By: Emily Leung, Eli Levine, Chavez Cheong, Ridge Ren, Sam Wolter
Between 2000 and 2010, Virginia’s population grew 13.1%, exceeding the 9.7% nationwide growth rate over the same period. The state’s population growth contributed to an increase in the housing stock, from just over 2.9 million units in 2000 to nearly 3.4 million units in 2010, with a large portion of this growth (30 percent) happening in the northern Virginia counties of Fairfax, Prince William, and Loudoun.
Figure 1 VA Housing Unit Estimates (2000-2010). Source: Census[1]
Real estate prices in Virginia followed the national trend of sharply increasing until 2007, but the rate of increase exceeded the national average. In 2000, the median home price in Virginia was roughly equal to the national median. By 2010, the median home price in Virginia was almost $20,000 higher than the national median of $225,000. The growth in home prices was propelled by growing demand in the Washington DC suburbs in Northern Virginia. For example, the median home price in Fairfax County increased from roughly $250,000 in 2000 to almost $470,000 in 2010.
Figure 2 VA vs. US House Price Index (2000-2010)
The Virginia constitution establishes the State Corporation Commission (SCC) as an independent department of state government with delegated administrative, legislative, and judicial powers. Commission decisions can be appealed only to the Virginia Supreme Court. The SCC is responsible for handling all charters “of domestic corporations and all licenses of foreign corporations to do business”[2] within the state. The SCC has three commissioners, selected by the General Assembly, as well as 675 full-time staff. Commissioners serve six-year terms but are permitted to serve multiple consecutive terms. The position of chairman rotates annually among the three commissioners.
As a result of a process described in the Virginia administrative code, title ten, the SCC delegates to the Bureau of Financial Institutions (BFI), “the authority to exercise its powers and to act for it” in many important fields, including mortgage lending.[3] This delegation provides the BFI with broad power, including “to grant or deny licenses to engage in business as a mortgage lender and/or mortgage broker, and prescribe conditions under which exclusive agents of licensees may act as mortgage brokers without a license and approve or disapprove individuals as qualified exclusive agents of licensees.”[4] In addition to its regular enforcement of requirements around licensing, annual reporting, education, and surety bond standards, the BFI investigates consumer complaints against mortgage lenders and brokers. Each year, BFI staff receives thousands of written complaints and telephone inquiries from the general public.
Additional legislation specifies key elements of Virginia’s system of mortgage regulation. The most important mortgage-related laws are found in Title 6.2, Chapters 16 and 17 of the Code of Virginia, which are respectively titled “Mortgage Lenders and Mortgage Brokers” and “Mortgage Loan Originators.” Chapter 16 outlines regulatory guidelines including bond requirements, qualifications, annual fees, and other guidelines for any “person who directly or indirectly negotiates, places or finds mortgage loans for others, or offers to negotiate, place or find mortgage loans for others” (mortgage brokers) or “any person who directly or indirectly originates or makes mortgage loans” (mortgage lenders).[5] Chapter 17 outlines background check procedures, qualifications, testing requirements, and other expectations for “individual who takes an application for or offers or negotiates the terms of a residential mortgage loan in which the dwelling is or will be located in the Commonwealth or represents to the public, through advertising or other means of communicating or providing information, including the use of business cards, stationery, brochures, signs, rate lists, or other promotional items, that such individual can or will perform any of the activities described in clause ” (mortgage loan originators).[6]
Figure 3 Virginia Mortgage Enforcement Actions (2000-2010). Source: Virginia MEAs
Our dataset contains the 1,215 mortgage enforcement actions (MEAs) issued by the DFI from 2000 to 2010. Each observation contained the date when it was issued; the filename for each respective MEA; the case name, denoting the targeted individual or firm; and a brief description of the contents of the enforcement action.
Overall, the issuance of MEAs spiked dramatically from 2000 to 2001. The data then shows a gradual annual increase in MEAs in the lead-up to the financial crisis, followed by another dramatic rise in 2006-2007 at the beginning of the crisis.
The 2001 surge appears to be the result of a statutory change that raised the surety bond required to obtain or maintain a license from $5,000 to $25,000.[7] This interpretation is supported by the breakdown of offenses by type (see Figure 5 below). It is not clear why this stark increase in MEAs quickly dropped the next year. One hypothesis is that this increase was offset by another statutory change in 2001 that created a loophole in the licensing process. Virginia’s license requirement in § 6.2-1601 allowed “an individual who is a bona fide employee or exclusive agent of a person licensed… may negotiate, place or find mortgage loans without being licensed as a mortgage broker.” Therefore, while the 2001 legislation increased license requirements, the subsequent amendment may have enabled some bad actors to avoid oversight by operating as employees rather than licensed brokers. However, it is unclear how this change would significantly change the enforcement of the surety bond requirement for insurance brokers.
Between 2002 and 2006, there were no major changes to the relevant mortgage laws, but there was a consistent rise in the number of MEAs issued. One possible explanation for this increase is that the relaxed requirements for who could negotiate mortgage loans allowed more bad actors to enter the industry. Another related potential explanation is that the booming housing market led to an influx of new mortgage lenders and brokers, and the uptick in MEAs simply reflects this increase in regulated entities operating in the market.
With the onset of the Global Financial Crisis (GFC) in 2007, MEAs again shot upward.
There are several possible reasons. Some mortgage lenders and brokers may have struggled to maintain the $25,000 surety bond. Financial distress may have persuaded some lenders not to submit their required annual reporting. These possibilities seem especially plausible in light of the breakdown of MEAs by type, which shows an increase in MEAs issued for surety bond violations and in MEAs issued for annual reporting violations.
After extracting trends within documents, our analysis focused on trends between topics. Virginia’s metadata provided information about the exact law that each MEA addressed, which enabled mapping of MEAs to specific offenses via the identification of keywords. Breaking down MEAs by specific offense provides greater insight into some of the major issues in the Virginia mortgage industry in the run-up and aftermath of the GFC.
Each MEA represents a formal document issued to the offending party explaining what law or regulation was violated. Using NLP, our team cataloged the violations cited in MEAs issued between 2000 and 2010. Figure 4 displays the most common violations during the review period. More than 40% of all MEAs were related to a violation of the annual report requirement.
Figure 4 Count of Offenses (2000-2010)
Figure 5 Categorical Timeline of Offenses
Figure 5 illustrates how enforcement trends changed over the decade. As discussed above, there was a spike in surety bond violations after the state increased the bond requirement from $5,000 to $25,000 in 2001.[8] This breakdown also helps show the second overall spike in MEAs at the onset of the GFC was driven primarily by an increase in violations of the surety bond and the annual reporting requirements.
Figure 5 also reveals a small spike in 2005 regarding enforcement actions against “unlawful consolidation,” (§ 6.1-416.1) involving some alleged violation of Virginia antitrust law. Our analysis cannot pinpoint a proximate cause for this increase, as there were no legislative changes to the law governing unlawful consolidations.[9] Unlawful consolidation did not show up as a source for MEAs in the other states we analyzed (Ohio, Washington, Massachusetts, North Carolina, and Arizona).
The laws that appeared most consistently in Virginia’s mortgage enforcement actions were all from Chapter 16 of the Virginia Code, which covers Mortgage Lenders and Mortgage Brokers; because of a recodification however, these laws are now numbered differently. §6.1-410 (now codified at §6.2-1601) mandated that all mortgage lenders and mortgage brokers (or those holding themselves out as such) obtain a license from the BFI. It was expanded in 2010 to incorporate additional requirements that licensees register with the Nationwide Multistate Licensing System and Registry (NMLS). §6.1-416 (now codified at §6.2-1607) also addressed licensing, requiring licensees to seek approval before relocating, or opening an additional office while prohibiting the transfer or assignment of licenses.[10] Until 2010 licenses remained in force until surrendered, revoked, or destroyed, but the law was then amended so that licenses expire annually at the end of the calendar year unless the licensee completes the annual renewal application via NMLS.[11] Other frequently cited laws were §6.1-413 (now codified at §6.2-1604), which stipulated the bond requirement discussed above, and §6.1-420 (now codified at §6.2-1612), which required lenders to pay an annual fee “to defray the costs of examination, supervision, and regulation.”[12] Finally, §6.1-418 (now codified at §6.2-1610) laid out the annual reporting requirement.[13] This law was also substantially amended in 2010. Until that year, the sub-section, titled “Annual Report,” required lenders to submit yearly a report “concerning his business and operations” for the Commissioner to review and use in an annual analysis. The amended law, titled “Periodic Reports”, requires the same reporting on a “periodic” basis “with such frequency and by such dates as may be prescribed by the Commission.”[14] This shift may have reflected a response to the frequency of annual reporting violations between 2000 and 2010.
[1]https://www.census.gov/data/tables/time-series/demo/popest/intercensal-2000-2010-housing-units.html
[2] https://www.scc.virginia.gov/
[3] https://law.lis.virginia.gov/admincodefull/title10/agency5/chapter10/
[4] https://law.lis.virginia.gov/admincodefull/title10/agency5/chapter10/
[5] https://law.lis.virginia.gov/vacode/title6.2/chapter16/section6.2-1600/
[6] https://law.lis.virginia.gov/vacode/title6.2/chapter17/section6.2-1700/
[7]https://www.minneapolisfed.org/~/media/files/pubs/cdpapers/mortgagebrokerregs/mortgagebrokerregulations_report.pdf?la=en.
[8] The “surety bond” category in Figure 5 denotes violation of § 6.1-13 in the Code of Virginia.
[9] § 6.1-416.1 governs unlawful consolidation
[10] https://law.lis.virginia.gov/vacode/title6.2/chapter16/section6.2-1607/
[11] https://law.lis.virginia.gov/vacode/title6.2/chapter16/section6.2-1607/
[12] https://law.lis.virginia.gov/vacode/title6.2/chapter16/section6.2-1612/
[13] https://law.lis.virginia.gov/vacode/title6.2/chapter16/section6.2-1610/
[14] https://law.lis.virginia.gov/vacode/title6.2/chapter16/section6.2-1610/
