Fee for Service
In Washington State, SB 6381 mandates Fiduciary Duties for mortgage brokers and the LOs working under mortgage brokers. At the end of the bill, there is a small but powerful addition. Brokers/LOs can now charge a fee for service.
Before this law passed, the only way brokers/LOs could earn a fee is when a loan closed (with some very minor exceptions.) Unfortunately, this created an external motivational system whereas brokers/LOs were motivated to close lots of loans, whether or not the loans were good for the consumer.
Being able to charge a fee for service brings brokers and LOs closer to professional status. (Brokers and LOs are classified as emerging professionals. The only thing missing is a mandatory code of ethics with sanctions. For background on professional status, read this article.)
Q: Will you begin to enact a fee-for-service agreement with your clients?
If so, what are some of the services you might begin to charge for? (example: credit score coaching)
Recall a time in the past that you’ve signed a fee-for-service agreement with other professionals such as an attorney, a CPA, a paralegal, or a license mental health professional. If you have access to this agreement, find it and read it again. If you do not have access to an agreement like this in your own home office, google “fee for service agreement” and locate examples.
What will be the elements of your fee-for-service agreement?
I agree with you about moving towards a more professional acceptance of the fiduciary responsibility - it will make more ...
The protection for the consumer from goverment is welcome, of couse, the time consumed would be a function of direct ...
Comment by mark cross on 24 October 2008:
I would have to think hard about how to structure and manage a fee for service agreement. This is much like hiring a contractor and choosing between a bid and time and materials. In many cases the T&M will be less expensive, but most people like the assurance of the cost up front being known. A good accounting and management system would also be required for time management and billing. I would not hesitate as a one or two man shop to implement a fee for service agreement but a company with multiple LO’s and varying experience could create challenges. I do believe as we mature into a more professionally recognized industry the move will be more towards fee for service.
Comment by RRK on 27 October 2008:
I charge a reasonable fee for my service, always at 1% for originating a loan. Clients have to pay for third party fees.
Pingback by Loan Modifications | Rain City Guide on 8 November 2008:
[...] who work for a mortgage broker owe fiduciary duties to their clients. They are able to charge a fee-for-service (provided the fee is disclosed prior to the work being performed.) Loan originators who are still [...]
Comment by Jenn Fick on 9 November 2008:
After thinking, I dont think I would require a fee-for-service charge. I think it might deter some clients who already have a bad taste in their mouth about the mortgage industry. I think they might feel that it is just another way of scamming money out of them. (Not saying all people think like this, but just a possibility) Loan originators are commission based. Now I am not saying that we should work for free – but usually you should know upfront if a loan will close – if you have accurate information, and by that I mean get the supporting documentation of income, assets, etc.
And to RRK – is the 1% your fee-for-service charge or your mortgage broker fee (line 808)? The article says you are allowed to charge a fee, even if the loan does NOT close.
So here is a question: what if you enforce the fee-for-service charge, have your client sign the contact, etcand the loan closes, do you charge both the fee-for-service charge as well as your mtg broker fee? Also, is there any limitation to the fee-for-service charge?
Comment by Leslie Maki on 11 November 2008:
I’m not sure how I would structure a fee per service charge. However I can understand the purpose of a fee per service charge especially for those clients that do not qualify for a loan now, but after you work with them for several months, educating them, helping them establish good credit, discussing their homebuying options and property issues, driving to properties to see the condition, etc., if a loan does not materialize at some point, the LO is not compensated. However, the next LO the borrower talks to gets all the benefit of the first LO’s efforts.
At this time, I would continue as is and not charge for additional services.
Comment by Shawn on 15 November 2008:
I have to back track some on my previous post stating I was already performing fee-for-service as the service for me was a successful loan close. I do not intend to charge fee-for-service. If one is going to provide value-add like credit coaching, then that might be best handled with another entity and does not require lending licenses, and can have a more structured fee schedule for services provided.
I’ve seen these sorts of fees used in commercial mortgage brokering, and they do not appear to be about actual income, but distinguishing serious borrowers from not. Usually the fee is deducted from the points received by the broker on loan close, but in the event the loan does not close, it is typically not refunded, and this is a very contentious issue as sometimes these fees are huge.
Comment by Cheryl Nopson on 23 November 2008:
We usually charge a 1.0 mortgage broker fee, that goes with any credit repairing or clean up. We dont see charging for additional services. We discuss options to improve credit, etc to educate the borrower.
Comment by Jeff Hilt on 4 December 2008:
I am a financial planner, investment advisor, insurance agent, and loan originator. We charge a fee for financial planning, estate planning, and investment advisory services. I am also a loan originator so that we can help clients in that arena as well. Perhaps we can begin to charge a fee for mortgage planning services, as well, we’ll see.
The real question I have with the fee for mortgage service issue deals with disclosure. As you know, disclosure is a big deal in the securities and investment advisory arena. I would like to see strict disclosure requirements in the mortgage arena, as well, to protect clients’ interests.
Comment by Bradley Allen on 6 December 2008:
The inclusion of the statement in SB 6381 now RCW 19.146.095(2), is curious. It is not clear what the legislature had in mind. Here is what I see:
The business of the mortgage broker (and his LO’s) is assisting people in obtaining or applying to obtain a residential mortgage loan (RCW 19.146.010(12)). This is further clarified in the proposed WAC 208.660.006, “[assisting people] in obtaining or applying to obtain a residential mortgage loan” by, among other things, counseling on loan terms (rates, fees, other costs), preparing loan packages, or collecting enough information on behalf of the consumer to anticipate a credit decision.
The first thing I think we need to consider is what things might a broker or his LO do for which he might charge a fee?
1. Assist the borrower in preparation of an application for, negotiating for, or obtaining a loan – or at least in an effort with that objective
2. Consulting in some other aspect related to mortgage lending (or not) that does not have to do with applying for, negotiating, or obtaining a loan.
If the broker or his LO is assisting the borrower in preparation of an application for, negotiating for, or obtaining a loan, I submit he ought to have a fee agreement in place. Here is the problem. RCW 19.146.070 says that if this is the service being offered, the compensation cannot be earned until and unless a loan is actually obtained. So the new regulation does not change anything with regard to item (1) above.
If the broker or his LO is consulting in some other aspect related to mortgage lending, that does not have to do with applying for, negotiating for, or obtaining a mortgage loan, then under RCW 19.146.010(12) he is not functioning as a mortgage broker. If he is not functioning as a mortgage broker, then RCW 19.146 does not apply (including the mysterious new “permission to charge a fee for service”. In other words, anyone is able to charge consulting fees for services unrelated to applying for, negotiating for, or obtaining a mortgage loan without being subject to any rules contained in RCW 19.146 or WAC 208.660. That was the case before SB 6381 and is still the case. So the new regulation doses not change anything with regard to item (2) above.
The issues are these:
In working for clients in the application for, negotiation for, or obtaining a mortgage loan, brokers are fiduciaries. As fiduciaries, brokers provide loan origination services and owe their clients a “fee for service” agreement. The agreement should describe the nature of the relationship, the scope of the services to be provided, a clear and simple statement of the fee that the broker will be paid for those services, and address any conflicts of interest that apply and how they will be managed. As an example of that last point, the broker might state that lenders pay extra for loans originated at interest rates above what the lender determines to be the par rate at any given point in time. To avoid any conflict of interest arising from such a payment, the broker will credit any such payment to the borrower at closing. Thus the broker’s recommendation regarding any loan terms that might alter the amount of YSP being paid will not be influenced by the payment of YSP and can be expected to be based solely on the broker’s assessment of the terms that best serve the borrower’s interests and not the broker’s.
If the mortgage broker or his LO’s choose to provide consulting services outside the scope of applying for, negotiating for, or obtaining a loan, what is the basis for competency in this unrelated service? What other regulations might pertain to services in this unrelated area? What is the value to the client? What is the nature of the relationship? The broker is a fiduciary with regard to services provided as a mortgage broker, but is he a fiduciary with regard to services that are not directly related to applying for, negotiating for, or obtaining a loan? The bottom line is that, as I see it, RCW 19.146 does not apply to the broker or his LO in providing these unrelated consulting services. So what does? And how does the broker make sure that the borrower is not mislead so as to presume that a fiduciary relationship applies when it does not?
I think that the intent of the legislature may have been this. At the core of fiduciary responsibility is the need to eliminate all conflict of interest that the fiduciary may have with his client. In the classic case, fiduciaries are not allowed to accept compensation for the services they provide since any form of compensation produces inherent conflicts of interest. In the application of fiduciary responsibilities to mortgage brokers, the legislature may have been taking steps the assure the mortgage broker that under this application of fiduciary responsibility, it is permissible for the fiduciary to be compensated for the services he provides so long as that fee is disclosed and agreed to before the provision of those services. This would be consistent with other areas in which fiduciaries are compensated for services. In any such case, the fiduciary must make it clear that there is a fee and what that fee will be. This fee, and any other conflicts of interest, must be fully, clearly, and plainly disclosed such that the client is plainly aware of the conflicts that exist and is in a position to judge the extent to which they might be concerned that these conflicts will affect the objectivity of the advice provided by the fiduciary. This must be done at the outset of the engagement such that the client may negotiate the fee or shop for a provider who, in the client’s judgment, will not be so conflicted.
Comment by David Nelson on 24 December 2008:
I would out line nominal items to cover out of pocket expenses to be paid up front and give credit for them when the loan closes against a 1% origination fee or what ever is agreed upon. Not too different that what I do now!
Comment by Scott E on 27 December 2008:
If Brokers and LO’s were to uniformly charge a ‘fee for service’, would we still be competitive with the Banking industry? Some banks do not charge a fee for service. I see the Banks advertising ‘no fees’, so where does this leave the Broker and LO?
Comment by Jillayne Schlicke on 27 December 2008:
@Scott,
“where does this leave the Broker and LO?”
It leaves the broker/LO transforming into a professional like a doctor or a lawyer. It leaves the bank LO staying in a retail relationship with the consumer.
Brokers/LOs are transforming.
They are ahead of bankers.
Brokers/LOs now have a competitve advantage over banker LOs. Broker/LOs owe their clients higher duties. Banker LOs do not.
My recommendation would be to use this as market differentiation.
Comment by pam grant on 29 December 2008:
In todays enviroment I am beginning to think that charging a fee for service is good business practice in the sense that by doing so sets apart professional and ethical originators from those who are in the business just to make a buck. Brokers and LO’s are licensed professionals and I believe that as long as fees/charge for service are disclosed and agreed upon at the onset we should be compensated. My time, knowledge and expertise is worth compensation no different than if I were a financial consultant, medical provider or any other licensed professional.
Comment by Yoshiho Takamoto on 29 December 2008:
I strongly agree for the idea about fee-for-sevice because I know there are multiple files at my broker’s desk that has been pending for almost a year. My broker did her job but the client is being indecisive. These clients are well qualified for a good rate but they keep wishing for better rate to the point sometimes it is unrealistic. That is not broker’s fault and I think to prevent these clients, we should set a rule or deadline to lock rate. However, each client scenario is different, it will be difficult to set a boundry that can be applied to all the clients.
I have 2 ideas:
1) Charge 25% of 1% mortgage broker fee 6 months after the pre-approval date.(within 6 months, no charge) or
2) Upon completion of 1003, good faith estimate, truth-in-lending, and price search online, present to client with the current rate available and let the client decide the rate they wish to get within 1% range cap. When the rate they decided on become available but decide not to lock, brokers/LOs should get 25% of 1% mortgage broker fee. (eg. client’s current available rate is 5%. Client wants to wait until 4.5% is available to them. When 4.5% become available to them, client wish for 4.375%)
In addition, brokers/LOs will not get paid until the loan close, if the client backs out during underwriting or escrow process, brokers/LOs should be able to charge 50% of the 1% mortgage broker fee.
These criteria will probably prevent clients from dragging to close the loan and also weed out the bad clients who are not serious about getting loans. Brokers/LOs will be able to focus more on the valueble clients instead of wasting time on clients who just want to know if they qualify. Once, we can standardize a set of boundries, brokers/LOs can be consider a professional who specialize in mortgage industry and clients will not feel that they are being scammed but willingly paying for the service rendered.
Comment by William Schornack on 29 December 2008:
I believe we should be able to charge a fee for service. As of now, we have to put in hours of work with no guarantee of payment for our services, the borrower can simply cancel their loan with no financial recourse.
Comment by Roger Ingalls on 30 December 2008:
Bradley,
Nice comments.
Jillayne, did you research further?
Have any of the fine minds you associate with ground this up, and see if you truly COULD charge a fee for doing loan origination work, where the fiduciary did not originate a loan?
For instance, if after researching the market for the best solution, the broker concludes that the best solution is with a retail lender (and not with a wholesale lender that the fiduciary/broker could complete), could the fiduciary accept a pre-agreed upon fee (from the borrower) for finding the optimal solution?
Comment by shelley safronek on 31 December 2008:
The mortgage industry has to recover from the negative press from this meltdown before this will be a readily accepted practice. Although Attorney’s and physicians are fee for service, they have the advantage of this being a standard operating procedure regardless if they provide any results. The extensive education requirements and passing the BAR/Medical Boards have put them in a different category that I have a difficult time seeing us ever reach. Especially if banks are offering their services for free.
Comment by Kirsta Lopes on 31 December 2008:
I don’t think I would charge a fee for service. I regard all of my customers’ loyalty very highly, and I feel that to charge a fee would sour that view. If I were to do some extra work on a file, I chalk it up to some of them are easy, and they make up for the ones that are a bit more difficult. By providing extra services for free, i.e. credit score coaching, it just shows that I go the extra mile for my customers.
Comment by Roger Ingalls on 31 December 2008:
Jillayne:
Where do YOU think we can find the answer to Bradley’s conundrum?
One law states that we can charge a fee for service (presumably the services of originating a loan), yet another prohibits us from accepting a fee if the loan does not close.
Aside from the marketplace viability of such a model(is it competitive with the existing model, and can an LO win clients, and attract business and revenue?), we need to know whether the model is actually legal.
DFI is probably not going to help us out. Based on my experience (regarding rampant illegal advertising), they do not offer rulings on potential legality, only on past transgressions, based on complaints.
Without knowing it’s legality, it would be somewhat foolish to experimentally market the “fee for service, regardless of outcome” model, only to have to face legal challenges.
Keep in mind, I LIKE the idea, and think it is a fairer system for both borrowers and loan originator/fiduciaries.
Shelley, banks do NOT offer their service for free. Let’s set that straight. They generally charge a non-refundable application fee, and of course, make “bank” chargin origination fees, and reselling the loan, with decent servicing release premiums (SRP’s), which are equivalent to the broker’s YSP.
Comment by Jillayne Schlicke on 31 December 2008:
Hi Roger,
Bradley submitted a detailed comment to DFI on this issue during the Rule Making session. The new Rules were just released yeterday and I have not had time to go through all 54 pages. Here is the link:
http://www.dfi.wa.gov/cs/recently_adopted_rules.htm#208-660
Comment by Scott on 27 January 2009:
If bill SB-6381 raises the bar for professional standards and allows fees for services all true professionals (Brokers & Lo’s)should charge for there advise and time
Comment by LINDA COFFMAN on 27 February 2009:
I believe as consistant regulation is brought to the industry the fee for service will become more popular among LO to charge clients. The clients will realize that the LO’s are professionals in the business. Right now I don’t charge fee for services as the business is upside down and consumers are wary.
Comment by Adam Neal Eifling on 29 December 2009:
The problem I have is the number of times I’ve heard from clients who started with a larger institution and paid for an application fee for example let’s say $400.00 and a week later the answer was “NO” we cannot do your loan but we’ll keep your application fee. That is not right. However regarding the time you may spend with someone to help re establish their credit is another consideration of an example. The reason why we still may hold back in this particular area is because 98% of clients we help to become approved eligible will never leave us because of the gratitude for helping them. Loyalty is secured and we have their details on hand. We call this process our Dirt to Gold program. But this process is like a field waiting to be labored to yield a harvest. Preparation time is valuable and worth reasonable compensation. I only hope examples such as this do not lead us back to a mess all over again as we are in now.