ST. LOUIS—Questionable credit histories have tripped up a much larger share of applicants for mortgage originator licenses than criminal background checks, according to a sampling of state officials who attended the American Association of Residential Mortgage Regulators’ annual conference here last month.
None of the states queried—Georgia, Louisiana, Maryland, Mississippi, Missouri, North Carolina and Pennsylvania—keep statistics regarding the results of either criminal or credit tests, both of which are required under the Secure and Fair Enforcement of Mortgage Licensing Act of 2008. But all seven have had similar experiences.
“We haven't flagged many candidates for licenses because of criminal records. I'd be surprised if it’s 1%,” said Jerry Janes, the supervisor of mortgage licensing in Missouri, which began licensing loan originators for the first time in April.
“But we've tagged a lot of people because of credit issues,” he added.
Criminal background reviews aren't new in Georgia, where convicted felons have been barred from writing mortgages for almost a decade.
Consequently, “not a large percentage” of law breakers have bothered to apply for an originator’s license, said Rod Carnes of the Peach State’s Department of Banking and Finance.
“I think they realize it’s just not worth applying,” said Carnes, who is deputy commissioner for nondepository financial institutions.
Georgia has “always” checked an applicant’s credit, too. But because of the economic malaise that has gripped the country over the last few years, it is finding a larger percentage of applicants with credit issues, the state official said.
The Secure and Fair Enforcement of Mortgage Licensing Act was intended to help remove people with questionable pasts from the ranks of mortgage brokers and loan officers.
Under the law, applicants for new or renewed licenses who are convicted felons are blocked from the business for seven years. But if the felony is related to financial abuses, they can never work in the field again.
The law isn't as specific when it comes to someone’s credit history. While it requires applicants to submit their credit records for scrutiny by their state regulator, each jurisdiction is permitted to set its own standard for licensing.
The act “makes our job simpler” as far as criminal records are concerned, said Carnes.
“A convicted felon is a convicted felon,” he said. “There’s no room for interpretation.”
But Carnes and his counterparts in other states are having a more difficult time dealing with applicants who have credit problems. “We understand these are tough times,” the Georgia official said. “So we try to balance that with the law.”
In Maryland, the nature of the credit problem is often a determining factor, said Anne Norton, assistant commissioner of nondepository institutions.
If the issue is a bankruptcy, a tax lien, a judgment or the failure to pay child support, Norton said, “the question is do I want this person to be handling someone’s money or having their personal information?”
“They've got to be able to demonstrate financial responsibility,” agreed Missouri’s Janes.
At the same time, the applicant’s explanation of the issue is sometimes meaningful.
“An arrangement to pay means a lot,” Norton, the Maryland official, said. “It’s an influential factor.”
Pennsylvania’s regulators also are grappling with applicants’ poor credit records. “Some are just not responsible, but others have life events just like everybody else,” said David Bleicken, deputy secretary of banking for nondepository institutions and consumer services.
“So we struggle with the details and try to sift through them.”
A number of states use credit scores to benchmark applicants. North Carolina requires a score of at least 600, but the rule is “not an absolute bar” to obtaining a license, said Mark Pearce, the Tar Heel State’s deputy commissioner of banks. “It’s just a tool to help us confirm the underlying issue of responsibility.”
Like a number of states, North Carolina and Georgia have appeal systems in place for applicants who believe they've been unjustly rejected.
“If they request a hearing, they can go before a judge and still obtain a license,” said Georgia’s Carnes.
It’s far more cut and dried when it comes to someone’s criminal records, which is probably why regulators haven't found many applicants with felonies.
“The law’s so specific that felons don't even bother to apply,” said Traci McCain of Mississippi’s Department of Banking and Consumer Finance. “We've come across only four or five.”
Felons haven't bothered to apply for an originator’s license in Louisiana, either. But that wasn't always the case, said Darin Domingue, deputy chief examiner in the state’s Office of Financial Institutions.
During the two-year period between 2003 and 2005 when Louisiana didn't require criminal background checks, the number of applicants tripled, the state official said.
“It was amazing. During the periods when the test was in place, the number of applicants was significantly less than when we didn't have the test.”
Despite the Secure and Fair Enforcement of Mortgage Licensing Act’s specificity, though, regulators say there is some leeway in how they are applying the law.
“It depends on the severity of the crime and how long ago it was committed,” said Pearce of North Carolina.
“If they can demonstrate that they've straightened up, we sometimes give them a second chance,” he said.
“If they've been in the business for 20 years, for example, then there’s no pressing reason to kick them out. But all of this is conditioned on the fact that there are no future complaints,” Pearce added.
Maryland’s Norton agreed.
“The majority of offenses we see are DUIs [driving under the influence] and disorderly conducts that took place while they were in college,” she said.
“These kinds of youthful indiscretions are different from more severe offenses, and really have no bearing on someone’s financial responsibility.”
