Informed Consent Process

This UW link provides a brief explanation of the informed consent process in medicine.  Is it possible to use these elements to build an informed consent process for the practice of mortgage lending?

From the UW: 

What are the elements of full informed consent?

  • the nature of the decision/procedure
  • reasonable alternatives to the proposed intervention
  • the relevant risks, benefits, and uncertainties related to each alternative
  • assessment of patient understanding
  • the acceptance of the intervention by the patient
  • Many LOs and mortgage brokers tell me that they have already enacted some of these processes informally with their clients.  How can we begin to create a formal informed consent process?

    In order for a client’s consent to be valid, he or she must be considered competent to make the financial decision and his or her consent must be voluntary. It is easy for coercive situations to arise in real estate and mortgage lending.  For an example please read this story about Joe Six Pack.  In this story, Joe felt somewhat powerless and vulnerable. To help empower clients like Joe, mortgage brokers can make clear to their clients that they are participating in the decision, not merely signing the application and disclosure forms.  With informed consent, the mortgage broker would be obligated to provide a recommendation and share his or her reasoning process with the client. With informed consent, the broker/LO has a high duty to make sure the client understands the information provided.  This means the dialogue would be in layperson’s terms and the broker/LO stops periodically to check for client understanding during the dialogue.

    Questions for Brokers and LOs:

    How do you explain the differences between mortgage products? Example: Difference between a 30 year fixed and a 5 year interest only.  Yes, the 5 year IO loan has a lower payment but what are the possible consequences?

    Fiduciary duties and informed consent requires more than just handing over disclosure forms and collecting signatures.  How do you know that your client understands everything you’re saying? 

    22 thoughts on “Informed Consent Process

    1. A good LO not only explains the particuler product but also the benefits and pitfalls as it pertains to each borrower. No two borrowers are the same and a program that is good for one may not be so for the other. I always try to ask questions. ie.. what is your risk level, where do you see yourself in 2,3,5 years down the road, what is your exit strategy, if you do this now how does it help or hurt in the future, are their any other options.
      I always try to talk in lay terms and ask them to interupt at any point they are confused or have questions. Sometimes I tell them to go home and think about it for a while. If a person is confused or unsure the loan may not ever get to closing. Why would I want to waste my time for a deal that might never pay out. Give the information , make sure they understand, then have them decide.

    2. What an awful article, but how true! No matter how much due diligence one loan originator can do to educate their clients, is there really any real way to make sure a loan originator knows their client fully understands? Sometimes clients are afraid to ask questions becuase they feel intimidated and dont want you to think they are stupid. I know that sounds silly, but its true. They just nod their head and say yes pretending. And other times, clients might understand, but later forget. Its almost like you would have to give them a pop quiz or something – but thats not really an ideal situation. I wouldnt be opposed to clients having to take an educational course before completing their purchase or refinance transaction. But who is to say they will learn – or pay attention for that matter? In Washington state, we are required to provide our clients a disclousure booklet called buying your home, a guide to settlement costs and helpful information, plus other booklets for ARMS, interest only loans and helocs (if applicable). But again, who’s to say they will take advantage of this reading material.

    3. Using layman terms and not industry terms will help the borrower understand the loan product and how it will effect them. Although LO’s give borrowers the HUD Settlement Booklet, I have my doubts that borrowers read it. It is awful boring. Having several conversations in a relaxed atmosphere that encourages questions from the borrower, patiently explaining different loan scenarios and listening and responding to borrower concerns are several ways to make sure your borrower understands their loan and the loan process as a whole. Ask your borrower questions and LISTEN to their answers. If you listen, you’ll know if the borrower understands or is just going through the motions.

      However, Joe Six Pack seems to have been a victim of an aggressive realtor who did not disclose the purpose of earnst money and what could happen if he didn’t go through with the sale. Not wanting to lose $10,000 EMA is quite the incentive to follow through with a loan you cannot afford. Before the borrower got over his head in his offer, the LO should have discussed the increased monthly payment with Joe Six Pack and made sure that he was comfortable with the higher payment and encouraged him to “think” about what is most important to Joe, what his comfort zone is and how he’s going to handle the larger payment and other expenses attached to owning a home (repairs, increased property taxes, etc.).

      LO’s cannot predict how the mortgage industry is going to change, what programs will no longer be available, and what new restrictions will be put into place preventing a borrower from qualifying to refinance. Best laid plans to improve a borrower’s financial situation in the future can fail due to changes in the market, the borrower’s personal situation, property values, etc. There is never a guarantee and of course borrowers should be made aware of this BEFORE they accept a loan.

    4. The more your articles have made me think about it, the more I come to the conclusion that I cannot be sure the client understands unless there is some form of borrower qualification that involved them becoming educated and proving it by passing a test.

      The basis for this thinking comes from Robert Kirosaki in his calls for financial education though the explination of changes in the IRS code in 1974 – ERISA – which laid the groundwork for IRA’s and 401ks and the move away from pensions. On the surface it seemed like a victory for the worker, but absent the accompaning financial education, it’s proven to have dire consequences.

    5. Joe Six pack should meet with LO and find out how much he can afford and the consequences that he will face later before meeting with Real Estate Agent.

      Most of my clients speak little English or no English at all. But they make good income to keep up with the mortgage payment. I explain the loan programs that are available, tax increase, insurance, and monthly payment to my clients before I referral them to Real Estate Agent and I recommend the Real Estate Agent to do the same. Previous clients are another success to get more referral and to market myself as an LO.

    6. Good god, The realtors I know could have somehow found a loop hole to get Joe his earnest money returned, say he lost his job. Since there was several back up offers it appears the realtor wasn’t about to lose a sale especially on the buyers behalf. Where was the educating LO and realor and the circumstances of the sub-prime loan. It appears the borrower was getting close to the payment he wanted but the circumstances would be nothing but DISASTER. This again is something I’ve seen lately with borrowers being put into loans that they really can’t afford, stated income, pre-payment penalty, etc.

    7. The article asks the question “is it possible to build an informed consent process for the practice of mortgage lending?” I have a problem with that question.

      Here is where the proposition of the article runs into trouble. The question posed revolves around the “practice of mortgage lending”. What is “the practice of mortgage lending”? That sounds to me like we are talking about what mortgage LENDERS do. Mortgage lenders are not fiduciaries. They have no duty to do any of the things listed as “elements of informed consent”. They are under no obligation to serve the interests of the borrower. Quite the opposite, the very nature of their business generally conflicts with the interests of the borrower. And, in the case of brokered transactions, the lender does not even interface with the borrower directly. How can one even suggest that these “elements of informed consent” are applicable to lenders? They are not and cannot be.

      The story of Joe Six Pack demonstrates a compelling need for borrowers to have access to and be served by people who genuinely and as a matter of law endeavor to do what is in the borrower’s best interest. Had Joe been working with a mortgage practitioner who was living up to a fiduciary responsibility to Joe’s interests, Joe would not likely have been put in that situation. But Joe apparently worked with a lender. The lender-borrower relationship is arm’s length. That is to say it’s based on caveat emptor, let the buyer (borrower in this case) beware. The borrower must presume that a lender has conflicts of interest that may or may not be disclosed. In working with any practitioner in an arm’s length transaction, one must look out for his own interests. While a borrower might hope that a lender has his interests at heart, it would be folly bet his future on that hope. Joe didn’t fully understand all he needed to understand, and because no one was looking out for Joe, he made bad decisions.

      What is the solution? Regulators seeking to make the arm’s length transaction fairer usually take the approach that more disclosure is the solution. I believe that by passing SB 6381 this year, Washington State provided the solution. Now it’s up to the broker industry to implement it.

      The article poses the question, is it possible to build an informed consent process for “the practice of mortgage lending”? The answer is no. Such a process would ask lenders to take on responsibilities that conflict with the nature of their business. But what about the practice of mortgage brokering? If we shift the subject of the question and talk about mortgage brokers instead of mortgage lenders, as we should since mortgage brokers have broad fiduciary responsibility under SB 6381, then the question itself is ill posed. All the listed “elements of full informed consent” are part of what a fiduciary must do. We do not need an informed consent process to impose these duties on the relationship between a broker and his client – they are there now as a matter of law. The real question for the mortgage broker industry is this – when will we build a set of practice standards for mortgage brokers? Practice standards are the standards of practice by which a broker fulfills his fiduciary responsibility. The list of “elements of full informed consent” given in the article is actually the beginnings of the outline of such set of practice standards.

      To further the discussion of “informed consent” in the mortgage broker business, let’s look at what is going on in other parts of the financial services industry. In the securities business we see parallels to what we are only belatedly recognizing in the mortgage industry. In the business of investments in securities, investors can choose to work with a stock broker (technically, a registered representative of broker-dealer), or he can choose to work with a Registered Investment Advisor (or representative of an RIA). The broker-dealer and its registered representatives generally do not owe broad fiduciary duty to their clients. The RIA and his representative do owe broad fiduciary duties to their clients under the law. Increasingly, we see practitioners who are licensed as both a Registered Rep of a Broker-dealer and of an RIA. Under one license he is not held to a fiduciary standard and under the other, he is. The question arises, under what circumstances does such a “dually registered” practitioner owe a fiduciary duty to his client and under what circumstances does he not owe such a duty. And under what circumstances is it permissible for a practitioner to switch rolls while working with a client. Some practitioners present themselves as investment advisors, with broad fiduciary duty, and then after providing advice, shift rolls and become the registered rep in selling the client the investments that have been recommended. Some contend that such a practitioner can ethically and legitimately begin the relationship as an investment advisor, a fiduciary, offer advice in that capacity, and then switch rolls and become the salesperson, setting aside his fiduciary responsibility, by obtaining the client’s “informed consent”. Informed consent is presumably the process by which the client acknowledges the transition from fiduciary to non-fiduciary. In other words, by signing the informed consent form, the client is saying, “I understand that up till this point in our relationship your effort has been dedicated to serving my interests with loyalty and utmost good faith, a legal standard you were bound to, but now I agree to let you sell me products that may or may not serve my best interests, with no legal responsibility to me to ensure that those products do serve my best interests.” First off, what fool would knowingly agree to such a transition. Second, given what we know about human psychology, is it even possible for a client to “knowingly” agree to such a proposition? Can a fiduciary, who is bound to act only in his client’s best interests even ask a client to consent to such a shift in legal responsibility – such a recommendation itself would seem to violate the fiduciary’s duty to his client. Is it not the equivalent of the fiduciary saying, “I believe it’s in your best interest to work with me under circumstances where I am not bound to serve your best interests”?

      On the website, Ron Rhoades, JD, CFP®, and author of the website, explores this issue in detail in his paper titled, “Managing Conflicts of Interest: The Limits of Disclosure and Informed Consent”. While this article addresses the situation as it applies to investment advisors and broker-dealer registered representatives, the parallels to the mortgage industry are unmistakable. Where in the securities industry the broker-dealer and its registered representatives are in the business of sales and work in arm’s length relationships, we have mortgage lenders (including correspondent lenders). Where in the securities industry we have registered investment advisors who have a fiduciary responsibility to their clients, we have mortgage brokers. And where the securities industry, as discussed in Mr. Rhoades’ paper, is wrestling with the issue of “dual registration”, where a practitioner is both a registered rep of a broker-dealer and a registered investment advisor, we see mortgage brokers who operate as both broker and lender. The issue of informed consent Mr. Rhoades is addressing is as I have described above, the issue of if, when, or how does a practitioner effectively “switch hats” in the midst of a relationship. Here is where “informed consent” becomes the issue. Is it possible for the client to give informed consent to such a hat switch? This is an important issue that has yet to be raised within the mortgage broker industry. And it’s time to raise it. Can I begin a relationship with a borrower as a broker (or LO of a broker) with a fiduciary duty to act only in the borrower’s best interest, and then later switch rolls and play the part of the lender (correspondent or otherwise) and thereby abandon my fiduciary responsibility? Clearly I cannot without the borrower consenting to such a switch. But can there be a means, legal and ethical, whereby the borrower consents to such a switch in the nature of the relationship? I think not.

    8. In the Joe Sixpack article, the real estate agent clearly ventured outside the bounds of common sense to get Joe to sign for a loan. Wait a minute, there weren’t really any bounds to go out of. Maybe someone should “provide some guidance” here and also provide some enforcement.

      Is it possible to build an informed consent process? Sure it is, though it would work at odds with the very sales-oriented nature of the business. In order to be successful, it would require one to shift from a transaction-centered approach to a client-centered approach to business.

    9. After reading the article, Joe Six Pack, my heart went out for his family. I am pretty sure there are huge number of clients who are or were in similar situation. This is another reminder for us brokers/LOs about the importance of our job to our clients. Since we are the mortgage specialists, we have an obligation to our clients to well inform and consent the pros and cons of the each programs that are offered to them by the lenders. From the beginning of a loan application to closing the loan, there are many people involved in the process. To prevent future victims like Joe, we all need to do our own part and do it right. As brokers/LOs we are the first line of defense to any risk that client might encounter. As long as clients understand the consequences, I believe brokers/LOs have done their job correctly. If the clients still choose to take the risk, it’s the choice they made.

    10. Using a medical analogy prior to surgery I have met with my surgeon and have gone over a list of risks, complications, pros and cons and expected results. All this is done verbally and in writing and I am also given time to ask questions, ask for further clarification of things of which I may be unsure by signing on the dotted line I am giving an informed consent which in my opinion indicates I have an understanding of which I am about to partake. I’m sure there are number of people who weren’t or haven’t been clearly informed but when you sign on the dotted line you are acknowledging you have an understanding of the information of which you are agreeing to. As with almost anything we do there is some type of risk involved.

    11. I agree with Yoshiho, ‘Since we are the mortgage specialists, we have an obligation to our clients to well inform and consent the pros and cons of the each programs that are offered to them by the lenders’ and to further that, we also should have an obligation that we get our ‘clients’ involved! What do I mean by ‘involved’ in the process? Well, if you have had experience in this industry its all about HOW FAST we can get a loan done etc., We owe an option to our clients and let them know its OK to shp around and seek information. If your client is loyal to you and trusts you, its then the client makes the decision to move forward with you armed with infomormation.

    12. I beleive that we all tryt to get our clients involved in their transaction and we try to explain the pro’s and con’s of each of their loan options. I can’t tell you how many times the borrower decides to take a loan that I would not recommed. We should not be held responsible for a borrower’s bad decision.

    13. One LO dilemna needs to be further explored.

      If a borrower qualifies for a program, (whether we think the program is prudent or not) we are obligated to tell the borrower the truth. We can offer an opinion as to what we think is the wisest course of action, but in a free society, the consumer gets to make the decision. Sometimes, my customers choose a course different than I advise, and I believe I am professionally obligated to assist them in a carefully considered choice, even if it differs from my opinion.

      Of course, we also enact laws to make certain unwise choices illegal. Often those laws are enacted after the fact.

    14. We must make sure the borrower is not in over their head financially and that they understand the long term results of this new obligation. It may be that we bring in a third party to help us communicate. We are always in a position to do great harm and anything in the process that rings a danger bell we must as professionals do every thing we can the protect the borrower. If we don’t do this it is wrong!!!

    15. Hi William,

      Is it possible to imagine a day when LOs decline to work with a homeowner because the homeowner’s “bad” decision is going to put the homeowner in a worse-off position than where he/she is now?

      Today, LOs say “if I don’t make the loan then this person will go to one of my competitors so I might as well do it.”

      Is it possible to imagine a day when your competitors would not make that loan either?

      I wonder how many people in foreclosure today would have been better off as renters.

    16. Educate, Educate, Educate your clients. It may not be heard the first time you review all of this information with your clients, but I do find it does begin to sink in as the dialog matures throughout the relationship. Each client is a different patient and requires different attention to the various aspects of this process. Like surgery, buying a home is very emotional and tends to bring out aspects of ones character that may not normally be seen by their friends, family or peers. If I work with a first time homebuyer, I still utilize tearouts from the old “workbooks” that use to be required for the low down programs of the 90’s. Preparing a budget is essential and required for a first time homebuyer if they are requesting me to assist them with this purchase! Looking at the numbers in black and white is a reality check. It’s amazing our school systems allow them to graduate high school without these skills.

    17. My manager and I used to offer free refinancing/home buying seminars to borrowers on a monthly basis. It surprised me that the general population is not interested in learning about their mortgage, and what it means to them. It seems that people will research what kind of refrigerator to buy, but will pick up the phone and call anyone that sends something to them in the mail, without doing any research on what loan programs there are available to them or what it means to them. We can talk until we’re blue in the face to get them to understand the terms of their loans, and if they nod their head and say yes, they understand, then we have to take them at their word that they do understand what we’re disclosing. In most cases, they probably don’t, but what more can we do to insure that? Bottom line is that it’s their home, their money, their free will, it’s their choice, and there are plenty of opportunities out there for them to become more educated if they so desire to.

    18. The process of informed consent is centered on taking a moral high road and putting your clients needs first and foremost at all times. LO’s need to understand the duty we have to full and informed disclosure

    19. The Real Estate Agent did not follow the proper steps to ensure this borrower was qualified for $345,000 Loan. I really believe that before a consumer can sign a Purchase and Sale, then need to review and sign information concerning the LOAN that they will be taking on. This is for the rest of thier life, not just a day or one year or two years. The initial process with a client is so important for them, I always believe that “as it begins it ends”, this story did not begin well and did not end well. When I explain an interest only to my clients I preface this type of loan with “this is a deal too good to be true” and then explain the pitfalls.

    20. How do you explain the differences between mortgage products? Example: Difference between a 30 year fixed and a 5 year interest only. Yes, the 5 year IO loan has a lower payment but what are the possible consequences?
      A: I always explain the Pros and Cons of each and every loan. Whether it is a 30 fixed or a 1yr ARM. As we all know, there are some LO’s that sell nothing but payment and completely gloss over the finer details i.e. adjustments to ARMS, pre-payment penalties, improtance of Margins and Indexes for ARMs, etc.
      I try to present at least 2 options for the clients (if not more) and explain what makes them different other than just the amortization or rate.

      Fiduciary duties and informed consent requires more than just handing over disclosure forms and collecting signatures. How do you know that your client understands everything you’re saying?
      A; By turning the tables on the client. I ask them the questions such as “What will the max adjustment be after the fixed period” and “What happens if the appraisal comes in lower than expected”….of course this is done AFTER thorough explaination on my part for each loan scenario and disclosure presented to them.

    21. How do you explain the differences between mortgage products? Example: Difference between a 30 year fixed and a 5 year interest only. Yes, the 5 year IO loan has a lower payment but what are the possible consequences?

      Quite frankly I haven’t done and ARM in 3 yrs, but if i were still originating them, the fixed period ARM’s are quite easy to explain how long the rate is fixed and the corresponding caps, index and margin. Slowing down believe to explain and ask if they are following along is a big part, as well as offering to answer any future questions while in the process.

      Fiduciary duties and informed consent requires more than just handing over disclosure forms and collecting signatures. How do you know that your client understands everything you’re saying

      In today’s lending environment with just about every loan being a conforming fixed rate, I am no longer discussing pre-payment penalties, index, margins, or Neg. Am. I will say that providing a comprehensive breakdown of costs scenarios, loan scenarios and payments, typically can enlighten many buyers to the different ways of structuring a loan. I’ve found by providing options intead of today’s “par” rate leads to customer awareness of the rate/fee correlations thus giving them the opportunity to choose.

    22. Explaining loan programs. I haven’t done an arm is several years but when I did I liked to show people several options, I like to give 2 GFEs so they can see the numbers on both. I explain the pros and cons of all loans in discussion. I like to enter into a conversation not a teaching lesson. I want them to understand the differences in this process also. Again, I watch their eyes to be sure they are still with me! To much information makes them confused so I typically just go over the top two that fits them best. I try hard to make sure they are a part of the process not just being drug along until we hit escrow.

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