State supervision of nonbank mortgage lenders — an industry group that was a key part of the "shadow" financial system widely blamed for the crisis — is becoming as tough as federal oversight of depositories. And in some ways, tougher.

Many nonbank lenders recently learned that, under a little-known provision of the 2008 Safe and Fair Enforcement for Mortgage Licensing Act, they will soon have to file call reports like the ones banks and thrifts prepare quarterly.

And under a multistate examination that 30 states began doing this year, a lender must upload the files for every single mortgage it originated during the exam period to an automated system. The software reviews the loans for potential violations of federal and state laws and spits out a report in minutes. This goes well beyond the random samplings of loans that federal bank supervisors typically examine.

"It is a brave new world," said Costas Avrakotos, a partner at K&L Gates LLP. Though, as an industry lawyer, he opposes some things the states are doing, "I give them credit for envisioning something and putting it together. … What they've undertaken, I don't think anybody thought was possible just a few years ago."

By establishing minimum nationwide state licensing requirements for mortgage lenders, the Safe Act is intended to prevent fraud and unscrupulous sales tactics by originators.

All 50 states will be on board with the new multistate exam by early next year, said Chuck Cross, the vice president of mortgage regulatory policy at the Conference of State Bank Supervisors, the trade group coordinating the states' efforts.

"The biggest thing we can do is bring uniformity and modernization to the exam process," he said.

The call reports would include a quarterly breakdown of a company's lending activity by state, including first and second liens and loans foreclosed on or in delinquent status, as well as the lender's financials.

In March, the conference requested public comments on the plan by May 14. No date has yet been specified for quarterly reporting to begin.

Currently, 38 states require that nonbank mortgage lenders file annual reports, and 42 states require that lenders submit standardized financial information.

"If they start requiring quarterly, it will be a lot more work," said Elizabeth Steinhaus, the general counsel at Fairway Independent Mortgage Corp. in Sun Prairie, Wis., who said she was just finishing up state exams for New York, Massachusetts and Tennessee when New Hampshire regulators stopped in her office for a surprise audit.

"Between the annual reports, the quarterly reports and multistate exams, we're under a lot more scrutiny as a lender," she said.

Nanci Weissgold, a partner in K&L Gates, described the quarterly call reports as a "hidden provision" of the Safe Act.

It got little attention until recently, she said, because "there's so much going on for lenders with limited resources who just got through Respa" — a Real Estate Settlement Procedures Act rule that took effect Jan. 1 — "and are knee-deep in the Safe Act licensing of loan originators. They're overwhelmed with that."

Because states are sharing more information through the multistate exams, if a lender is in trouble with one state, the problem has the potential to grow into a national one, lawyers and lenders said.

However, Steinhaus said she expects the workload will drop once multistate exams become the norm. She and others also said they expect that, once nonbanks are filing quarterly call reports, the states will use the reports to determine which lenders to audit.

The automated compliance system in the multistate exam screens for violations of the Home Mortgage Disclosure Act, Truth in Lending Act, Home Ownership and Equity Protection Act, and Respa, as well as state laws and the government-sponsored enterprises' requirements.

Mark Pearce, North Carolina's chief deputy commissioner of banks, said state-level loan reviews "would increase the gap between what states and federal regulators do on consumer protection." Federal regulators "don't look at individual loan files," he said.

("Because of the large volume of mortgages, you can't look at every one," said Kevin Mukri, a spokesman for the Office of the Comptroller of the Currency. Banks' mortgage units "get daily supervision," he said, and random loan sampling is just one technique the OCC uses.)

The market has changed since the states began developing uniform state licensing and multistate exams in response to the subprime lending boom. At that time, states were concerned about regulating large nonbank lenders like Ameriquest Mortgage Co. and New Century Financial Corp., neither of which is operating today. About 70% of residential loans are originated today by the top four banking companies, none of which is subject to state oversight.

"They're chasing yesterday's problem," said Rebel Cole, a professor of finance at DePaul University in Chicago. "Now nonbank lenders are at a competitive disadvantage because banks are originating the majority of loans."

States' efforts to examine tens of thousands of mortgage loans in minutes, scanning for every state and federal violation, could prove to be a breakthrough, particularly if federal agencies adopt similar technology.

"I think if we are doing this effectively on the state side and demonstrating tangible results, they'll have no choice but to adopt similar technology," said Steve Antonakes, the Massachusetts banking commissioner.

Avrakotos, the industry lawyer, said he thinks the state regulators group is overstepping the Safe Act's authority by asking nonbanks for financial information in the call reports. Far fewer nonbank mortgage lenders exist, he said, because many got federal bank licenses at the height of the crisis.

"There might be fewer still after they see what they have to put into the system and the extent of mortgage reporting," he said.

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Corrected May 18, 2010 at 5:19PM: An earlier version of this story misstated Chuck Cross' title at the Conference of State Bank Supervisors. He is the vice president of mortgage regulatory policy.