By Jerry Kopel
The Dept. of Regulatory Agencies (DORA) pulled no punches in reviewing the need to regulate mortgage brokers in Colorado.
A mortgage broker acts as intermediary between a large financial institution and a borrower in buying and selling a home, or refinancing or getting a second mortgage on a home.
DORA's Sunrise Review states: There are many different ways to set up the deal "when combined with unsophisticated and desperate consumers on one hand, and with unscrupulous mortgage brokers on the other hand (it) is, quite simply a recipe for disaster." Well, Mrs. Lincoln, did you enjoy the play?
Money is definitely the root of this tree because mortgage brokers make their money from commissions or fees. The larger the "value" involved (the loan) the larger the fee from the client.
"The higher the profit potential for the lender on a particular loan" states DORA "the higher the broker's commission is likely to be."
Wyoming recently joined 47 other states and Washington, D.C. to regulate mortgage brokers, leaving Colorado and Alaska as the only two states without state regulation.
Twenty-nine of the 49 jurisdictions require no level of experience for mortgage brokers. Forty-one of the 49 jurisdictions require no education. (I assume the inability to read or write is not a basis for exclusion.) Forty-three of the 49 jurisdictions require no examination. Thirty-three of the 49 jurisdictions require no minimum net worth.
But only eight states require no surety bond.
Do you want to become a mortgage broker without experience, education, or examination? There are 25 states including Wyoming that will presently welcome you, as long as you can put up a surety bond. According to DORA, no experience , education, or examination will be required in Colorado, so no regulatory board is necessary.
(When I entered the legislature, I could have become a taxidermist by simply paying a license fee under Game, Fish and Parks. We no longer license taxidermists.)
One value of registration. It is easier to prove the lack of it, than it might be to prove what constitutes an actual violation of the permitted practice. The penalty is a Class 1 misdemeanor, which is six to 18 months in jail and $500 to $5,000 in fines.
The DORA version of the proposed law is being carried by Rep. Val Vigil, D-Adams County and Tom Massey, R-Poncha Springs, and includes either a $100,000 bond or a malpractice insurance policy, or a certificate of deposit as necessary for registration.
Criminal and civil background checks will be required before registration is issued.
Presently, there are two separate mortgage broker groups, the Colorado Assn. of Mortgage Brokers (CAMB) and the Colorado Mortgage Lenders Assn. (CMLA).
CAMB first sought regulation in 1993. DORA supported them. A bill was introduced and defeated. In 2001, CAMB again sought Sunrise review for licensing.
DORA's review said what is needed is to pass laws to "protect (against) harmful lending practices without the creation of a new regulatory program." CMLA also opposed the 2001 bill request. No bill passed in 2002.
In 2005, DORA's review said "yes" to registration. This time, CAMB and CMLA are, according to a Denver Post article, joining hands to counter the DORA bill.
They propose registration but without a surety bond, or other monetary protection; a three-year $75 registration fee (that's $25 per year) and $5 per mortgage closing to pay for "a fund used for investigating and prosecuting loan originators who break the law." They plan, according to the Post article, to "pay" the state to prosecute violators. Is that in the form of a gift to the judicial branch?
The $75 registration fee violates authority given to the DORA director to set the registration fee based on the amount of overhead involved.
Here are just a few of the bad things done to consumers and lenders according to DORA.
Equity skimming, based on broker forgery of home value, quit-claiming the property to the broker who rents the property to ex-home owner. Broker doesn't pay the mortgage, ex-homeowner can't sell the property before foreclosure because broker has title and is entitled to any equity.
Inflated appraisals, which lead to higher fees and commissions that depend on the value of the loan. The homeowner may be left with less equity than expected. The lender can also suffer harm as to value on foreclosure.
Property flipping. This is inflated appraisals carried to the ultimate, conspiracies to sell and re-sell the property at higher prices based on false worth as to the lender.
Loan flipping. Refinancing a loan for remodeling work done on a home before the loan is paid off, resulting in an increased loan balance which is flipped over a number of times, with a subprime lender can result in the homeowner losing the home.
Regulation by registration and background checks can probably clean out a number of bad brokers, without the need for a drawn out trial. If you are not registered and act as a broker, you could go to jail for 18 months.
Jerry Kopel served 22 years in the Colorado House.
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