By JIM SMITH, Realtor
In a recent column, I described the legal and ethical obligations that come with working in real estate, particularly as a Realtor. The mortgage lending industry has a similar obligation to protect consumers from unethical and fraudulent practices. Both industries are regulated by the Colorado Division of Real Estate, but the mortgage industry is subject to additional regulation on the federal level.
There are four main sources of mortgage financing for home buyers — credit unions, banks, mortgage companies and mortgage brokers. While there are many differences between each, the most significant is the additional training and regulation that mortgage brokers must go through. Whereas “loan officers” or “loan originators” working at a bank or credit union are not required to be licensed, all mortgage brokers must be licensed at both a national and state level.
Registration and licensing (which are different) is completed through the Nationwide Mortgage Licensing System (NMLS), created in January 2008 in response to the housing market crisis occurring at the time. The Secure and Fair Enforcement for Mortgage Licensing (SAFE) Act, enacted in June 2008, further mandated licensing by prohibiting individuals from originating loans without obtaining and maintaining their status as a licensed mortgage loan originator (MLO) through the NMLS, unless employed by a depository bank or institution such as Wells Fargo, Chase, Bank of America, to name just a few. All individuals originating mortgage loans must register with NMLS and obtain a unique identifier (NMLS number, which allows monitoring of performance), but not all “loan officers” must be licensed. While mortgage brokers must be licensed, loan originators working for banks are not required to complete the additional licensing and testing that mortgage brokers must go through.
Before applying for a license, potential mortgage brokers must complete twenty hours of pre-licensing education, which consists of training on Federal laws and regulations, ethics, and general mortgage origination basics. Many states, including Colorado, require additional state-specific training.
After a prospective MLO has completed his or her pre-licensing education and passed the SAFE test with a score of 75% or higher, they are required to submit their credit report and their fingerprints for a criminal background check. Only then can applicants apply for a license. Once the individual has obtained their federal license, he or she is required to take additional classes to obtain their Colorado license, and there are annual continuing education requirements on both the state and federal level.
Another great benefit to working with mortgage brokers is that they must legally disclose all fees upfront, including how much they will be compensated for their services. By contrast, banks are not held to this same standard. Banks are not required to disclose how their loan officers are compensated.
The most important “take away” from this discussion is that it benefits the consumer to shop for a mortgage. In addition to the loan costs, ask your potential lender about their education, experience and licensing status. When working with buyers, I always recommend working with a mortgage broker for the reasons mentioned above. I recommend calling Jaxzann at 303-990-2992.