Alert Sounded About Cheating on Mortgage-Licensing Exams

Test files are for frat houses, not your mortgage business.

That is the clear takeaway from a recent $5.3 million fine and consent order slapped on New Day Financial in Fulton, Md., which had saved questions and answers from past licensing exams for new test-takers. A joint settlement was reached with regulators from 43 states, who deemed the practice a violation of the rules of conduct for mortgage-license testing and continuing education.

It is unclear how widespread the problem is, but the incident raises doubts at an important time, given the recent rise in licensing-renewal rates among individual loan officers and financial institutions.

When asked whether there have been other instances of licensing-test fraud or cheating, a Conference of State Bank Supervisors official said it was the first one made public.

"We cannot speak to other instances that may or may not have happened, unless those instances have resulted in public orders, and I am not aware of other public orders that address this issue," said John Prendergast, a vice president of the CSBS, which through a subsidiary owns and operates the Nationwide Mortgage Licensing System and Registry.

There is little doubt that, particularly in the early days of licensing testing, some lenders sought examples of the questions and answers involved. But the message they generally received from industry officials was that getting the answers to actual questions that had been on the test is banned.

The Mortgage Testing and Education Board has rules of conduct for mortgage licensing test-takers. If any test-takers are still wondering what is allowed, they might want to review them. In light of the recent consent order, they might want to take note in particular of No. 7, which pertains to test confidentiality, and No. 11, which specifically prohibits fraud and actions that would undermine the integrity of the tests, according to a CSBS spokeswoman. There also is a broader set of originator education and licensing standards and rules that applies to course providers and whistle-blowers.

CSBS officials acknowledge test cheats are hard to uncover, particularly in cases of in-house collusion. But with more regulatory encouragement of whistle-blowers in many quarters, in addition to the increased communication and cooperation among regulatory bodies, it remains a constant risk for lenders.

Regulators expect lenders to have controls in place to at least try to prevent testing and education infractions.

Under the consent order, New Day must work temporarily with an outside agency that will monitor its compliance efforts until regulators are more confident that its in-house operations are sound. So while working with third-parties has its own risks, it may be advisable in certain situations like this one.

"If [mortgage businesses] are aware that there are more eyes on people, there is independent oversight and they have to sign off that they have to manage their employees in a particular way, it is really going to make them think twice about trying to do something that they know isn't right," Prendergast said.

He also said that having a tip line that allows employees to anonymously report any infractions, as New Day will provide going forward, is a good practice.

Regulators are not the only ones worried about licensing-test fraud. Employers are broadly concerned with the integrity of individuals' licenses as they move from company to company, said Greg Schroeder, president of Comergence, a risk management firm for originators and appraisers.

This is particularly important for nonbanks and brokers, who often find the testing requirements related to their licenses gives them a competitive edge over bank originators who only have to register without testing.

New Day's consent order will force some of its licensed originators who took tests during 2013, when the questionable activity took place, to retake the exams to assure the integrity of their licenses.

But all anyone can find out when they search the Nationwide Mortgage Licensing System is whether a particular individual has a license, noted Schroeder.

"You either pass or fail, and that would be the issue with your NMLS number. If you don't pass, you obviously don't get the number," he said.

Regulators report actions such as this consent order as they come out, said Schroeder, whose company has a contract with the NMLS to share pertinent alerts each night with its clients.

In general, if an integrity question arises about existing or would-be employees, re-testing them may be a way to address the concerns. But companies need to be sure that whatever action they take complies with applicable labor laws, Schroeder said.