingerprint registry "thin."
‘Were a significant number of bad loans made by ex-convicts?’ he asked.
Well, actually, Mr. Berlau, yes, there were.
An investigative report recently published by the Miami Herald revealed that a frighteningly large number of brokers and originators who joined the Sunshine State's mortgage industry between 2000 and 2007 had criminal records – 10,529, to be exact.
Of those, the newspaper found that 4,065 individuals passed background checks, despite having committed crimes that Florida law specifically requires the Office of Financial Regulation (OFR) to screen for. These offenses include bank robbery, racketeering and extortion. Twenty brokers allowed by regulators to keep their licenses had been convicted of mortgage fraud.
But those statistics in and of themselves, of course, don't necessarily contradict Berlau's sentiment that employing ex-cons doesn't automatically equal mortgage fraud.
''We look at all the facets around – you know, whatever file – and we predicate on the fact that everybody deserves another chance,'' Terry Straub, director of the OFR's Division of Finance, told the Herald. A shot at rehabilitation is, of course, only fair.
Just because the Florida mortgage industry attracted a lot of people with criminal records in the last eight years doesn't mean they are responsible for bad loans – right?
Enter Scott Almeida, who, after being released from prison for cocaine trafficking, submitted to the OFR a character reference (a letter from his mom), paid a $215 license fee and was approved as a broker. Almeida now stands accused of orchestrating almost $3 million in fraudulent loans and fleecing dozens of borrowers of their life savings. The OFR received two complaints about Almeida's practices but failed to investigate accordingly.
Then there's Michael Fletcher, who was previously convicted of grand theft. School teacher Candace Young alleges Fletcher misled her into signing over the deed to her house. She says she thought she was refinancing. (After spending $100,000 on legal bills, Young got her house back when a civil-court judge nullified the deed transfer. The notary whose signature is on the documents admitted she was not present for the deal, the Herald reports.)
"I think it's horrible," Young told the paper. "Why would you let someone convicted of grand theft just go and raid the public? What does it take to lose a license?"
Gary Kafka, meanwhile, worked at several lending firms, despite the fact that his probation officer advised in court records that he should not work in the mortgage industry. His prior conviction? Bank fraud.
Two years after his jump into the industry, Kafka was convicted of inflating incomes and misrepresenting finances, costing his then-employer, America's Best Lending, some $2.7 million.
As a loan originator, he was able to simply bypass the annoyance of licensing altogether. (In Florida, loan officers at banks have no licensing or registration requirements, lenders need registration only, and brokers require licensing, registration and a background check).
The Herald report found that more than half the people responsible for writing mortgages between 2000 and 2007 were not subject to any criminal background check at all.
The newspaper also uncovered several instances in which regulators okayed applicants even after they discovered the applicants had lied on their registration forms. Twenty-two brokers who were stripped of their state licenses (for reasons ranging from dipping into clients' accounts, to charging excessive fees) went on to become originators instead.
Moreover, although lenders are required by law to submit to the OFR every quarter the names of its originators, the Herald found that hundreds of companies did not comply.
And so it would appear the system was broken. Systemic limitations dictated that supervision in some areas (i.e., lender licensing) was not required.
Still, the lack of regulatory oversight is nothing short of gross. OFR was, like many, too caught up in the housing boom to care about due diligence. Looking the other way apparently became common practice for the OFR.
OFR Commissioner Don Saxon, in response to the Herald's report, issued a statement in which he touted some of his office's successes over the past year in strengthening the licensing process – among them, the implementation in March of the reassuringly named REAL (Regulatory Enforcement and Licensing) System database, which aims to provide a single source of information for licensing and enforcement activities. He said the OFR may try to link REAL to the National Mortgage Licensing System.
Saxon also noted that his office will work to "explore administrative rulemaking initiatives that could significantly strengthen [the office's] approach when considering the application of any person who has been convicted of a felony involving fraud, dishonest dealing or any act of moral turpitude."
It's clear that the onus for better policing Florida's industry rests with the OFR. Innovative solutions and more careful examinations of registrations are obviously needed.
However, the cooperation of originators and brokers is also important. No one particularly enjoys submitting fingerprints, and we can all agree there are far more good apples in the industry than bad. So why should credible originators and brokers forgo their privacy when they're not the ones committing the crimes?
"Every time a bad player's in the industry, we all get a black eye," Ritch Workman, president of the Florida Association of Mortgage Brokers, told Fox Business News. "I'm happy the story broke. I think it's going to be a purge of the industry."
Considering confidence in the mortgage industry is at an all-time low, isn't making sacrifices in the name of improving the industry's less-than-stellar reputation worth it?
