WASHINGTON (Reuters) - Mortgage broker Richard Hobson was astonished when he set up shop in Seattle last year after learning his trade in the tightly regulated UK market.
It was obvious, he says, that a real estate disaster was brewing. “The mortgage industry here has been an eye opener for me. I am surprised about how lax the system was and is.”
But it doesn’t take a newcomer to see that the U.S. mortgage brokerage business is facing big changes as a regulatory backlash follows an historic housing market bust.
Congress and the Bush administration are pursuing reform proposals on how brokers qualify to do business; how they get paid; and how much information they share with borrowers.
The full Senate is expected to take up legislation this month that was approved in May by a 19-2 vote in the Senate Banking Committee.
The bill would impose national minimum standards over the existing patchwork of state systems for licensing mortgage brokers and lenders.
To get a license, brokers and lenders would have to be fingerprinted, undergo background checks, prove their record is clean, pass an exam and meet other requirements.
The national licensing provision, part of a broader housing bill expected to win Senate approval, was co-authored by Republican Sen. Mel Martinez of Florida, a former secretary of the U.S. Department of Housing and Urban Development (HUD).
“When you see an industry that’s so unregulated that someone can actually steal money from their purported client, something’s wrong,” he told Reuters in an interview.
The House of Representatives approved a bill in November to require licensing of mortgage brokers and bank loan officers.
And the Bush administration in March called for “strong nationwide licensing standards” for mortgage brokers, stiffer federal and state oversight of all mortgage originators and better disclosure of loan terms to borrowers.
BROKERS ON THE DEFENSIVE
“We absolutely feel that better disclosure and better regulation are important. We’re working with everyone we can,” says George Hanzimanolis, president of the National Association of Mortgage Brokers.
The association’s Web site appeals to members for support, warning that “the mortgage broker industry is being attacked on every front. ... Our industry will be unrecognizable if changes policymakers have proposed are made final.”
With more than 50,000 firms and 400,000 employees, mortgage brokers are mostly independent contractors who act as middle-men between mortgage borrowers and lenders.
In 2005, they originated 25 percent of U.S. prime mortgages and about 60 percent of subprime mortgages, according to the Government Accountability Office, a research arm of Congress.
More recently, the industry has suffered as housing has slumped, particularly in states where home prices soared the most a few years ago, such as Florida, Nevada and California.
Hanzimanolis says the association is generally supportive of national licensing standards, as long as they don’t unfairly single out brokers and are uniform for brokers, bankers, credit unions and other lenders.
“You’re going to see a much more professional industry in the next year and ... going forward,” he says.
Changes being considered in America resemble steps taken recently in Britain, where the business still has problems, but where regulators have been cracking down for several years.
Hobson, for instance, had to pass three exams to get his mortgage broker license in Britain, which a few years ago put the business under the national Financial Services Authority.
There is no national oversight in America, where the states oversee brokers. Even though Washington state’s standards -- one exam and required continuing education including an ethics course --- are tougher than many, Hobson says the Washington test was “very, very easy” compared to the UK exams.
In Nevada, a mortgage broker’s license can be had by submitting valid identification, financial records and some other supporting documents. No exam or study course is needed. Annual renewals do require some continuing education.
COMPENSATION AT ISSUE
Beyond licensing, critics have accused brokers of unfairly steering some borrowers into mortgages they cannot afford and taking excessive fees, known as yield-spread premiums, from lenders for pushing higher-rate loans. The Center for Responsible Lending, an advocacy group, calls yield-spread premiums “a kickback to brokers” that should be banned.
Hanzimanolis calls such criticism “sensationalism” while adding that there should be more disclosure on compensation.
He says his industry alone is not to blame for the housing market crisis. “Mortgage brokers don’t design the products ... We don’t underwrite,” Hanzimanolis says. “All we do is offer the products that Wall Street and the bankers design.”
HUD last month released a study criticizing the complexity of buying a home and finding that loans from mortgage brokers typically cost more than loans directly from lenders.
“This report demonstrates once and for all that the process consumers endure when they buy their homes is entirely too confusing,” says Roy Bernardi, acting secretary at HUD.
HUD in March proposed requiring lenders to disclose more about mortgage closing costs and payments to mortgage brokers. The proposal is a milder version of one made in 2002 by Martinez when he was running HUD. His successor, Alphonso Jackson, dropped it in 2004, in the face of industry opposition.
That was about the same time that Britain began toughening oversight of the mortgage industry -- a job still under way.
The UK’s financial watchdog, the Financial Services Authority (FSA), last month warned mortgage brokers they should inform clients if a better loan deal could be had by borrowing directly from a bank, instead of using an intermediary.
Most UK mortgages are sold through intermediaries, with brokerages accounting for over 70 percent of the 2007 total. Britain has about 7,000 mortgage intermediary firms.
The FSA’s mortgage brokerage oversight system mandates disclosure of basic information in standard format, requires assessment of borrowers’ ability to repay, and focuses on consumer fairness.
“I hope the U.S. mortgage industry takes steps ... similar to the UK. It is in the client’s best interest,” says Hobson, the transplanted mortgage broker.
Reporting by Kevin Drawbaugh; Editing by Tim Dobbyn
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