Borrower beware

The Star-Ledger, March 18th, 2007

The Star-Ledger Archive COPYRIGHT © The Star-Ledger 2007

Date: 2007/03/18 Sunday Page: 001 Section: BUSINESS Edition: FINAL Size: 1455 words

New Jersey doesn't bother checking loan officers' ability or integrity


You need a license in New Jersey to cut hair, do nails, even groom a cat or dog.

But to sell a mortgage loan – the single most expensive investment most consumers will ever make – all you need is $100. No education, no criminal background check, nothing.

No wonder the state, which had 11,000 loan officers in 2000, now has some 40,000, whose sole fiduciary responsibility is to themselves. The state Department of Banking and Insurance will register anyone who can fill out a one-page form and pay an annual $100 fee.

"A Realtor has to be tested, an attorney has to be tested. But a person can write mortgages and put people in millions of dollars in debt without a single exam or a single continuing education requirement? It doesn't make sense at all," said Marilynn English, president of English Financial in Cedar Grove, who has been fighting for years for the licensing of loan officers in New Jersey.

"Under the current laws, for $100, Joe the Pizza Delivery Man can write mortgages in New Jersey," she said.

Loan officers are different from mortgage brokers, who are licensed by the state and required to post a $100,000 surety bond and have a minimum net worth of $50,000. There are about 1,500 licensed mortgage brokers in New Jersey.

Loan officers (also known as mortgage solicitors or originators) and mortgage brokers essentially perform the same function, acting as middlemen between those who need a loan and those who have money to lend. The broker or loan officer brings the two parties together, saving borrowers the hassle of shopping around. And for that, they get paid.

But while mortgage brokers are personally liable and can lose their license for fraud for the life of a loan, the army of loan officers pounding the pavement aren't accountable for their actions. Instead, they work under the umbrella licenses of the brokerages that hired them.

Ehab Abousabe, president of United Capital, a mortgage banking company in Princeton Junction, has been a longtime advocate for licensing loan officers in the state. "In order to be a mortgage loan officer in New Jersey, the only thing you need to do is find a mortgage company willing to hire you," Abousabe said. "There are no education requirements. No financial requirements. You pay a $100 fee to the state Department of Banking and Insurance every year, and you can put on your business card that you are a loan officer or a senior loan officer or whatever you want to be called."


For thousands of prospective homeowners – particularly those with poor credit – a loan officer, not a broker, is the primary point of contact when it comes to securing a mortgage loan.

It's a dangerous mix, many say: borrowers who know little to nothing about the mathematics of finance or risky loan products, and officers who churn out home loan after home loan, often without understanding the long-term risks themselves.

To make matters worse, the riskier the loan, the more the loan officer gets paid by the bank.

Aside from the fees they collect from borrowers upfront – such as application fees, rate lock-in fees and processing fees – loan officers get paid a rebate by the bank for bringing it the loan. This rebate is called a "yield spread premium." And as a general rule, the higher the loan's interest rate, the bigger the YSP the loan officer gets to put in his pocket.

The consequences of risky lending have become more evident with the slowing of the housing market. The last few months have seen a flurry of closures, bankruptcies and mass layoffs by subprime lenders that during the housing boom specialized in lending to risky borrowers or offered unconventional loans. At the same time, a record number of cash-strapped homeowners have been falling behind in their payments, and foreclosures are on the rise.

Last year, the mortgage industry churned out more than $2.4 trillion worth of loans, and about seven of every 10 home loans were originated by mortgage brokers.

A study by a nonprofit research group, the Center for Responsible Lending, projects that one in five subprime loans issued during 2005-06 will fail, putting 2 million homeowners at risk of foreclosure.


During the past year, about a half-dozen states, including Maine and Maryland, passed laws requiring loan officers who work for mortgage brokers to be licensed, according to Christopher Cruise, a national mortgage trainer based in Silver Spring, Md., who teaches and trains mortgage brokers and regulators.

In January, Maryland started requiring loan officers employed by mortgage brokers to fill out an application, submit to criminal-background checks, and – if in the business less than three years – take a 40-hour course covering regulations and ethics. Maryland charges $300 for a two-year license, plus a one-time investigation fee of $100. The cost of the course can run up to $550.

The Maryland Association of Mortgage Brokers said it lobbied hard for the law as a way to drum out bad characters and give customers some assurance the employee looking at their sensitive financial records isn't, for instance, a convicted identity thief.

"We recognized that there were too many people coming into this business that were not being regulated in any fashion, and they could hide behind their licensed broker and brokers had no way of tracking potential employees," said Thomas Shaner, executive director of the Maryland association.

Before the law, Maryland had 15,000 loan officers; the licensing process weeded out about 5,000 of them, Shaner said.

The New Jersey Mortgage Bankers Association and New Jersey Association of Mortgage Brokers have come out in favor of licensing of loan officers. However, no proposals have been drafted yet, according to E. Robert Levy, the executive director of both associations.

"We are working with our boards to develop a proposal that will accomplish the results we are seeking," Levy said. "There are a lot of issues that have to be dealt with."

While more than a dozen states have a law requiring loan officers to be licensed, Levy said that in many cases, it applies only to loan officers working for mortgage brokers. Exempt are loan officers who work for banks, credit unions or consumer finance companies.

"That's politics at work for you," Levy said. "Our board thinks everyone ought to be treated the same."

Another stumbling block is manpower, Levy said. The banking department does not have enough staff to handle the process of licensing loan officers in New Jersey, he said. "Without adequate staff to handle this, we will have a big mess on our hands," he said.


Levy said it could take two years or more for New Jersey to get an acceptable law drafted and passed.

Until then, licensed mortgage brokers are responsible for their own employees' conduct, Levy said.

"It is expected and always has been expected that the company will have the appropriate policies and training in place and make sure loan officers are not abusing the public in any way shape or form," Levy said.

However, Cruise, the Maryland mortgage trainer, said he doesn't think that system is very effective.

"You cannot legitimately say you are regulating this industry if you don't regulate the foot soldiers – the guys and gals doing the bad – who are coming into your home," he said.

Even if a broker is disciplined by the regulators for the unethical or illegal conduct of one of their employees, there is nothing preventing that employee from job-hopping and leaving no trail.

"The regulators are putting all the responsibility on the owners, the brokers, exclusively – but the people on the street can do whatever they want," said Princeton mortgage banker Abousabe. "Sure, the owner is responsible and that's why the regulators feel it is implied responsibility, but your employees should be accountable for themselves as well."

In the meantime, Cruise said, that consumers should employ the golden rule of retail when shopping for a mortgage loan: Caveat emptor. Let the buyer beware.

"Consumers should approach a loan officer as you would a car salesman," Cruise said. "If you go into a car dealership, that sales person has no obligation to get you the best deal, and so you don't trust them."

_Sam Ali may be reached at or at (973) 392-4188. _

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