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Senate Includes Feinstein-Martinez Mortgage Licensing Bill In Major Housing Reform Legislation

-Legislation would protect consumers, eliminate bad actors from the mortgage industry-

Washington, DC – The U.S. Senate today approved broad housing reform legislation that includes a measure by Senators Dianne Feinstein (D-Calif.) and Mel Martinez (R-Fla.) to establish minimum national licensing and oversight standards for America’s mortgage brokers and lenders.

The SAFE Mortgage Licensing Act was introduced by Senators Feinstein and Martinez in February in response to growing reports of abusive lending practices by unscrupulous actors in the mortgage lending industry.

The broader legislation is designed to prevent foreclosures, stabilize the declining housing market, and reform the government-sponsored enterprises Fannie Mae and Freddie Mac in order to stabilize the secondary mortgage market.

The SAFE Mortgage Licensing Act will ensure that all mortgage professionals are trained in federal lending laws, ethics, consumer protection, and the sub-prime mortgage marketplace. In addition, the bill allows consumers at no charge to verify the credentials of their brokers and lenders.

“This broad housing legislation that the Senate approved today will help hundreds of thousands of Americans keep their homes,” Senator Feinstein said.

“And the SAFE Mortgage Licensing Act will ensure that America’s mortgage brokers and lenders are ethical professionals. Unfortunately, we’ve heard countless stories of bad actors in this industry – people who engage in fraudulent lending practices, such as steering people into loans they clearly cannot afford.

“Simply put, the only way to crack down on these abuses is to ensure that brokers and lenders meet basic standards and earn a license. This legislation does exactly that.”

“Although Congress has taken a number of steps to help alleviate the current housing crisis, we also need to work proactively to put practices in place that will help prevent another crisis down the road,” Senator Martinez said. “Setting minimum national standards for all residential mortgage loan originators will go a long way towards achieving that goal. I am pleased that this measure is included as part of the broader housing package we passed today.”

The SAFE Mortgage Licensing Act would:

• Ensure that all residential mortgage loan brokers and lenders meet basic professional standards.
• Require brokers and lenders to obtain a state license.
• Require states to establish minimum standards for applicants, including:
  
• No felony convictions for the past seven years;
• No similar license revoked;
• Demonstrated record of financial responsibility;
• Meeting minimum net worth or bonding requirement;
• Fulfilling education requirements (20 hours of approved courses, to include at least 3 hours related to federal laws, 3 hours on ethics and consumer protection in mortgage lending, and 2 hours on the sub-prime mortgage marketplace); and
• Passing a written exam (minimum score of 75% required to pass).
  
• Require state regulators to develop a satisfactory licensing system within one year of legislation’s enactment. If this does not occur, the Housing and Urban Development (HUD) Secretary is given discretion to develop licensing procedures.
  
• Enable consumers at no charge to verify whether their broker or lender has a state license, or is employed by a national bank.

Background

Millions of Americans – including those with weak credit scores – have used sub-prime and exotic mortgages to purchase homes using adjustable-rate loans with low initial monthly payments. Some of these mortgages require little or no down payment.

Many mortgage lenders and brokers offering these mortgages act responsibly. However, some have used predatory lending tactics, resulting in unsuspecting borrowers assuming mortgages they cannot afford.

Most mortgage brokers and non-bank lenders are lightly regulated by state agencies, and standards of accountability have not kept pace with the increasing sophistication of the mortgage industry.

The FBI announced last week that between March 1 and June 18, 2008, 406 defendants were charged in 144 mortgage fraud-related cases.  Mortgage fraud charges were brought in more than 50 judicial districts, and approximately $1 billion in losses can be attributed to these mortgage fraud schemes. 

The FBI reports that complaints of mortgage fraud have jumped 1500 percent over the last four years—from 3,000 in 2003 to 48,000 last year.  More than 60,000 mortgage fraud complaints are expected this year.

Last year, more than 2.2 million foreclosures were filed in the United States, a jump of 75 percent over 2006, according to data released by RealtyTrac. Foreclosure rates are expected to remain high, as 1.8 million adjustable-rate mortgages will reset to higher rates in the next two years.

California and Florida have been especially hard hit:

• California and Florida account for a disproportionate share of the nation’s foreclosures, according to the Mortgage Bankers Association: California accounts for 13 percent of all U.S. mortgages and 21 percent of the nation’s foreclosures; Florida accounts for 8 percent of all U.S. mortgages and 15 percent of the nation’s foreclosures.
  
• California had the most foreclosure filings in the nation last year, according to RealtyTrac. There were 481,392 filings issued on 249,513 properties last year, more than three times the filings in 2006. Overall, 1.9 percent of all California homes entered some stage of foreclosure last year;
  
• Florida had the nation’s second-highest number of homes in some state of foreclosure last year. There were 279,325 filings issued on 165,291 properties last year, a nearly 124 percent increase over the number of filings in 2006. More than 2 percent of Florida households entered some stage of foreclosure last year;
  
• Seven of the 10 metropolitan areas with the highest foreclosure rates in the nation are in California, according to RealtyTrac;
  
• In California 47,171 homes were repossessed during the first quarter of 2008, according to DataQuick Information Systems. That’s a 327 percent increase over the first quarter of 2007, when 11,032 homes were repossessed in California.

The legislation is similar to H.R. 3012, introduced in the House of Representatives by Representative Spencer Bachus (R-Ala.).  The national licensing concept has broad bipartisan support and is endorsed by consumer groups and the President’s Working Group on Financial Markets.

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