New Day Financial received a $5.2 million dollar fine from the Conference of State Banking Supervisors (CSBS) for systemic violations in its licensing training program. Although the CSBS's condemnation of New Day Financial's training program management system stopped short of using the word "fraud," it's astonishing to see the scope of misrepresentation perpetrated by compliance personnel and company leadership. This incident reminds us that we often have to state the obvious, because in a high paced environment you can often lose perspective in the interest of expediency. But what happened at New Day caused a gasp at the audacity and scope; specifically the practice of having others take your training for you.
SAFE Act Training - It's Here... Deal With It
It's true that most mortgage professionals consider Nationwide Mortgage Licensing System approved pre-licensing and continuing education a fruitless, nuisance exercise. Much of the 8 or 20 hours of mandated material could easily be covered in 1 hour. Compliance training in all fields gets characterized in this way, whether it's nurses, plumbers, real estate agents, insurance agents and all of the rest of the regulated industries. But as mortgage professionals we usually buck it up and take our medicine as the price of admission. That's why no one in the industry has much sympathy for the New Day perpetrators. But the case raises some other interesting issues.
Compliance training isn't real learning. But that is by design. It advances a certain regulatory agenda, namely the idea that days spent mulling countless pages of federal law (much of it obfuscated by lawyerly wordsmithing) will make a commissioned salesperson (loan originator) an ethical and law-abiding industry participant. The New Day case provides more evidence that more compliance training doesn't mean more compliance. Loan originators especially dread the continuing education and pre-licensing training is perceived as largely useless with new entrants requiring weeks or months of vocational training to learn the job. Delivering it with more "engagement" simply means more "work" for the students. Because the material has such a low perceived value, participants naturally minimize the amount of time and effort expended.
While it doesn't excuse the actions of the individuals who cut class, it's likely the class cutters already knew the material being delivered in the "mandatory" continuing education. Like any long time industry professional, one is aware of the regulatory compliance requirements; many long-timers could teach the course (and do!). So, in part, the fault for the fact that people go to such extremes to avoid taking courses on the same old federal regs - the same regs that we talk about ad nauseum all day long - can be laid at the foot of the regulators who constrict the course materials. The Nationwide Mortgage Licensing System (NMLS), a subsidiary of the Conference of State Banking Supervisors (CSBS), mandates the content. It micromanages the approval of licensed training as if it were the holy grail of compliance. If you want professionalism and continuing education, we recommend the regulator de-regulate continuing education training. This will allow individuals to acquire learning in an area which they have some motivation and some diversity of topics.
Pre-Licensing Education and Testing - A Different Paradigm
Again, the intent of requiring pre-licensing education is good. But the idea that a new entrant can sit in a class for 20 hours and understand the mortgage industry is disingenuous. Similarly, the NMLS' recent statement that the 20 hour class cannot simply contain test-preparation material is also disingenuous; the focus of these classes clearly is preparing for the licensing test.
It's Fraud, Though, Isn't It?...
The New Day personnel who allowed others to take licensing courses and tests clearly crossed a line. How that misrepresentation is not fraud on an individual level is not clear. Perhaps there is another suit to follow.
Oddly, NMLS Worried About the Wrong Thing
The action provides more insight into the peculiar mindset of the CSBS and the NMLS. What provoked the Multi-State Mortgage Committee (MMC) most was the so-called "cheating" on the test by the copying of exam questions and sharing them with others. For anyone who has taken the tests, knowing the questions and answers really doesn't provide any advantage. The NMLS believes that the questions have real value, where a test-taker has to really parse each question to understand what the question is asking. The questions on the NMLS exam do not really test knowledge, but more the test taker's cognition and skill at multiple choice. Remember, multiple choice tests PROVIDE YOU WITH THE CORRECT ANSWER
. The test taker has to choose which answer is the most correct.
This belies the issue. The test questions - the content matter - scope is so narrow that the same questions get asked again and again in different forms. Learning management specialists tinker with a battery of approximately 600 potential multiple choice questions and provide a range of partially correct answers, with enough "distractors" (technical learning specialist term where a seemingly correct answer incorrect answer is presented) to throw off a seasoned compliance officer. The board reviews the tests result macro data, and if too many people are failing or passing the test, they tweak the questions to make them slightly easier or harder, until they get into the 20% fail rate area. The idea that the questions themselves have any value at all simply reflects the regulator's misunderstanding of the user experience.
Still, the questions are NMLS property. The MMC does have everyone who logs into the NMLS sign a code of conduct that says they won't copy questions and reveal details about the test. We can complain about the absurd nature of the questions and the subjectivity of the "Best" right answer, but rules are rules.
The Need for a Training Policy and Procedure
The pinnacle of shame in the New Day debacle remains the statement of the COO who asserted he had no idea that his employees were taking his CE for him. That he didn't know he was not exempt from the hours is a tribute to willful ignorance, or a level of isolation reserved for reclusive terrorists.
This draws attention to the need for clear policies and procedures with respect to training. What makes a good policy and procedure? This example taught us that we needed to amend our SAFE Act policy to state the obvious - that each licensed or registered (covered) employee must take his or her own CE; that sharing answers and questions on tests is a prohibited practice.
NMLS has to Acknowledge its Part
The mortgage training industry needs to get honest about the problem of redundant training. Here is an opportunity to get creative. Be willing to step outside the box and challenge the NMLS' education department to approve more wide-ranging topics. Understand that compliance training in a vacuum doesn't help anyone except the regulators. De-regulate topics and provide a more dynamic system where the discussion can change based on the headlines of the day and the needs of the current market.
By creating an environment which stifles innovation in favor of conformity, the NMLS' system has condemned the industry to lowest common denominator, homogeneous training. The poor quality and low value of the NMLS content means that people participate ONLY because they have to. The format and content mean that people essentially check in and check out - Zombie Training - present in body but not in mind. If people can find a way around it, they will, as the New Day incident proves. If the NMLS believes that this is the only incidence of short cuts in the CE process, I am certain they are mistaken.
In order to FORCE engagement, the NMLS has mandated that individuals must take a quiz at the end of the class. Originally, these quizzes were not graded, so it was part of the training process. Now, these quizzes are graded as a way of gauging how much the student paid attention. REALLY? Why not have a really good class, where students participate and put their hands on something, question, fail and learn? Socrates would shoot himself if he saw what we were doing.
As further evidence of the difficulty the NLMS creates for students, it recently announced a mandate that SAFE Act CE had to be taken all at once - in one day - instead of the possibility of spreading the training out over a year. How does this benefit anyone except the NMLS? What could the exception to ongoing training possibly be? Did they just want to avoid clogging up the database with multiple partial credits?
Whoops - How Much is that Whistle-blower's Payday?
Of course, you never know how much a whistle-blower gets paid, unless he or she files a lawsuit to collect. According to various law firms, the payday for a whistle-blower in a government action can be anywhere from 5 to 35% of the fine or recovery. 10% of $5.28 MM is $520,000 - not a bad payday.
Training Policy Sample Here
MortgageManuals customers already have a training policy embedded in their Policies and Procedures manuals. For instance, Originator training is in the Origination Manual
; Processor training is in the Processing Module
; Compliance training is in the Mortgage Regulatory Compliance Module
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