While the Great Recession, touched off by the abuses in the housing market in the years leading up to 2007, has wreaked havoc on the economy of the United States, it has also caused some positive changes in the economic landscape. One of these changes, reported by Reuters, is a system of monitoring and registering mortgage brokers.
Before: Fraud and Deceit
Many analysts have cited a lack of significant regulation of mortgage brokers as part of the reason why the housing market was able to explode and then collapse a few years ago. With little oversight of mortgage industry workers, many of the following practices were common:
- Broker kickbacks: Some mortgage brokers were reportedly financially awarded for originating more expensive loans. For example, even when a borrower could afford a prime or fixed-rate loan, brokers saw more pay if they issued a subprime or adjustable-rate one.
- Insufficient documentation: Some brokers pushed “stated income” loans (also known as “liars’ loans”), which meant that they could make up any number for a borrower’s income without proof. This allowed borrowers to qualify for more expensive loans than they would have with documentation—because most of these borrowers couldn’t realistically pay for such loans, and eventually defaulted.
- Contract dishonesty: In some instances, brokers reportedly took advantage of non-native English speakers to deceive them about the terms of the mortgage, pushing them to sign when they might not have otherwise.
Of course, many mortgage brokers did their job honestly and well—and the new regulations aim to make sure such brokers become the norm nationwide.
The New Rules
As part of the response to the damage caused by the real estate market’s fallout, Congress passed the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act) in 2008. Now, various government entities have released rules for mortgage brokers so they can comply with the regulations outlined in the law.
These rules include the following:
- Mortgage brokers must add their names to a nationwide registry in order to legally work.
- Part of the registration process will include fingerprinting and background checks for everyone interested in registering.
- Mortgage brokers will be required to submit to credit checks, complete education courses and pass both state and federal tests to continue performing their jobs.
The aims of these rules are to eliminate fraudulent practices in the mortgage industry by better regulating those who participate in it. Sources note that as many as 30 percent of brokers who have already taken the government test have failed, suggesting that those who remain will be well-qualified for their work.
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