The Impact of Broker ID Laws  

by Frederic J. Gooch, General Counsel DocuTech

This past year has been one of the most active in recent history for government involvement in mortgage lending. The collapse of real estate and credit markets worldwide has led to a figurative “alphabet soup” of new and revised regulations and laws—HERA, TILA, RESPA, SAFE and TARP were all passed or revised in 2008.

Adding to the regulatory pressure is the rise of identity questions. “Who Are You?” is no longer as simple as checking a driver’s license. Identity theft continues to be one of the fastest growing crimes in the United States, and mortgage originators are being asked to serve as a front-line deterrent to identity theft. This includes both confirming their own identity as well as those of their customers.

To that effect, an emerging trend in mortgage lending documentation state regulation is requiring the names and registration numbers of mortgage brokers or originators be included on security instruments and other loan documents.  Massachusetts and North Carolina were the first states to have adopted such requirements, and Delaware has recently followed suit. Other states are watching to see how the regulations work and are considering similar legislation.

While adherence to these new regulations and laws will necessitate small changes in the way mortgage originators do business, they will also help weed out those unscrupulous few who have led to the widespread mistrust of honest, hard-working mortgage professionals.

Broker ID Laws Require Accountability

Massachusetts was the first state to require broker identification. Its law requires, "every mortgage and assignment of mortgage secured by residential property…presented for record, in which a mortgage broker…is involved shall contain or have endorsed upon it the name, post office address and license number of the mortgage broker and, if applicable, the mortgage loan originator…responsible for placing the mortgage loan with the mortgagee.”

The state of North Carolina adopted a similar requirement soon afterward.  The North Carolina law requires the lender to include in the loan closing instructions the name of the person who acted as a mortgage broker in the origination of the loan.  If the settlement agent receives information from the lender or otherwise has actual knowledge that a mortgage broker or other person acted as a mortgage broker in the origination of the loan, the settlement agent must place an entry on the first page of the deed of trust showing the name of the mortgage broker or other person who acted as a mortgage broker in the origination of the loan.

Most recently, as part of the newly-adopted Mortgage Loan Originator Act rules, effective December 11, 2008, the state of Delaware is requiring that the licensee number of the mortgage loan originator performing origination services be recorded on the application.  The motivation behind these regulations is to legally require accountability on loans. Consumer advocacy groups have often claimed that third-party originators have no motivation to find the best loan for the consumer, since they are not putting up the funds to secure the loan.

The Broker ID laws are the legislator’s answer to providing accountability. Lenders and consumers will now be able to know which broker or originator filed a loan. In cases where the loan does not perform, lenders will be able to include the originator in required actions and decisions regarding servicing the defaulted loan.  Lenders can also identify those mortgage brokers with whom they conduct consistently good business.

However, there are relatively few cases of fraud where the broker’s identification is unknown. A more common situation is the broker misrepresenting information to get a loan approved. Broker ID laws will help mitigate this type of fraud by providing a paper trail to the originator.  Even though they were not designed with these laws in mind, the Broker ID laws will also work with the new broker licensing act and the Red Flag Rules against identity theft.

Broker ID Laws Complement SAFE Act

Broker ID laws, at their root, are an additional piece to regulations affecting mortgage lenders and bankers. Two specific regulations that have come out recently lend themselves to complementing the broker ID laws. First is Title V of the Housing and Economic Recovery Act of 2008 (HERA). HERA received a lot of attention upon its passage into law for provisions to rescue borrowers and modernize the government-sponsored enterprises (GSE) Fannie Mae and Freddie Mac.

Title V of HERA, also known as the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE), says that anyone who originates loans—brokers and lenders alike—must be licensed or registered as a mortgage loan originator by August 1, 2009. The law stipulates that licensing must be done at the state level.  Each state will comply with standards established by the Nationwide Mortgage Licensing System and Registry (NMLSR) maintained by the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators.

A key piece of the licensing is the requirement for a unique identification number for every originator. By using these ID numbers on all mortgage documentation, the regulatory boards of states with Broker ID laws can better track and monitor which originators are submitting questionable or fraudulent loans. Brokers who engage in problematic activity will be more likely to be screened out during the licensing process, leaving lawful mortgage originators to make more loans.

Broker ID Laws Complement Identity Theft Laws

The second piece of legislation that complements the broker ID laws are the upcoming Red Flag Rules passed by the Federal Trade Commission (FTC). These rules were established to fight identity theft.

The Red Flag Rules are designed to protect consumers’ sensitive personal data, such as Social Security Numbers or financial account numbers. They require financial institutions to implement a program to detect and prevent identity theft by processes that verify identity and flag suspicious behavior.

These rules apply to any “creditor.” Unlike most traditional definitions of creditors, though, the rules specifically define a "creditor" as any person or company that regularly extends, renews or continues credit. It explicitly lists mortgage brokers as being subject to this law.

Regulators will be looking for brokers to develop processes and procedures that ensure that they are confirming an applicant’s identity. In addition, they will be required to report suspicious activity, such as unusual account activity, fraud alerts on a consumer report, or attempted use of suspicious account application documents.

Again, like the SAFE Act, broker ID laws will provide lenders and regulators with the paper trail needed to follow-up on reports of identity theft. Brokers who have not developed the proper programs or paid due diligence to identity theft will be held accountable.

Using Automation to Comply with Broker ID Regulations

The main issue with complying with broker ID laws is making sure that originators, lenders and brokers keep up with state and federal laws. At its most basic level, Broker ID laws are simply extra paperwork. Today’s document compliance systems can be configured to automatically include or prompt for broker identification, protecting both the lender and the originator.

For brokers and originators working with wholesale lenders in multiple states or jurisdictions, these programs can also take away the indecision involved in selecting documents. Automated document compliance programs can select and prepare only those documents needed based on geography, loan terms and borrower status.

More importantly, document compliance systems provide more than just tools for verifying an identification number. A lender’s primary concern, fraud-wise, is in income and asset fraud. Document compliance technology can provide both pre- and post-closing compliance checks.

Pre-closing checks specifically will help protect brokers by ensuring that applications submitted to the lender meet all the federal, state and local laws and regulations. And when those loans are tested by the compliance checks, the broker can know their ID has been established with a loan that went through a complete due diligence process.

Accountability is a great motivator, and broker ID laws can protect brokers who take the proper precautions to originate loans that are best for their customers and their lenders. Instead of spending hours manually printing identification numbers on loan documents and tracking which states require the reporting, automated systems can take the guesswork and reduce the time needed to comply with these new laws.

More importantly, by using document compliance systems, brokers can be sure that the loans pass all due diligence needs and that their broker ID will only be associated with compliant, fraud-free loans.