The Arizona legislature has proposed legislation that would require loan originators – the people consumers deal most with during the mortgage application and writing processes – to be licensed and to participate in continuing education.

Arizona’s Department of Financial Institutions (DFI) regulates three mortgage lending positions: commercial mortgage bankers, mortgage brokers, and mortgage bankers.  Real estate agents are required to be licensed.  So are escrow agents.  And appraisers.

But not the loan officer.

Anyone who’s signed a mortgage knows that it’s no light matter.  There is A LOT of paperwork involved and – as too many have discovered – if you don’t cross your Ts and dot your Is – twice, at least – you could be in for real financial trouble.  And the loan officer is most likely the person you’ll deal with more than anyone else in the mortgage process.  So it really doesn’t make sense that loan officers aren’t required to be licensed.

Some Arizona legislators agree.

A March 13, 2008 summary of Senate Bill 1028 explains the history behind the proposed legislation:

The Department of Financial Institutions (DFI) regulates three mortgage lending entities: commercial mortgage bankers, mortgage brokers and mortgage bankers.  A mortgage loan originator is a person who interviews the consumer in connection with the consumer’s application for a mortgage loan and acts as a middleman between a lender and the consumer.  Loan originators usually work for mortgage brokers and currently fall under the mortgage broker’s license for disciplinary purposes.

An article last week in the Arizona Republic talking about the bill told the story of Stan Lund, president of the central chapter of the Arizona Association of Mortgage Brokers, who’s advocating for a law like Senate Bill 1028.

Lund learned a few years ago that one of his loan officers was scamming home buyers. The guy would tell borrowers to make out $300 appraisal checks to him instead of to the appraiser. He assumed that they wouldn't notice the actual appraisal fee in the complexities of a loan transaction.

Lund fired the loan officer, reimbursed borrowers and called the state Department of Financial Institutions. But the department had no power to act. As a fraud case, it would be small potatoes for authorities busy with meth and mayhem. A couple of weeks later, the culprit had landed another job as a loan officer.

Most loan officers are honest and competent. But we need a way to get rid of the rotten apples by revoking their licenses.

The crux of the problem, then, is that there’s no way really to prevent a loan originator who gets fired for misconduct  from being hired by another broker.  If loan originators were required to be licensed, the punishment for mortgage fraud or deceit would be license revocation – so the person would no longer be able to work in the field.

It’s too bad that we have to force people to do the right thing.  But I guess that’s the reason behind our whole system of laws.  In a world where some people will try to make a buck by misleading or defrauding others, a law that would allow real punishment to befall those misdoers makes sense.

What do you think?