CAMB 2007 Convention

NAMB West
NAMB West

Mortgage Brokers  - the Focus of Four New Colorado Bills
The Good, The Bad and The Ugly

by William F. Kidwell, Jr., GMA

At the end of 2005, Colorado was one of only two states with no direct statutory or regulatory controls over independent, residential real estate mortgage brokers.

In 2006, Governor Bill Owens signed The Mortgage Broker Registration Act. The Act requires residential real estate mortgage brokers to submit fingerprints and a criminal background check, to secure a $25,000 surety bond (or assign $25,000 to the Division of Real Estate) and to register with the Division of Real Estate (DRE). The statute authorized the director of the DRE to deny registration based on a specified list of offenses and exempted supervised lenders and FHA mortgagees from the process.

In the five months the law has been in effect, more than 5,000 mortgage brokers have registered. More than 450 companies listing over 23,000 employees have received exemption letters. Over 2,890 of those exempt employees work for just under 140 Colorado-based FHA mortgagees.

After years of effort, CAMB’s 2005 Sunrise Application successfully resulted in a Department of Regulatory Agencies’ (DORA) review that led to the passage of The Mortgage Broker Registration Act. While we vigorously opposed DORA’s addition of a surety bond CAMB remains proud of the leadership role it has played in championing protection for Colorado consumers involved in real property finance transactions. The Mortgage Broker Registration Act is by in large good and necessary law.

Almost before the new law’s ink dried, the Colorado General Assembly, in response to increasing public pressure derived from Colorado’s presence atop lists of reported foreclosure volume and fraud; conceived and passed four new bills that will directly affect how mortgages are delivered to Colorado residential real estate owners and buyers.

Before The Mortgage Broker Registration Act was even in effect and prior to the opening of  the 66th Session of the General Assembly there were multiple bill drafts addressing issues ostensibly related to fraud, foreclosure and the almost perpetrator-like role played by “third party originators”. In reading the early drafts, one could only conclude that fraud was the single biggest contributor to foreclosure and every instance of fraud or foreclosure was caused at some fundamental level by a mortgage broker. It should come as a surprise to no one that CAMB takes great exception with this broad but unrepresentative and inappropriate characterization of the professionals we represent.

So, what’s next with respect to the new laws that will have been signed? (This is being written just prior to Governor Ritter’s anticipated signature into law on Friday, June 1, 2007).

The Good

CAMB applauds the sincere and passionate interest shown by the 66th General Assembly’s members. And, since we believe their motivation was pure and consumer-facing, we echo that sentiment for the bills’ sponsors.

The attention received as a result of the sheer number of bills has elevated the subject of residential real property to a level it deserves. The “home” represents the single largest financial tool most of us will manage. Therefore it is only appropriate that its use receives the appropriate level of scrutiny and attention. As an industry, we must find ways to improve education, communication and inclusion so that every participant in such a significant transaction has the best chance to understand and make informed decisions.

To their credit HB07-1322, SB07-085, SB07-203 and SB07-216 elevated the thought process and public debate surrounding real property finance to a level possibly never before achieved in Colorado. If for no other reason, the industry and the consumers owe a vote of thanks to the sponsors who took the lead and made the charge on these bills.

Repeal of the FHA Exemption

HB07-1322 and SB07-203 repealed the FHA exemption that appears to have applied to almost 3,000 Colorado mortgage brokers and possibly as many as 23,000 brokers from 37 states and Puerto Rico. The repeal of this exemption applies the law more equitably to those targeted for inclusion in the new Mortgage Broker Licensing Act.

Pre-licensing and Continued Education

Contrary to the findings and recommendations of the Department of Regulatory Agencies in their review of CAMB’s 2005 Sunset Applications, SB07-203 introduces the requirement for licensing and the attendant mandate for pre-licensing (9 credit hours and testing) and continued education. (9 credit hours in a three year period)  CAMB supports a base-line, pre-licensing education requirement and looks forward to working with the Division of Real Estate to create meaningful continuing education programs. CAMB looks forward to delivering Certification programs that supplement the education component of professional development in our industry. We invite all members and future members alike to become active participants in the many emerging programs being developed and ask each of you to give us input regarding the key education items you feels should be included. The cornerstones of CAMB’s five year strategic plan are education and certification. Your active involvement will help us deliver the things that are most important to you and your mortgage business.          

Appraisal Fraud

SB07-085 took a broad stroke at making undue pressure to influence appraisers’ independent judgment a criminal offense. It also recognized that it generally requires multiple parties to perpetrate fraud and included everyone involved as punishable.

Rule Making

The new law expands the Director’s rule making authority. Many may ask why is this good? Rules are easier and faster to implement than to change statutes. That is why CAMB usually prefers rule-making instead of statute. One example of CAMB’s impact through rule making was its timely and assertive actions to head off the October 2006 emergency rule that could have led to the unavailability of surety bonds in Colorado. Because the issue was addressed in rule making, quick and decisive action headed off a potential catastrophe. 

Temporary Licenses

In order to accommodate the immediacy of the bills, particularly as they relate to the repeal of the FHA exemption, the law allows for issuing temporary licenses for a period of about ninety (90) days from the date the governor signs the bills.

The Bad  and The Ugly

The most troubling aspect of the bills is the expressed reason for the urgency with which they were introduced and passed. Each bill was authored and “ramrodded” through on the fundamental belief that “third party originators” are the epicenter of real property fraud and that fraud is a material contributor to the recent increases in foreclosure. In addition to this misconception is the apparent widespread belief in our General Assembly that Colorado’s reported foreclosure increases are a result of our unregulated environment prior to January 2007. These two “facts” combined with the constancy of media attention placed the Colorado mortgage brokerage industry in a “perfect storm” damning the originator and declaring a public mandate for immediate action. 

Witnesses repeatedly testified that fraud and foreclosure have increased just as much, if not more, in states that have some of the most rigorous laws and regulations.

Evidence was offered that in states that have adopted volumes of law aimed at subduing “causes” of foreclosure; those same states have experienced foreclosure increases at record rates.    

The Mortgage Broker Registration Act is brand new. There are no empirical data to link increased laws and regulation to a reduction in fraud or foreclosure. CAMB’s consistent plea was to commission a study to determine the actual causes of foreclosure. CAMB’s contention remains that given the “actionable” facts, regardless of the causes - fraud, life events, societal mandates for home ownership or the use of inappropriate financing products; Colorado would be equipped to move into 2008 with specific plans that have a real chance to manage whatever issues were discovered.  

These pleas, which were echoed by others as well, fell on deaf ears. Now, Colorado has four new acts which, according to the appropriations identified in the bills, will increase the cost of doing business by over $4,000,000. Moreover in their combined form they add layers of complexity to an already complex process and won’t directly or indirectly address fraud or foreclosure prevention or management. 

Errors and Omissions Insurance

SB07-203 requires every licensed mortgage broker to obtain errors and omissions insurance. The ugly aspect of this is not that the requirement brings the mortgage broker into the same insurance arena as their real estate partners, but rather that errors and omissions insurance have nothing to do with fraud and foreclosure. All the provision does is to add another layer of expense for brokers and administrative burden for the Director. Errors and Omissions insurance, similar to the surety bond introduced a mere five months ago are irrelevant to preventing or curing the problems these bills are focused on.

Good Faith and Fair Dealing

HB07-1322 and SB07-216 introduce the concept of “good faith and fair dealing”. What can possibly be “bad” or “ugly” about such an inherently good thing? First, the language singles out mortgage brokers as the only parties to a real property transaction who have to act in good faith and fair dealing. The borrower doesn’t, the real estate agents don’t, the title company employees don’t, the appraisers don’t. Further, a very frightening “yet to be defined” concept of Net Tangible Benefit is introduced. Additionally, mortgage brokers, are directed to conduct a reasonable inquiry. In and of themselves, each of these actions may appear reasonable and at the core represents things already done by professional brokers, but again, our industry was singled out to these standards and violations subject mortgage brokers to criminal punishment and/or loss of livelihood.

Is The Mortgage Broker Licensing (changed from Registration when signed into law) Act an Individual or Company-based law?

SB07-203 and HB07-1322 both contain language that require the individual mortgage broker to have a contract with a lender before a product can be advertised or offered. Today lenders generally have agreements with legal entities. This means on average, lenders in Colorado may have a few hundred executed broker agreements. The new law, if followed to the letter will 1) prevent mortgage brokers from offering products that may benefit a borrower unless they are already contracted with the lender who provides the specific terms and 2) if implemented as written will increase the number of contracts between lenders and brokers from several hundred to several thousand leading to a significant increase in administrative burden.

Never ending disclosures

SB07-203 requires mortgage brokers to disclose, upon request of the borrower at least twenty four hours before closing, documents including deeds, title work, loan agreements and other items seldom available directly to the broker prior to closing. While RESPA clearly allows the borrower to request a copy of the HUD-1 (Settlement Statement) 24 hours prior to closing, the new law’s mandate far exceeds current federal law and does not conform to the existing workflow.

There are numerous other provisions of the new laws that require more in depth analysis to fully understand. Some provisions appear to conflict directly with RESPA, others appear to confuse a mortgage broker with an underwriter. Others tell mortgage brokers when and how to pay their bills.  Another requires that if a borrower is unable to obtain a loan for any reason, appraisals and credit reports must be delivered to the borrower or other brokers upon request without regard to whether the items have been paid for by any other party.
In the case of the changes in The Mortgage Broker Registration Act (Title 12, Article 61, Part 9 C.R.S.) hopefully the good, which CAMB has championed since the 1990’s will outweigh the bad and the ugly.

Only time will tell. And, only concerted, focused effort will produce the most desired outcome. That focused effort needs your support. As one of Colorado’s mortgage professionals you owe it to yourself and your industry to get involved, weigh in and help us help Colorado create the best outcome.

The price of poker professionalism just went up! It’s not the same old game - - you can not ignore the change and still survive. Be a driver, not driven!

Please, do yourself a favor; contact a fellow mortgage broker professional and both of you join CAMB. Together, help us create an even louder, consistent, aggregated voice that advances the same professional level of expertise and service we have been advocating since 1983. You really do owe it to yourself to participate and help shape the outcome.