Informed Consent for Mortgage Lending

In Part 4, of a 6-part series, the Mortgage Professor states, as follows:

“In sum, regardless of why borrowers refinance, the question of whether they receive a net benefit from it is for borrowers alone to answer. Loan providers do not have the information needed to second-guess them.”

He goes on to say that

“on the other hand, borrowers often make their decisions on the basis of incomplete and sometimes misleading information. Instead of requiring lenders to assume responsibility for borrowers’ decisions, let’s make them responsible for providing borrowers with the information they need to make better decisions.”

The National Association of Mortgage Fiduciaries supports the Mortgage Professor’s theoretical position that holds residential lending professionals (all retail mortgage salespersons, no matter where they work) to a certain standard of practice.  What the industry must determine is exactly what this standard of practice should be.  NAMF would like to make a few comments sketching out a position in this matter.  We can first start with the idea of professional “responsibility,” which implies that lending workers must focus their attention on the needs and interests of their clients.  We believe that this requires, at a minimum, that lenders fully inform their clients of the relevant information and consequences to their potential borrowers.  This obviously mandates a standard of truthfulness and completeness.  Anything less than this opens the door to moral subjectivism and a moving standard that manipulates the hopes and dreams of borrowers.

Nevertheless, NAMF believes that the standard could be and should be higher.  NAMF believes that the standard should include a fiduciary duty that absolutely requires the informed consent of borrowers to the terms of their loan.  Informed consent has both an objective and a subjective standard.

Criteria have already been formulated to determine the risk category of a borrower.  Lenders ought to be required to carefully explain the category within which a borrower falls.   However, there should also be a subjective standard; here, lenders would be required to probe into the financial situation of a borrower if that lender determines that the borrower is unsophisticated.  Each lender would be required to make sure that a borrower asks the relevant questions and receives full and complete answers to them. This is analogous to a layperson gaining the benefit of informed consent at a surgeon’s office or a lawyer’s office.  Surgeons and lawyers do not guarantee results, for a fiduciary standard does not require it.  Analogously, lenders would not be required to guarantee a particular kind of result to a borrower.  It would be up to each borrower to determine his or her value choices in the face of complete and accurate information; the duty of each lender would be to facilitate informed consent. In fact, a form attesting to informed consent could be provided.  It would make sure that each borrower was alerted to the recommendation of seeking third party review of loan documents and that the borrower had ample time and opportunity to do so.  This procedure could be carefully addressed by way of a written code of ethics or state/federal regulatory guidelines.  We do not see any good reason why the standard for mortgage lenders should be any lower than the standard for lawyers and medical doctors.

Originally published May 1, 2007 in Inman News co-authored by Jillayne Schlicke

31 thoughts on “Informed Consent for Mortgage Lending

  1. Even though we all have to make a living, LOs shouldn’t charge their clients higher interest rate. LOs have the responsibility to inform their clients about the information and consequences of the outcome.

  2. I believe in order to protect all parties a form or checklist could be used to cover areas of a transaction and include signatures by borrower. It seems that more and more forms are needed and even when you try and go over all of these most borrowers wish to just get through the piles of disclosures and get down to their basic question. What is my payment , how much will it cost and how long. It is one thing to provide disclosure another to ensure the borrower understands. I have been in the industry for many years. The last time I sat with a doctor or attorney I found myself confused by all the forms and disclosures. The average borrower even with consent still probably never fully understands or cares, and even if they wanted to, do not have the time. Lets face it, the market could move up in rate and hurt the borrower faster than they could read the information much less digest and understand it. I am not suggesting we do not need this just that the more paperwork the less a customer will probably read or analize, thats just human nature.

  3. In response to Mark – I agree. Yes it might be a great idea to have borrowers sign a form attesting to informed consent, however, I have seen a handful of clients who dont read any of their disclosures, or even review their loan application for accuracy before signing it. I am not sure how this form would differ?

    I am not sure if this relates, but a while back I noticed a few lenders requiring our borrowers to complete a tangible benefits worksheet for refinances. I found this to be a (small) helpful guide for clients to think and review thier situation.

    “lenders would not be required to guarantee a particular kind of result to a borrower.” – Can anyone clarify what is meant by results? I know that the standards should not be different for anyone, but it a lender promises a 30 year fixed, I would sure hope they wouldnt place a borrower on a 5/1 arm with out their concent.

  4. If the borrower were to be provided with a side by side comparison sheet that showed the differences between loan programs and/or the differences in rate/cost for lower credit scores, that would most likely satisfy the requirement of educating the borrower or providing the borrower with good information to make a decision. However, I believe that the comparision sheet use the borrower’s actual loan scenario to educate the borrower and not just generic calculation of numbers.

    Or, if the borrower received a simple and easy to understand Good Faith Estimate and Truth In Lending for each loan program they are considering, that should give the borrower a good basis to make a decision along with explanations from their LO.

    I don’t believe adding another form will solve any misunderstandings by the borrower or clarify the loan documents. The current disclosures should be reviewed to see if they need updating, easier to understand language and less clutter. The number one comment I hear over and over again from clients refers to the number of pages they have to sign with the loan application/disclosures and then again at closing (final loan docs). They find the volume of paperwork overwhelming and tend to stop listening to the explanations nor do they take the time to read them.

  5. Perhaps we’re not aiming at this problem from all the angles we could? Why not put some burden of the privledge of owning a home with a mortgage on the home buyer?

    If you want to drive a car, you must be licensed and insured. To be licensed, you must pass a test. To pass the test, you must become study and become educated. If you don’t get to be on someone else’s insurance plan who effectively has more income and track record than you, then you’re going to pay a higher rate for insurance.

  6. All clients need to be treated equally no matter how much money they make. On some loan products required credit ratings, may be the factor for interest rates.

    Brokers/Los need to set standard rules, provide an overview describe the structure/guide day-to-day operations, compliance check list/disclosures to go over with their clients. It takes time to explain to first time homebuyer about the rules and regulations that we as a Loan Originators have the fiduciary duties to inform the borrowers the relevant information and consequences of the outcome. Loan Originators could search for the best loan programs and propose to their clients to determine which is best for clients interests.

  7. Once we obtain a credit report we generally get an on-line approval with several products of approval for the borrower to choose from. I always give the borrower the best choice of course and a 2nd option if it makes sence. We carefully go over all the requied disclosures and GFE to dislose the closing costs and to make sure the borrower is fully aware of the type of loan they are obtaining. I feel the disclosures are very easy to understand and not confusing at all. The borrower must take the time to read what they are signing, They are borrowing $ to re-pay. It’s our duty to inform the borrower and keep our good name. Another must is go to your clints loan doc signing at escrow and make sure again that they fully understand and are pleased with the transaction.

  8. I wholeheartedly agree. It is paramount for a client to understand the product they are purchasing before the deal is done. This is true for every realm of the financial services. If a registered rep sells a variable annuity to a client and the client doesn’t fully understand everything about it, they have failed both the client and the industry. If one gets a client into a mortgage they don’t fully understand, say an ARM, they have failed that client. Could it be that some who would resist the idea of informed consent actually don’t want their clients to have complete knowledge of the transation? Maybe they don’t want an informed client. Where Jillayne says in the article “This obviously mandates a standard of truthfulness and completeness. Anything less than this opens the door to moral subjectivism and a moving standard that manipulates the hopes and dreams of borrowers”, is there anyone out there in mortgage-land who would be against a standard of truthfulness and completeness? If you are known as someone who acts in the client’s best interest, that will eventually pay dividends.

  9. I couldn’t disagree more with the Mortgage Professor. The net economic benefit of a refinance is generally readily ascertainable. This ought to be a matter of core competency for anyone who is acting in the borrower’s best interests. Certainly there may be benefits that the borrower perceives that are not reducible to economic benefits, but these too can be understood. And the notion that the information necessary to make this kind of determination is not available to the LO is absurd. All the LO need do is ask. The only instances where the decision is the borrower’s alone to make is one in which the borrower has chosen to make the decision alone (or where he didn’t know he had a choice). The borrower is on his own to make a decision in any arm’s length transaction, not just a mortgage transaction. If a borrower does not feel the need for assistance and advice, he can choose to deal directly with a lender. Borrower-lender transactions are arm’s length and the lender has no duty to assist the borrower beyond the provision of regulatorily required disclosures and information, honesty, and fairness. Moreover, any “assistance” provided by the lender, well meaning as it may seem, must be presumed to be tainted by the lender’s undisclosed conflicts of interest. The wary borrower, knowing himself to be in an arm’s length transaction must either independently validate what the lender may be recommending or accept his fate. The importance of the mortgage broker industry, after SB 6381, is precisely that this is where a borrower may turn when he wants something more than an arm’s length transaction. In other words, when a borrower is looking for help that will be provided solely in the service of the borrower’s interests, the broker is his only alternative. As anyone inside the industry knows, the average borrower does not know or understand much about what is going on in the loan origination process or the loan pricing business. Furthermore, the details are often not independently verifiable by the borrower, even if he could understand and make use of them. Contrary to what the Mortgage Professor says, brokers not only can second guess the borrower, they have a duty to second guess the borrower in the interest of doing what is in the borrower’s best interest. This is all the more reason why a borrower stands to benefit from working with a broker – but only if that broker is truly functioning out of loyalty and good faith with regard to the borrower’s interests. Borrowers are highly likely to be dependent on the practitioner they have chosen to work with in obtaining their loan. They should be able to confidently rely on the broker as an agent of the borrower to be dedicated to serving the borrower’s interests. The same cannot be said of a lender.

    NAMF’s position that all LO’s are created equal presets a problem. The LO is only a proxy for or an extension of the entity be represents. LO’s who are responsible to lenders have no more and no less duty than that of the lender they represent. LO’s responsible to brokers have no more and no less duty than that of the broker they represent. It is contrary to free market capitalism to assign fiduciary responsibility to either of the two principals to a purchase-sale transaction. The lender is one such principal. Since the lender is not a fiduciary, it is inappropriate to hold that the lender’s LO is a fiduciary.

    It sounds nice when the article says that all LO’s must focus on the needs and interests of the borrower. It’s a nice idea, but it is not a legal responsibility. Again, LO’s of lenders do not have a responsibility greater than that of the lender, and the lender has no responsibility to focus on the needs and interests of the borrower. It might be good business sense for lenders to pursue such a standard, but that is not the same as legal responsibility. In the lender-borrower transaction, an arm’s length transaction, the lender only has responsibility under existing regulations to provide certain information to the borrower – he has no responsibility to ensure that the borrow understands that information or acts appropriately on it. The principle governing the lender-borrower transaction is caveat emptor – let the borrower beware.

    The broker transaction is altogether different. The broker is acting as an agent of the borrower. The broker has fiduciary duties to serve the borrower’s interests. Yes the broker must make the same information available to the borrower as the lender does, but unlike the lender, the broker must (a) ensure that the borrower adequately understands that information and appropriately considers it in his decision, or (b) given that the borrow may not fully understand the information provided and potentially additional information that is not required to be provided, the broker must make use of his own knowledge and experience to act as the borrower might act if the borrower knew and understood as much. This is a radically different calling from that of the lender. While it’s true that in the end the borrower makes the decision and may even make a decision contrary to the recommendation of the broker, the broker has a duty to at least recommend that which the broker has determined to be in the borrower’s best interest.

    The last paragraph in this article goes on to describe what might be higher standards to be applied to lenders. Again, I have to disagree. If the author substituted the word “broker” everywhere the word “lender” is used in this paragraph, I would be more inclined to agree. Lenders are not fiduciaries. Lenders are the other principal to an arm’s length transaction. We might hope that lenders step up to something akin to fiduciary standards of care as a matter of good business practice, but it is incorrect to suggest that they do so by way of a legal requirement. An animal trainer can train a tiger to act more like a house cat, but one cannot make laws that require a tiger to be a house cat. Opposing parties in an arm’s length transaction are just that. We can ask them to be fair, we can be pretty explicit about what is or is not fair, but we cannot demand that one party always act in the best interests of the other.

  10. Why does the borrower want the loan.
    Can they afford the payments.
    Do the understand the cost in relation to the benefits.
    Is there a better solution for them other than a full refi to fulfill their needs.
    We need to be prepared to help them think their actions though as if it were our decision about our loan.
    We need to be responsible for our actions since we are in a positions tom do great financial harm.

  11. I definately agree with this article. I do believe that mortgage brokers and LOs job is to inform and consent to their potential clients and it is for the clients to decide which program to go with. As long as clients see the full picture and well comprehend the program presented to them, it will minimize the misunderstanding and the risk they might encounter once they accept the loan program. As I mentioned in the other article comment, I feel that mortgage brokers and LOs are considered “mortgage doctors” therefore the standard that we keep should be as high as doctors, lawyers and other professionals.

  12. I have provided an “Attestation to Benefits” form to all refinance customers for a few years now. My use of this form has been more of a checklist so the borrower understands the terms of refinancing and the benefits of doing so. A borrower must understand why they are refinancing and be informed of the benefits of doing so. FHA has required the generic comparison of FHA vs. Conv. what is the difficulty of using the borrowers actual figures so they can make an informed decision. The lowest rate is not always the best rate. Sane can be said for fees. Informed choice would put the burden of “best” decision on the borrower where it should be.

  13. I worked for a lender “x” for a few years. A lender that prided itself on ethics, loyalty, responsibility, do the right thing, etc. We presented options to the homeowner and had a matrix for benefit to borrower. Options were presented to the borrower and the matrix determined the best ‘option’ for the borrower. Sometimes the borrower would pick the option that the matrix would determine less benfit then others and all the borrower was looking for was the lowest interest rate. I agree with Pam, ‘that the lowest rate is not always the best rate’, but most borrowers that I worked with did not care, they just wanted the lowest rate. In my experience, regardless of how much I educated ‘most’ borrowers, they are all about rate, not benfit or loan program per se. Most borrowers after a year forgot what loan program they got, but they do remember that rate! TO protect ourselves from future legal ramifications, a loan benfit statement from the borrower or “Attestation to Benifits” should be signed.

  14. I believe the borrower is ultimately responsible for making a educated decision as to what loan terms work based upon their specific needs. We are not doctors who get paid at the time of service from either the consumer or insurance provider. We are not attorney’s who charge on a hourly basis or take a case on contingency in hopes of making more money than thier customer.

  15. Again, true fiduciaries should be able to charge a fee for counseling.

    Can they? The jury is still out.

    Most clients I deal with are very intelligent, and understand quite well what they are doing.

    If I believed I was dealing with someone of seriously limited intelligence, I would request a 3rd party (family member, someone from their church) to be present, and review the loan together.

    Most loans today are not too difficult to understand. It’s too bad that option arms didn’t have a requirement like reverse mortgages have, where the borrower HAS to review the loan with a completely independent counselor.

  16. The more knowledgeable the borrower is the cleaner the loan. I’m for a set check list that must be asked of the borrowed verbally to clear the communication lines. What is safety for the borrower is also safety for the originator!!

  17. Hi Roger,

    Have you considered referring homeowners who don’t understand you or who you’ve determined to have limited intelligence to an attorney instead of to a family or church member who may not be able to explain mortgage lending documents and laws?

  18. Hi David,

    Informed consent is not a checklist but a process. Surely we could come up with a checklist for housekeeping sake but a check mark in a box does not mean the LO has delivered full informed consent.

  19. @ William, “I believe the borrower is ultimately responsible for making a educated decision as to what loan terms work based upon their specific needs.”

    That’s fair, as long as the borrower is given all the possible consequences for each loan product. In the predatory lending days, this did not always happen.

    “We are not doctors who get paid at the time of service from either the consumer or insurance provider. We are not attorney’s who charge on a hourly basis or take a case on contingency in hopes of making more money than thier customer.”

    Actually as of June 2008, Mortgage Brokers and LOs are fiduciaries. You do have the ability to charge an hourly fee similar to a doctor or a lawyer. See Senate Bill 6381.

  20. It’s amazing to me that we have had disclosures for the Equal Credit Opportunity, Fair Credit Reporting Act, Privacy Act etc…… but have not been able to adequately formulate a disclosure that is easily understandable to the average consumer. By the time they get to the point of signing the loan application and disclosures, their patience is running out. Before setting appointments to finalize the 1003, I will send over the general disclosures to my clients ahead of time so that we can concentrate on the details of their loan during our meeting. I can talk until I am blue in the face about the details of the multiple disclosures, but 9 times out of 10, they are half-heartedly listening and waiting for me to get to the numbers.

  21. Oops….sorry, I didn’t fully finish my second sentence from the previous post….What I was referring to is a better disclosure to explain the rates in comparison to the fee i.e. a higher rate can lower your fees using the YSP. The TIL really tends to send the consumer into confusion!

  22. I agree with this article, and that we should disclose, disclose and disclose again. What I have noticed with borrowers is that most of the times they wholeheartedly trust in the lender they’re working with, they may not like them, but they trust them. Offering for them to get a 2nd opinion often doesn’t yield any results, they typically stay where they’re at for whatever reason, i.e they don’t want to start the process over again, and think they will get the same thing from a different lender. Some of your more savvy borrowrs know that this is not true, and will seek out multiple lenders, always angling for a better rate, better fee, etc. Your average borrower does not understand most of the forms in a loan package. The TIL is a joke. Disclosures need to be made more user friendly.

  23. Informed consent of all borrowers is instrumental in achieving that fiduciary relationship with the trust all our clients deserve. If we are holding our services out to consumers as professional mortgage brokers the consumer deserves a true advocate.

  24. Every client has a different level of learning, it is our responsibility to teach to each level what they are looking at whether it be a TIL or GFE or any other paperwork. It is a challenge which makes this business fun and exciting.

  25. We do have an informed consent form that notifies borrowers itemized, of loan amount, rate, lender and 3rd party fees, and lock period that is signed by me and the consumer so thier really isn’t any grey area. The one thing that continues to come up later is potentially changing of fees based on appraised value with Fannie and Freddies risk based pricing on conventional loans, but these types of necessary disclosures eleviate and confusion last minute and is the responsibility of the originating lender.

  26. You can never over dislcose in my opinion. Every applicant is different and may not need for one who is purchase a few homes may not need special attention to evey form but there are those that these forms are the first time they are seeing them so I feel giving extra attention to these first time applicants keeps every one on the same page and the communciation open with a clear understanding of fee’s and expectatations of the loan process.

  27. The article is treading on some very shakey ground in a number of places. Do I feel there needs to be a fiduciary responsiblity from the LO to the buyer. No, and I don’t beleive one will ever exsist as at that point you’re not talking about being an Loan Originator any longer, you’re talking about being a Loan Conselor. And that is not what we do.

    I feel we disclose more than enough at this point for a person of average inteligence to grasp what is being done AT THEIR REQUEST. I do not feel that we need to dislcose more. At this point in time, the new 2010 GFE is doing what should have been done long ago, it’s requiring us to stand by our quotes. No argument from me there.

    However, when you start to say the standard needs to be higher, that’s where you lose me. We already have several forms that require the borrow to sign as proof they have read and understand the material before them and further, that they are authorizing us to proceed. Short of placing a blanket requirement for everyone’s loan to be passed thru a Moral Loan Tester on a national level, how in the world do you propose to enforce the ” fiduciary duty” you talk about in the article? It’s impossible. It can’t be done and it shouldn’t be done.

  28. Hi Shawn,

    “how in the world do you propose to enforce the ” fiduciary duty” you talk about in the article? It’s impossible. It can’t be done and it shouldn’t be done”

    It’s already being done right now.

    Broker LOs in Wa State owe fiduciary duties to their clients. Senate Bill 6381 was passed in Wa State in 2008. It’s already being done.

    The way it is done with traditional professional groups is through a professional association. For example doctors have the American Medical Association and Lawyers have their Bar Association. CPAs, engineers, nurses, and so forth, all have professional associations helping guide their member’s ethical conduct.

    Shawn, LOs know more than the average random consumer as to all the different moving parts in a mortgage loan. Yes, they sign forms that indicate they’ve received the forms but I’m not so sure that every single form they’re signing, they’re indicating they UNDERSTAND what’s in the form. Take a look at the 4 to 6 main documents. Where does it say, “I understand what I’m consenting to?”

  29. Instead of comparing LO’s to doctos and lawyers.. why not comapre to a profession which is a more related component such as a financial planner. I meet annually with my financial planner and am asked to complete a questionairre about risk/investment tolerance. The series of questions is based on today and future needs. She then supplies me with options so I can make an informed choice. Matter of fact.. so does my Cpa. This topic goes back to my last post on fiduciary duties. As a professional, I can run the math equations.. as a human/consumer.. what’s not a benefit to my specific scenario may be a benefit to my clients.

  30. I do my best to make sure my clients know what they are signing. I like to watch peoples eyes and see when I am loosing them so I start to ask questions of them at that point. I know they are overwhelmed at all the paperwork but I really try to make sure they understand all the important things and go over the high points again after we are all done. The page they really want to know about is the GFE anyway. I really try to make them an active part of their own home loan. As I have said before, I like to educate people and make them comfortable, this buisness is all about referals. If at the end of the day they feel things changed or they did not understand, they do not trust you with their friends. Referal line stops.

  31. Oh my goodness, no third party input! I try to fully inform my client, ” the whole big picture” mentality. Everyone sees things from a different prespective bringing another opinion into the mix would be even more difficult. I like the surgeon comparison 🙂

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