The recent revelations about Wells Fargo opening unauthorized bank accounts have great potential to undermine consumer confidence once again in our financial sector. Requiring mortgage loan officers in depository institutions to pass the Secure and Fair Enforcement for Mortgage Licensing Act exam is a small but essential step to help restore the confidence essential to the success and sustainability of the mortgage industry.
Wells Fargo undertook a major effort to pressure its staff to cross-sell products, and created financial incentives for them to do so. Offering a wide range of products to their customers is one of the strengths of banks, and Community Home Lenders of America has no issue with banks in this regard. However, consumers have a right to work with individuals knowledgeable about the products they sell, and who can prove that through full certification and licensure.
As the housing crisis was developing in 2008, Congress adopted the SAFE Act. It requires all loan officers working at nondepository institutions to: (a) pass the SAFE Act mortgage competency and ethics test, (b) pass an independent background check, (c) complete 20 hours of SAFE Act pre-licensing courses and (d) complete eight hours of continuing education annually.
But the SAFE Act was passed before Lehman Brothers failed in September 2008, and before Congress was fully aware of the significant contribution Wall Street banks' marketing of subprime mortgage-backed securities had on the financial crisis.
As a result, loan originators working at banks — even the largest Wall Street banks — were excluded from the SAFE Act requirements cited above, in spite of the fact that bank employees selling insurance or securities to their customers have to take a similar test.
Virtually all other mortgage and real estate professionals, such as Realtors and appraisers, have licensure or certification qualification requirements similar to the SAFE Act.
Why is this important? The SAFE Act test can be taken multiple times until a loan officer passes. While many who failed retook the test and passed, becoming qualified under the Act's requirements, there are actually some 1,000 bank and depository institution loan officers that havetaken the test multiple times, never passed and yet are still registered to originate mortgages for consumers, according to the Conference of State Bank Supervisors.
Moreover, over 95% of approximately 400,000 bank LOs have never even taken the SAFE Act test. We don't know how many bank LOs could pass the test if mandated to take it — but extrapolations of pass/fail rates of those who have taken the test mean there could be as many as 100,000 bank LOs would fail the test if required to take it tomorrow.
This is particularly important for mortgages, since this is similar to the kind of activity that brought down the economy in 2008. Unfortunately, a consumer who is now working with a bank LO that failed and can't pass the SAFE Act test doesn't even know that simple fact.
For these reasons, CHLA last week wrote a letter to the Consumer Financial Protection Bureau to renew our long-standing suggestion that the CFPB require all LOs to, at the very least, pass the basic SAFE Act test. Dodd-Frank provides the CFPB the authority to require each and every loan originator nationwide to be qualified.
Ideally, the CFPB could require all bank LOs to meet every SAFE Act requirement (test, independent background check, continuing education courses) — but requiring bank LOs to at least pass a simple mortgage competency test is an important first start.
And, as we suggested in our letter, the CFPB could have the greatest impact by imposing and enforcing that LOs at banks with over $10 billion in assets (which fall under the bureau's direct supervision) must take the exam.
The revelations about Wells Fargo have the potential to once again dent consumer confidence in the nation's largest banks. The reports from Wells, and the possibility that other large banks engage in these practices, only serve to further emphasize that mortgage loan officers in depository institutions should be held to the same SAFE Act standard as those in nondepositories, for the consumer's good, and for the sake of the mortgage industry's reputation and success.
Scott Olson is the executive director of Community Home Lenders Association.