Nationwide Mortgage Licensing System: Pros & Cons

The Conference of State Bank Supervisors (CSBS) has developed an electronic licensing system in hopes of standardizing and streamlining mortgage licensing. As of 12/20/07 42 mortgage regulatory state agencies have signed up.

The recent mortgage industry boom created a huge influx of new licensees. Many state departments were overwhelmed by the volume. The Nationwide Mortgage Licensing System (NMLS) was the response of the CSBS in order to be able to keep up with the increase of applicants.

Jeff Vogel, CSBS chairman stated, “We were clearly seeing the challenge to our supervisory systems,”. He said, “The world of mortgage finance and residential mortgage lending was changing at the speed of light while state and federal regulation struggled to keep pace. Also, the industry had a weak track record on self-regulation,”. “We recognized that serious reform was needed.”

All of this sounds like a very cost effective and thoughtful way to handle regulation, right? So who could disagree with the implementation of such a system?

The National Association of Mortgage Brokers (NAMB), that’s who. Before you say to yourself, “well of course, they don’t want to be regulated”, you should listen to what they argue. NAMB claims that the NMLS does not effectively protect consumers, as 60% of mortgage originators will not be regulated by the electronic system.

Federal law prevents any regulatory activities related to any federally chartered bank, thrift, or credit union. This means that states cannot license or regulate mortgage activity by these institutions.

Harry Dinham, the President of NAMB cited the largest recent fines and settlements involved lenders and banks, Ameriquest’s $325 million settlement in 2005 and Household Bank and Beneficial Finance’s $484 million settlement in 2003.

Dinham asserted that “If the goal of this registry is to protect consumers by standardizing license requirements and tracking bad behavior then it should apply to all mortgage originators. As it stands today, thousands of loan originators who work at banks and other financial institutions would not be required to register. This approach puts consumers at risk”. He went on to say that “This flawed system will create a false sense of security for consumers and government agencies because many bad actors will continue to be able to move freely from bank to lender and back again without fear of being detected by the proposed registry.”.

So lets take a look at the strong pros and cons for and against the system.

Pros:

  • Increased efficiency and effectiveness on the state level
  • Improved consumer protection
  • Cons:

  • Most lenders are not regulated by the system
  • It appears that the system is much needed and should help to strengthen mortgage regulation on the state level. Since all lenders are not monitored by the system, the mortgage lenders regulated by it are up in arms about some of their fellow lenders not being under the same microscope. However, the system never changed who is regulating them. It is simply helping them to better regulate lenders that are overseen by state agencies. So wouldn’t the best solution be to push for the same system to be used on the Federal level? That would offer greater protection to all and all lenders would then be an equal playing field.