Fiduciary Duties for Mortgage Brokers and LOs

In October of 2007, Andrea Negroni wrote an article for Mortgage Banking Magazine titled “Mortgage Brokers–What Fiduciary Duties Exist?” Negroni provides a framework for mortgage brokers to begin learning about case law already on the books where courts have imposed fiduciary duties on brokers.

The National Association of Mortgage Brokers has been quite insistent that brokers cannot and should not owe fiduciary duties to their clients.  However, the court cases that exist begin with the application of the principal-agent relationship.

“Agency is a fiduciary relationship that results from the consent by one person (the principal) to another (the agent) that the other (the agent) act on his/her behalf or subject to his/her control.  An agency relationship can be created either expressly by oral or written agreement, or it may be implied through conduct.  For a practical example, when a mortgage broker tells a prospective borrower that he or she will obtain the best loan or the best rate and the borrower relies on him to do so, an agency relationship may result from the broker’s conduct.” 

Fiduciary comes from the Latin word fiducia, meaning “trust.” A fiduciary is a person who has the power and obligation to act for another under circumstances that require complete trust, good faith and honesty. A fiduciary is said to have substiantially more knowledge and expertise in his or her area of specialization. A fiduciary is held to a standard of conduct and trust above that of a random person. Fiduciaries are obligated to avoid self-dealing and conflicts of interests in which the real or potential benefit to the fiduciary is in conflict with the best interests of his or her client.

For example, a mortgage broker must consider the best loan product for his or her client and not sell loan products on the basis of what brings him or her the highest commission. The best interest of the client must be primary, and absolute honesty is required of the fiduciary.

John Long sums it up in this Scotsman Guide article. In regards to Senate Bill 6381, mortgage brokers:

  • Must act in borrower’s best interests with the utmost good faith and fair dealing toward them;
  • Must disclose any and all interests to borrowers that are used to facilitate their request.  That is, brokers must explain and determine that borrowers understand how everyone in the process benefits from the transaction;
  • Must disclose to borrowers all material facts known to the broker that might reasonably affect their rights, interest or ability to receive the intended benefit; and,
  • Must not steer or direct borrowers to accept a loan with a less-favorable risk grade than the grade they would qualify for under prudent underwriting standards. This is permitted, however, if borrowers are offered loan products within the risk catagory and choose the higher-risk-grade product after consideration.

46 thoughts on “Fiduciary Duties for Mortgage Brokers and LOs

  1. Mortgage Brokers do owe it to their clients to give them the best deal they can find within reason. In today’s market, with lending being so tight, it’s very difficult to make much of a paycheck with any given loan. We need to give our clients great service and pricing, while also trying to make ends meet. Doing what’s in their best interest means giving them a par rate and charging zero points. Obviously, we have to make something. Loan Officers are having to orignate more loans in order to keep up their income. I think we will have more and more Loan Officer’s seeking out other careers because for many of them, neither the loans, nor the commissions are enough anymore.

  2. Mortgage originators are obligated to offer a loan that is in the best interest of their client and not their own wallets. Although it is not always possible to charge par pricing due to costs of an interest rate, it should be understood that it is not ok to sell an interest rate that is to the LO’s benefit and not the client. Like in any industry the client is the reason we have business. It should be the moral, ethical and fudiciary obligation of the loan originator to disclose all information to the borrower. We all have to make a living, but it is not ok to rob a bank… and it shouldn’t be ok to be robbed by one.

  3. This is really a subject that I’d like to comment on. It pains me that whole issue, while very noble, does not not address the whole complexity of the marketplace by singling out some market participants and not others.

    It just seem like we have a bit of a “conundrum” to resolve.

    On one hand, there is a pressure from regulators to impose fiduciary duties on mortgage brokers, on the other hand, most of mortgage brokers the are sales people making money only from commissions resulting from “margin” for selling the loan.

    If we look at mortgage brokers as retail salespersons “selling loans”, the amount of “sale margin” depends on both the overall market (“supply” e.g. general lending conditions, competition etc) as well as “selling ability”. From that perspective, please give me one example of retail sales where the retailer announces his margins and the wholesale price for any ticket item! Of course, this is usually highly guarded information and never ever disclosed to the customers.

    If, on the other hand, we assume that retail mortgage brokers have “fiduciary resposibilities” to customers, than they should charge $0 in broker fees and get the best pricing for the customer, effectively eliminating yield spread premiums. Viola, we have mortgage brokers working for free! No problem, but I do not see many “pro-bono” mortgage brokers in the near future.

    There is also another caveat: Unlike selling candies, the closing of the loan transaction does not depend on the broker, but “financial ability” of the borrower as determined by the wholesale lender underwriting team. Just imagine beer seller qualifying each buyer by calling the beer manufacturer to screen the customer and determine if by any chance he is not an alcoholic anonymous or has prior DUI convictions in order to determine if the sale transaction (e.g. selling a beer bottle) can proceed.

    Why can the brokers not just make money by charging fixed application fees? Well, this model usually works for any “licensed profession” quite well, except that it would have to be widespread and mandated by state or federal laws (everybody would need to charge the same) and it would need to be enforced. E.g everybody makers the same money per transaction. Better service atracts more customers – allowing to make more money.

    But then, who would pay application fee if the loan may not close? Well, lawyers do that all the time – in form of a retainer for service, and then billed hourly against the balance. Yet the outcome of your legal case is never known or guaranteed.

    The above model still does not address the issue how to motivate mortgage brokers to actually close loans, instead of just taking application fees. Well again. in law-regulated model, there could be a extra standard commission, paid to the mortgage broker by a lender but not from customer closing funds. This would mean that banks and wholesale lenders would agree to federal overarching regulations in respect to what is allowed and not allowed lending practices.

    The question remains, how would mortgage brokers make any money under the statue of “fiduciary responsibility” ? The alternative would be of course a salaried jobs with banks, completely eliminating wholesale banking and leaving only major players in the mortgage lending arena – and only the ones that can afford keeping large salaried sales force. With the current consolidation of the banking industry and pressure from bigger financial institutions to eliminate mortgage brokers, it is entirely possible that this would create monopolies of scale allowing few strong financial institutions to solely dictate rates and fees, to the dismay of consumers.

    There is another market model possible – having the lenders identify loan sales by fixed resale margins, much like it is the case with “certified dealers” in other vertical industries/channels. Such channels are fully controlled by the wholesaler and the wholesaler dictates rigid margins that the broker/dealer can make per sale.

    One way of the other, the idea of using legally imposed fiduciary duties is quite clever way for major players (e.g. banks) of eliminating competition (e.g. mortgage brokers) in a fight for ever-shrinking marketplace. Mind you, that brokers are mandated to disclose all fees (front and back) now already while lenders area allowed not to disclose any back end fees. How is that for “fiduciary resposibility” of the banks?

    Also, because of branding of major banks and perceived institutional “trustworthiness”, consumer market allows them to charge application fees, which help support their loan officers sales force. This is what I would call “unfair advantage”.

    So while there are many possible models of the mortgage lending industry, one must come up with one that is in real interest of the customers.

    So if we really want to change the current model and impose “fiduciary duties” on all market participants, following simple rules must be observed:

    1) Rules must be the same for all market participants, no matter big or small
    2) Regulations must be developed with the good of the customer in mind, and that means “healthy” yet standard commissions across the board
    2) Regulations must not favor bigger institutions over independent businesses
    3) All regulations must be uniformly imposed and enforced by state or federal bodies across all licensed entities.

    Now. let’s fond one politician who will take on bigger players, lending powerehouses and lobbyists to prevail. Or, just forget about “fairness” and treat mortage lending like any other retail sales industry. As usual, “Buyer Beware” 😉

    Jack Kloskowski
    Mortgage Helpline

  4. Hi Jack,

    Thanks for your well thought out comment. A couple of things come to mind.

    From my vantage point I believe all Loan Originators, no matter where they work, will ultimately owe fiduciary duties to their clients.

    Banks will fight this as long as they can due to their business model.

    A bank has more overhead than a broker (typically.)

    In order to keep costs down, it is far less expensive to hire green LOs who know nothing and train them on the job, and they pay those new to newer LOs far less compared to hiring experienced LOs. In contrast, highly seasoned LOs will typically leave the safety of a bank once they have established a client base because they can make far more at a broker or correspondent lender.

    Employing highly trained/educated LOs will eat into a bank’s earnings so they will fight higher duties as long as they can.

    The winds of change are blowing in favor of more consumer protection. Fiduciary Duties might start out state-by-state and then eventually move to the federal level.

    “If, on the other hand, we assume that retail mortgage brokers have “fiduciary resposibilities” to customers, than they should charge $0 in broker fees”

    A fiduciary does not work for free. Fiuciaries typically make way, way more than other workers. Your analogy of an attorney receiving a fee-for-service is more accurate.

    Loan Originators are starting to emerge as professionals.

    Right now in most states their status is retail. I hear the following example quite often: “Every man for himself. Every LO gets to make as much money as he can off of the consumer. If the consumer is an idiot and signs the loan papers, that’s not the LO’s fault.”

    We are living in historic times. Right now LOs are transitioning from retail sales people to professionals.

    The big question to ponder now is the fiduciary LO who is also an employee of a corporation. Lots of interesting ethical questions to write about in that dynamic.

    Thanks for stopping by! I really enjoyed reading your thoughts.

  5. Something that is being left out of this discussion, and Jillayne touched on this in her response to Jack, that fiduciaries do not work for free. We are responsible for providing our clients with the best deal, which means “including our fees”. Do banks always give their clients the best deal? The answer would be “no”. They can’t answer that “yes”, because their loan officers in many cases aren’t licensed and they only offer “their” product. We all know on any given day our pricing changes. Until Mortgage Brokers are heard equally on the large stage, we will continue to fight the uphill battle by laws that are directed towards us and not the large institutions. As you may have noticed lending options has shrunk significantly this year, leaving people looking for home loans with less options.

  6. I believe most brokers who consider this industry a long term career and depend on referals have acted as fiduciaries. A good LO or Broker should be taking the time to find out what is in the clients best interest and look at the borrowers overall picture and make suggestions that may not have been considered by the client. I believed when you provide value and solve problems earning a fee is not a huge issue. I prefer to believe we as brokers have always had the ability to help more than a bank. We do not just provide a loan like a bank would do, but rather provide a solution to a problem a borrower needs help with. This solution may be a loan, total reorganization of debt,or just advise with no action. In any event, once we have outlined the options an informed consumer can usually tell you what is best for them ,and I belive in most cases want to pay for the expertise. I think we all know that nobody works for free.

  7. The Milgram Experiment is interesting and in many ways a disturbing display of how we as humans can act against others. Most of us who have been involved in this industry for a long enough time have had customers who demanded the pain (an inferior loan product) or an underwriter who asked us to get rid of information (sanitize a file) so they could approve and sell a loan. In either situation we could transfer the responsibility to someone else to justify the outcome. The difference is we felt we were helping the client, not inflicting pain. There have been a number of cases such as the HFC mess where LO’s were instructed to hide info and put borrowers into bad loans for high fees but I do not believe this was the norm. I believe most of us know when a line has been crossed and legislation has a hard time regulating ethics in those who will cross the line over and over. The market will eventually get rid of these problems, as we are seeing now, as people find it harder to make a living and the customer is made more aware. The best steward of our business are those of us who are in it for more than just the quick money. If we start with ourselves this industry will be far better off than with a top down regulation from State and Govt enforcement people who have no idea of what we really do for our clients and honestly don’t really care.

  8. As a Loan Originators I put my clients needs first and interview them to find out what are their best interests. Then make recommendations on the availability of loan products based on the client needs. I believe all Loan Originators should be accountable for fiduciary duties to their clients.

  9. What exciting times we are in. Loan Originators actually have to know how to put a loan together. And we have to do this with customers who, in some cases, know more than we do. All the talk about the vast difference between bankers and brokers is just that. I’ve worked on both sides of the fence and believe me each works as hard and has to know as much as the other.

    I’m just not smart enough to come up with the ideal way to compensate a good loan officer but it seems that the market is doing that for us. If you are not honest, willing to put your customer first and always do the right thing you probably won’t survive in this market. It is really healthy to watch everyone scrambling to find that balance between making a living and keeping their customers happy.

  10. Let me just begin by saying that I still consider myself a newbie to the industry, as I only have 3 years total experience. Also, I am young, and am not afraid to say that I have a lot to learn. While reading this article, I was thinking in my head, “Why isnt this information a no-brainer?” I believe that in ANY business, one should always be heald to their fiduciary responsibilities. Maybe it’s easier for me to say this, as I am employed at a small brokerage where loan originators believe fiduciary duties are key to a sucessful career – and this is how I learned about the business. The loan originators in my office work purely from return clients and referrals. We do not have a marketing division or anyting of the sort.

    Like I said before, I believe everyone, in any business should excersie their fiduciary responsibilities. But why dont they? Is it because their place of employement doesnt emphasize how important it is? I do – and thats why I think that so many companies are going under…

    As far as the National Association of Mortgage Brokers go, why don’t they believe loan originators owe fiduciary duties to their clients? I am not very familiar with their practices, but I thought they were here to assist loan originators and keep us afloat?

    This might be a little off track, but why arent real estate agents heald to their fiduciary repsonsibilities? Why is no focus on them and only us?

  11. It is my opinion that no LO should claim that they can provide the borrower with the “best” or “lowest” interest rate as it is an impossible task to know what every lender and every loan program is offering. However, I do believe that as a LO you should listen to your client, discuss what their goals are, what is the purpose of the loan and then determine whether or not a loan is appropriate.

    I work in a very small town and most of the borrowers I work with are not savvy borrowers, do not have college educations and have limited funds. They prefer to work with mortgage brokers rather than banks because they need hands on attention, lots of time and simple to understand explanations of the entire loan process. They want to be able to “trust” the person they are working with and see them face to face. (I often run into my clients at the grocery store, so you want to treat them well.) It is not uncommon to have the borrower ask “What would you do?”. It is not a difficult question to answer.

    If the LO prices all his/her loans similarly, such as charging 1% broker fee and 1% YSP or 2% broker fee and PAR interest rate or just charge a flat fee for every loan….would that eliminate the idea of self dealing and/or conflict of interest? Then all you would have to be concerned about is the loan program and the lender you selected.

  12. Some very thoughtful comments! I’m also a relatively new broker, but I conduct my business essentially as fee for service already. I tell all my borrowers upfront I make x% of their loan amount. It’s up to them how they pay it either out of pocket or in higher interest rates or a combination. Where possible, I show them the rate sheets. A practice discoraged by my wholesale suppliers, but necessary for my methodology. This may not be the recipe for huge volumes or margins, but I sleep well at night and so do my clients.

  13. When the issue of fudicial responsibility began coming to the forefront I felt a sense of relief. I guess I was taught this business from the old school and always believed that it was my duty to provide borrowers with the knowledge of how the mortgage process works. Part of this process is to explain the good faith estimate line item by line item and exactly how the charges apply and who benefits from payment. I have always educated the borrower to understand how I am compensated either by charging a flat loan fee with par pricing or lender paid premium which would result in higher rate to borrower. I too would show rate sheets to borrowers. I believe my clients appreciated being an informed party to the transaction.

  14. Fiduciary responsibility arises in many instances in financial services transactions. Generally, fiduciary responsibility arises under common law as a matter of the facts and circumstances of the transaction. Alternatively, fiduciary responsibility may be imposed by statute. When the transaction is between two principals where neither is statutorily assigned fiduciary responsibility to the other, the determination of if and when fiduciary responsibility may exist is the purview of the courts and is determined largely on a case by case basis. Based on a review of case history and where sufficient case history exists, a practitioner may be able to build a set of practice guidelines that, if followed, preclude the existence of fiduciary responsibility where that is an objective. The problem is, as Ms. Negroni puts it, “for the most part, the law is unclear about whether mortgage brokers represent borrowers, lenders, or neither.” Basically, case law is too sparse relative to the broad range of variables that may exist in a mortgage transaction making it nearly impossible for one to determine clearly whether or when mortgage brokers are to be viewed as fiduciaries to their clients. The best guidance Ms. Negroni provides is, “As a result of the ambiguity in this area, mortgage bankers, brokers and mortgage industry regulators (including lawmakers) should familiarize themselves with the existing laws and cases that have considered brokers’ duties and responsibilities”. And in her article Ms. Negroni provides us with a summary of key cases where fiduciary responsibility was determined to have existed on the part of a mortgage lender or broker. That was where things stood when Ms. Negroni wrote the article in 2007. But for those of us in Washington, this all changed on June 12, 2008. That is the date that a new law generally referred to as SB 6381 took effect. Ms. Negroni’s article is intended to help provide an overview of case law to help us understand when and where fiduciary responsibility may exist – the revision to the law makes her case law history review but an interesting academic exercise. We no longer have to look to case history to understand whether our actions may have invoked fiduciary responsibility with regard to our roll in the brokered loan transaction. The law now simply and clearly says that we have fiduciary responsibility by virtue of acting as a broker in the mortgage transaction.

    Ms. Negroin stated in 2007, “When brokers are paid commissions by both parties to a loan transaction, confusion results about whom the brokers actually “work for.” Unfortunately, there is little legal guidance to answer the question “Whom do mortgage brokers work for?””. But now there is ample “legal guidance” – the revised RCW 19.146 tells mortgage brokers who they work for – no more ambiguity.

    Ms. Negroni appropriately raises the issue of compensation. She is absolutely correct when she says that there is confusion about whom the broker works for when the broker is paid by both the borrower and the lender. Even now, in Washington, where public law makes it clear whom the broker is supposed to be working for, a reasonable borrower must wonder where the broker’s duty lies when the broker receives compensation from the lender, a party with conflicting interests to those of the borrower. Broker practices must remove any doubt as to whom they owe their loyalty.

    Ms. Negroni points out that the fiduciary duties one party, acting as agent, owes another are enhanced when the agent has knowledge that give him an advantage over his principal. Further, she points out that the fiduciary duty incorporates the principle that there should be no self dealing. Consider that the brokered mortgage loan transaction is fundamentally a purchase-sale transaction. The lender purchases a note from the borrower. The price that the lender will pay is indicated on the lender’s pricing sheets that are typically issued by lenders at least daily. To what extent does the borrower have access to the pricing information on those sheets? NONE. The borrower, the seller of a note, has no direct knowledge of the price that the purchaser of that note (lender) is willing to pay. And the amount that the lender is willing to pay varies according to a number of variables – price adjustment information that the borrower is generally not privy to. The borrower, as seller of a note, is absolutely dependent on the broker to tell him truthfully and plainly what he is to be paid for his note. And, where different note terms may result in different prices, he is dependent on the broker for information on how he might vary the terms of his note to produce a price that serves his best interests. Does the broker have knowledge of the transaction that puts him at an advantage? Absolutely. Does this increase his fiduciary responsibility? Again, absolutely. If the broker accepts YSP as a component of his compensation is he not self dealing? By claiming the YSP the broker is positioning himself as the purchaser of the note who will then sell the note himself at a “markup” to the lender. In so doing he contends that he “earns a spread” on that part of the transaction. This is clearly self dealing. Moreover, it is deceitful self dealing since the borrower is unaware of this aspect of the transaction. It is particularly deceitful given that the broker never actually “owns” the note that he presumes himself to be selling. Summarizing, in claiming or accepting YSP as a part of his compensation, the broker creates reason for the savvy borrower to question the broker’s loyalty, takes advantage of information that is not otherwise available to the borrower, is fundamentally engaged in a form of self dealing. The long standing practice of claiming or accepting YSP as a form of broker compensation is anathema to the fiduciary responsibility the broker owes the borrower under RCW 19.146.

    Ms. Negroni raises the issue of disclosure. Disclosure, particularly in the mortgage industry, has become the cure-all for fair play issues. John Long, in his article in the Scotsman Guide, suggests the default cure of disclosure. But in light of fiduciary responsibility, what is the roll of disclosure? Does the practitioner suppose disclosure will relieve him of fiduciary responsibility? Ron A. Rhoades, JD, CFP® has is an expert on fiduciary responsibility and has written extensively on the subject (see his articles and papers on http://www.fiduciarynow.com) contends, after a great deal of research, that fiduciary responsibility is not waivable. A practitioner cannot sidestep his fiduciary responsibility through disclosure. That is not to say that disclosure is not necessary.

    Ms. Negroni highlights the California case of Wyatt v. Union Mortgage Co. In this case the court held that where a borrower is unsophisticated and relies on the knowledge of the broker (and with regard to YSP, what borrower could be considered anything but unsophisticated and totally reliant on the broker’s knowledge), the broker is compelled to abstain from acts that are adverse to the borrower’s interests. Other authors have similarly concluded that one of the first responsibilities of the fiduciary is to remove or avoid any acts that may create a conflict of interest. Surely this duty comes before disclosure. It is not sufficient to disclose a conflict of interest if that conflict can be removed. In the extreme, consider that it is not OK to cheat someone even if you have disclosed your intent to do so. Your first duty as an honest person is not to cheat someone. The first duty of the fiduciary is to remove or avoid conflicts of interest. Disclosure is mandatory – disclosure of any conflicts of interest that cannot be removed or avoided. Even so, the simple disclosure is not sufficient. The fiduciary must act in the best interests of his client. Disclosure must be clear such that the borrower understands not only the full implication of the conflicts that remain, but what steps the broker is taking to ensure that those conflicts are unlikely to affect the broker’s loyalty to the borrower. In the classic case, fiduciaries are uncompensated – the interjection of compensation creates an inherent conflict of interest. In the modern business world, fiduciaries are compensated but must be very careful to ensure that the means and structure of that compensation does not pose greater conflict of interest than necessary, that the compensation is plainly understandable, and that the conflicts created are clearly (to the client) manageable. The claiming or accepting of YSP as a form of compensation creates a conflict that is very difficult for even the most sophisticated borrower to understand. This conflict is easily avoided and therefore must be avoided.

    The claiming of YSP as a source of broker compensation stands as perhaps the single biggest conflict of interest in the provision of loan origination services. In my view the best way to avoid the conflict of interest potentially posed by the payment of YSP is to undo the oversimplification of loan pricing that pervades our vocabulary. We disclose on GFE or HUD1 a note amount as an amount “loaned”. Against that we charge discount points, when applicable, and describe this as some kind of fee paid to the lender in exchange for a lower interest rate. And we describe YSP as an amount the lender pays the broker for delivering a loan of higher value to the lender. All of this is fable created to help unsophisticated borrower’s better visualize the loan pricing. Can you imagine selling a home without knowing what the buyer paid you for it? Yet we create and tolerate this to go on in the note purchase-sale transaction. We never tell the borrower plainly and directly what the lender has paid him for his note. As an alternative why not simply treat the amount the lender pays the borrower for his note as just that. The conversation would go something like this:

    Mr. & Mrs. Borrower, you have selected an interest rate of PAR-1/8 percent. At that rate the lender will pay you a price equal to 99.5% of your note face amount. That is to say if you present a note with a note amount of $200,000, the lender will purchase your note for $199,000. Alternatively, you could select an interest rate of PAR and at that rate the lender will pay you $200,000 for your note. Or you might select an interest rate of PAR+1/8 percent and for that the lender will pay you $201,000. Your third party closing costs are $2,000 and my fee is $3,000 for a total of $5,000. Assuming that you need escrow to deliver $200,000 to the seller for this deal, if you choose the PAR-1/8 percent rate, you will need to bring in $6,000 to closing – $5,000 for closing costs plus $1,000 to make up for the fact that you are only going to receive $199,000 for your note at that lower interest rate. Or, if you select the PAR interest rate, you will only need to bring in $5,000 to closing to cover the 3rd party fees and my fee. Finally, if you were to choose the PAR+1/8 percent rate, you would only need to bring in $4,000 to closing since the lender will pay you $201,000 for your note at that rate. $200,000 will go to the seller and the remaining $1,000 will be applied against your total closing costs of $5,000.

    If we could get back to this more accurate representation of the brokered loan transaction, we would not disclose discount points and YSP as though they are separate and mysterious components. We would simply disclose the price the lender pays for the note as the “amount paid by the lender”. And the transaction could more honestly serve the borrowers interests. Doesn’t it seem reasonable that anyone selling something of value that they own should want to know what the buyer of that “thing” is paying for it? This is true whether that “thing” is a car, a home, or a person’s promise to make a series of payments over time – a promissory note. As fiduciaries, we owe it to our clients to peal back the obfuscation created by the way note pricing has been historically disclosed. It is contrary to the borrower’s best interests.

    Maybe that’s asking too much too soon. As an interim step, and as a means to eliminate the conflict of interest inherent in the YSP issue, we should adopt rules that require the broker to credit YSP to the borrower. This can be done easily by showing the YSP amount as a credit to the borrower in the 200 section of the HUD1 and as a credit on the GFE. This is an easy step to take. It is easy to remove YSP as a conflict of interest issue. This is what HUD concluded was a best practice in their Statement of Policy 2001-1. And it is the very least we must do as fiduciaries. Mere disclosure of a conflict is not sufficient when that conflict is easily avoided.

  15. Loan originators are obligated to give the client the best interest rate and loan procuct available. I can’t tell you how many new clients that I have seen that were put into loans in the past 2 years that were never beneficial to the client, Un-necessarry or unknown pre-payment pentalties, sub-prime loans with excellent credit, When I have to ask again WHY did you do this type of loan, The same reaponse is they trusted their loan originator or it was a friend of a friend they would be taken care of or refinaced again in 2 years, Well guess what that guy is long gone. It is our job to educate and help the consumer. Luckily in our office we all take pride in what we do in the best interest of the client.

  16. Much like the CFP Board of Standards sets standards for financial planning professionals who earn the right to use the CFP designation, it seems that the mortgage industry could go down this path. Self-regulating organizations within an industry can help bring the overall level of positive behavior up. Of course, “positive behavior” has to be defined and accepted. Standards have to be set.
    I’d also like to make a remark on a slightly different subject. Previous posts have referred to the retail sales nature of the loan business. While that is somewhat true, we’re not talking about buying a sweater off the rack at Macy’s. People don’t declare bankruptcy because they bought a sweater they couldn’t afford. We’re dealing with what are for most individuals very high levels of debt as a ratio of their net worth. These kinds of financial transactions represent some of the most serious some folks will make in their lifetime. They deserve to be dealing with a person who is obligated to put the client’s interest first and who has disclosed any conflicts of interest in the recommendations they make.

  17. I think the industry can be well served with full disclosure which makes it easier for the client to see what the are getting for their money. YSP is a real gotcha. Full disclosure of it levels the playing field. Lets take the temptation of of the system and help the little old ladies across the street safely but for a fee of course.

  18. Since the crisis, many borrowers open their eyes to assess the current situation they are in. Maybe they have signed and got a loan during the bubble-run years but with government stepping in to regulate, it only leaves a tight room for LOs to process loans. But at the end, the honesty is what it counts for the long run. If the clients believe LO provided honest, best deal for them, they will always refer thier friends and they will tell other friends so on and so forth. I believe fiducary duties are the key to this industry.

  19. Brokers and LO’s should have always owed a fiduciary duty to their clients. Now that ‘case law’and other laws are recognized, Brokers and LO’s should develop some type of ethical guideline to their practice, like doctors, lawyers, etc. As guidelines, laws, ethics, and accountability develop the mortgage industry will be recognized as more like a professional practice. The way I see it, if we present a few options to a potential borrower, and the borrower chooses a certain loan program, and 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.

  20. @Scott

    “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.

  21. I agree with your statement about ‘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.’ What I meant was, after closing, its up to the homeowner to make the choice what do with the product, etc..

  22. 510-LO-44600
    509 457-1944 (fax) Western Financial

    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.

  23. Bradley:

    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.

  24. LO’s and Mortgage Brokers have had a fiduciary responsilbility for quite sometime. Inorder to be competitive and build a clientle for the future, people want to know what they are paying for. My company has always disclosed YSP. I agree with Brad that YSP helps keep up front cost down for borrowers. If this is presented honestly there is no reason to feel bad or embarassed about making a living. (granted, I am not charging 2-4 point in YSP either) When it comes to peoples wallets, information about the dispursment of fees up front is best. Offer service, under promise and over deliver. I do not think this really a new topic or issue for professionals who have been in the industry for 15-20 years. You can’t stay in and decieve people.

  25. With any relationship that we build, whether personal or business, we must consider the Fiduciary aspect of the relationship as necessary. It is our duty as Human Beings to treat one another with Respect and Honor our client as we would Honor ourselves. I was taught by a very wise LO that not all clients can afford a home and it was my ability as a LO to make that determination and to council the client accordingly. When a client is eligible for a loan it is our duty to discuss disclosure of fees and loan programs in a honest manner. We hold the key to our clients futures and must not let greed take away from their futures and their childrens futures. Linda

  26. Honestly, it doesn’t matter what industry I will ever be employed, I will always maintain the integrity of my position. Whether the fiduciary responsibility is mandated by law or an implied ethical value, the client/customer/patient needs should always take priority. Although I would like to think that we can charge for our services each and every time, I just don’t see it becoming a reality. Realtors are not paid unless a home is closed and I don’t see our position in the eyes of a homebuyer or refinance consumer changing in the near future. I have always made a great living in this industry for over 20 years, some close and some do not. Some transactions are extremely time consuming and some just flow right through. It all works out in the end!

  27. While I agree that we owe our borrowers the best Fiduciary responsibility, it seems that it is very hard to do while trying to make a living. I too think that the best way is to charge no origination and par pricing, and lately, it seems I have had to get pretty close to that just to make some deals work due to value issues. How then, are we supposed to stay alive in this industry? Everyone has to get paid, and the bottom line is we have to make money somehow, and this is how we choose to make our living. It’s definitely a conflict to our borrowers and to ourselves for the ethical LO. Are giving our customers full disclosure of YSP, GFE, TIL & loan programs really fulfilling our fiduciary obligation?

  28. Hi Kirsta,

    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.

  29. I have been in this business over 20 years. When I started things were really more simple[FHA,VA,Conv.].Ethics were an assumed part of the business. This all changed during the recent and as some else stated hopefully bygone “predatory” lending days. I feel that ethics went out the window with cronic availability of mortgage cash no matter what the borrowers circumstances past or present.This influx also brought on a proliferation of untrained and unknowledgable loan originators. Ethic’s needs to find it’s way back into the industry. In the past ethics and responsibility to the borrower were understood, time has come to spell out responsibility to the new people entering our industry and the old ones that may have picked up some bad habits along the way.

  30. I have a question after reading thru these blogs regarding my own circumstance. I am in processing of getting a refinance loan on an existing home I own. I have gotten the good faith estimate and the broker disclosure document. I feel brokers need to make money in a transaction but the question I have is HOW MUCH?!?! For example, for a $350K loan, the total compensation for the broker per the disclosure fee is over $6,000. Sure, I am paying 1/2 point origination fee but there is another $4500 on the back end that they are getting. This does not include all the fees I need to pay in section 800 of the GFE. What is a reasonable fee for a broker for bringing a lender and a lendee together?

  31. Hi Steve,

    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?

  32. Roger, regarding your 30 Dec comment:

    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.

  33. Correction to my last comment (1/6/09): paragraph 3, last sentence should read:

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

  34. I am neither a broker nor LO. My wife and I are in the process of a major home renovation of a 100+ year old house in Virginia, where the architect has submitted final plans, the contractor has provided final pricing and a contract has been signed. Getting a construction loan has been nightmarish.

    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.

  35. Hi Keith, Here are my answers to your questions.

    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?

  36. The time has come to act & conduct ourselves like true professionals. With that territory comes higher standards which should include the application of a principal/agent relationship. The mortgage industry is the only industry that holds themselves out to customers as professionals with this quasi fiduciary approach.

    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!

  37. This is business and a relationship is built through this business with the client, you want a one time deal then you don’t act in a fiduciary/agency relationship, you want a lifetime client then it is a natural duty. I still always have the best interest for my clients in mind either in giving advice or closing a loan with them. Including following up after the loan has closed to make sure they have thier first payment coupon to send into the lender. I want a client for life!

  38. As I have commented previously your first instinct should be to serve the client before self. Yes we have to make a profit but this does not mean charging above outer space fees to never return again. We make our profit not from the one loan we close today but from the referrals earned by it tomorrow. Having this mentality in place that each loan closed leads to another tomorrow keeps a check n balance in place. Clients should always be treated as if they are clients for life. Regardless if you see them again or not they will always have referrals. It’s responsibility to tap into this fountain of flowing.

    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!

  39. How I continue and grow my business is important to me. I beleive a big part of being here today is my fuduciary responsibility to my clients. We all know that repeat business brings more referrals. And we know you cant get referrals unless your doing a great job for the best interest of your clients. I was brought up by being taught you do the right things and you will be rewarded…. this does not have to be financilly but anything rewarding. It works for me. 🙂

  40. Thank you, Jillayne, for bringing attention to my 2007 article on the fiduciary duties of mortgage brokers. The article has recently been updated to 2010 and the update will appear in the October 2010 issue of Mortgage Banking magazine. There is a lot more law on this subject now than there was 3 years ago so you and your readers might want to take a look at the update.
    Andrea Lee Negroni, Esq. (BuckleySandler LLP)

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