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Bill to license home loan originators hits roadblock

PHOENIX – Legislation to require that people who help arrange mortgage loans for homebuyers get a state license has hit a roadblock near the finish line at the Legislature.

Billed as a consumer protection measure and similar to laws on the books in some 30 other states, the legislation enjoys support in the real estate financial industry as well as Gov. Janet Napolitano’s administration.

However, one senator’s opposition has prompted Senate Republican leaders to sidetrack the bill (SB 1028) since it was approved overwhelmingly by the House on a bipartisan vote.

“I would imagine we would have a similar type vote in the Senate,” said the bill’s sponsor, Sen. Jay Tibshraeny, R-Chandler. “Making people accountable and requiring education and more ethical treatment of consumers is something whose time has come.”

The issue is on the Legislature’s plate at a time when the mortgage industry has come under increased scrutiny because of foreclosures and other problems associated with the subprime loan crisis.

The state already regulates mortgage brokers and mortgage bankers, but the bill would require licensing of an estimated 10,000 so-called “loan originators” – front-line employees of mortgage brokers and other lenders.

Under the bill, originators would have to undergo criminal background checks, pass a test, meet continuing education requirements and stay licensed while in the business.

Originators typically interview customers in connection with a loan application and act as middlemen between lender and consumers.

“In that relationship, we have seen a lot of abuse,” said Felecia Rotellini, director of the Arizona Department of Financial Institutions. She cited identity thefts, sales pitches for inappropriate loans and incompetence of some originators.

Without licensing requirements, “there’s no guarantee that a consumer is talking to somebody who knows what they’re talking about,” Rotellini said.

Rotellini and others say the required background checks would help keep people convicted of financial crimes in other states from working as originators in Arizona.

The reverse is true if Arizona doesn’t follow other states in requiring licenses, said Sen. Debbie McCune Davis, D-Phoenix. “The bad actors could come here.”

The stalled licensing bill is opposed by Sen. Pamela Gorman, an Anthem Republican who heads the Financial Institutions, Insurance and Retirement Committee. She previously declined to hear two similar bills, essentially killing them.

Gorman said she favors having the state establish a voluntary registration system that would help consumers decide which mortgage businesses to patronize.

Licensing wouldn’t do much good to combat fraud, which is the problem she hears most about, she said.

“A slip of paper called a license doesn’t stop somebody from committing a crime, which is what fraud is,” Gorman said. “I do recognize this is a serious problem and I would like to see them (industry groups) work together to fix the problem before the industry starts coming back on line, before the same bad characters get involved again.”

Gorman’s committee voted 3-2 in February for a bill she sponsored to establish a voluntary certification system. But Tibshraeny, as head of the Senate Rules Committee, did not permit Gorman’s bill (SB 1504) to advance to the full Senate.

“I think we’re beyond a voluntary registry,” Tibshraeny said. “It might sound good, but it doesn’t give the consumers the protection they need from unscrupulous dealers because your unscrupulous dealers are not going to register.”

An expert on real estate financing said he supports the licensing for loan originators despite strong free-market leanings.

“We should really have licensing the way we do in the securities industry simply because this is the largest asset in most householders’ portfolio, and we essentially require people that deal with a household’s investments to be licensed,” said Tony Sanders, an Arizona State University professor of finance and real estate.

Lee Miller, a lobbyist for the Arizona Association of Mortgage Brokers, said the group supports licensing.

In getting the House to approve his latest bill, Tibshraeny did an end-run around Gorman by having an unrelated bill rewritten to mirror the original licensing bill that Gorman had refused to consider.

Senate Majority Whip John Huppenthal, R-Chandler, said Senate leaders halted Tibshraeny’s bill out of deference to Gorman in her position as committee chairman.

“We’re just trying to resolve a dispute between a chair and members. Hopefully they will work it out,” Huppenthal said, adding that he’s confident the issue can be addressed next session if not.

McCune Davis said the stakes for consumers are too high to wait.

“The Republican leadership needs to make it a priority, and if this bill does not succeed in becoming law this session it will be a black eye on the Republican leadership,” she said.

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