Thursday, May 6, 2010

Death Panels for Small Business Owners Part III

When I started originating mortgages in 1998, Texas did not have a mortgage licensing law. A person who wanted to start a business just went out and got started. In my case, I cashed in an IRA and with $10,000, subleased two tiny offices from a local attorney, which he agreed to lease to us furnished to include electricity and the use of the typewriter, for $245.00 per month. The offices were part of the attorney's suite of offices in a building he owned, but they had a private entrance. I did not have cell phone; I had a beeper. I could not afford a copy machine, so I took the mortgage loan files to Kinkos to get them ready before I sent them overnight to the investors. Over the summer I was able to pay cash for a fax (my father, who was my business partner, split the cost with me) and on the fax we could also make a one page copy if we needed one. Downstairs in the parking lot was a pay phone. If for any reason my phone was not working in the office--or during the week that I had the phone company install some additional lines--I stood outside in the parking lot to make my phone calls. I carried a small styrofoam ice chest to work each day with lunch and sodas, since we did not have a refrigerator. A computer was completely out of the question--I bought a good quality Hewlitt Packard financial calculator and learned to calculate APRs with that.

The first day that we signed our lease, we were referred to a good attorney who helped us incorporate, and I went out and started originating loans. I did not know what I was doing, but I was willing to work hard and eager to learn. My father had a list of investors he had worked with in his previous job, and I contacted each of them, and most of them agreed to sign us up.

To get our New Mexico license (since we are right on the state line it made sense to have both licenses) we had to have a financial statement, but of course, we had no money at all. My father had an acquaintance who was a CPA and he agreed to prepare our financial statement. At the end of the financial statement, in his notes, he wrote, "This company probably will not be open a year." I was furious; I did not think prognostication was the duty of a CPA. I threw a fit and then threw away the financial statement. I then went to see a CPA who was an acquaintance of mine. He prepared a financial statement without the personal commentary, and we found a company here in town who would write a surety bond for us. What we had was very little, but it was enough for the state of New Mexico to give us a license.

We stayed in that space for 22 months. During those months, I went to open houses and to every community meeting I could find. I took the time and effort to get to know everyone in the industry I could. I joined the Texas Association of Mortgage Brokers one year before they started a local chapter so that I could learn about my industry. I originated my first loan within days after signing my lease, and I closed it two and a half months after we opened the office. Over the months that followed, I originated more loans and I signed a factoring account for a local company that brought in some income. I picked up a builder who did affordable housing on the Eastside as a client (that was when housing truly was affordable and we had houses in the $45,000 to $75,000 range). By the time my lease was up and I had to look for new offices, I had been able to purchase a small refrigerator!

We opened Frontier 2000 Mortgage & Loan 12 years ago last month. As I look at the changes to the regulatory landscape today, I am most struck by the fact that a person today would not be able to do what we did then because of massive regulation. Most argue that the regulation is necessary to prevent another meltdown, but the regulation that exists today really impedes the small entrepreneur who wants a chance to prove that he or she can work for themselves, take care of their families, and contribute to the tax base and the local economy.

In 1999, Texas did introduce a licensing law. The law that they passed required that a broker (who would be responsible for the actions of the company) had to have a degree in business and 18 months of experience or three years experience as a loan officer. I had a master's degree in history, but that did not count, so I got an insurance license because persons holding an active insurance license satisfied the experience requirements of the law. So did a law license, or an active license as a real estate broker. We also had to have a surety bond. We made sure that we had everything ready to be fully compliant on January 1, 2000.

In 2003, Texas introduced a testing component to their law. A new loan officer coming in had to be able to pass a test in order to get the license. The test cost some money and the training to get ready for the test cost money; however, those of us who were already licensed who did not have any actions against us were grandfathered in so we did not have to retest. We had to take continuing education courses of 15 hours every two years, including a course on ethics, unless we held an active license in one of the other professions described above, and in that case we could use the continuing education required for our other license to meet the requirements. We had random audits by the state which involved the state sending a letter and informing that they would be coming to our offices on a given date and inspecting our files. We were required to keep a log of all of the loans applications we took and the disposition of those loans so that when the auditor arrived, he could choose the files he wanted to see from the list. (This would have been a great hardship when I was getting started, but fortunately in 2003 we moved into a building with on-site storage.) The state contacted us with any complaints and mediated consumer problems. We were required to have a bond for Texas and New Mexico and to pay fees to each state. We were fingerprinted and had our backgrounds checked by the FBI.

A few years later, the state introduced an entity license. Not only were we as individual originators licensed individually by the state, but our corporation had to be licensed also. This, naturally, meant more fees.

Our regulator, the Texas Department of Savings and Mortgage Lending, understood that as small business people we were not made of money, so they worked to keep the fees reasonable. Further, because their department was required to be self-sustaining within the state and was responsible for raising its own budget, they had an interest in trying to help small business stay alive and stay compliant. They communicated with us through emails and letters. The auditors were polite and professional and sent us a copy of our audit in a timely manner. Firms which were not complying with the laws could have their licenses suspended or revoked.

In 2008, after the real estate crash, Congress and the President decided that not enough had been done to regulate mortgage brokers and loan originators, so they passed the "Secure and Fair Enforcement for Mortgage Licensing Act of 2008." This bill goes into effect July 30, 2010 in most states. State licensing and supervision is no longer enough; now a residential loan originator--there are no more brokers or loan officers; we have all been made equal--must maintain a federal license. Your neurosurgeon and tax attorney are licensed by the state in which they live, but your friendly neighborhood loan originator is licensed by the Federal government with additional licensing requirements for each state. Gone are the exemptions for other professional licenses--every mortgage originator has to pass the state test and a federal test, no matter how long they have been in the industry, and they have to pass a credit check and a background check. The loan originator must demonstrate "financial responsibility, character and general fitness such as to command the confidence of the community and to warrant a determination that the loan originator will operate honestly, fairly and efficiently." (Section 1505 b). In other words, if you lost your income during the last three years and had your house foreclosed on, you will probably not be getting a license. A loan originator must take annual continuing education classes and renew annually. And we have to satisfy net worth requirements as established by our state regulatory agency. (In Texas our regulators wisely set up a recovery fund that we each pay into at every renewal which covers this requirement.)

Under the new system, we are each issued a national tracking number that will stay with us for life. It will track foreclosures and defaults and provide a record of how competently we have done our jobs. This will help regulators determine whether we are "good" or "bad" originators.

It is now May of 2010. Most originators all over the country who desire to remain in their professions are currently going through the necessary steps to complete the licensure process. But how many of them know that when financial reform passes, the law that is just now being implemented is going to change? HR 4173 (sponsored by Barney Frank [D MA] who says that he wants death panels for non-depository financial institutions) amends that SAFE act again. Currently each banking entity is regulated by its own agency. HR 4173 will replace most of those agencies with the new Consumer Financial Protection Agency, and this Agency will have charge over enforcing the provisions of the Safe Act. The bill amends the current SAFE Act as follows, "The Agency (Consumer Financial Protection Agency) may prescribe regulations setting minimum net worth or surety bond requirements for residential mortgage loan originators and minimum requirements for recovery funds paid into by loan originators." Under the current act, each State sets the regulations, but the new bill transfers this authority to a new agency of the federal government. What will the new requirements be? No one knows, but we do know that our state regulator has sent out proposed forms for comment which include a comprehensive financial statement submitted to the state every 90 days, so we know that Big Brother is watching, and that our very jobs will now depend on our ability to be profitable. Somewhere out there is a young person with a dream and an ice chest who just doesn't have what it takes financially to start her own business.

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