Licensing Brokers Is No Panacea

Q: I've read articles about how the mortgage crisis is leading the federal and state governments to tighten licensing and other requirements for mortgage brokers. Will this curb the abuses that led to the crisis?

A: No, because mortgage brokers played only an incidental role in the crisis. Blaming the crisis on brokers makes as little sense as blaming it on greed.

Brokers have been with us for decades; greed has been with us forever. Neither suddenly caused a financial crisis.

I hasten to add that I believe that mortgage brokers should be licensed and required to pass a competency examination, for the same reason that plumbers and morticians are.

They all provide important services to the community, which has a stake in their being performed effectively at reasonable cost.

Licensing and examination weed out some of the worst players and encourage professionalism and self-restraint by the rest. But that will barely touch the deep-seated ills of the mortgage industry.

The main rap against mortgage brokers is that they led and encouraged borrowers to take mortgages that were not suitable for them. This included option adjustable-rate mortgages, which allowed very low payments in the early years that did not cover the interest, and 2/28 ARMs offered to subprime borrowers, which had relatively low rates and payments until the first rate adjustment after two years. In both cases, borrowers were vulnerable to large payment increases, and in many cases these have led to default.

Not all brokers did this, by any means, but enough did to justify the charge. Yet brokers were not alone in encouraging borrowers to select unsuitable mortgages. Loan officers employed by lenders, who are cut from the same bolt of cloth as mortgage brokers, did the same.

Quite properly, the uniform licensing and registration system called for by the federal Secure and Fair Enforcement for Mortgage Licensing Act, enacted last year, applies to "all loan originators, including mortgage brokers and loan officers."

It will be good to have all loan originators licensed and certified, but don't expect major changes in the way the system works. The primary motivation of loan originators will remain what it was -- to close loans -- because that is what their income depends on.

There are some who will tell a client that refinancing is not in their interest, thereby forgoing any income, but they are few and will continue to be few. Selfless behavior depends on character, and character cannot be legislated.

If loan originators can't be depended on to protect naive borrowers from mistakes, who can?