Since the passage of the SAFE Act of 2008, mortgage originators have faced background and credit checks as components of the licensing process. Now, some lenders say, they are having a hard time with those basic requirements in light of the down economy.

Under the Nationwide Mortgage Licensing System (NMLS) applicants must meet background and credit requirements in order to obtain or renew licensing. While those requirements have reached a level of uniformity across the nation, it can come down to a state-by-state judgment call as to whether an originator’s application can move forward. And as NMLS has ramped up efforts, some lenders say the current requirements are too tough.

While they support the licensing process—a background check and a credit check, 20 hours of pre-licensed education, and a test with national and state-specific material—they think the process has become too stringent at a time when the economy has taken its toll on many individuals.

“They’re getting more difficult and strict,” says Paul Fiore, head of sales at American Advisors Group. “When I struggle with it, is when states have taken stances against people who don’t have anything on their record, but because they’ve had financial hardships, they have trouble getting licensed.”

This has become much more prevalent in the last three to six months, Fiore says, noting that many more people today have been hit financially with the economic downturn, which could lead to credit issues. This could pose a problem for lenders who are already licensed but may be unable to renew their license after a subsequent poor credit report.

“If you hire experienced people who have been in financial services industry, very few are sitting there with sterling credit,” he says, adding that the reverse industry is much harder now than it ever was.

However, the background and credit checks are important, says Bill Matthews, president and CEO of State Regulatory Registry, which owns and operates the NMLSR. If a loan officer is involved in a financial transaction with someone else, he needs to have demonstrated through his background and credit that he is qualified, Matthews says.

Both existing and new licensees must provide the NMLS with authorization to pull a credit report, although individual states can determine whether or not a new credit report will be pulled at renewal. The NMLS guidelines cater to the types of transactions loan officers conduct, he says.

“If they have a felony conviction in the last seven years, they can’t hold a license,” says Matthews. “If the felony conviction is of a financial related crime, they’re banned for life.”

The credit component is fairly straightforward except for what Matthews calls a “gray area.” While outstanding tax liens or bankruptcies are unacceptable, there are some credit issues that the system will address on an individual basis.

For those who have bad credit and are behind on bills, child support, or alimony, perhaps due to the economic climate, he continues, their cases can be evaluated individually, and they may be given a conditional license that depends on their performance throughout the next six months.

While the guidelines may be restrictive, some lenders say they can’t be careful enough in terms of their new employees. Network Funding, for example, considers these tests standard practice in the hiring process of each prospective employee, regardless of whether or not they’ve applied to a position requiring licensing.

“It’s especially important in the reverse side when you’re dealing with a protected class like senior homeowners,” says David Cook, head of Network Funding’s reverse mortgage division. “A lot of fraudulent activity is performed by people who don’t belong in the business.”

Network Funding exercises caution when it comes to subpar credit reports because financially desperate people may not make ethical decisions, Cook says.

“If someone is really down and out, and they’re financially strapped, those are the folks that you have to be very careful about, in regards to taking advantage of a situation, maybe in a way that’s not straightforward,” he says.

While he thinks the licensing requirements are necessary, Cook expressed some concern regarding credit checks on lenders in his company for license renewals, as well as filling continuing education requirements.

“I can visualize where we may have credit issues coming up,” says Cook. “I would suspect we’ll have a few that just won’t get their continuing education done in time. If they let their license expire, or don’t renew for any reason, we have to terminate.”

However, Network Funding does give some leeway when it comes to questionable credit reports.

“We’ll allow them to send in a letter of explanation,” Cook says. “Just looking at a credit report shouldn’t be a final decision maker, but it certainly contributes to a lot of it.”

Many states share this attitude and will consider the circumstances relevant to an applicant’s credit, says Matthews.

“If you’ve had a bankruptcy because of a health situation or medical bills, that has nothing to do with your financial responsibility,” he says. “If you owe liens because of real estate speculation, that would be a good example of not being financially responsible.”

Written by Alyssa Gerace