The Meaning of Fiduciary Duties

The president of the National Association of Mortgage Brokers made a speech before Congress on March 27, arguing that “NAMB remains opposed to any proposed law, regulation or other measure that attempts to impose a fiduciary duty, in any fashion, upon a mortgage broker or any other originator.” NAMB’s president goes on to explain why he thinks mortgage brokers “should not, and cannot, owe a fiduciary duty to a borrower.” 

He makes the following argument: “The consumer is the decision-maker, not the mortgage broker. Mortgage brokers do not represent every loan product available in the marketplace, nor do we have the ‘best’ loan available. Rather, the mortgage broker enters into contracts with various lenders and is then able to offer such lenders’ loan products directly to the consumer. This is a critical point because there is no ‘best’ result. What is ‘best’ depends upon three inter-related concepts: product availability, price and service. Focusing solely on a price of a product may not yield the “best” result for a consumer. Only the consumer can determine the ‘best’ combination of factors that fit their needs.”

In contrast to NAMB, we argue that mortgage brokers and all mortgage loan originators at all types of lending institutions can and ought to have fiduciary duties toward each and every consumer that comes through their doors. To help with our discussion, let us address what it means to be a professional. 

Traditionally, a professional is someone with specialized knowledge and a certification of substantive competency, along with a pledge to a written code of ethics within an industry. Some examples of professionals are medical doctors, lawyers, CPAs and Realtors. Furthermore, the typical standard of practice of a professional is at the level of a fiduciary duty. This requires the highest standards of good faith and fair dealing, as well as the charge to never put one’s interest above the interest of a client. Put simply, it is a relationship of trust. There is an implicit economic tradeoff here. In exchange for the honor, prestige and income of a typical professional, there is an agreement to owe fiduciary duties to clients.

Historically, we have seen and are continuing to see the emergence of new professional groups. For instance, in the past few decades we have seen the rise of paralegals, who operate alongside lawyers and judges, and who provide a valuable service within the legal community. Law enforcement is also becoming more professionalized, as barriers to entry rise and the standards of competency and ethics increase. This brings us to the question about the status of residential mortgage loan originators who work for many different kinds of lending institutions, including broker, banker, credit union or consumer finance company. If they belong to a professional class, then they would have to follow an ethics code with fiduciary duties. In contrast, if they are not professionals then mortgage products and services should be treated like any other retail establishment, and fiduciary duties do not apply.

Mortgage lenders have been in an ambiguous status for a number of years, which is perhaps at part of the root of the default/foreclosure problem with which we are dealing. Huge numbers of consumers actually believe that they can trust all mortgage lenders to look out for their best financial interest. They walk into lending establishments with the expectation that their lenders owe them fiduciary duties. The problem is that there is no well-formed code of ethics that requires a fiduciary standard of practice. This incongruence of basic assumptions then allows some unscrupulous lenders to take unfair advantage of their clients. This is not to say that all lenders violate trust or take advantage of unsuspecting clients. Yet, because there has not been a precise, written code of ethics, there are no standards of practice that have been agreed upon and publicized, much less the instantiation of a fiduciary duty in this regard.

The industry of mortgage lending is at a historical crossroads. It can either become a professional group with fiduciary standards or it can remain a retail establishment in which most of the burden of information is with consumers. Yet, they can no longer have it both ways. Yet, let us be clear that mortgage loan originators working at all types of lending institutions can owe fiduciary duties without representing to consumers that they are finding them the “best loan” or getting them the “best result.” A fiduciary standard simply would not put this burden on loan originators.

By way of analogy let’s clarify. Medical doctors, lawyers and Realtors do not have to promise that they will get their clients/patients the best surgical results, the best legal results or the best deal on the house in order to discharge their clear fiduciary duties. Instead, they are promising to do the best job they can; to fully inform their clients of all relevant information and risks, and to carefully make sure that their clients have been provided with the necessary tools and understanding to make a fully informed decision. Mortgage brokers, bankers, lenders and consumer finance companies could easily adopt a fiduciary standard for their loan originators if they chose to, and it would be both practicable and fair.

Originally published by Inman News on April 3, 2007, co-authored by Jillayne Schlicke

30 thoughts on “The Meaning of Fiduciary Duties

  1. I really enjoyed this article. Maybe the folks over at NAMB (NAMP)should read this, and they could gain some insite as to how important ethics are!

    “The consumer is the decision-maker, not the mortgage broker.”
    – This may be true, but the ultimatly the consumers descision is primarily based on the information their loan originator has provided them. The consumer puts their faith and trust into the loan originator. They want to believe they have their best interest at heart.

    I cannot believe NAMP has the audacity to believe there is no such thing as a “best” result. Their idea of what the “best” is seems to be completely diluted and they are taking the term “best” to the extreme. When I tell my clients I am going to find them the best result, this means I would review their situation and assess thier wants and needs and do everything I could to find them a product to best suite their situation and what they are looking for. Now obviously a client with a low credit score, high ltv, and other determing factors can’t qualify for the best rates. However, given their situation, I would certainetly find the best program and rate out there for them. It all depends on their situation.

    I really liked how they threw in a doctors fiduciary duty to their patients. This is an example that EVERYONE should be able to relate to. You trust your doctor. Why should should the standards be any differnt for us? They shouldnt.

  2. Washington State DFI SB6381 effective 6/12/2008

    Mortgage brokers have a fiduciary duty to borrowers.
    The fiduciary duties owed are acting in the borrower’s best interest, good faith, disclosing all other interests to the borrower, refusing to accept undisclosed compensation for an expense paid by the borrower, following the borrower’s instructions, disclosure of all material facts that could impact the borrower’s interests, using reasonable care in performing all duties, and providing an accounting to the borrower for all money and property received from the borrower.
    The fiduciary duty does not require the mortgage broker to obtain access to a loan product that is not available to the broker at the time of the transaction with the borrower.
    Mortgage brokers may collect a fee for services if the fee is disclosed to the borrower before the services are provided.

    I’m not sure if the Washington State SB6381 supports your article as the first duty listed is acting on the borrower’s “BEST” interest. What are regulators asking…..best loan product, best interest rate. Per your article, a fiduciary standard would not put this burden on the LO. However, I am unsure what Washington DFI is asking.

    If your article is correct, agreeing to educate, inform, advise and disclose all information about the loan and the loan process so that the borrower can make a good decision based on good information, is not a burden and is good for both the borrower and the LO.

  3. I think this article brings to light the confusion around what exactly a fiduciary responsiblity will be in the mortgage industry. Is it a monetary obligation? To get the client the best “price”, or is it to make sure the consumer is making an informed decision? Or both??

    If we look at doctor’s, well they’re obligated not to harm you, but how many of them take much of any time to truly explain much of anything? I realize this is a stereotype as I’ve found doctor’s more than willing to participate when I engage.

    If Fiduciary duties are what it takes to not be thought of like used cars salesmen (sorry!) and to not be put up as the poster children for the housing collapse, then I’m prepared – what ever it means in pratice.

  4. I like how this article points out that “the consumer is the decision-maker.” The mortgage broker is more of a person of guidance. The (mortgage broker) are able to walk the consumer through the process of the loans for them to make the right decision. The more the agent teaches the consumer, the more the consumer trusts the agent. All Loan Originators do the best job they can to find the best loan products for their clients and inform their clients of all pertinent information so their clients would understand what are the risks.

  5. I believe the borrower is the decision maker. In our industry referalls are everything. We always compare loan products such as fixed loans over an arm product with the client. In these times the fixed product is the best result. We always guide the borrower to what makes the best sence if its cash out, LTV, MI to finance in the payment.etc. The hungry wolves is this industry are long gone. We, originators that are left take pride in our borrowers finances and that will bring reward and complete satisfaction to the clients. I always look out for the best interest of the borrower.

  6. This article presents two very different representations of the mortgage industry. On the one hand, NAMB’s view that brokers are not agents of either the borrower or the lender. On the other, NAMF’s view that all originators as well as brokers serve the borrower’s interests. The author of NAMF’s position goes on to discuss the “professional”. The discussion of the “professional” is a confusing direction to take the discussion of fiduciary responsibility since the notion of a “professional” is vague at best and has really nothing to do with whether a practitioner has or ought to have fiduciary responsibility to the borrower.

    Let’s back up and examine the industry at a higher level to begin to understand the differences between the two main players within the “mortgage industry” – mortgage brokers and mortgage lenders. Some conversations on this subject broadly refer to “mortgage originators” using this term as a proxy for the lender, the broker or the employee/agent of a lender or broker who might be licensed separately as a “loan originator”. We need to be more precise. We need to appreciate that agents and employees of a lender are extensions of the lender and therefore possess the same duties as the lender with regard to the borrower. Similarly, agents and employees of a broker are extensions of the broker and therefore possess the same duties as the broker with regard to the borrower. So we don’t need to get into a discussion of the “loan officer” separately – we can restrict the conversation simply to brokers and lenders.

    We also need to come to a more fundamental understanding of the mortgage loan transaction. This transaction is typically viewed as a borrower/creditor transaction. I submit that this is an oversimplification of the nature of the transaction. Oversimplifications too often lead to incorrect conclusions, particularly in transactions involving intangible financial products. Upon close examination, the mortgage loan transaction looks much more like the transaction that businesses and governments frequently undertake to raise capital. In the business world these transactions are not viewed a creditor/borrower transactions – they are viewed and purchaser/seller transactions. A corporation does not see the process of creating and selling bonds to raise capital as a creditor/borrower transaction, they see it as a transaction in which they create and sell marketable bonds to investors. The difference is this: in the creditor/borrower transaction, the creditor controls the transaction; in the bond creation and sale process, the creator of the bonds controls much of the transaction by selecting terms of the bond issue in light of the market for those bonds. The modern mortgage transaction is much more akin to the latter given the robust secondary market for mortgage notes. And given this more appropriate view we should view the borrower as the issuer of a note who is in a position to select terms for that note, in light of the market for that note, such that the overall transaction provides the optimum benefit to the borrower. Lenders are the market for the notes that borrowers create and sell.

    So let’s take that broader approach and see what the industry looks like from that perspective. Let’s view the borrower as a seller of a note – his interest is in optimizing the price obtained relative to the future cash flows obligated (optimize his cost of capital). And let’s view the lender as an investor interested in purchasing notes that serve the lender’s investment objectives – the investor is interested in maximizing his return relative to the risk taken. The interests of these parties are fundamentally conflicted. The borrower’s interests are best served at the expense of the lender and vice versa.

    Under this broader view, the note seller has complete control over the terms of his note. How long does he want to spread payments out? Does he want to pay interest-only with a balloon payment or fully amortize the principal? What interest rate does he want? Does he want a fixed rate or variable interest rate? Under this view, the seller is free to construct the note terms that serve his interests. What he cannot control is the market for his note. Like a business issuing a bond, the note seller must be cognizant of the marketplace. Perhaps I want to structure my note at a fixed rate of 2%. But if there is no market for my note at 2% I have a problem. Or there may be a market, but the market price for my note at 2% is so low that I cannot raise the capital I need. So the astute seller examines the market and defines terms that are both sellable and that will raise the needed capital under terms that fit the seller’s future cash flow forecasts. And of course, part of the note seller’s equation includes the cost of creating the note and taking it to market – note origination expenses. He would reasonably seek alternatives that offer lower origination costs.

    The lender, under this view, is in the business of purchasing notes as an investor. As an investor, the lender sets the offering price for notes based on its assessment of the risk associated with the note and the yield required for taking that risk. Contrary to what some believe, investors in bonds (or mortgage notes) are not particularly concerned with the interest rate (coupon rate) of the bond. They simply pay a price for the bond or note that produces the desired yield. The pricing of notes, like bonds, is largely reduced to a mathematical model that incorporates the promised cash flows, risks, term, and expected yield to come to a price that the investor will pay. In this view the investor interested in buying a note that might be offered by a particular issuer will set a price that varies with note parameters, such as the prospective interest rate, based on a common assessment of expected yield. The lender pays a lower price for a note of lower interest rate, not because those notes aren’t as profitable, but rather because they are profitable at that lower price.

    In this broader view of the mortgage industry, the “borrower”, as seller of a note, has two choices. A. He can take his note directly to investors with the intent of negotiating the best deal he can, or, B. He can engage someone to act as his agent who will take his note to the market and negotiate on his behalf to obtain the price that serve the borrower’s interests.

    What do these two options look like in the real world? In the real world, investors to which the borrower can take his note are commonly referred to as retail lenders. This includes banks, credit unions, so called correspondent lenders, and private lenders. These investors generally employ customer service level people that we call loan officers. These may be employees or independent contractors engaged to work on the lender’s behalf. Any such employee or “independent contractor” must be viewed by the note seller (borrower) as an extension or agent of the lender. If the borrower chooses to deal with such an actor, he is must recognize that he is dealing with the investor through the investor’s agent. The other option in the real world is to work with a broker – the broker is an agent that a borrower might engage to work on the borrower’s behalf. The broker (and by extension, the loan officers who are employed by or under contract with the broker) provide services to the borrower to help him define marketable terms and determine the market price obtainable under those terms. The only conceivable roll of brokers is as agents of the borrower, though this concept has historically been rejected quite universally. So let’s dig deeper.

    The transaction “on the table” is a purchase-sale transaction. The principals to the transaction are the investor (lender) and the note seller (borrower). The investor (or his representative) comes to the table to purchase a note. His interests are to buy the note at the lowest price possible thereby enhancing his investment return. The borrower (or his representative) comes to the table to sell a note. His interest is to negotiate the highest price possible relative to his future obligations under the note thereby minimizing his cost of capital. The note seller and the note buyer have competing interests, as is the case in any free market arms length purchase-sale transaction. It would not make sense to presume either party to have broad fiduciary responsibility to the other.

    When the transaction is viewed from this perspective, NAMB’s long held position that the broker is not an agent or representative of either party makes no sense. If the broker represents neither principal to the transaction, how does the broker come to the table? There is no logic to either party engaging someone who does not represent their interests. NAMB contends that brokers contract with various lenders and are then able to “offer” such lender’s loan products directly to the consumer. What NAMB is describing is an actor engaged by the lender to work on behalf of the lender. If true, then brokers so contracted are appropriately viewed as agents of the lender. This would be particularly true if the contract obligates the lender to pay the broker for successfully placing the lender’s products in the market place. But such is not the case. In addition, NAMB seems to be concerned that the imposition of fiduciary responsibility on brokers somehow requires brokers to then offer “the best” loan to the borrower. NAMB has a very confused view of fiduciary responsibility as it relates to the broker industry. The assignment of fiduciary responsibility to brokers would not and does not require the broker to “offer the best loan” since brokers do not “offer loans”. Lenders “offer” loans, not brokers. More precisely, lenders purchase borrower’s notes, brokers do not. Brokers, as fiduciaries, have a responsibility to take reasonable steps to arrange a transaction with a lender at a price and under terms that best serve the borrower’s interests – it’s more about the process and less about the outcome. Contrary to NAMB’s confused position, pure brokers are not contracted to offer the products of the lender. Brokers enter into agreements with lenders that describes the terms under which the lender will accept for purchase a marketable note created through the efforts of the broker. Brokers do not provide loans, they provide loan origination services. Until the distinction between the provision of loans and the provision of loan origination services is understood, the brokered transaction is difficult to understand with regard to fiduciary responsibility. That said the question remains: given that brokers provide origination services only, how do they gain a seat at the table in the negotiations between the note seller and the investor? I will come back to that.

    NAMF’s position that all loan originators are fiduciaries is weak because it too fails to recognize the different rolls that lenders and brokers play. As I described above, lenders are best viewed as investors seeking to buy notes that represent good investments and borrowers are best viewed as note sellers who are interested in selling notes at a price that minimizes their cost of capital. Lenders and borrowers are principals to the transaction, brokers are not. Lenders (investors) have opposing interests to those of the note seller (borrower). It does not make sense to presume that one principal to a purchase-sale transaction should be a fiduciary to the other. These are arms length transactions between parties that have conflicting interests. The best that can be hoped for is for these parties to treat each other fairly and honestly and each to avoid concealing or misrepresenting information that the other would reasonably consider material to their decision to go forward with the transaction. NAMF’s position that loan officers of lenders (which are just extensions of the lender) be considered fiduciaries to the borrower simply does not compute – they represent the lender and therefore sit on the opposite side of the table from the borrower.

    So how do brokers “come to the table”? Brokers are not principals to the transaction. Therefore they come into the transaction only at the invitation of one or the other principals. They therefore represent the interests of the principal that engaged them. If brokers were to come to the table as representatives of the lender, they would simply represent an extension of the lender and would be involved in an arm’s length relationship with the borrower. If, on the other hand, the broker comes to the table as a representative of the borrower, they must have a fiduciary relationship with the borrower. It’s one or the other. The Washington state legislature, through SB 6381, took a long overdue step to make that clear, at least in Washington.

    NAMF’s article goes on to discuss professionalism. The fact that lenders are not fiduciaries has nothing to do with whether or not they do their job in a professional manner.

    The author of NAMF’s article fails to distinguish between members of a profession and professionals. I would agree with the contention that members of a profession generally ought to be fiduciaries to their clients. But I would stop short of suggesting that members of a profession have a legal duty to act as fiduciaries simply because they are members of the profession. Fiduciary responsibility arises out of common law or by statute, not by way of membership in a profession. Nor would I agree that professional behavior is the same as fiduciary responsibility.

    The article revolves around three separate issues and at times seems to confuse one with the other. These issues are, (a) professional behavior, (b) the nature of a profession and what it takes for an industry to become a profession, and (c) fiduciary responsibility. It is unfortunate that in this article did not treat these issues separately.

    A. In short, professional behavior is behavior that any business person, fiduciary or not, should subscribe to. It is not a legal standard. It combines courtesy with fairness and honesty. It would be unprofessional to be discourteous. It would be unprofessional to treat a customer unfairly. Professional behavior is not a legal issue or necessarily even an ethical issue. It’s just good business.

    B. A profession is generally viewed as a group of practitioners who are selected to be members of the group based on:

    1. Mastery of an established body on knowledge that is based on broadly accepted sound fundamental theory. The soundness of this body of knowledge must be accepted by both those inside the group and those outside the group. This body of knowledge must have greater scope and depth than the average person would normally possess such that specialized education, training, and experience is prerequisite to membership in the profession. The existence of the requirement to master this body of knowledge represents a high barrier to entry into the profession. The mastery of this body of knowledge must be recognized by the members of the profession as an essential ingredient to proper practice in that profession. Mastery must be demonstrated by formal vetting such that all members of the profession and members of the public served by the profession can have confidence that a prospective member has, in fact, mastered the body of knowledge. That said, no aspect of the mortgage industry qualifies as a profession. There is no recognized body of knowledge. The best we have is the list of subjects that are examined on the state mortgage broker examination or loan officer examination. There is no formal specialized education, training, or experience required of the applicant prior to taking the examination. The industry does not recognize mastery of this knowledge as an essential ingredient to proper practice in the industry. The scope and depth of the examination is to establish that the practitioner understands basic terms associated with mortgage lending, primarily so he can understand the rules and regulations governing his actions. The rules and regulations are the focus of the examination. The fact that there is no formal education required, the fact that the examination is a short multiple choice quiz cannot be taken to be a meaningful vetting process to ensure that members of the industry have mastered a substantial body of knowledge. Simple proof – what is the difference between YSP and discount points and where do these pricing components come from? Most in this industry do not know the correct answer. And there is no requirement to know the correct answer. It is not taught in any formal course as a pre-requisite to licensing and it is not examined on the broker or loan originator examination.
    2. A commitment is made to use this specialized knowledge for the public good with a renunciation of the goal of profit maximization. This pretty much precludes business models that position the business as one side of an arms length purchase-sales transaction with members of the public on the other side of the transaction. The players in an arms length transaction of that sort would most likely be serving their own interests. Professions recognize from within a sense of serving the public good. There is no such recognition from within the mortgage industry. Mortgage practitioners almost universally hold that they are business people in business solely to make a profit. The fact that NAMB has consistently denied that brokers serve the interests of borrowers is demonstration enough. The fact that people need loans to buy houses does not a make mortgage lending a service of the public good. People need cars, but car salesmen are not in business to serve a public good. People need appliances, yet appliance salesmen are not in business to serve a public good. Lenders in particular are not in business to serve a public good; they are investors that invest for their own profitability. A profession develops this sense of a service to a public good from within the “profession”. It is conceivable that the brokerage industry could develop such a sense. Brokers are not principals in the purchase-sale transaction that is the mortgage loan transaction. So brokers could recognize that borrowers are in need of advocates to help them make good decisions with regard to mortgage loan terms, find lenders who will pay a competitive price for their note, and to help guide them through the note origination process. Brokers could develop business models designed to effectively serve the borrowers interests out of a sense that this serves the public good. But I see no evidence that that is happening as of yet. The fact that the preamble to RCW 19.146 says that the legislature has determined that the actions of mortgage brokers can affect the public interest is not at all the same as the sense of service to the public good developed from within a profession. The preamble to RCW 19.146 establishes the need to regulate the practices of mortgage brokers to prevent them from harming the public. A profession develops practice standards from within to ensure that the public good it serves is well served. When a profession recognizes that responsibility, there is less of a need for legislators and regulators to seek to protect the public from the members of the profession by defining minimum standards.
    3. A commitment to abide by the practice standards adopted by the profession. A profession develops its own practice standards, the means to monitor its members for individual compliance, and sanctions for enforcing it. In order to accomplish this, it is generally necessary for the profession to gain recognition by state or federal law makers and to co-develop laws that enhance the profession’s ability to enforce its practice standards. Today, there are no practice standards that have been developed by the mortgage brokerage industry. Brokers simply study and endeavor to comply with state and federal regulations designed to protect the public. A profession develops practice standards that are recognized by regulators as exceeding any protective measures that regulators might define. With that recognition, professions become the chief regulators of their own profession and utilize state or federal regulations to assist them in enforcing compliance with those practice standards. Nothing like this exists within the brokerage industry today. Indeed, the brokerage industry today continues to fight tighter standards proposed by regulators to the detriment of the consumer.

    C. And then there is the fiduciary. He may or may not act professionally. He may or may not be a member of a profession. But if a practitioner is deemed to have broad fiduciary responsibility to his client, then there are certain things he must do. With regard to mortgage brokers, the state of Washington has deemed them to be fiduciaries. I am at a loss as to how any other standard could have been accepted for so many years. The duties of fiduciaries are generally and broadly separated along three lines.

    1. Due care
    2. Utmost good faith
    3. Loyalty

    However, according to Ron Rhoades, J.D, CFP®, author and editor of http://www.fiduciarynow.com, “under English law, from which the U.S. system of jurisprudence was initially derived, it is reasonably well established that fiduciary status gives rise to five principal duties: (1) the no conflict rule preventing a fiduciary placing himself in a position where his own interests conflict or may conflict with those of his client or beneficiary; (2) the no profit rule which requires a fiduciary not to profit from his position at the expense of his client or beneficiary; (3) the undivided loyalty rule which requires undivided loyalty from a fiduciary to his client or beneficiary; (4) the duty of confidentiality which prohibits the fiduciary from using information obtained in confidence from his client or beneficiary other than for the benefit of that client or beneficiary; and (5) the duty of due care, to act with reasonable diligence and with requisite knowledge, experience and attention.”

    Clearly, as a fiduciary, the mortgage broker owes the borrower a straightforward, plain language statement at the outset of the relationship (not three days after taking the application) of what services he will provide and what he expects the borrower to pay for those services. You would expect nothing less from the guy you pay to repair your car. The three day rule regarding the preparation of a GFE and many other RESPA required disclosures are minimum standards under RESPA, not minimum standards for a fiduciary. The fiduciaries standard is that which unquestionably serves the borrower’s interests with due care, loyalty, and utmost good faith. The fee to be charged, expressed prior to the engagement, not three days into it, ought to be based on the work to be done – not the interest rate, not the loan amount, not any other loan parameter that does not require the practitioner to expend greater time, skill, or experience – utmost good faith. The fee should not be split into several parts (origination fee, broker fee, processing fee, etc) so as to mislead or confuse the borrower as to what he is paying for the service provided. The broker should not take compensation from any other sources (ie, the lender) as this would create an unnecessary conflict of interest. Given that lenders pay a price for borrower notes that may include YSP, we should discuss this with the borrower so they know what it is and then we should make sure that any YSP paid by the lender will be credited to the borrower. The selection of a higher than par interest rate should be a decision made by the borrower, under the advice of and with the help of a broker, specifically to produce YSP that will reduce overall up front closing costs. It should not a decision of the broker as a means of generating revenue – as a fiduciary, the broker can have no self interest in the selection of the interest rate. Similarly, the decision to include any other loan parameter that affects the price the lender might pay, such as the inclusion of a pre-payment penalty, should be made by the borrower with a clear understanding of the tradeoff between lower closing costs and the potential for higher costs or limitation under some future circumstance. As a fiduciary provider of loan origination services, the broker should advise the borrower of any and all programs known that might serve the borrowers interests. Brokers must have a process for identifying lenders with more attractive pricing on behalf of their clients. They should also be prepared to offer an objective analysis of any loan program being considered to make sure the borrower understands the implications of the program in the near term and in the long term if there might be significant changes to the payment amount over time. This is the provision of due diligence on behalf of the borrower. Even if the borrower intends to sell the home or otherwise pay off the loan in the near term, the broker must make sure that the borrower fully understands the implications to his cash flow if plans should change and the loan is held to maturity. And the broker needs to recommend against any terms that the broker judges as too risky for the borrower. For any program being considered, brokers should provide the functional equivalent of the GFE produced at a range of interest rates ranging from below par to above par so that the borrower can make an informed decision about the rate/payment vs. the need to pay or finance closing costs. These are just a few examples. At the end of the day, the broker needs to be certain that he has used his considerable experience, knowledge, and skill to make sure that every facet of the service he provides is designed and delivered so as to serve the borrower’s interests. Loan origination services provided by a fiduciary involve much more than just getting a loan for the borrower.

    NAMB’s view of the industry is understandably muddied. NAMB’s interest is in perpetuating the myth that brokers and lenders are all in the loan sales business. This approach limits competitive pressures that might otherwise diminish the ability of loan officers to earn egregious incomes for minimal time, education, and skill. I see brokers and lenders (retail or wholesale) as being in fundamentally different businesses and so I do not agree with the NAMB position. NAMF’s position is similar in that NAMF suggests that broker’s and all loan officers, even those that represent lenders ought to be held to fiduciary standards. I cannot agree with this position either. I think NAMF’s position is likely born from the superficial proposition that all loan officers are in business to help borrowers get loans. From that perspective, it does seem appropriate that all loan officers should act in the best interests of their clients. While the idea of all loan officers working on behalf of the best interests of borrowers is nice idea, it is a fantasy. This view fails to account for the fact that loan officers are extensions of the entities they work for and those entities, lenders and brokers, are in fact in fundamentally different business. The interests of the lender (and by extension the loan originators representing the lender) are fundamentally at odds with the interests of the borrower. In contrast, the interests of the broker (and by extension the loan originators representing the broker) should be (and as a result of SB 6381 is required to be) aligned to the interests of the borrower. One can and should expect lenders and their loan officers to be honest, fair, and professional in their dealings with borrowers, but one cannot generally hold them to fiduciary responsibility. If a lender’s loan officer invokes fiduciary responsibility, which he may do based on his actions and claims, he invokes it on behalf of the lender – and the lender would most likely not knowingly approve. On the other hand, brokers are in business to serve the interests of their clients. They possess substantially more knowledge about the transaction than their clients and they present material facts about the transaction that the borrower cannot verify independently. The loan officer of a broker has fiduciary responsibility because his broker has that responsibility. The borrower engages a broker to serve the borrower’s interests and the borrower is highly dependent on the broker for truth and accuracy concerning all details of the transaction. The borrower might shop for brokers, but once a broker is selected, the borrower relies on that broker to shop for appropriate loans and loan terms on his behalf. The broker is a fiduciary.

    Until we can all come to an understanding of the difference between lenders and brokers, which is difficult given several decades of effort to blur the distinction, we cannot begin to discuss the meaning of fiduciary duties and begin to evolve practice standards that are appropriate for the fiduciary in serving the borrower’s interests.

  7. One of the problems we have in the mortgage industry is a large gap in most cases between the knowledge level of the borrower and the knowledge level of the broker or LO where it comes to understanding the details of the financial transaction. These transactions deal with such large sums of debt for the average homebuyer (Joe Sixpack)that the risks must be understood before the transaction is undertaken. Sadly, many in our profession would rather have the deal done and move on to the next client as opposed to taking the extra time to educate the client who has the “deer in the headlights” look.
    You write above in your article, “Yet, because there has not been a precise, written code of ethics, there are no standards of practice that have been agreed upon and publicized.” I think we are going to have to come up with standards of behavior and a government-recognized self regulatory agency (like in the securities industry), or the government is going to set standards for us. To a certain extent we are already seeing this happen. I believe this process should include a fiduciary duty. It must also include an easily understood arbitration process for those clients who believe they were wronged in the process of getting a loan. Don’t want any part of that? Then I would say go find another line of work.

  8. I really liked the sentence, “In exchange for the honor, prestige and income of a typical professional, there is an agreement to owe fiduciary duties to clients.” because the relationship between LOs and clients are well addressed. In order for LOs to be seen as a respectable occupation, LOs need to act in professional manners. When NAMB’s president said that LOs should not be burdened with “fiduciary duties” because they cannot deliver, I do not agree with his definition. When he said “the best result”, LOs never should promise their clients the best result since every scenario is different and many factors are involved in the process of assessing if certain client qualify for the best result. “Best” in who’s standard? Like doctors, lawyers, and other “professionals”, LOs should be be seen as a professional who specialized in mortgage industry to deliver the best service to thier clients. I believe LOs and mortgage brokers should get another name, “mortgage doctors” since that is what we do.

    This is a critical point because there is no ‘best’ result. What is ‘best’ depends upon three inter-related concepts: product availability, price and service. Focusing solely on a price of a product may not yield the “best” result for a consumer. Only the consumer can determine the ‘best’ combination of factors that fit their needs.”

  9. Please disregard the last paragraph from above post. I was just trying to read this section while writing my own opinion.

  10. NAMB appears to support self regulation for all parties whether the be the broker/lender/lending institution and ultimately the customer be responsible for the “best” end result. My belief is your basic home buyer/owner will lack the knowledge to make an informed decision as to what is “best” by virtue that the loan industry is very complicated even to those of us with years of experience and education. If I were in situation where I needed legal/medical advice I would be extremely stupid if I did not seek the advice of a professional who would have the knowledge and expertise to assist me in making life choices based on my circumstances alone. Homeowners are not round pegs you can stick into square holes. Every homeowner has their own criteria that must be examined to ultimatele determine what is “best” for them. By the nature of the business I am in I believe I have always been in a position of fidicuary responsibility.

  11. I really respect Bradleys comprehensive entry, and read it twice and I have to agree, but Im not going to elaborate as if I wrote it would take a few days, but well written. I dont think there is always the ‘best’ option for a borrower, but at least an ‘informed’option. And I have to agree with Cheryl, the borrower is the decision maker. I feel as if I go beyond the ‘fidicuary’ duties, and that is why my referral base is so great.

  12. I think that loan originator’s are already held to a higher standard than Banks, Credit Union’s ect. I agree that we need to develop our own code of ethics before someone who has little or no knowledge of our business dictates it for us. I also believe that we should all be on a level playing field. So far the Banks and CU’s are exempt from the professional standards that we must adhere to. With the recent meltdown of the banking industry I hope this will change.

  13. That speech was quite the blast from the past…

    Most of the products he refers to have already been eliminated from the market place.

    I reviewed NAMB’s proposed GFE…guess what was missing entirely? A line dedicated to YSP!

    Man, how can these guys expect to be taken seriously?

    Ah, well.

    They made a good point about FHA availbility being withheld from small brokers.

    In hindsight, allowing more brokers to do FHA may have saved a few thousand future foreclosures…

    Bradley, I thought I wrote too much on Jillayne’s posts…, but your insights are always interesting.

  14. The better we do our job the more value we are to our clients. When we bring great value to the table we build the industry and secure the future!!

  15. I entered this industry as a real estate salesperson in another state, that was one of the first to establish a “buyers agency” relationship. I was quite surprised in 1990 that Washington State did not have real estate agents representing a buyer requiring a fiduciary relationship. This has obviously since changed and should be established in the mortgage industry. Although it has not been mandated by law, I adopted this practice immediately when I entered into the finance side of the transaction and has resulted in a very successful business.

  16. “The consumer is the decision-maker, not the mortgage broker. Mortgage brokers do not represent every loan product available in the marketplace, nor do we have the ‘best’ loan available.” Do we rely on ourselves as a decision maker when we go to see other professionals? While a dentist may offer us choices based on cost, do we think that we know better than the dentist does on what would be the best course of treatment for us? How about the financial planner? I go to one because I’m NOT an expert in that field, and rely on someone with expertise to help me navigate my finances. A consumer comes to a loan originator looking for the same amount of expertise, most consumers don’t have the knowledge to know what the language is on a set of documents, so they TRUST that we are doing the best for them that we possibly can. I absolutely believe we owe our borrowers fiduciary duty.

  17. Why is the fiduciary duty a challenge for NAMB, Realtors have a fiduciary/agency disclosure forms that detail those duties that all clients acknowledge. It certainly eliminates any implied or verbal puffery.

  18. Scott, It would cost brokers more time and money and resources to adequately train their LOs to become full fiduciaries so the broker community in general would naturally be against anything that would eat into its profits. NAMB is supported by large (and small I suppose) brokers. It is doing what it is suppose to do: Work on behalf of what its members want.

    Ironically, if done correctly, becoming a fiduciary for one’s client may actually REDUCE liabilty for the broker.

  19. Very good article. When I first started working in this industry (for a Mortgage Broker), I questioned how just about anyone with the desire could walk in off the street and find a job as a loan officer. With housing values increasing, there was more refi/purchase demand than anyone could keep up with.Since we have just experienced the collapse of our industry as we once knew it,what better time to promote professional behavior. If fiduciary responsibility within our field can restore consumer confidence then that will benefit all of us that have chosen to remain. I agree that ultimately the client has to take responsiblity for any and every contract that he/she chooses to sign. However, I do believe as mortgage professionals that we need to always present products that will improve if not maintain the clients current lifestyle.

  20. I enjoyed Bradley’s breakdown of the responsibilities and agree with most of what he offers in his well written commentary. I do think that more LO’s should have formal training, ie: Paralegal Studies or Math and general business studies. This is not a business for Amateurs, this business encompasses a Financial Transction which represents the largest purchase most of our clients will ever make in thier lives! If you are not able to keep up with the changes or explain to a client what the documents mean then change your job.

  21. I think we all know the definitions of what a fiduciary is especially with the help of Brad Allen. At the very least the lending business has a more or less serious fiduciary obligation in every transaction.
    The recent down turn in the price of real estate causes the critical review of all aspects of purchases, sales and financing. When things go wrong the law suits start accelerating. This is where compliance departments figure out if they did a good job of keeping their reps out of trouble. As a beginner I want to know what the best practices are so I do a good job for my customer and protect myself from major grief and expense down the road.
    Evern is Washington State did not officially make me a fiduciary I’m going to assume I am one.

  22. Fiduciary Duties should have been in place a long time ago. I have turned down deals in the past with Realtors because the borrowers couldn’t really afford the payments. Only to see that buyer get the deal closed with a different mortgage originator who didn’t have the clients best interest at heart. Maybe that is why we are having problems with defaults. But not all are bad actors.

    The meaning of Fiduciary Duties has been twisted in the past and maybe that is way the lending industry is getting the bad reputation it has over the past few years. The only way we can correct this issue is to provide a better platform and provide a standard set of rules that all can play by the same playbook.

    Now with each and every loan that is going to be booked it has the originators name on each and every loan file. If you think that they are still not watching what’s going on then your going to get a huge wake up call when the file goes into default. Many leaders have been doing this from years in their wholesale divisions. Just wish they would have applied the same tactics to their retail divisions.

    But a loan originator is a loan originator, so if you work at a bank or a broker shop – all should be licensed. All should attend the required CE classes every year and all should be required to keep their backgrounds up to date on the NMLS. That includes an ethics class on an annual basis.

  23. Mr. Allen’s excellent analysis of the buyer seller nature of the mortgage note transaction goes only part way in determining the answer to the question of fiducicary duty in the mortgage transaction if the “public good” is the criterion on which such duty be evaluated. The common law protects buyer seller transactions but falls miserably short in protecting the public good in the modern world.

    The entire transaction must be reviewed with the alacrity demonstrated by Mr. Allen. Unfortunately, I do not posses such ability. I will comment that such additional analysis must take into account the dangers inherent in at least the most obvious vectors of chance.

    1. On the borrowers end we see several possible scenarios, the worst of which is foreclosure of the mortgage supporting the note due to the collapse of the economy and the associated loss of both equity in the real estate and employment. This is magnified by the likely simultaneous collapse of an entrancing real estate bubble the existence and effects of which were not apparent to the borrower and which may have led to the mortgage itself.

    2. The Public Good require us to truly view the other end of the transaction. On that end it is not the buyer of the note as Mr. Allen has characterized the lender but rather it is the ultimate holder of the debt evidenced by the actual note buttressed by the mortgage granted by the borrower. But wait, there has been something new added to the stew. The note holder has “securitized” the note by pooling it with many others of similar risk and issuing bonds on that bundle of notes. These bonds were sold to other investors who may have purchased credit default swaps (I think) from insurers such as AIG who were required by the Basel II requirements to maintain sufficient capital to indemnify the bond buyer if the value of the bond disappears. Whoops, what happened to the public good? Which public, what good, who’s on first, etc, etc, etc? Somewhere along the way the public good became the private greed. The borrower was still at risk as was AIG or the uninsured bond holder but the lender and the note holder were not. Yet foreclosure will repay them a second time at the borrowers extreme expense. The ultimate bond holder also may be protected by the finer details of the securitization process if the proceeds of the sale of the borrowers home are distributed that far. It is more likely that the bond holder or its insurer will bear some loss. There is yet another club with which to beat the borrower. If the mortgage and note are separated to effec the securitization of the note, the borrower may be foreclosed upon under the terms of the mortgate but still be in debt to the holder in due course of the note.

    3. The public now has a lender and its minions including brokers who have profited by the sale of notes and the proceeds of mortgage foreclosures on the one hand and a family on the streets or the public dole. Since at least Charles Dickens this has been a situation known to be contrary to the public good.

    There is no possibiity that lenders and brokers can avoid their fiduciary duty to the borrower but it is not as a party sitting across the table in a buyer seller transaction. It is that the borrower is a member of the public whose good must be preserved.

  24. I am excited that our industry is revolving and major changes are headed our way. When we are all working professionally on the same platform with the same products that are in the best interest of the consumer while being a profitable business to operate for all.

    This must take place as there will always be a need for mortgages.

    We don’t need to make millions off the consumer while putting them in the position of creating fraud without their knowledge and setting them up for failure for this to run efficiently.

  25. I agree that the mortgage broker should have a fiduciary duty to his/her client. I have worked too long and too hard to earn my reputation as a upstanding mortgage professional to be lumped in with many of the “chop shops” and unethical brokers who muddied our profession’s reputation throughout the last decade.
    Excellent analogies through the article showing the reader how other professions have this code of ethics and adhere to it in good faith not only to the client but the profession as well. I am all for it as it will help in cleaning up the tarnished image of the American mortgage industry. It is time mortgage professionals join the professional ranks with doctors, lawyers, and realtors and come together with our own pledge, our own code of ethics. We owe it to our clients and our profession. Thanks Jillayne – John

  26. I understand where NAMB is coming from trying to reflect away from the actual consequences which fiduciary responsibility can bring upon the broker. I believe the loan process should carry itself down to a one on one working relationship between client, loan originator and investor. The narrower you make it the more responsibility can be accounted for. No one can then hide in a large banking center when foul is called. With the indivual loan originator licenses investors can track the better of the loan originators for quality loans being placed. This would be the future separation between professional and non professional performance. In the big leagues you don’t per form back to the minors you go.

  27. I think that our duty is to educate the consumer as to what is available, and how each product works and if we have that product available. We also need to state clearly what each product will cost the consumer in terms of fees, and the cost of the loan to term. We need to let the consumer know that as a company we may not offer the best solution for their circumstances. It is then the consumer’s responsibility to determine what will best serve their needs.

  28. Good article, however it ends simplistically. Why can’t Mortgage brokwers, bankers, lenders and consumer finance companies adop a fiduciary standard for their loan originators which is both practicable and fair as the examples given: medical doctors, layers and realtors.
    I can’t possible know what is best for my clients on personal level.. sure.. maybe on a numerical level. For example. I ask what the clients goals and objectives are. My service to them is the gather the products/rates program guidelines and provide them the detailed information. Numerically they may only save $100.00 a month. Which may breakevern in 2 years. If this is what meets their goals and objectives then I have done my job by providing them tools with full disclosures to make an informed decision.

  29. I am all for putting the client’s needs first. However, there is point at which the client has to take responsibility for the decision they make too. I love this industry and I have chosen to ride out all these transitions.

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