With our disclosures we go over each page one by one with our clients. We will do nothing less but making sure we’re made available to walk the client through with clarity.
As I review these new rules or laws taking shape some have had little impact on us because we’re already there or attempting to do what is right if clarity was not defined before. But other laws are the price being paid for someone else’s mess that might drive the independent broker out of business. I pray we’ll rise like the professional we are meant to be. Because one fact I know pertaining to client service. No banking personnel will exceed the service that I will as a small business owner! That’s for DARN sure and anyone can take that to the BANK!

It is time for the National Association of Mortgage Brokers to take a leadership role in implementing full disclosure which includes a fiduciary/agency relationship with all our borrowers. If you don’t have fair & honest dealings with full transparency with your clients you are nothing more then a used car salesman and should be treated as such!

1) is this typical?
No,however, we are in atypical times right now with mortgage lending. Lending guidelines sometimes change daily.

2) Does fiduciary responsibilities apply in my situation?
I do not know. Contact this regulatory agency. They will know for sure:
http://www.scc.virginia.gov/bfi/reg_inst/mort.aspx

3) What could I have done differently to avoid this nightmare?
What do you have in writing thus far from this mortgage broker?

4) Will the first broker make any compensation?
You mean if broker number 2 handles the transaction?
Fee splitting is not allowed. You can explicitly ask this question and then make sure that you communicate to broker number 1 your wishes. If possible, put it in writing and get him to sign it.

5) Is the second appraisal necessary and should I be responsible for it?

Yes. This is likely necessary because you’re using a new broker/lender and it has also been quite a long time since the first appraisal. This is normal.
Yes you will need to pay for it.

6) If the first broker has been unprofessional/unethical, do I have any recourse?
Sure. You could turn him in to a professional association that he is a member of. The most common is to look for a NAMB logo, the Nat’l Assoc of Mortgage Brokers. Let me know how that goes.

7) Can a broker require all documentation, proffer advice as to how to proceed and not be considered as entering a tacit agreement?

What kind of documentation do you have in regards to any agreement you had with him and what does it say?

My wife and I are both employed, each of our credit ratings exceed 790, we have substantial equity in our home and have a good amount in liquid assets. This is our first, and last, major renovation so we do/did not understand the drawing/contractor/loan procurement process. Our architect offered the name of a mortgage broker who has successfully helped his clients in the past.

My wife contacted the broker in Sepetember 2008 and she was told a constuction loan could not be closed until final pricing by the contractor but we could get started by submitting to him the paperwork/documentation and to make sure the LTV and our resources were in line with the amount of the construction loan. The broker told us he would send an appraiser to get the ball rolling and to pay the appraiser his fee.

When I contacted the broker to introduce myself I asked him basic questions regarding construction loan rates vs. mortgage rates, do we pay P & I on the construction loan or just interest, how are payments made, etc. I never received a direct answer, just a lot of words that I felt were germane to only those who understand the mortgage broker industry.

Fast forward to the middle of this December when my wife contacts the broker. The broker, between the appraiser and the nearly complete architect plans, said he could find the funds based on our credit history and assets but he wants the loan to reflect a 70/30 LTV rather than 80/20 due to today’s credit environment. Okay, we understand the credit world is shaky at best so we do everything to achieve the 70/30 LTV.

When I contact the broker to send him the signed AIA contract I explain that the contractor requires a 10% (of the estimated project cost) deposit and I would want that money coming from the construction loan – how would that work? He explained that I would have to front the amount (funded by my ‘rainy day account’) but at closing that amount would be directed to my account, it happens all the time. He also computes the LTV based on the appraisal and AIA contract and the LTV is 71/29 and the broker says he foresees no problems.

The next day, after I confirm that he received the AIA contract, he tells me that, “. . .the investors may want to see your commitment. . .” but he is not contradicting his earlier statement “it happens all the time” and I may not be able to get my rainy day account money at closing. My thinking at this point in the process is that I don’t want to get into a point/counterpoint dispute with the person who is going to supply me with the construction loan so I ask him when we can close because actual construction (not demolition) is set to begin in the middle of January and that’s when the next installment is due.

Early this week, the broker calls my wife and says his institution won’t be able to work with us but he lined up another broker at another insitution for us. He also said the other institution needs another appraisal and that will be another $450. So far the new broker has yet to contact us, actual construction is set to begin next week and we still have yet to close on a construction loan.

Many questions:
1) is this typical?
2) Does fiduciary responsibilities apply in my situation?
3) What could I have done differently to avoid this nightmare?
4) Will the first broker make any compensation?
5) Is the second appraisal necessary and should I be responsible for it?
6) If the first broker has been unprofessional/unethical, do I have any recourse?
7) Can a broker require all documentation, proffer advice as to how to proceed and not be considered as entering a tacit agreement?

Thanks for any help, advice. I know this is jumbled but so much has occurred while trying to procur this loan. If institutions won’t give me credit, who are they giving credit to? I mean the loan they give me keeps small business working (the contractor), the chain of supply (lumber/building material) flowing, improves energy efficiency and shows the community that there is consumer confidence and others could/should invest in their properties.

“And, in my opinion, such a fee is NOT fair and reasonable and is therefore contrary to the borrower’s best interests.”

I am not sure what you are disagreeing with me about. I agree completely that YSP is fully disclosed under current disclosure requirements. And I am not in any way suggesting that we abolish YSP. It is a powerful tool for the borrower to use in creating loan terms that serves his interests.

That said, it is my opinion that, in spite of all the disclosure, few borrowers understand what this thing we call YSP is (for that matter, few originators understand it). And, in most cases (there are studies to back this up) most of the YSP does not get credited to the borrower. As long as the borrower does not know what YSP is, does not know that it is up to him whether he uses YSP as a tool to help pay closing costs, then he is not an empowered party to the rate selection decision. Therein lies the problem of YSP for the fiduciary. As long as the client does not fully understand YSP and that it is his choice to use YSP or not, then YSP stands as a potential conflict of interest. As long as the LO/broker can make a little more money by steering the borrower toward terms that generate more YSP without the client’s consent to the resulting increase in compensation, the costs of the transaction are likely to rise contrary to the borrower’s best interests.

This gives rise to the question that is raised by Steve Smith in his Jan 4 response. He says that he has recently applied for a loan of $350K. The GFE given to him shows a .5% origination fee (that’s $1,750) plus a “back end” or YSP of $4,500 (that works out to be a YSP of 1.286%). In a normal market, this means that Steve is being shown a loan interest rate that is about 3/8% over PAR. Steve is savvy enough to understand that this tells him his broker/LO is going to earn $6,250 on this deal and he wants to know if this is reasonable. Roger, I don’t know how you explain YSP but the broker industry “party line” is that this is a fee paid by the lender to the broker”. How many borrowers know that they can negotiate this total fee? How many will assume that the $1,750 is negotiable but that the lender payment is beyond their control? In my experience, the vast majority of borrower’s will not appreciate that this total of $6,250 is what they are paying the broker and that this total is fully negotiable, or that they can shop for someone who will not charge so much? It’s just too confusing for even the most sophisticated borrower. I submit that if the LO felt that $6,250 was a fair fee for his service, he would better serve the client’s interests by simply telling the borrower that his origination fee is $6,250. The LO could then tell the borrower that he could choose an interest rate higher than PAR and use the resulting YSP from the lender to help pay for this origination fee. I suspect that if we did that, Steve’s question could be more easily answered. If every broker/LO disclosed his total compensation as his origination fee, borrower’s could readily shop for the best provider and the competitive market place would soon set a level for reasonable compensation. Today, because we have obfuscated this total fee to the borrower, the market place is dysfunctional and there is no answer for the astute shopper like Steve. My answer to Steve, by the way, is that few LO’s who know what they are doing spend even 10 hours on a loan. If $6,250 is the fee, that works out to well over $600 per hour. My attorney is in envy! Personally, I think that is an absurd amount of money for an LO to charge for the services provided. And, in my opinion, such a fee is fair and reasonable and is therefore contrary to the borrower’s best interests.

But the problem gets worse. Suppose that Steve goes forward with this loan. A week later, the LO suggests to Steve that he thinks rates may be about to increase and they agree to lock the loan. When the GFE was prepared, the price from the lender was 101.286% at the rate quoted. Now, on the day the loan is locked, the lender’s price happens to be 101.35% (that’s YSP of $4,725). How do you work this out with the borrower? In my experience, LO’s, if they say anything at all, simply produce a new GFE showing everything as it was but with the new YSP of 1.35% or $4,725. I don’t know about you, but in my experience, the borrower is focused on the interest rate that he locked at and the total closing costs. Since, in this scenario, he got the same interest rate and closing costs as disclosed in the original GFE, does he even notice or consider that the LO just made another $225? Few do. So when pricing improves a little over the original GFE, the usual beneficiary is the LO. Interestingly, as every LO knows, even if prices decline, the LO is likely to make more money that originally planned when he increases the rate. What did the LO do to earn this additional fee? NOTHING! If you consider that Steve had agreed to the fee of $6,250, should he not also have agreed to pay the higher fee? In any other business, if you raised your fee without providing more service the consumer would be most unhappy and would protest. But in this bizarre industry, it is done every day and the consumer is none the wiser – yet it is fully disclosed in no fewer than 6 different forms. If we are fiduciaries acting in the best interests of our clients, we must protest this practice on behalf of our clients. They are too ignorant to know better and they have placed their trust in us to use our knowledge and experience to serve their best interests.

I maintain that the only way to deal with YSP as a fiduciary is to credit all YSP to the borrower. This forces us, as LO’s, to plainly disclose our fee – our total compensation – to the borrower and get his agreement to that fee up front. This should be done as simply and in as straight forward manner as possible. AND, this kind of disclosure is also required by our fiduciary responsibility. In Steve’s case, the LO should simply tell Steve that he will charge $6,250 for loan origination services. Then, assuming that Steve would knowingly agree to such an exorbitant fee, the choice of interest rate is in part a choice of how to pay for the origination fee (and other closing costs). And if lender pricing changes along the way, as we all know it will, any such change is passed along to the borrower – the LO/broker compensation remains at the level agreed to up front. That’s what any of us expects of our car repairman, our dentist, or any other service provider we might work with. That is what our borrower’s should be able to expect of us.

If every broker/LO disclosed his origination fee this in this way, the borrower could actually shop for origination service providers and market place competition would determine the fair value for those services. What a capitalistic concept! I have worked this out, and LO’s could make money doing this. Furthermore, they would prove to be very competitive with bankers, even though bankers don’t disclose YSP. The borrower would win as well. The only losers would be those LO’s who have come to think they ought to be able to make a great living originating just a few loans a month. This is America – hard work should be rewarded, deception and sloth should not be.

Thanks for stopping by the NAMF blog. I have a few questions:

Please take a look at your Good Faith Estimate and let me know the line number where the .5% shows up.
801, 802,…

On each good faith estimate, the name of the fee will correspond to a number.

801 Loan Origination Fee
802 Discount

808 Mortgage Broker Fee

and so on.

Also, tell me, did he say that you were going to get a “no cost” loan where all your closing costs were going to be covered by the new loan?

Also, how much time did this person spend with you? An hour? Two, three, four hours?

Did he explain his compensation to you and if so, what did he say?

Fiduciary duties, or “putting our client’s interests above our own” doesn’t mean we work for free. On the contrary, professionals who hold fiduciary duties on average make substantially more than non-professionals.

The industry has trained the consumer to shop us based on rates and fees. The industry must re-train the consumer to shop us based on our knowledge and other good reasons to choose an LO.

“It’s definitely a conflict to our borrowers and to ourselves for the ethical LO.” How can being ethical be a conflict for our clients?

“Are giving our customers full disclosure of YSP, GFE, TIL & loan programs really fulfilling our fiduciary obligation?”

No, this is fulfilling our duty to abide by state and federal law.

Once again, interesting comments.

However, I disagree about the YSP.

There is no way any borrower of mine would NOT know about the YSP.

In a typical loan today, I am required to have them sign no fewer that 6 different forms, ALL of them specifically describing any YSP (or other fees) earned by the broker.

The amount of compensation is usually so low that I find it a tad embarrassing to see how little I work for.

To deny brokers and fiduciaries the ability to use YSP to cover a portion of loan costs would HARM consumers who would prefer to have lower up front costs.

A mortgage loan officer should always work in the best interest of teh borrower. The L.O. should explain the mortgage process, (including going to closings) and provide service afterwards. We should act in a very professional manner and explain the GFE and TIL and any other documents as necessary. Our fees should not be excessive.

“we present the features and functions of that loan program, then we have met the fiduciary requirement. What the homeowner does with the product after signing is up to them.”

Not so fast. A fiduciary would have to go beyond that. For example, A fiduciary would want to make sure that his/her client understands all the possible consequences of each choice. A fiduciary would also need to make himself/herself available for clients up through closing.

For example, during the predatory lending days (and I hope I can talk about them as if they were in the past now) LOs would not disclose the YSP or disclose it in a way that was not clear that the broker/LO was collecting that money. At escrow, when the homeowner had a question about how the YSP was appearing on the HUD I, the loan originator was suspiciously unavailable to talk to at that time.

A fiduciary would need to fully explain all fees.