Last week was an insane weekend for college basketball! Kentucky showed why it was the overall top seed in how it handily defeated Louisville. On the other hand, Ohio State and Kansas literally took it to the last three seconds of regulation before a lane violation at the free throw line sealed the Buckeyes fate and sent the Jayhawks back to their second title game in the last five years. As maddening as 2012 has been for the month of March in NCAA Division I men’s basketball, it wasn’t the only show of March Madness. For the majority of mortgage brokers and mortgage bankers across the nation, March 31st was the day of reckoning as the new Nationwide Mortgage Licensing System (NMLS) “Financial Condition (FC)” reports came due, and it was enough to make one pull their hair out!
As many of you know, the NMLS has turned the mortgage industry on its head. With the system’s arrival, over 1/3rd of the individuals who once originated mortgages have left the industry. New regulations require every mortgage professional, not just the employing broker or banker, to pass exams at the state and Federal level in order to maintain their licenses. Additionally, there is a requirement for 8 hours of annual continuing education. However, the icing on the cake is the mortgage industry’s March Madness, as every mortgage banker or broker, whether sole proprietor, corporation or partnership must file statements of financial condition as an additional annual requirement to keep the doors open and their businesses running. The requirement technically states that a mortgage operator must file its FC report with the NMLS within 90 days of its fiscal year end or face suspension; however, given that most mortgage industry professionals’ best month occurs in December, 12/31 makes the most sense as a fiscal year end. Accordingly, March 31st is D-day.
These financial condition reports are quite detailed, and even for an operation that uses Quick Books, Peachtree, or some other form of accounting software, they represent a tedious mountain to surmount. For the anal operator with a degree in accounting, and a knack for detail at an exponential level, the process is fairly straightforward, as the required reports are detailed balance sheets, income statements, and statements of cash flow. However, for the individual who is a sole proprietor without any background in finance or accounting, it’s an absolute nightmare. Long term current liabilities, net interest income from warehousing activities, additional paid in capital, deferred revenue, and net cash from operating activities are all terms utilized in the FC reports with many more categories than the ones I just provided. In fact, these reports remind me of the “stress tests” that the government imposed on the commercial banks at the outset of the financial crisis of 2008 to determine which financial institutions would fare the best in the worst of conditions. From my vantage point, I see the FC reports as a test that subjects those who have to complete them to more stress than they ever imagined, as they are simply ill-prepared to fill them out.
Personally, I view the FC reports as another shake out method to further reduce the number of people originating loans in the marketplace. At first, it was the exams which in many ways decimated the ranks of mortgage professionals by over 40%, as many people were just poor test takers who had relied on their “gift of gab” for so long to make their income, that passing the Federal and State exams was just impossible. Accordingly, they quit, or closed shop (if they were the owner) and either went to work for a bank doing mortgages or left the industry entirely. Then, there is the continuing education (CE) requirement. In most professions that I’ve observed, continuing education is required, but not on an annual basis. Doctors, dentists, attorneys, CPAs, and other high-dollar/high-risk professions, all have CE requirements, but they are spread out every 2-4 years. However, it has now been determined that the mortgage professional needs CE every year. For this reason, another percentage (although smaller) of the mortgage professionals has left the industry out of shear frustration. For many, the financial condition requirement is the final straw that can break the camels back, as many won’t be able to bear under this type of stress test. They either won’t have the assets, income, or equity to meet the NMLS’ requirements (which still haven’t been disclosed) or they will give up based on their inability to classify the preceding items in the appropriate box on an NMLS worksheet by the end of March, thus causing a new type of madness never before seen during this month. As such, the industry shake down continues.
I am no prognosticator by any means of my own imagination, but Kentucky should be the 2012 NCAA Division I Men’s Champions by 10 pm Pacific time on Monday April 2nd. It will be the end of another season of March Madness for college basketball, but the beginning of annual and perpetual March Madness for the mortgage industry. I believe this is a shake out, as I can think of no other industry that compels its practitioners to provide the completion of annual CE credits and financial condition reports as a requirement for maintaining an active license. I have yet to hear of the case of the neurosurgeon taking annual CE exams and providing cash flow statements to the Medical Board in order to continue the practice of saving lives. I haven’t heard the case of a high caliber divorce attorney shutting his/her doors because they didn’t turn in a balance sheet to the state bar. If your favorite mortgage broker or banker is feeling exhausted or glum in the first part of April, have a little empathy. They may have had some hot recruits who couldn’t pass the exams. Another reason for their depression could be the dreadful, annual CE requirements that they have no time to fulfill. Given the timing, it’s most likely that they struggled to complete their FC reports or just gave up trying and have considered other options with their current skill set to pay their bills. For many in the industry, the end of March Madness represents the crowning point for college hoops. For others it represents a true April Fool’s joke that has been played on them by the regulators–and it’s not funny.
Preston Howard is a mortgage broker and Principal of Rose City Realty, Inc. in Pasadena, CA. Specializing in various facets of real estate finance, he can be reached at email@example.com.