Purpose and Benefits of Licensing

Consumer protection is the main purpose of licensing. Consumers benefit by knowing that they are dealing with competent individuals who have certain level of experience and education in the area of mortgage financing. Licensing aids in consumer protection through the various benefits of licensing, as discussed below.

Benefits of Licensing

1. Experience: Licenses are generally issued to mortgage professionals who have certain level of experience. This ensures that license holders have practical knowledge and experience in working with borrowers and helping them understand the various elements of the mortgage life cycle.
2. Competency: License holders are required to pass an examination prior to getting licensed. The exams are designed to ensure that the applicants demonstrate a minimum level of competency in mortgage and real estate areas.
3. Education: A person needs to obtain certain education before getting licensed. In addition, license renewals require obtaining continuing education. The objective is to ensure the professional are up to date with current business practices and regulatory requirements.
4. Ethical Behavior: Issuance of licenses is usually restricted to people who have prior convictions or history of unethical behavior. In fact NMLS system also requires licenses to demonstrate competency in handling personal finances. The requirements are designed to protect consumers and hold license holders to higher standards of behavior.
5. Forum for Complaints: The various license issuing agencies have a system for the consumers to file a complaint against the license holders. The licensing agency would investigate the complaint and if found to be true the licensee may face disciplinary actions such as penalties, loss of license, or even referring for criminal prosecution.

Licensing is not a Guarantee for Good Behavior

License is not a guarantee of competency or ethical behavior. There will always be some certain individuals who will try to cut corners, gain unfair advantage, or commit outright fraud. In the end, the borrowers need to do their own due diligence in selecting a mortgage originator.

Criticisms of Licensing

1. Burdensome: The process of obtaining, maintaining, and renewing a license can be cumbersome and requires complying with multiple requirements. This can be daunting for a new entrant to the profession. In fact, even experienced licensees acting in good faith may sometimes miss a technical requirement and find themselves facing disciplinary actions.
2. Expensive: The costs may relate to application fee, renewal fee, costs involved with reporting requirements, and various miscellaneous fees such as fingerprinting, credit report, bonding, and printing. These costs can quickly add up when trying to maintain licenses in multiple states.

Police Power as Source of Licensing Laws

Police power is the source of creating laws that require mortgage licensing. According to CA Bureau of Real Estate (BRE) Reference Book, Chapter 1, page 1:

"Police power is the power of the state to enact laws within constitutional limits to promote the order, safety, health, morals and general welfare of our society."

It is the police power that allows the State legislature and federal government to require individuals engaging in mortgage profession to obtain licenses. Using police power a State cannot take away the right of employment but can only regulate it for consumer protection or general welfare of the society. This implies that the licensing agency cannot arbitrarily refuse to give a license. If a person meets the requirements then the agency must issue a license.

External Links

1. BRE Reference Book - A Real Estate Guide

Updated: Sep 14, 2013