Home / Focus / Banking & Finance March 2008 / Additional 5% budget cut could mean loss of financial regulators

Additional 5% budget cut could mean loss of financial regulators

The home-lending industry is freefalling in response to the collapse of the sub-prime mortgage market. The state is reeling from a loss of revenue and is considering major cutbacks for state agencies.
The demand for more oversight of mortgage lenders, coupled with the prospect of less money to regulate them, has left the Arizona Department of Financial Institutions scrambling to come up with a scenario that essentially will allow the agency to do more with less.
The number of licensees under ADFI’s jurisdiction has risen substantially since 2000. Mortgage broker and banking licensees have increased 12.5 to 13 percent annually, and even larger increases could occur if the Legislature passes a law requiring the state’s loan officers to be licensed.
However, ADFI Superintendent Felecia Rotellini says the money allocated to the department every year has not been adjusted to account for the increased workload for regulators. And a round of budget reductions last fall has taken its toll.
“We have cut back 5 percent of our budget since September, so we are down two mortgage examiners and an escrow examiner and other positions,” Rotellini says. “It has slowed down our examination of the mortgage companies.”
For the fiscal year 2008, the department’s budget is $4 million. The department receives revenue from licensing and examination fees, but it all goes into the state’s general fund and is reallocated to the department.
“The fee to the institution or enterprise for examinations is $65 an hour, so our department is actually generating money for the state,” Rotellini says. 
But H2512, which passed the House on March 11, would allow the department to retain the fees collected from the possible licensing of loan officers.
“If licensing fees came into the department we believe the fees would provide the support for the infrastructure and then there would be no impact on the general fund,” Rotellini says.    
Rotellini also says the governor’s proposed budget for fiscal year 2009 allocates more money to the department in response to the expansion of the department’s licensees.
But the Legislature has proposed a round of cuts that would affect all state agencies. And the finance department is facing the possibility of another 5 percent reduction. 
“If we are kept at the 5 percent budget cut, we can handle that,” Rotellini says. “If we had to cut another 5 percent of our budget it would all come from salaries, and it would mean 20 to 25 percent of our staff would have to be let go.”
10,000 unlicensed loan officers
The nationwide mortgage crunch has motivated government officials at all levels to search for solutions.
Rotellini says the Legislature should act now to protect Arizona homeowners from defaulting on their loans. One step would be to pass a new law requiring loan officers to receive state licenses, which would create another level of oversight in the mortgage industry. 
“Loan officers are the first line of defense as far as mortgage fraud and misrepresentation or misunderstanding by the borrowers as to what kind of loan they might have. If we get those people educated, than we move toward solving that issue,” says Rotellini.
A loan officer is an individual who works under a licensed mortgage broker or banker, and the officer is usually the person who is directly working with borrowers. 
“That is where the action is happening, that is where loan officers are sitting down with consumers and borrowers and are supposed to be explaining the risk to the borrowers and consumers,” Rotellini says. “They are gaining personal information about a borrower and they are giving advice and counsel about the loan products available to borrowers. Right now there is no screening, no requirements that they have any background or knowledge in this area.”     
Arizona has more than 10,000 loan officers, all of whom are unlicensed.
Two bills, one in the Senate and one in the House, would require loan officers be licensed.  If passed, H2349 and S1203 would also establish education requirements for all loan officers. 
“Loan products are complicated.  They are important and serve a purpose, but if they are misunderstood and utilized to get people into a house that they can’t get into then it is a recipe for disaster,” Rotellini says. 
Rotellini says Arizona’s lack of predatory lending laws makes regular inspections of officers important.
Bankers versus brokers
ADFI’s chief mission is licensing and regulating financial institutions in the state “in a manner that will not unreasonably impede economic growth or business activity.”
“We regulate all types of business from consumer lenders, payday lenders, collection agencies, escrow companies, debt management companies and we even examine pre-need funeral trusts,” Rotellini says.
The department has 4,298 licensees under its jurisdiction, the majority of who are mortgage bankers and brokers.
Rotellini says the department has devoted substantially more attention to the mortgage industry in Arizona since she took over in 2006.
“We have shifted resources to deal with the needs in Arizona,” Rotellini says. 
In 2006, the department responded to increased consumer complaints by partnering with the U.S. Department of Housing and Urban Development (HUD) to create a mortgage-fraud task force in Arizona. ADFI also introduced the Home Equity Theft Protection Act to crack down on scammers who claim they will help rescue homeowners from foreclosure.
The department also conducts regular examinations of mortgage-lending companies.  These examinations occur every 12 to 24 months, depending on the history of the company’s lending practices. 
“Since I have been with the department, we have, in my opinion, beefed up these examinations,” Rotellini says. “We are trying to send a message to the regulating community that if you violate our statutes and engage in deceptive practices, then we will take action as necessary.”
Regulation level depends on charter choice
Banks and credit unions are also regulated by ADFI. When preparing to do business in Arizona, they have a choice to make. They must choose whether they want a state or national charter. The department has regulatory authority over only those that choose the state charter option.
Arizona has 34 state-chartered banks and 26 state-chartered credit unions.
State-level regulation of banks and credit unions generally allows the institution to have a better connection to the region in which they are operating. 
“We are more familiar and confident with our market, and we have a personal relationship with our bankers and the credit unions,” Rotellini says. 
Backers of the bank or credit union that wish to obtain a state charter are required to submit an application to ADFI before the institution can be established. The application must demonstrate that the institution has enough money to carry out its business plan.
“We examine them for safety and soundness to make sure that the deposits are secure investments” Rotellini says, “We focus on internal controls, loan portfolios and their information-technology function.”
After the formation of a financial institution, the department continues to act as the regulatory agent. Examinations of a bank or credit union occur in a similar fashion to those performed on mortgage enterprises. 
There have not been any new applications for credit unions in several years, but there are six pending bank charters.
 Despite public fears of full-blown recession and staring down the barrel of an across-the-board budget cut, Rotellini is co
nfident that the state can rebound from the economic slowdown.
“Arizona’s economy is still a great start-up economy, so there are a lot of entrepreneurs that are willing to invest in a start-up bank,” says Rotellini. ?

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