On Tuesday, May 19, 2008, the Senate Banking Committee passed the Federal Housing Finance Regulatory Reform Act of 2008 (H.R. 634). The tail-end of the bill, entitled the S.A.F.E. Mortgage Licensing Act (Title VI), if passed, would establish a nationwide regulating system for all mortgage loan originators and others who even assist in loan origination. At first blush the bill appears to be a much-needed addition to the laws governing the actions of loan originators. However, many believe the proposed bill would go too far.

The bill states that “an individual may not engage in the business of a loan originator without first … obtaining a unique identifier.” To obtain this “identifier,” an individual is required to “furnish” to the newly created Nationwide Mortgage Licensing System and Registry “information concerning the applicant’s identity, including fingerprints for submission” to the FBI and other government agencies. The fingerprints will be part of what the amendment calls “a comprehensive licensing and supervisory database.”

The database would apply to a broadly defined class of individuals who are even loosely involved in the mortgage industry. It would apply to loan originators, broadly defined as anyone who “takes a residential loan application; and offers or negotiates terms of a residential mortgage loan for compensation or gain.” Presumably, this includes all loan officers and their assistants. The bill would even apply to real estate agents and brokers who are compensated by lenders or mortgage brokers.

The purpose of the bill, of course, is to provide greater consumer protection and increased accountability among loan originators. The Senate Banking Committee’s summary of the S.A.F.E. Mortgage Licensing Act states that it “establishes a licensing system for all loan originators to help standardize requirements for mortgage brokers and ensure that they meet minimum educational and performance standards.” The bill’s drafters, Chairman Chris Dodd and Ranking Member Richard Shelby, tout it as the means to regaining integrity in the industry. However, in reality, the bill, if passed, will likely produce very few results, while causing most everyone in the loan origination industry to get fingerprinted and have personal data submitted to federal regulatory agencies, at an enormous aggregate financial cost.

The proposed identification system is not going to stop loan fraud. It is not going to stop bait and switch in the lending industry. And, it is not going to stop borrowers from being duped into signing onto a loan (or loans) that they don’t understand. These practices will continue, in substantially the same volume, regardless of whether the FBI has fingerprints.

Fingerprinting simply is not the answer. Mr. Dodd and Mr. Shelby may pat themselves on the back for drafting a bill that tells everyone watching that the legislature is hard at work to protect the American consumer. But, the truth of the matter is that the bill, if passed, will achieve very little. If Mr. Dodd and Mr. Shelby truly wanted to protect the American consumer, they would get busy drafting legislation that would provide incentive to borrowers for obtaining competent counsel or advisors to assist borrowers in understanding their loan. The fact remains that, no matter how many clever-sounding regulations the government places on loan originators, there will remain a large percentage that are willing to take advantage of unsuspecting/ill-equipped borrowers.

Unfortunately, whenever we see waves of professional abuse such as has recently occurred in the mortgage industry, the knee-jerk reaction of America’s legislators is to run out and pass more red-tape regulations in an attempt to look like they are doing something about the problem. The tragedy is that, in focusing on regulating the abusers, they lose site of the real solution: helping to equip the abused. Until our legislators start to draft legislation that promotes or requires borrowers to obtain competent and objective guidance during the home loan process, we can expect unsavvy borrowers to continue to be taken advantage-of by loan originators, whether those loan originators have been previously fingerprinted or not.

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Attorney Tyler F. Belong is a partner at the San Diego law firm of Hogue & Belong. Mr. Belong is also a founder of the Mortgage Accountability Association.

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