America needs licensed mortgage loan originators

Op-ed views and opinions expressed are solely those of the author.

Mortgage Loan Originators have not been treated in a manner consistent with their credentials and qualifications. In some extreme instances, MLO’s were unfairly scapegoated for the 2008 financial meltdown.

The Neutering of Glass-Steagall- “A Bi-partisan Mistake!”

The Glass-Steagall Act was part of the Banking Act of 1933. It placed restrictions on activities that commercial banks and investment banks (or other securities firms) could do. It effectively separated those activities, so the two types of business could not mix, to protect consumer’s money from speculative use. This included but was not limited to banks making risky investments with depositors’ monies.

Sixty-two years later, Republican Congressman, James A. Leach was joined by Bill Clinton’s Secretary of the Treasury, Robert Rubin in introducing a repeal of sections 20 and 32 of the Glass-Steagall Act on grounds that “market realities” needed to be addressed. The partial repeal of the act in 1999 was part of a broad deregulatory push spearheaded by Federal Reserve Chief, Alan Greenspan, Senator Phil Graham of Texas and Rubin.

Glass-Steagall was not technically repealed in 1999, but it was effectively neutered. Legislation was passed that year that allowed bank holding companies to engage in previously forbidden commercial activities, such as insurance and investment banking.

The change in the law opened the floodgates for giant mergers, such as the $33 billion deal between J.P. Morgan and Chase Manhattan in September of 2000. During the darkest days of the financial crisis, Bank of America acquired two troubled financial companies — Countrywide Financial Services and Merrill Lynch, deals that wouldn’t have been possible before 1999.

Dodd-Frank to the Rescue?

Since 2008, regulatory changes in the U.S. and abroad have supposedly mitigated that danger. The Dodd-Frank financial overhaul bill contains complicated provisions that would allow regulators to step in and take over failing banks, if necessary.

Was this the answer? Nobody truly knew. In many ways, Dodd-Frank was reminiscent of a farmer plagued by coyote raids on his hen house. In the end, he came up with the perfect solution: “He would kill all his chickens, making it impossible for the coyotes to do the same.”

Former Massachusetts Congressman, Barney wasn’t a banking expert. He was a tireless advocate for Gay rights. Former Connecticut Senator, Christopher Dodd was arguably the most corrupt Senator on the hill, as was witnessed by his sweetheart mortgage deal with Countrywide Home Loans. He was forced into retirement by his own party bosses!

The topic was complicated, and an aggrieved America demanded an explanation. An alternative explanation needed to be cooked up! A bi-partisan mistake, designed to enrich large banks was the recipe for getting voted out of office!

President Barack Obama found Mortgage Brokers an easy target. Aggressive banks created the 2/28 and 3/27 ARM loans with high margins for credit challenged borrowers! Mortgage Brokers sold merely them.

As with the framers of Dodd-Frank, Obama lacked a background in banking. Ditto for Massachusetts Senator, Elizabeth Warren who proposed the Consumer Finance Protection Bureau. Yet many listened and concluded that more regulations on Mortgage Brokers would be the answer. In doing so they issued the death sentence to tens of thousands of mostly family-owned small businesses.

Creating a Regulatory Purgatory

The “S.A.F.E. Act” was probably the best of the post 2008 regulations. The “N.M.L.S.” assigned “unique identifier numbers” to all Originators. A national licensing exam was long overdue. Where it fell short was not making this requirement universal. Originators working for Charter Banks, Community Banks and Credit Unions were exempted. Critics contended that had the requirement been for all Originators, at least 20% of them would have been eliminated, due to inability to pass the rigorous exam.

Placing a 2.75% cap on Mortgage Broker revenue sounded good on paper. But in many “flyover America” locations, it translated to “no longer being able to do smaller loans.” Using “Appraisal Management Companies” as intermediaries between Brokers and Appraisers reflected the novice orientation of its creators. In the end, it doubled the borrowers’ appraisal cost.

Previously, Correspondent Lenders and their branches could “table fund” loans in the bank’s name. Banks liked this practice because “straight commission, on collection employees requiring no benefits” resulted in huge savings, that were subsequently passed on to the borrowers.

Ironically an increased lack of transparency came with the changes. Previously, Yield Spread (YSP) was disclosed on the HUD 1 Settlement Statement. Today, a borrower may never know how much they paid for the loan.

A High Bar

Mortgage Originators must be “squeaky clean.” Any previous felony or a misdemeanor involving banking, real estate, securities or insurance fraud will result in exit visas from the industry. The continuing education is extremely intense. The knowledge needed to originate certain types of loans requires exposure to accounting. The record keeping required for a Mortgage Broker business’ is tedious. Yet thanks to derogatory insinuations by framers of recent regulations, MLOs are often viewed with suspicion, bordering on contempt. This paradigm is unjustified.

It may take an Originators Union to reveal the shaky credentials of regulation framers! A united effort to end the practice of Originator abuse, such as being paid AFTER a loan is sold in the secondary market, could be expanded. It starts with demanding corrective reforms. Originators’ right to receive 1099’s, no cap on revenues, a return to the Correspondent Lender model, eliminating the need for appraisal management companies, and requiring that ALL Originators pass the national S.A.F.E. exam, head the list.

“Creating awareness” is the first step. Union members would receive consistent updates on legislative action. Hostile politicians and bureaucrats would be identified. Industry friendly Congressmen and Senators would be recognized and supported. They do exist.

A prime example is Kentucky 6^th District Congressman Andy Barr. A member of the House Financial Services Committee, Barr essentially grew up in his father’s Lexington Kentucky based C.P.A. firm. In 2020, I wrote Andy a detailed letter outlining the need to lift the 1996 moratorium on the FHA 203k investor loan. Within a month, he had followed up with a letter to then HUD Secretary, Ben Carson, urging attention.

In his 2023 interview with presidential candidate Vivek Ramaswamy, Dr. Carson described the cumbersome nature of entrenched H.U.D. bureaucrats. “Some of those people had been there 50 years. They were masters of the slow walk.”

Originators are highly specialized Financial Services Professionals. They typically tackle loan files that their banking counterparts deem too difficult. They are engaged in a critical function that impacts American families as much, if not more than any area of Financial Services.

It’s time for America to recognize these underappreciated professionals.

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