In Washington state, LOs who are licensed under a mortgage broker owe fiduciary duties to their clients. Same in many other states now.

It’s debatable whether or not it’s the job of the real estate agent.

An agent has a conflict of interest wouldn’t you agree? If the transaction doesn’t close, the Realtor does not get paid. It would seem difficult for an agent to give neutral financial advice regarding the mortgage lending side of the transaction. Most agents want to leave the mortgage lending work to the mortgage lenders.

However, I DO know a handful of Realtors that insist on making sure the homebuyer is not being taken advantage of by a predatory lender, and insist on attending the end-of-closing signing appointment to make sure the lender honored the fees quoted on the good faith estimate.

Self-reg works for groups of professionals (that work inside those corporations.)

There’s a narrative history of how professional groups are formed. Loan Originators are classified as “emerging professionals.” Self regulation (LOs deciding to kick those bad apples out of the industry much like a Bar Assoc ruthlessly dis-bars their bad apple lawyers) is one of the last pieces for LOs to do. But this step comes from the LOs, not their corporations or from the government.

The other last step is for all LOs to owe fiduciary duties to their clients.

Think about doctors, lawyers, accountants, engineers, nurses, paralegals…. these are all groups of professionals that work in a corporate setting.

The higher the duty to the consumer the more money the professional makes.

All of the above have industry lead self regulation in place.

Loan originators do not. Someday LOs will.

If LOs want to put more of the burden of discovery on the consumer then the value of an LOs services will go down.

One additional solution for me to add to the list is compliant storage of data and paper work. I think it should be that each and every lender should not have any paper laying around the office. Or stored in some off site Self Storage place. Only for that company to go out of business. Where is all of my copy files?? Where have they kept all of my taxes, bank statements, credit reports and loan documents? No one seems to be asking that question now but it is a big problem.

Look at the down turn and what it did to all of those smaller companies who have paper every place. It should be a requirement that every one needs a safe compliant vaulting service otherwise you can be in business.

Self regulation drafted by people who work in and are experts in mortgage originations understand what is practical and what is not are the best to write the regulations.

Again it goes back to putting the client first and not your paycheck!

Jillayne, I have to disagree with you here. ALL retail mortgage salespeople do not owe fiduciary responsibilities to consumers. In particular, sales people attached to a lender (or a broker acting as a lender) fundamentally cannot owe fiduciary responsibilities to consumers. Purchase-sale transactions have, at least, two principals involved. These kinds of transactions are called “arms length” transactions. Each principal has its own interests that are generally in opposition to the other principal’s interests. It is a mistake to consider that either party owes fiduciary responsibility to the other in an arms lenght transaction. The lender-borrower transaction is an example of such an arms length transaction. The lender (and any “loan officer” who works for the lender) is one principal and the borrower is the other. Sales people who work for and on behalf of the lender do not owe and cannot be deemed to owe broad fiduciary responsibility to the borrower, i.e., the other principal to the transaction.

On the other hand, mortgage brokers (and by extension their loan officers) represent a very different situation. The mortgage broker is not a principal in the lender-borrower transaction. Brokers come to the transaction as a result of a relationship with one of the principals to the transaction. That is, they come to the transaction representing either the borrower or the lender. Although the broker industry has maintained that they represent neither, such a position is preposterous. A careful study of the nature of the relationship shows that the mortgage broker is more likely to be regarded as representing the interests of the borrower. In order to remove any ambiguity, however, the state of Washington has now defined mortgage brokers to always be representing the interests of the borrower. Under Washington law mortgage brokers owe a fiduciary responsibility to the borrower.

In my view, your Solution Number 1 needs to be rewritten to say that mortgage brokers must recognize and embrace their fiduciary responsibility to the borrower and all that this implies. As you say, the mortgage decision is no less important to families than a medical procedure or legal matter. Borrowers ought to have access to practitioners who are bound by practice and by law to do what is in the best interests of the borrower.

As a corollary to Solution Number 1, I would add that is important for borrower’s to come to understand the difference between mortgage brokers and lenders. Step one is for the broker industry, in recognition of their fiduciary responsibility, to establish a difference. Step two is for the borrower to actually understand that difference so he can make an intelligent decision in choosing how he will shop for a loan and how he will choose the kind of business he will work with.

Comments on Solution number 2:

We would not be discussing the behavior we call predatory lending if mortgage brokers had accepted and exercised fiduciary responsibility to borrowers for the past 10 years. Very little of the “predatory lending” that went on was done by lenders directly. The vast majority was originated by brokers and their loan officers. How could this have happened if brokers had been acting in the best interests of their borrowers? Your Solution Number 2 is just and extended consequence of the failure to implement Solution Number 1. There may be a need to formulate and enforce stronger anti-predatory lending laws governing lenders, but since the vast majority of loans are originated by brokers, the establishment of a sense of fiduciary responsibility among broker will likely have a greater impact.

Comments on Solution number 3:

Effective self regulation that would protect borrowers by ensuring that industry players are acting on the best interests of the borrower is a great idea. It goes hand in hand with the broker industry becoming a true profession. However, there is, as near as I can see, virtually no interest among industry leaders in moving in that direction. The broker industry continues to fight fiduciary responsibility, even in Washington where such responsibility is now a matter of law. It is only the mortgage broker side of the business that will benefit from self regulation as this is the only side of the business in a position to embrace fiduciary responsibility. But to date, rather than embrace the differentiating quality of fiduciary responsibility, brokers and their loan officers continue to call for the so called “level playing field”, that is, common regulatory rules for brokers and lenders. This is not the path toward recognition of fiduciary responsibility out of which may come the capacity for beneficial self regulation. If the industry cannot learn to serve the borrower’s interests as matter of standard professional behavior, one would have to question what direction any attempt at self regulation would take. Serving the interests of the borrower IS the higher calling that any meaningful attempt at self regulation would need to focus on.

Comments on Solution Number 4:

I would certainly not defend rating agencies. However, it is for investors to do due diligence on their prospective investments. MBS investors relied heavily on rating agencies without doing due diligence on those rating agencies themselves. That said, rating agencies, in examining pools of mortgages, relied on the underwriting standards of the lenders that issued the loans. In examining the underwriting there was a presumption of honesty. After all, every 1003 says, in the fine print, that the borrower certifies all information to be complete and accurate under penalty of legal consequences if it is not. And every loan officer of every broker has a duty not to accept and forward on an application that he knows to be a misrepresentation of the truth. Passing the blame on to rating agencies is not entirely appropriate. Given the widespread use of “liar’s loans” in which borrowers actually lied and given that too often loan officers either colluded in the application or worse, dictated the falsehood in the application, the presumption of honesty made by rating agencies was thoroughly undermined by the industry players in processing those loans. If rating agencies are to be required to do better due diligence, where would you have them stop – should they re-underwrite every loan in a pool? The whole system for providing liquidity relies on the rating agencies ability to draw risk conclusions from a review of underwriting standards, without a need to re-underwrite each loan. Dishonesty wrecked the integrity of the underwriting process.

Comment on Solution Number 5:

Absoutely!

Comments on Solution Number 6:

Here again, I point back to Solution Number 1. If the mortgage broker industry stepped up to become the source of origination services dedicated to serving the interests of the borrower and IF the borrower were to be educated on the difference, there would be a strong voice of logic, reason, and client centric information in the market place. In such a market place, why would anyone listen to the deceptive advertising by disreputable lenders? The public would find safety in working with a broker. And, of course, a broker industry dedicated to serving the borrower’s interests would not be involved in this kind of advertising.

New Solution – Number 7:

I would add one more solution. This goes hand in hand with my “rewrite” of Solution Number 1. It is imperative as a consequence of fiduciary responsibility and the included responsibility to eliminate so far as is practicable all conflicts of interest, that mortgage brokers end the practice of claiming YSP as a part of broker/LO compensation. All YSP should be credited to the borrower. Further, they should eliminate compensation related to anything other than the level of service provided. This is in keeping with serving the borrower’s best interests. That means, besides crediting YSP to borrower, brokers and their LO’s should set origination fees on the basis of the services provided, not on the basis of interest rate or loan amount or any other aspect of the loan that does not call for greater training, effort, or experience. Only when the biases of the compensation element are effectively removed from the loan program and terms recommendation, will the incentive to do all that has created such a problem be largely removed.

I agree with the eight professional status criteria listed on this website because they will make all boats rise; the consumer, the loan officer, the investor and the economy will all benefit.

Education should be the great equalizer, not salesmanship, especially in the mortgage industry. The mortgage transaction will be the largest financial event in most of our clients lifetime and it will have the most impact on thier net worth due to the laws of compound interest. Absolutely, there should be fiduciary obligations that are either rewarded if served well, or penalized if their is fraudulent, predatory lending.

Regarding solution #4, I agree that the secondary market needs to be more regulated. My one suggestion would be to mandate investor recourse against the borrower to prevent borrowers walking away from their houses. There are countries in Europe that will garnish a borrowers wages and assets if they default on their loan. Patrick O’ Driscoll, with the Cato Institute wrote a great article on this in the WSJ on November 17, 2008.