Licensing overload; Financial Institutions has thousands of new businesses to license, regulate

A state law nearly doubling the amount of loan originators and brokers who must be licensed and monitored by the state has increased the workload of a staff already struggling to keep up with approving new mortgage-originator licenses, regulating existing businesses and protecting consumers.

“We are compromised from a timing and resource standpoint to … utilize that interagency agreement with the FDIC to conduct the examinations,” says Lauren Kingry, superintendent of the Arizona Department of Financial Institutions.

The Federal Deposit Insurance Corporation (FDIC) routinely helps state banking regulators across the country get examinations done. With extra help from the federal agency, state-chartered institutions and enterprises in Arizona are being examined within the statutorily mandated requirement of 18 months, Kingry says.

Tanya Wheeless, president and CEO of the Arizona Bankers Association, says she would like to have “a robust team of state examiners” conduct the examinations rather than a federal agency.

“Our banks pay examination fees and various other fees into the department, so we would like to take full benefit of those services,” Wheeless says.

Scott Earl, president and CEO of the Arizona Credit Union League and Affiliates, agrees with Wheeless, and calls FDIC assistance a “short-term fix” to a long-term issue.

Both say the Financial Institutions agency should keep more of the money it generates from examination fees paid by regulated businesses to help it become self-sustaining. Right now, a portion of the fee money is remitted to the state’s general fund.

A reduced budget, shrinking staff and increased regulation responsibilities, however, are proving quite challenging to the department, which now regulates about 4,000 businesses and individuals.

Last year, the department’s budget was cut by about 10 percent, to $2.9 million. It also lost 20 employees, leaving the department with 29 examiners and staff members, Kingry says.

SB1028, signed by Gov. Janet Napolitano on July 7, 2008, added thousands of new businesses and individuals for the department to license and regulate.

As of July 1, 2010, which was the deadline for all loan originators in Arizona to be licensed, the department had received about 4,500 applications. About 1,000 were returned to the filers for incomplete paperwork and other deficiencies.

Kingry says the department still has about 500 applications sitting in the office that it has yet to begin considering. When the department does begin reviewing an application, he says, it typically makes a determination in about 45 days, well below the statutory requirement of 120 days.

The department was given money to hire five new staff members to assist in reducing the backlog. The new employees, who started the week of Aug. 16, will also help the department examine and supervise financial entities that may be performing mortgage loan originator responsibilities, but did not need a license until now.

Kingry says those who waited until the last minute to apply for a license face a four-month wait and are barred from the loan-origination business until their license is approved.

“Loan originators can’t actually originate loans while they don’t have a license,” Kingry says. “They can still work and have income from their business, but they can’t have income that is associated with the negotiation of a loan.”

Along with licensing and regulation, combating fraud is another agency priority. Kingry says there just simply aren’t enough employees to investigate as many cases as he would like.

“There are significant events that we hear about that could be considered fraud, but we are not able to attend to all of those,” he says. “However, we are doing our best to follow through once a complaint is filed and follow through on reports of fraud as quickly as the staff we have allows.”

Paul Klimke, the president of the Arizona Association of Mortgage Professionals Central Chapter, says the Financial Institutions Department still needs more employees to keep consumers safe.

“If we really want to provide a safe-lending environment for the consumer, then frequent regulation and inspecting ought to become so important,” Klimke says. “We want to make sure that people are following the rules and are doing what they’re supposed to.”