The raison d’etre is the same whether you work as a mortgage loan officer at a depository bank or an independent mortgage bank – originate a purchase mortgage or refinancing for a client.
But the educational foundation and understanding of mortgage products, rules and regulations can differ dramatically between depository LOs and their nonbank counterparts.
Federal regulations mandate that nonbank LOs take training prior to being certified. To maintain their license, a nonbank LO must take continuing education courses on an annual basis. Loan officers working for depository banks are not bound by the same requirements.
Several LOs who made the leap from a depository institution to a nonbank told HousingWire that they struggled with education requirements and felt less knowledgeable than their nonbank LO colleagues.
Some nonbank stakeholders take issue with the lack of uniformity of educational requirements for all LOs. They believe it has the potential to create consumer risk.
Most recently, the Community Home Lenders Association, an influential nonbank trade group, renewed calls for the Consumer Financial Protection Bureau to create uniform requirements for all LOs. As of now, the CFPB does not have plans to make any changes.
Regulations to oversee them all
The Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act) established a number of requirements that loan officers must complete to be licensed in their respective state.
Requirements for nonbank LOs include a 20 hour pre-certification course; eight hours of annual CE courses; registering in the Nationwide Mortgage Licensing System (NMLS); and submitting fingerprints to NMLS for a criminal background check.
Congress moved to implement more stringent requirements on nonbank LOs because prior to 2008, “anyone off the street could be hired” as a loan officer and this was a way to enhance consumer protection, said one veteran LO.
Depository banks, however, were not bound by all of the requirements put in place by the SAFE Act. The only overlapping requirement is that all bank LOs must be registered with the NMLS and submit fingerprints for a background check.
John Jeha, an LO at Stonecastle Mortgage who also works as a continuing education instructor, said that depositories were not impacted as much by the SAFE Act because there was already heightened oversight.
“The banks said that they don’t need to do all this continuing education and the pre- licensing that we have to do as a nondepository,” Jeha said. “The depositories say that they teach all of their people this stuff anyway because they have so many regulations.”
The Office of the Comptroller of the Currency (OCC), the Federal Reserve System, and the Federal Deposit Insurance Corporation (FDIC) oversee and regulate the activities of banks.
“These organizations impose response training responsibilities on banks to have a well-trained staff,” said a source who requested anonymity because he was not authorized to speak about bank regulation. “So that falls under the normal oversight, the safety and soundness, and normal oversight requirements by the banking agencies.”
A spokesperson for the Conference of State Banks Supervisors, which owns and operates the NMLS, said that both sides are subject to significant oversight by federal regulators or state regulators.
“We are all professionals and it’s important to always stay abreast of skills and trends,” the spokesperson said.
Learning materials up to par?
Although depositories are not required by law to have their loan officers take pre-licensing training or have them annual recertify, some depositories make their LOs do onboarding training and annual training modules.
The depth and quality of these training sessions differ from lender to lender, and are done in accordance to individual banks’ needs.
Sam Elder, mortgage loan consultant at First United Bank, said that the Oklahoma-based depository requires LOs to do training modules annually. The modules cover some mortgage-related topics, but there are also topics that pertain to other facets of working at a bank.
“Here’s the thing, we learn about stuff that’s not applicable to us. On the mortgage side, there’s certainly banking, you know, your customer stuff,” he said. “There are things that are very, very specific to mortgage, and there are things that are not specific at all, or even necessarily applicable to us. You’re having to learn more things at a bank.”
Karol Bourdet, a former LO at Wells Fargo who transitioned to Precision Home Loans in 2020, said that the depository required training classes when an LO is first hired and then there is an annual online training.
“The testing is mostly related to bank requirements topics and a few origination topics, i.e HMDA, Fair Lending etc.,” she said. “But nothing in my opinion like the continuing education classes or the three-hour test for state licensing.” (Depository LOs are not required to be licensed on a state-by-state basis, they can originate loans in any state.)
Continuing education for nonbank LOs is more rigorous, with a heightened focus on the Truth in Lending Act, Equal Credit Opportunity Act, and the Real Estate Settlement Procedures Act (RESPA), multiple LOs and continuing education teachers said.
If a nonbank LO fails to recertify their license, they are effectively cut off from the industry. Depository LOs who may have forgotten to take their annual classes get to keep their license, former and current loan officers at banks said.
William Kidwell, a loan officer at Intelligent Investments, LLC., said that both nonbank LOs and depository LOs need to be held to higher standards in their training.
“My mindset is that if we believe that individuals who deliver mortgage services are working with consumers with the single largest asset that they have, or will likely have, I have to wonder, how we can have people doing that with 20 hours of education or no education,” Kidwell said.
He noted that the continuing education courses for nonbank LOs do not provide the necessary understanding of advising consumers on “difficult balance sheets, cost versus debt, and debt service parameters,” but that at depository institutions it may be even worse.
Kidwell also criticized an existing loophole that gives LOs who jump from a depository to a nonbank 120 days to originate loans without any pre-licensing education.
“I don’t know about everybody else on the planet, but I don’t know that I would want my neurosurgeon to have 120 days to learn to be one, just because he was a doctor someplace a year before that,” Kidwell said.
A level educational playing field?
Loan officers who transition from a depository to working for an independent mortgage bank often experience challenges in getting up to speed on all the regulatory material, LOs who made the jump said.
According to Jeha, LOs leaving depositories and coming to the non-depository side of the business generally don’t have as much training.
“[These LOs] are not very understanding of the rules and regulations that somebody at a nondepository company knows about,” he said. “I think non-depositories are much better at training and the rules and regulations make us more knowledgeable than depository LOs.”
Bourdet, a former LO at Wells Fargo, said that the pre-licensing test was “definitely more rigorous” than the education material at the California-based depository.
“In my opinion the LOs working for depositories could be less knowledgeable about products and regulations,” she said. “I think that the depositories are not as picky in making sure they are hiring LOs with mortgage lending experience. Usually the nonbanks look for experienced LOs with a book of business.”
She added that during her time at Wells Fargo, case bankers would sometimes give out misinformation to the customer about mortgages.
“The bank bankers are not trained in mortgage lending, just consumer lending products, i.e. equity and car loans,” Bourdet said.
In its October 2021 letter to the CFPB, the CHLA said high-profile scandals by depositories – such as Wells Fargo’s fake accounts controversy – have put a spotlight on the consumer risk that arises from a lack of training.
“The combination of unqualified bank mortgage loan originators, combined with senior bank management pressures on employees to push profitable mortgage products
without regard to suitability, represents a clear consumer threat,” the CHLA said.
However, a recent 26-state federal investigation that penalized 400-plus LOs for effectively cutting class and slapped Danny Yen, the perpetrator who masterminded the fraudulent CE scheme, with a $75,000 penalty, raises questions about the effectiveness of the continuing education programs as a whole.
Calls for change
In its October 2021 letter, the CHLA called on the CFPB to close loopholes in the LO Comp rule, which implemented certain sections of the SAFE Act in 2013. The trade group has been making this call since 2014.
According to the CHLA, an amendment to the SAFE Act in 2010 requires every mortgage loan originator, including those working at banks, to be “qualified.”
However, the trade group argued that the watchdog’s 2013 rule “created the unique exemption that bank mortgage originators enjoy from licensing [and] testing.” The CHLA also noted that the CFPB considered and then rejected requiring a bank LO to meet the same requirements as non-bank LOs.
“That rule merely requires unspecified mortgage training and a non-independent background check, both of which can be carried out in-house by the bank,” the trade group said.
The letter added that “it is incongruous that bank employees that sell insurance or securities must be licensed and meet high qualification standards, but a mortgage LO selling mortgage products- a sector that brought down the economy in 2008- are exempt from the basic requirements that apply to every other financial profession.”
“There are no plans to make the education requirements mandatory across the board,” a spokesperson from the CFPB said.
Jeha said that having uniform requirements for all LOs would help consumers “immensely.”
“For somebody on my side of the business, the non-depository side, not only do we have to do the education, but I would say 95% of loan officers have to pay for it themselves,” Jeha said. “So they’re motivated to make sure that they’re doing the right thing. At a depository institution. It’s like, ‘Oh, another class I have to take. It’s online. There’s no live classes, there’s no interaction. I just have to get through it. And then I’m just going to continue doing what I’m doing.’ Standardizing it would be much better.”