Fiduciary Duties

The Moral Terrain of The Mortgage Lending Industry

General ethics applies to everyone in all spheres of life; in contrast, professional ethics is usually memorialized by written code and is intended to apply only to those individuals who have been identified as professionals in their field. For example, in the legal industry, both lawyers and paralegals are considered professionals and must abide by certain written ethical codes, while legal secretaries and law clerks are not considered professionals and are not held to the same professional standards (although certainly the employers they work for can require it). In the healthcare industry physicians owe specific moral duties that are captured by various ethical codes; in contrast, orderlies and certain other lower level functionaries are not considered professionals and do not have to abide by these codes of ethics, although they follow directives that are patterned after the applicable codes.

The essence of professional status requires one to take a licensing exam which tests substantive knowledge and codified standards of practice. Currently, the mortgage origination industry is in a state of transformation because, although loan originators working under a mortgage broker and non-depository lender must pass licensing exams, loan originators who work for depository banks are not required to do so (though provision in the Dodd Frank Act require depository banks to hold their LOs to the equivalent standard set forth in the SAFE Mortgage Licensing Act.) A brief historical review of standards of practice indicates that the position of mortgage loan originator is moving towards a clearly identifiable status as a profession. We in the industry can now move mortgage originators clearly into professional status by implementing competency exams for all LOs and disciplinary procedures, once a code of ethics with sanctions is formally put into place. Until then, we revert to using general ethics in the workplace.

General ethics attempts to provide a rational framework for answering the paramount moral question “What ought I do?” We all struggle with this question every day in all contexts, and we attempt to find answers through emotion, intuition, authority figures, and hopefully, reason. In answering these questions, we attempt to construct common and objective frameworks of values in order to solve these problems in a consistent fashion. This gives our lives coherence and unity as we strive toward ethical ideals. In contrast, the problems of professional ethics in a business setting, emerges from highly unique structural domains and thereby carry with them modified sets of values. For example, in the criminal justice system there are specific players that play specific roles in that structure and the overlying value for lawyers is to protect the constitutional rights of clients. In the healthcare industry physicians have duties of informed consent to patients, and while doing no harm to the patient, they must also respect patients’ rights to self-determination.

We infer that anyone who is officially designated as a professional also has fiduciary duties toward his or her client. Fiduciary duties arise in any circumstance where one person has greater authority, power, or knowledge than their client. This carries with it the duties to act in the highest good faith and to never put one’s own interests above the interests of any client with regard to the subject matter of their contractual arrangement. Being designated as a professional carries correlative burdens and benefits. One benefit is that a professional has greater industry prestige and greater earning power. A corresponding burden of this fiduciary duty is that there is a greater responsibility to protect the interest of clients.

At this point in time, we cannot assume a mortgage originator is a) a professional (which triggers a different set of ethical considerations than general ethics and b) is a fiduciary and as such owes duties of the highest good faith to his client. Furthermore, this would imply that the mortgage originator also has the affirmative duty to ensure his or her subordinates are also protecting those fiduciary duties. In some states, laws have been passed that designate a mortgage brokers and the loan originators licensed under the broker to owe fiduciary duties to their clients but this is not the case in all 50 states for all loan originators no matter where they work. Instead we would classify loan originators as an emerging profession.

It is not clear that an individual not officially designated as a professional owes fiduciary duties to clients, though many courts have held loan originators to a fiduciary standard during the last decade as borrowers attempted to balance the scales of justice after becoming victims of predatory lenders. (See “Mortgage Brokers-What Fiduciary Duties Exist? By Andrea Lee Negroni, Mortgage Banking Magazine Oct 1, 20007.”) Typically non-professionals deal at arm’s length with their clients. In this case, consumers do not expect that their mortgage loan originator is not self-interested in their dealings, which necessitates the need for broker shopping in order to get the best deal, yet many borrowers did believe the loan originator was working on behalf of the borrower when no such duty existed.

If a mortgage originator does not have professional status that results from national competency examinations and being held to a code of ethics with sanctions, then there is no good reason for a consumer to expect any kind of special duties above and beyond those prescribed by law. The expectation again is that both parties are operating at arm’s length and the consumer must be held accountable for his choice in mortgage originators. In situations where the mortgage originator does not have official professional status, the operative rule continues to be “caveat emptor.” In contrast, in situations where the mortgage originator has official professional status, the operative rule shifts to “caveat venditor.”

Frequently, all professionals face conflicts between professional obligations and their own personal senses of morality. For example, a pharmacist may have to respect his clients wish to purchase a Plan B Emergency Contraception even though the pharmacist is personally opposed on moral grounds. While we do not intend to provide any definite answers to these sorts of conflicts that occur, we can offer some account of some of the moral considerations that go into thinking through these sorts of conflicts.

There are two ways that professionals can approach ethical problems. One is called holism and the other is called separatism. Holism is an approach that implies that one has an absolute set of standards that applies to all contexts and domains of one’s life. In contrast, separatism means that a moral agent separates and isolates the moral domains of his or her life. He or she does not have one single set of moral standards that applies in all contexts. He or she may have a different set of standards for strangers, a different set of standards for home, and an even different set for work, especially because there may be a written code of ethics at work to which he or she must abide.

For example, many states have consumer protection statues within their mortgage loan originator licensing laws requiring a duty of honesty to all parties. By becoming a loan originator that person agrees to abide by that absolute rule. In comparison, that very same person, in her personal life, may have adopted a rule concerning telling the truth that allows occasional deviations if the consequences so warrant. This person then is adopting the strategy of separatism because she is rigidly separating moral domains of his life with different moral rules. Another individual, however, could follow the approach of holism by maintaining an absolute rule of lying in all contexts of his life if it is in his best interest to do so. If one’s professional, ethical standards are vague and ambiguous, it is difficult, if not impossible to be a separatist. This is so because there is no clear rational way to separate one’s professional moral obligations from one’s general moral obligations. This, then, throws one into a holist approach, which leads to subjectivism and thereby risks an “anything goes” policy. Moral chaos ensues.

Due to what we believe was a deficient motivational structure, rampant violations and the resulting public outcry, mortgage originators are now facing severe externally-imposed federal regulations which are quickly worsening the situation of a typical mortgage originator and business owner.

The National Association of Mortgage Broker Code of Ethics, while it mandates that members shall conduct business in a manner reflecting honesty, does not go far enough in clarifying what honesty means. This allows a wide number of interpretations of honesty and unfortunately, because there is no precise definition of honesty there is no objective standard to which members can be held. This is the very problem in this industry. Because code provisions are expressed with great ambiguity they are susceptible to moral subjectivism, which means that ultimately just about anything goes and the “anything goes” policy has caused huge amounts of political and legal machinery to gear up to create external regulations of our industry. Laws come with far more serious sanctions than we would mandate through continuing education, disciplinary proceedings with retraining, and so forth, which we believe will be less efficient and will decrease industry profits. The mortgage lending industry has a choice: We can either proactively, internally regulate ourselves with the attempt to educate, train, and improve the moral fiber of mortgage originators, or else we will risk constant and even greater external regulation by various legal bodies.

We believe the best way to elevate the moral fiber of any industry is to develop and provide an ethical structure of motivation for our industry that is not dependent on external rewards or punishments but instead helps loan originators develop a system of internal rewards based on ethical virtue, duty, and consequences.

Portions of the above article appeared in Mortgage Originator Magazine in 2001


The students of CE Forward, Inc., DBA as NAMF are writing a descriptive and prescriptive Code of Ethics for the mortgage lending industry.

For more information, contact Jillayne Schlicke 206-931-2241

NAMF is an NMLS Approved Course Provider
Provider ID: 1400068