Solutions to the Mortgage Lending Crisis

The mortgage industry crisis is a gift.  Mortgage lending can emerge from this mess and transform itself. I have been co-writing about predatory lending and the ambiguous professional status of retail mortgage salespeople for over 7 years. The industry has traded consumer respect for massive profits.  It does not matter where you work: banker, broker, credit union, consumer finance company. It does not matter what you call yourselves: Loan officer, loan originator, loan consultant, mortgage planner.  The average consumer does not understand the differences. 

Solution number 1
All retail mortgage salespeople, no matter where they work: bank, broker, credit union, consumer finance company, should owe fiduciary duties to consumers, just like a doctor or a lawyer does.  The process of purchasing or refinancing a home has become more and more complex over the past 20 years. This major financial decision is no less important than a medical procedure or legal matter.

Solution number 2
Let’s stop dancing around the ambiguous behavior we call “predatory lending” and define it.  We use to call such actions “fraud.” There are now 24 states that have passed anti-predatory lending legislation.  This means multi-state brokers must deal with a patchwork of state regulations.  A federal solution is in order, but we must also make sure that funds are set aside to regulate any new federal law. An un-regulated federal law is useless.

Solution number 3
If the industry does not like paying higher costs associated with more state and federal regulations, the industry has another choice: Self-regulation.  Any industry is far better of self-regulating rather than letting the government regulate for you.  The last time the mortgage industry had to swallow government forced regulation, we ended up with RESPA and the Truth-in-Lending Act. Oh, yes, these are such fine pieces of federal legislation and so easy to understand that the industry joyfully and voluntarily steps up to the plate every day to willfully comply with these two gems.

Every time I ask mortgage brokers the following question, I get the same answer, 100% of the time: “If you accidentally messed up and violated a federal or state law, would you want one of the competitors in your marketplace to give you a call and say, for example, ‘Hey there, I think you missed the APR on that piece of advertising’ or would you rather have your competitor turn you in to your state’s regulator?”  Everyone would rather have their competitor place a direct, friendly call to them.  There’s this really cool guy named Kant who came up with one way (well he came up with many ways but we’ll just focus on one right now) to help us figure out how to act ethically. He said that if we want something for ourselves (a courtesy phone call) then we must also want it for the other person.  “But, but,” you ask, “what if that other person is our competitor?”

Self-regulation means that the industry understands that consumer respect is only as high as it’s LOWEST player.  Self-regulation is a sign that an industry is moving forward and growing up.  Yes, it will mean requiring more pre and post education, tougher exams, and higher duties owed to consumers, but moving into the realm of professional status also means more prestige, less government oversight, and the fees emerging mortgage professionals will charge for their services and knowledge will be higher because their knowledge and duties will be worth more. If you regularly argue for less government intrusion and you are pro-business, you understand the value in self-regulation.

There are now four national professional associations where retail mortgage salespeople can voluntarily choose to act with professional status, or at least pledge a higher level of honesty than the existing industry associations.  Members of NAMB must simply look like they’re honest. 

Retail mortgage salespeople who join the Mortgage Professor’s Upfront Mortgage Brokers Association will guarantee, in writing, a fixed price for their services up front.  Members also pledge to put their client’s interests above their own.

The National Association of Mortgage Professionals has a Code of Ethics that is better than NAMB, MBAA or NAPMW.

The Certified Mortgage Planners have a more detailed Code of Ethics.  However, all a person has to do is attend a 3 day class and pass a test and I’m not sure I agree with their premise: To help consumers plan how to use their home equity.  This organization has some work to do in its intentionality.  Interestingly, a regular raincityguide.com reader sent me an entire slew of articles that catch lead Mortgage Planner instructor Barry Habib with his pants down recommending consumers choose subprime products, take their equity out of their home and invest it, and other “advice.”  Looks like CNBC hasn’t asked him for advice for a couple of months.

The National Association of Mortgage Fiduciaries Code of Ethics is prescriptive and detailed. We are the only professional organization whose code of ethics prescribes fiduciary duties and we are open to all people in the mortgage lending industry.

Ameriquest and Household Finance, two consumer loan lenders were forced by way of court settlement to cease rewarding their retail mortgage salespeople for steering trusting consumers into high cost, high rate loans. In contrast, Mike Dodge recently penned an Inman Guest Perspective in which his company, Internet Brands, voluntarily adopted a twelve point, detailed, home borrower’s Bill of Rights.

Solution Number 4
Require ratings agencies to do proper due diligence on pools of mortgage backed securities and dis-allow ratings agencies to be paid by the investment bankers; a conflict of interest that certainly should have been caught long ago.

Solution Number 5
Ban downpayment assistance programs which artificially inflate sales prices and are nothing more than seller money laundering according to Tanta. 

Solution Number 6
Require that mortgage companies that purchase leads be held accountable for the advertising used to harvest those leads.  Deceptive mortgage spam, deceptive radio ads, deceptive lead generation websites only serve to circumvent an ethical mortgage company’s attempts to advertise in accordance with state and federal laws.

Some view the mortgage industry meltdown as a threat. I see it as an opportunity to put the industry back on track ethically, to help retail mortgage salespeople transform into emerging professionals, rope predatory lending back into where it came from: the fraud corral, and open a national dialogue on self-regulation. What do you see? What solutions would you add to this list?

45 thoughts on “Solutions to the Mortgage Lending Crisis

  1. As a Loan Originator it is our responsiblity to make sure that the consumer has a full understanding of their loan. We have to be held accountable in our fiduciary duties. When a consumer purchasing a home it is an investment and looked at as retirement planning. Our state and federal regulators need to implement a stronger code of ethics requirements accross the board.

  2. I do feel that one day we will break out of this Mortgage crisis. With the more strict laws and regs, the industry is really going to see a “weed out” of Loan Officers. Lending will become more of a respected career in years to come. I don’t think that it’s there yet. It will take a while for the average consumer to not feel that they’re being ripped off every time they take out a home mortgage, but eventually they will grow to trust mortgage lenders again.

  3. When the licensing regulation came about it “weeded’ out those predatory lenders and those LO’s who really should not have been lending. This was a good thing thing. Those people gave good Lo
    s a bad name and it hurt our industry. It would be nice to see the reforms in government and the banismnet of those who acted unethically, but it would also be nice to show applause for those who acted ethically when they had the opportunity to act otherwise. Additionally, I would like to add, it was not only the Lo’s who were so unethicial it was the lenders seeking the loans who “allowed” such occurance, and an allowance of such an inflation of “real estate’ market. It is sad to see customers who cannot refinance out of the nasty loan they were in simply because they are now negative in their house 3 years after their purchase. I hope the mortgage crisis ends, not just for us but for everyone. Loan officers need loans but customers need solutions to their financing situations as well.

  4. Self regulation is the best way to police an industry because the industry itself knows the details that are needed and not needed, not the politicians. The new laws that are getting passed that are designed to help protect the consumer in reality are making it worse for many of them.

  5. I agree with solution 5 and 6. I believe this is a wake up call to LO’s and leders both. This is what happens when you get greedy. The Lo’s couldn’t do any thing unless the lender approves, so these lenders that want to get any one in a house at any cost wasn’t looking out for the cusumers best interest, they were lining there pockets. We as Lo’s need to care about our clients, not just look at them as a pay check. If there was more LO’s out their that really wanted to help this might not be an issue. You will allways have those individuals the want a house no matter what, they will do what ever to get one. they will evintualy find someone to lend to them. I agree with Laura we need to help our clients understand what is going on with them, not everyone is in the possition to buy a house and thats ok, some day they will be, but putting people in houses, that aren’t capabel of paying the morgtage payment, so we sell them on interest only, that’s just setting them up to fail and lose everything and shame on the lenders and LO’s for doing that, If we can’t protect them no one will. We do need a code of ethics and we all should feel bless to live by them.

  6. No offense all, but self-regulation is the stuff fairy tales are made. I have seen hundreds of high-visibility lenders come and go over the years whose lending practices crossed over the line so far that they were outrigt criminals. We all knew who they were and the type of people who worked for them. Even in this market each of us know at least one company who is still doing this kind of lending.

    Fiduciary lending always comes down from the top. If you work for a crooked company you’re probably a crook. The state has the responsibility for putting these folks out of business and for holding the rest of us accountable.

  7. Even with federal regulations loop holes will be found and exploited. There is a large portion of the industry has has passed the sad excuse for state testings and applications. The WA state test in my opinion was a joke. I have been in this industry over 20 years and watched the evolution.

    Until there is an equal playing field between banks and brokers in the mortgage realm it will be difficult at best to make fair regulation. I agree that self regulation of an industry is far better than goverment envolvment in making those decisions. However there needs to be a shift in thinking to doing what is best for the consumer…rather than your own personal gain.

    I am all for free enterprise however the common customer doesn’t understand the lovely indept nuances of goverment disclosure and doesn’t take the time to read it either. Disclosures need to be in plain English for the consumer. Loan agents need to clearly explain the product and clearly work as an advocate to place a borrower in a loan that they can pay. Realtors need to sell a home within the actual budget of the client not the wishful budget of the client.

    Until there is a common ground in which all real estate professionals can agree on it will be next to impossible.

    I would like to see that all real estate professionals test based rules and regulations and then on specific test cases. Applying the rules and regulations currently out there into a “real life” scenario. Test cases with documentation to review, ratios to address, properties to consider, and fees to quote and disclosures and forms to provide. Just because someone can pass a test on what the rules and regulations are doesn’t mean that they can apply them.

    Applying rules and regulations to an actual scenario is what will determine additional educational needs. This should be done prior to issuing a license.

  8. I’m not really sure if there are any surefire fixes for the current situation we are all in, but I do have an idea that could possibly help.
    > the financial institutions could renegotiate interest rates with the homeowners that are falling behind in their mortgage payments, this would still allow for a positive cash flow and allow the homeowners to stay in their homes. at some point the mortgage holder should realize that reduced income is more desirable than a vacant foreclosed home in a down market

  9. I’m not sure that many American Companies are built by “Self Regulation”. That is something you can only do as an individual. The truth is a majority American’s are greedy and do not understand how grateful they should be to live in this country. The best thing about this falling economy is people have come to realize they cannot just go buy whatever they please. Everyone needs to take advantage of this situation and ultimately “pay it forward”.

  10. I agree with most of the solutins in this article. Lets look at all this in a different way: compared to the number of years a person needs to study to become a stock broker, CPA or attorney how many years of education and and how many exams do we have to pass to become a mortgage originator? Yet another way to look at this: how much a CPA could affect solvency and financial stability of a household as campared with a mortgage consultant? I have clients that I have to force them to sit with me to discuss their financial goals and reasons for them obtaining a mortgae, purchase of refinace.We need to have oversight,by us or by government, that is it.

  11. Finding the Ethical solution to our problem is far from being over. I believe the solution to our current crisis starts from the bottom up. Consumer- as a consumer, we have to start asking questions and be selective in our choice on who to work with, regarding LO, Lenders, ect. U.S consumer are know to spend more than they can afford, therefore, we have to start learning to save and only spend what works for us.
    Lenders, LO, and Brokers – we all must be responsible for ethically guiding the consumer into products that really works for them for both present and future. Have guide line and condition that really works for them.
    There really shouldn’t be any differences between Lenders and brokers when it come to presenting information to clients (ie- YSP- Lender isn’t require to show it on the GFE, where the broker does). I also believe that all LO must be correctly train. From what I understand, most LO fail because there is NO standard system that is set in place for training, and we wonder why LO isn’t prescribing the right products for the public.

    Well, there’s soooooo much more that we can do and very little time to do all of it.
    The real solution is simple: If Lenders, government, LO and consumer treat each other the way, they want to be treated, then we would all be fine. 🙂

  12. I am in favor of solution 5. It could help eliminate future problems in the overall buying and selling of residential properties.
    I found the Court settlement doc very interesting. Again a lot of money changing hands yet no admission of any wrongdoing. I also believe self regulating would probably have better long term results as opposed to Gov. Regulations. I also agree with solution 4. Conflicts of interest always wreak havoc at some point.

  13. Seems to me as a new comer to this business that the six solutions advocated plus all the other established ethical and regualatory criteria should be sufficiently adequate to make the Mortgage Industry a well Regulated and highly Ethical Business Profession.
    It begs the question again as to how well the high standards are practiced, maintained and demanded by the Industry,
    Continuing Professional Training / Education at all levels to maintain a high degree of professional knoledge and competence keeps everyone industry sharp no matter in which area of the Mortgage / Real Estate they are involved.

  14. Every set of comments has some merit and overall leave little to be added. I have been “around” the profession for several years and had little or no inclination to become a LO. Finally I found myself giving “comfort and understanding to people and realized most people — even many LOs — have only the narrowest understanding of mortgages. The RE Agent wants to sell a house, another agent wants her client to buy a house, the client wants a house and the LO wants to make the loan. The extent of the majority understanding about mortgages is “WHAT’S THE RATE?” WHAT’S THE TERM? HOW MUCH IS THE PAYMENT?”
    Having been a speaker at various business events, a couple of times I asked for hands of all those who have ever signed a mortgage. Then I asked again for the hands of all that felt they understood what it was they had signed and its ramifications. NEVER A HAND!
    That’s why I became a LO. I consider myself an ethical person and a professional — regardless of what I’m doing. I find many in this business who do not and there’s the rub! We must provide a real value. If we don’t perceive our services as having real value, we simply degenerate into rate wars. Conversely, if we are perceived to provide value, people will gladly pay a fair fee for good service and a feeling of being taken care of — not just being taken!.

  15. I love Solution 3 – self regulation. I work with Primerica which we have a mortgage that is simple interest. This is a higher interest rate as explained to each and every client. But because it is simple interest you pay only the interest owed therefore not the total amount borrowed and the interested owed from the last payment. My mortgage though a 30 year mortgage will be paid off in 14 years … due to my biweekly automatic (not charged for the service) payment to the loan. I asked for a payment that would be paid off … also I will have a decrease of interest in two years because of the payment being consistent for two years (biweekly payment plain that is not charged) – mortgage companies don’t offer this and because of the interest rate people are afraid to listen to what they really get out of this… it’s not for everyone. Prior I had Countrywide mortgage and tried to do this 1) they lost payments couldn’t do the biweekly unless you paid for it 2) poor customer service 3) PMI was not taken off because of whatever reason they could think of as an excuse … just discussing mortgage service.

    Totally love the self regulative because as every one is interest aware … when I was going around to banks they gave me NOTE rate not APR.

  16. I am grateful for the professional standards and newer requirements which has sent the rift raft of loan originators running for the hills. If you need a law to tell you to act in a fiduciary manner. You need to get out! Fiduciary awareness should have come naturally from the first moments in working with people’s lively hoods. I admit the new licensing and changes of laws have been a burden in trying to keep up with. However like any change we learn to adapt for the better. We must engage and stay in front of law makers. Not stand by silently for someone who has no clue about our industry rewrite laws without thinking them through. For example: Olympia and reverse mortgages. Our input must be LOUD and made CLEAR! Common sense for uncommon times must remain in balance.

  17. I agree that the melt down gives us a chance to clean the slate and start again. We do have a fiduciary responsibility and we should be putting our clients interest above our own. Too many costs “fluff” is adding to the loans. The industry should regulate itself before they get more regulation they don’t want. Make the playing fileds level and cap admin and processing fees to an amount that is fair for all partys. In addition under no circumstance should we ever make over 5 points in a loan upfront or on the back side. And our lenders/investors should monitor the quality of our portfolio. I once sold insurance and part of our performance pay was based on loss ratios as a percent to the portfolio. Those with better loss ratios should be entitled to better costs of funds. Rewards for those who manage and maintain profitable portflios and client bases.

  18. I agree with Susan Lohse. I do feel that one day, we will get out of this Mortgage crisis. But it will not be easy since many borrowers are already used to the old ways. It will be very difficult to all of the sudden come and change the regulations. But with everyone doing their own part and following the regulations, I believe one of these days we will get out this crisis. As a Loan Originator it is our responsiblity to deliver fiduciary duties to our consumers.

  19. I like the part about self-regulation. And if people act in an ethical, professional manner a lot of the earlier problems would be lessoned. But it start higher up the “food chain” with lenders not offering the option arm type products and not relaxing or eliminating the underwriting guidelines. If a person wants an 97% LTV loan, they should qualify with stricter standards.

  20. The crisis will ends some day soon ( I hope) and when it does, there will be more regularion, both governmental and throught the mortgage industry. It is similar to the real estate business. When thigs were good, people would quit working for Boeing the become a realtos. When things got tough, they went back to work with Boeing and the state required tougher licensing requirements and more education. It will be the same in the mortagage industry.

  21. Obviously, solution #3 is the best, and that is why you expanded on it so much. Self-regulation is huge. It costs less, it keeps the governement out of the picture, and it brings the industry together. I think you should be friends with your competitors, hey, you might learn something that way!

  22. If you have been a mortgage professional for many years the only way to look at what has happened to our industry is an opportunity to weed out those who were in it to make a quick buck and try to raise the level of consumer trust and confidence. Consumers do see the industry as whole threw a single lens. I am gratefully for the licensing requirements and required education credits. It helps to establish a better code of ethics leading the way to self regulation. I believe self regulation is the best way to obtain concusmer respect while maintaining a reasonable fee structure; value and service never go out of style. If regulation is needed anywhere it is in advertizing. I listen to the radio ads and I am thankful I don’t own a gun! I for one would like to know the APR’s on some of the rates that are quoted.(i will get of my soap box..ug) If our industry would step up to our fiduciary responsibilities we would creat a better work place and provide excellant service to our clients.

  23. Seeing that the regulations have been tightened up the industry as a whole should benefit. Weeding out those with the wrong intentions will create a better working environmment for those consumers who just want to believe in a fair and equitable service.
    Self regulation is the key here to providing the most cost effective tool for the consumer.

  24. I agree with the perspective that the current mortgage crisis will refine the industry professional. When I applied for my license last year the company that was providing finger-printing services said that upwards of 20% of Washington loan officers will not be elgible because they had a felony on their record…whoa!

    I agree with the eight professional status criteria listed on this website because they will make all boats rise; the consumer, the loan officer, the investor and the economy will all benefit.

    Education should be the great equalizer, not salesmanship, especially in the mortgage industry. The mortgage transaction will be the largest financial event in most of our clients lifetime and it will have the most impact on thier net worth due to the laws of compound interest. Absolutely, there should be fiduciary obligations that are either rewarded if served well, or penalized if their is fraudulent, predatory lending.

    Regarding solution #4, I agree that the secondary market needs to be more regulated. My one suggestion would be to mandate investor recourse against the borrower to prevent borrowers walking away from their houses. There are countries in Europe that will garnish a borrowers wages and assets if they default on their loan. Patrick O’ Driscoll, with the Cato Institute wrote a great article on this in the WSJ on November 17, 2008.

  25. I do not agree with gov’t intervention any more than necc. We as an industry thru our own actions have brought the gov’t down on us however. Self policing is the ideal business model. Most of us as commissioned sales people consider ourselves entrepeneurs and pro- business.This spirit lends itself to a self regulation.We have the experience, talent and intelligence to do it. It will be a challenge to win our industry back!

  26. Wow!! It’s about time someone bluntly calls out the isues like that. I can agree with everything you just said, and I wish others could as well. The quicker we deal with these issues the faster the industry could recover.

  27. If more people would take these isues into consideration and just do the right thing, then maybe the industry could spring back quicker. I also think that for those of us working in the industry we could earn back the respect of the consumers.

  28. Comments on Solution Number 1:

    Jillayne, I have to disagree with you here. ALL retail mortgage salespeople do not owe fiduciary responsibilities to consumers. In particular, sales people attached to a lender (or a broker acting as a lender) fundamentally cannot owe fiduciary responsibilities to consumers. Purchase-sale transactions have, at least, two principals involved. These kinds of transactions are called “arms length” transactions. Each principal has its own interests that are generally in opposition to the other principal’s interests. It is a mistake to consider that either party owes fiduciary responsibility to the other in an arms lenght transaction. The lender-borrower transaction is an example of such an arms length transaction. The lender (and any “loan officer” who works for the lender) is one principal and the borrower is the other. Sales people who work for and on behalf of the lender do not owe and cannot be deemed to owe broad fiduciary responsibility to the borrower, i.e., the other principal to the transaction.

    On the other hand, mortgage brokers (and by extension their loan officers) represent a very different situation. The mortgage broker is not a principal in the lender-borrower transaction. Brokers come to the transaction as a result of a relationship with one of the principals to the transaction. That is, they come to the transaction representing either the borrower or the lender. Although the broker industry has maintained that they represent neither, such a position is preposterous. A careful study of the nature of the relationship shows that the mortgage broker is more likely to be regarded as representing the interests of the borrower. In order to remove any ambiguity, however, the state of Washington has now defined mortgage brokers to always be representing the interests of the borrower. Under Washington law mortgage brokers owe a fiduciary responsibility to the borrower.

    In my view, your Solution Number 1 needs to be rewritten to say that mortgage brokers must recognize and embrace their fiduciary responsibility to the borrower and all that this implies. As you say, the mortgage decision is no less important to families than a medical procedure or legal matter. Borrowers ought to have access to practitioners who are bound by practice and by law to do what is in the best interests of the borrower.

    As a corollary to Solution Number 1, I would add that is important for borrower’s to come to understand the difference between mortgage brokers and lenders. Step one is for the broker industry, in recognition of their fiduciary responsibility, to establish a difference. Step two is for the borrower to actually understand that difference so he can make an intelligent decision in choosing how he will shop for a loan and how he will choose the kind of business he will work with.

    Comments on Solution number 2:

    We would not be discussing the behavior we call predatory lending if mortgage brokers had accepted and exercised fiduciary responsibility to borrowers for the past 10 years. Very little of the “predatory lending” that went on was done by lenders directly. The vast majority was originated by brokers and their loan officers. How could this have happened if brokers had been acting in the best interests of their borrowers? Your Solution Number 2 is just and extended consequence of the failure to implement Solution Number 1. There may be a need to formulate and enforce stronger anti-predatory lending laws governing lenders, but since the vast majority of loans are originated by brokers, the establishment of a sense of fiduciary responsibility among broker will likely have a greater impact.

    Comments on Solution number 3:

    Effective self regulation that would protect borrowers by ensuring that industry players are acting on the best interests of the borrower is a great idea. It goes hand in hand with the broker industry becoming a true profession. However, there is, as near as I can see, virtually no interest among industry leaders in moving in that direction. The broker industry continues to fight fiduciary responsibility, even in Washington where such responsibility is now a matter of law. It is only the mortgage broker side of the business that will benefit from self regulation as this is the only side of the business in a position to embrace fiduciary responsibility. But to date, rather than embrace the differentiating quality of fiduciary responsibility, brokers and their loan officers continue to call for the so called “level playing field”, that is, common regulatory rules for brokers and lenders. This is not the path toward recognition of fiduciary responsibility out of which may come the capacity for beneficial self regulation. If the industry cannot learn to serve the borrower’s interests as matter of standard professional behavior, one would have to question what direction any attempt at self regulation would take. Serving the interests of the borrower IS the higher calling that any meaningful attempt at self regulation would need to focus on.

    Comments on Solution Number 4:

    I would certainly not defend rating agencies. However, it is for investors to do due diligence on their prospective investments. MBS investors relied heavily on rating agencies without doing due diligence on those rating agencies themselves. That said, rating agencies, in examining pools of mortgages, relied on the underwriting standards of the lenders that issued the loans. In examining the underwriting there was a presumption of honesty. After all, every 1003 says, in the fine print, that the borrower certifies all information to be complete and accurate under penalty of legal consequences if it is not. And every loan officer of every broker has a duty not to accept and forward on an application that he knows to be a misrepresentation of the truth. Passing the blame on to rating agencies is not entirely appropriate. Given the widespread use of “liar’s loans” in which borrowers actually lied and given that too often loan officers either colluded in the application or worse, dictated the falsehood in the application, the presumption of honesty made by rating agencies was thoroughly undermined by the industry players in processing those loans. If rating agencies are to be required to do better due diligence, where would you have them stop – should they re-underwrite every loan in a pool? The whole system for providing liquidity relies on the rating agencies ability to draw risk conclusions from a review of underwriting standards, without a need to re-underwrite each loan. Dishonesty wrecked the integrity of the underwriting process.

    Comment on Solution Number 5:

    Absoutely!

    Comments on Solution Number 6:

    Here again, I point back to Solution Number 1. If the mortgage broker industry stepped up to become the source of origination services dedicated to serving the interests of the borrower and IF the borrower were to be educated on the difference, there would be a strong voice of logic, reason, and client centric information in the market place. In such a market place, why would anyone listen to the deceptive advertising by disreputable lenders? The public would find safety in working with a broker. And, of course, a broker industry dedicated to serving the borrower’s interests would not be involved in this kind of advertising.

    New Solution – Number 7:

    I would add one more solution. This goes hand in hand with my “rewrite” of Solution Number 1. It is imperative as a consequence of fiduciary responsibility and the included responsibility to eliminate so far as is practicable all conflicts of interest, that mortgage brokers end the practice of claiming YSP as a part of broker/LO compensation. All YSP should be credited to the borrower. Further, they should eliminate compensation related to anything other than the level of service provided. This is in keeping with serving the borrower’s best interests. That means, besides crediting YSP to borrower, brokers and their LO’s should set origination fees on the basis of the services provided, not on the basis of interest rate or loan amount or any other aspect of the loan that does not call for greater training, effort, or experience. Only when the biases of the compensation element are effectively removed from the loan program and terms recommendation, will the incentive to do all that has created such a problem be largely removed.

  29. Jillayne, your comments about RESPA and TIL are right on the mark. APR is easy to understand once explained to a client, but on a regular basis it does bring up questions. And the fact that it is easy to unintentionally make a mistake and miss one little item which will make the file out of compliance. I’m lucky I work for a mortgage bank that does a QA on all files to ensure this doesn’t happen.

    Self regulation drafted by people who work in and are experts in mortgage originations understand what is practical and what is not are the best to write the regulations.

    Again it goes back to putting the client first and not your paycheck!

  30. Self Regulation is the way to go.
    Working for a company who checks my files to make sure they are in compliance is a big plus. Educate your clients. Encourage them to ask questions and answer them honestly. It is really not that difficult to do the right thing. I am grateful for the shake and and wake up in our industry so the consumer will ultimately win. I am happy to be a loan officer and I look forward to helping make this a respectable industry.

  31. I like self regulation solution, but could not agree more on #5. Downpayment assistants is a joke. Usually the seller bumps up the price, and this difference gives to the buyer. I think one way we going to come up from this crisis, is to have consumers vest into the home as much as possible. Someone will most likely hold on to piece of property if they have contributed 20% as down payment, even in a event if the property has declined in value. If someone have nothing vested, he will just most likly walk away, and contribute even more to crisis we are facing right now.

  32. I also am thankful for the changes that are taking place in our industry. They are long overdue and hopefully will take us to a much more professional level in years to come.It would be best if we can as a profession self regulate and rise to the challenges ahead of us.I would like to see all LO’S( Bank and/or Broker employed) required to be licensed and all held to the same standards.I also agree with getting rid of down pymt assistance programs.All this does is artificially inflate the homes value which has now come back to haunt us.

  33. I remember a real estate crunch back in the 80’s, the doom and gloom was predominate in the industry. When its good people forget it won’t always be that way, when crunch time arrives people forget it won’t always be that way. Economics run on curvey roads and fall of the road on a hair-pin turn once in a while. We have just done that! We will recover. If we can foster an atmosphere of “action” by those in this industry we just might be able to come out of this mess a self-regulated respected profession. It will take years to accomplish, but the penalty for us not taking action ourselves will result in inaffective government regulation, which is the best they can do and does not serve us or the consumer in a fruitful win-win situation. There is just not any room for uncontrolled greed in this industry any longer. We are not all guilty but we are ALL responsible, this is a simple truth.

  34. I am currently working under a Self Regulatory Organization FINRA formerly the NASD. They have enormous power over the conduct of securities broker dealers and registered reps. I have many daily compliance duties that do get tedious. One of the primary duties of a rep is to “know your customer” and another is “suitability”. They (FINRA) have the power to levy hugh fines, sometimes up to $250,000 and more. At this point in the mortgage business I’m relying on my Broker for guidence. This blog and class however makes me realize how little I actually know about the mortgage business. In spite of regulation criminals always figure out ways to take advantage of others.

  35. In my opinion, everyone should be honest and explain everything to the consumer, so they are aware of what they are truely accepting. Most consumers want to “trust” what mortgage professionals are telling them. That is what we should be doing for our clients, the right thing…

  36. In order to stop the mortgage crisis, self regulated programs should be set in place for the consumer and should have serious consequences if not followed properly. Consumers have the right to have honest L.O. and originators working for them and I think this kind of system is exactly what we need to keep lenders accountable.

  37. I like most of your solutions.
    #1 – Agree
    #2 – I agree. So does FHA. The new rule coming into place does just what you said. HUD’s letter to Deborah Bortner of DFI for the response dated 11/28,2006 and which was put out on May 24 2007 by DFI. In the letter look to response #5 and #6.
    This would limit compensation.
    #3 – All am all Pro Business.
    #4 agree
    #5 agree – no DPA’s
    #6 is very tough to control. Look no further to the loan mod business and you will see that internet lead providers are getting the majority of revenue for selling loan mod leads. But you comment from the guy at internet brands (one of the largest internet classified companies and reseller of leads) would be very tough to montior. I can see his borrowers Bill of Rights is a good game face tactic but who is to say (or who will regulate) that his tactic are all above board.

    One additional solution for me to add to the list is compliant storage of data and paper work. I think it should be that each and every lender should not have any paper laying around the office. Or stored in some off site Self Storage place. Only for that company to go out of business. Where is all of my copy files?? Where have they kept all of my taxes, bank statements, credit reports and loan documents? No one seems to be asking that question now but it is a big problem.

    Look at the down turn and what it did to all of those smaller companies who have paper every place. It should be a requirement that every one needs a safe compliant vaulting service otherwise you can be in business.

  38. Those are all great solutions and if the suggested solutions were implemented all would benefit greatly, that should cover it! Our industry absolutely needed reorganization and cleansing. For those who intend to stay in this industry for the long haul relish this change. Back to basics. Good ethics, logical underwriting and prudent corporate review.

  39. I don’t believe many American Companies are built by “Self Regulation”. They have many polices and procedures in place to set the example, but with big corporations it’s not easy to follow through with all of the expectations. Throw a few bad seeds in there and the “self regulation” theory gets thrown out the window. I’d like to believe a majority of individuals out there cna have self regulation and meet their companies standards, but this is not always the case. People in America take many things for granted, many eyes have been opened as the recession continues to put people in harder finanical situations then ever before. In order to stop the mortgage crisis, self regulated programs should be set in place for the consumer, with serious consequences aside from just losing a home.

  40. Hi Ross

    Think about doctors, lawyers, accountants, engineers, nurses, paralegals…. these are all groups of professionals that work in a corporate setting.

    The higher the duty to the consumer the more money the professional makes.

    All of the above have industry lead self regulation in place.

    Loan originators do not. Someday LOs will.

    If LOs want to put more of the burden of discovery on the consumer then the value of an LOs services will go down.

  41. Yes Ross you’re correct in that most U.S. companies are not built on self regulation.

    Self-reg works for groups of professionals (that work inside those corporations.)

    There’s a narrative history of how professional groups are formed. Loan Originators are classified as “emerging professionals.” Self regulation (LOs deciding to kick those bad apples out of the industry much like a Bar Assoc ruthlessly dis-bars their bad apple lawyers) is one of the last pieces for LOs to do. But this step comes from the LOs, not their corporations or from the government.

    The other last step is for all LOs to owe fiduciary duties to their clients.

  42. I am not aware of any lender/broker/loan officer that has fiduciuary to consumer, they have fiduciary to there broker or lender. It is the Realtors job to counsel the financing.

  43. Hi Wade,

    In Washington state, LOs who are licensed under a mortgage broker owe fiduciary duties to their clients. Same in many other states now.

    It’s debatable whether or not it’s the job of the real estate agent.

    An agent has a conflict of interest wouldn’t you agree? If the transaction doesn’t close, the Realtor does not get paid. It would seem difficult for an agent to give neutral financial advice regarding the mortgage lending side of the transaction. Most agents want to leave the mortgage lending work to the mortgage lenders.

    However, I DO know a handful of Realtors that insist on making sure the homebuyer is not being taken advantage of by a predatory lender, and insist on attending the end-of-closing signing appointment to make sure the lender honored the fees quoted on the good faith estimate.

  44. I like the solution #1 and #5. Honestly, I don’t think the self-regulation solution works since it really depends on LO or brokers’s own perspecitve and integrity or say honesty.

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