As the president tries to cure the economy, he's calling for stricter banking regulations and more oversight of mortgage brokers. He hasn't revealed specific mortgage license guidelines yet, but they'll likely include numerous kinds of oversight and consumer protections.


The new president and his team are preparing to overhaul the financial regulatory system to help repair a badly broken economy. As newly appointed Treasury chief Tim Geithner said in a written statement to members of Congress, "Our regulatory system failed to adapt to the emergence of new risks. The current financial crisis has exposed a number of serious deficiencies in our federal regulatory system."


Mortgage lenders gone wild

One sector that will be particularly affected is the mortgage industry, where predatory lending and a conspicuous absence of underwriting led to the biggest real estate and mortgage catastrophe in history. Mortgage brokers have been operating freely, often without the basic requirement of a license, and some have been practicing despite criminal records. For that reason, many states have already instituted new mortgage license and certification requirements for those mortgage brokers who operate in their jurisdictions.


Mortgage/banking regulation goes national

The Obama Administration plans to add additional layers of mortgage licensing regulation at the national level. While the details of such a proposed oversight are not yet known, changes would likely target fees, disclosures, ethics, and standard marketing and lending procedures.


Mortgage brokers would likely not be allowed to make money on add-on fees, for example, such as charges for underwriting or kickbacks from lenders in exchange for pushing consumers into more expensive loans. They would most likely be required to adhere to comprehensive written policies and procedures regarding guidelines for subprimes and other high-risk loans, and would also be required to ensure a thorough analysis of borrower characteristics with a view toward risk management to prevent defaults and foreclosures. At a minimum, transparent disclosures of mortgage broker financial incentives and commissions would be required, and the fees and costs of every loan would need to be clearly provided to each borrower before loans are transacted. Educating consumers about the potential risks and liabilities of each type of loan is a component of that type of disclosure, and the government is already beginning to require more proactive education and counseling for borrowers. Seniors taking out reverse mortgages, for example, as well as homeowners using federally-insured mortgages, like FHA loans, now have to agree to undergo free mortgage counseling as part of their application process.


Officials also want to tighten rules to eliminate conflicts of interest at credit rating agencies that are supposed to objectively evaluate the strength of mortgage security assets like those that fueled the mortgage meltdown. They hope to extend that kind of oversight to cover the grading or credit rating of such products as credit default swaps, which are used to insure mortgage securities against losses.

Published on March 1, 2009