Banking Law

In 2006, we reported on the trouble that Danny Payne, then commissioner of the Texas Department of Savings and Mortgage Lending, was having with mortgage brokers who couldn't pass a basic test of compliance knowledge that was required by Texas law in order to retain their licenses to broker mortgage loans. At that time, 25% of the brokers in Texas had failed the test and 35% had failed to take it. The next year, it was Washington's turn in the dunce's corner, with 56% of the brokers failing the required exams. This year, Colorado is under the gun, and Colorado's Director of Real Estate, Erin Toll  (a BLB favorite, pictured left) has issued a dire warning about the consequences.

About half of Colorado?s 8,729 licensed mortgage brokers have failed to pass a required exam and may lose their licenses on Aug. 31, which could have a tremendous impact on Colorado?s real estate market.

?We could be looking at a complete disaster,? said Erin Toll, director of the Colorado Division of Real Estate, which regulates mortgage brokers.

A "disaster"? That seems a tad bit dramatic, doesn't it? Not according to Ms. Toll.

?I don?t want to be Chicken Little, but the market is so volatile, it could be disastrous for Colorado,? Toll said. ?You shrink the loan-originator population and then tell the lenders ?we?re not going to buy your loans on the secondary market? when up to 70 percent, in our estimate, of all residential loans are sold to Fannie Mae or Freddie Mac on the secondary market. We could have a disaster.?

The "disaster" might consist in people having to use one of the more than 4,000 mortgage brokers who did pass the test, and the thousands of more who work for banks and who don't have to take or pass the test in the first place. Moreover, it's not clear how many of the brokers who haven't bothered to take the test have simply given up on mortgage brokerage and decided to finally seek honest work, like pole dancing or going to law school.

?There has been a dramatic decline in employment in the mortgage industry from 2006 to 2009, and I would be willing to bet that the vast majority of those people who have not completed their education and testing requirements are no longer in the business,? said CMLA President Terry Jones. ?I don?t think it?s going to have an impact at all in terms of the availability of loan products to the public in Colorado.?

I agree. Sorry, I simply have a hard time envisioning a "crisis" that involves a creditworthy consumer not being able to find a first mortgage loan to buy a house or refinance the one he or she already owns because there aren't enough mortgage brokers in Colorado. It's more likely that a comet will hit the Earth, killing all life as we know it, than it is that the economy in Colorado will be wrecked by a shortage of mortgage brokers.

However, Ms. Toll does issue one dire warning for those mortgage lenders who did pass the examination that rings true.

Another consequence of inactivating half the state?s mortgage brokers is that licensing fees on the other half likely will double, Toll said. Currently, the application fee is $200 for a three-year license, but that was based on the expectation that at least 8,000 brokers would be licensed.

It?s the same thing that happened to real estate brokers, who saw licensing fees soar last year after new applications plummeted by 60 percent.

Mortgage brokers in Colorado are going to feel like they suddenly morphed into a federal savings bank. With a declining number of members left to bear the assessment load, every survivor's piece of the burden will go up dramatically.