Audit faults Md. oversight of mortgage sector

December 28, 2007|By Jay Hancock

Perhaps we shouldn't be surprised. Not only did Maryland lack strong laws to prevent abuse by mortgage operators, it didn't enforce what flimsy regulations it had during the worst mortgage blowup in memory.

As of June, state regulators were as much as two years late in performing required mortgage-lender examinations, according to a new audit by the Department of Legislative Services.

A flood of mortgage-broker applications overwhelmed the Office of the Commissioner of Financial Regulation after Jan. 1, making it more likely that licenses were being granted to unqualified people. The office also failed to ensure that mortgage lenders and other financiers with expired licenses were no longer doing business in the state, the audit found.

Maryland's mortgage mayhem - 16,000 foreclosures in the last year - probably wouldn't have been prevented by more effective regulation. But it might have been ameliorated. State regulators are at least supposed to conduct basic background checks to keep out criminals and amateurs.

The bigger question is this: If the state can't enforce the lightweight laws it has, how will it deal with tougher mortgage screening that is almost certainly on the way?

What's obvious is that the Department of Labor, Licensing and Regulation, which oversees mortgage regulation, didn't assign enough people to the job. What isn't obvious is whose fault it was.

DLLR Secretary Thomas E. Perez blamed former Gov. Robert L. Ehrlich Jr. "Bob Ehrlich didn't believe in effective regulation," he said. "He took the `R' out of DLLR."

Perez, who signed on in February, claimed he and Gov. Martin O'Malley moved quickly to address the growing mortgage problem and "get a much better handle on it than we had in the Ehrlich years." Lender penalties and recoveries for homeowners grew substantially for the year ending June 30, he said.

But there were still substantial failures in June, when auditors made their examination.

That month auditors performed a spot check of 20 mortgage lenders, for whom examinations are required every three years. More than half the examinations were overdue - one by 25 months.

In the same period, broker licenses "were not reviewed and approved by supervisory personnel to ensure that they were issued only to qualified applicants," auditors found. "Consequently, licenses could be issued to unqualified applicants without detection."

Moreover, the financial regulation office couldn't keep its own finances straight, according to the audit.

The office failed to maintain adequate controls on nearly $2 million in cash collections for fees and penalties, although there is no indication money went missing.

At the same time, the office didn't properly document costs allocated to a fund that was financed by mortgage fees and supposed to pay for mortgage regulation.

Maryland had no license requirement for mortgage brokers until this year, when nearly 15,000 applications poured in. That happened as the complexity of mortgage products increased along with the time needed for oversight, Perez said.

Lender examinations that once took two days now take three, DLLR told auditors. New hires, "given the comparatively low salaries we can offer, are often trainees who are not able to conduct examinations on their own for 6-12 months," the audit found. Plus, the extra resources needed to prosecute a tide of violations mean less time to monitor everybody else.

Ehrlich spokesman Henry Fawell declined to address the audit's findings. But he said that Ehrlich worked hard to boost homeownership and that O'Malley has been happy to claim credit for his programs.

"If there are teachers and nurses and police officers who the O'Malley administration thinks are unworthy of their homes, that's their problem," he said. "But Governor Ehrlich is happy to have helped them."

If Perez wants to deflect blame and score political points, that's his option. What's more important is that DLLR gird itself to enforce not only current law but tougher standards that the legislature needs to pass.

States frequently complain that a lack of federal oversight forces them to step in with tough business regulation. But they need to back up the talk. When Marylanders most needed protection from shady mortgage operators, this state failed.

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