US bill would require mortgage broker licensing

By John Poirier

WASHINGTON, May 20 (Reuters) - A Senate plan to help U.S. homeowners avoid foreclosures would also crack down on mortgage brokers by requiring them to be fingerprinted by the FBI and licensed by state regulators.

Critics say mortgage originators contributed to the U.S. housing crisis by crafting so-called "liars' loans" in recent years that required little money down and no verification of a consumer's income.

The Senate Banking Committee on Tuesday approved legislation that would create a $300 billion government-backed mortgage rescue plan and a new regulator for Fannie Mae (FNM.N) and Freddie Mac (FRE.N).

The bill also endorsed an initiative by the Conference of State Banking Supervisors to license unregistered mortgage brokers. The group of state regulators and the American Association of Residential Mortgage Regulators earlier this year launched a nationwide mortgage licensing system, an Internet-based database that eventually aims to contain enforcement actions and background data for every licensed mortgage broker and lender.

The bipartisan-brokered legislation, which is expected to be approved by the full Senate, would set tougher standards for mortgage brokers by requiring applicants to pass proficiency tests and to be fingerprinted by the FBI.

The licensing requirement was not included in a version of a housing rescue bill approved earlier by the U.S. House. Negotiators for the House and Senate will prepare a final version of legislation before it is sent to President George W. Bush.

"It creates very high minimum standards," John Ryan, executive vice president of the state bankers' group, told Reuters. "It puts the pieces together so that we can have a robust mortgage regulatory system."

Stricter standards would help create more transparency for institutions that want to do business with reliable originators, he said.

The new licensing requirement would apply to loan originators offering loan terms in return for compensation and to those who offer real estate brokerage services. To obtain a state license, a broker would have to pass a written test after taking at least 20 hours of training in ethics, law, and lending standards for nontraditional mortgages.

To keep a license, the bill would require mortgage brokers to take eight hours of continuing education annually.

"Most states are going to have to rewrite their licensing laws to be in compliance," Ryan said.

Banks with subsidiaries operating in several states could get their employees licensed by a federal banking regulator.

The lack of supervision of unlicensed mortgage brokers was widely criticized by lawmakers and consumer groups. Some critics blamed the Federal Reserve for failing to use its consumer protection powers to halt mortgages with easy terms that were made to borrowers with poor credit histories.

Mel Martinez, a Florida Republican, introduced the licensing provision in the Senate bill. He and Dianne Feinstein, a California Democrat, previously tried to pass in the full Senate. Both states have been hit hard with home foreclosures and falling residential real estate values. (Editing by Kenneth Barry)