Fiduciary Duties

The Moral Terrain of Mortgage Lending

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

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

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

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

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

It is not clear that an individual not officially designated as a professional owes fiduciary duties to clients, though many courts have held loan originators to a fiduciary standard during the last decade as borrowers attempted to balance the scales of justice after becoming victims of predatory lenders. (See “Mortgage Brokers-What Fiduciary Duties Exist? By Andrea Lee Negroni, Mortgage Banking Magazine Oct 1, 2007.) Typically non-professionals deal at arm’s length with their clients. In this case, consumers do not expect that their mortgage loan originator is not self-interested in their dealings, which necessitates the need for broker shopping in order to get the best deal, yet many borrowers did believe the loan originator was working on behalf of the borrower when no such duty existed.

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

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

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

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

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

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

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

NAMF is writing such a code. Contact Jillayne Schlicke for more information: 206-931-2241

Portions of the above article were originally published in Mortgage Originator Magazine in 2001 and authored by Kevin Boileau, Ph.D., and Jillayne Schlicke, M.A.

DFI Speaks Out on Loan Modifications

From the Washington State Department of Financial Institutions:

DFI Advises Homeowners To Verify The Licenses Of Anyone Offering Loan Modification Services Before Hiring Them

OLYMPIA – The Washington State Department of Financial Institution’s Consumer Services Division advises homeowners who are delinquent on their mortgage to be cautious about using the services of someone offering to help them work with their lender to modify the terms of their home loan.

The Department of Financial Institutions (DFI) has received a number of inquiries regarding the legality of providing this service in this state. While there is nothing inherently illegal about this business, those providing this service in the State of Washington must be licensed as loan originators, mortgage brokers, or consumer loan companies and be overseen by the Department of Financial Institutions. Additionally, under applicable law, the loan modification provider associated with mortgage brokers have a fiduciary relationship with the borrower and must act in their best interest.

“DFI is concerned that homeowners in desperate situations may pay substantial fees for loan modification services and not take advantage of the HUD-approved counseling services offered for free by numerous non-profits,” DFI Director Scott Jarvis said. “The non-profit providers can often negotiate better deals because they have formed working relationships with many of the lenders.”

“We are concerned because loan modification businesses are using high-pressure tactics to get people to pay for their services, in some instances claiming a 100 percent success rate in negotiating their loan,” warns Deborah Bortner, DFI’s Director of the Consumer Services Division. “The truth is, not every loan is fixable.”

DFI advises homeowners to make sure loan modification providers are licensed as a loan originator before using these services. Verify a license at www.dfi.wa.gov or by calling 1.877.RING.DFI. DFI is also warning consumers to be especially wary if one of these companies asks for a fee up front. Consumers may also wish to seek free homeownership counseling. For more information, visit www.homeownership.wa.gov or call 1.877.894.HOME.

The unanswered question remains: Is helping a consumer negotiate the modification of a deed of trust the unauthorized practice of law?

If the answer is “yes,” then the nominal, paperwork intake performed by an LO must stop at some point and the file handed over to a local attorney.

I’ve submitted an inquiry to the WA State Bar Assoc on this issue asking for an “unauthorized practice of law” opinion.

Attorneys do not split their fee with non-attorneys. This means the consumer could choose to pay the LO a nominal fee for work performed such as counseling and gathering the homeowner’s information and then the consumer will pay a licensed attorney a separate fee.

I’m not sure why a consumer would choose to pay an LO a fee for doing what could be performed for free by working directly with their lender or by working with a HUD-approved Housing Counseling Agency. If a consumer does decide to pay for loan modification help, it seems more rational to just hire an attorney direct. I’ve surveyed 10 attorneys and so far almost all of them are quoting in the $1500 range for a loan modification. Some charge more if there are more liens on title. Why pay that fee, along with a separate fee to an LO?

Why pay a loan mod salesmen $3500, $4000, and upwards of $5,000 for something you can get for $1500 from a person with a law degree whose conduct is heavily regulated by the Bar?

The percentage of loan originators who know anything about loan modifications is at about one half of one percent right now because nobody up until a few weeks ago was doing them. Instead, the industry just refinanced people over and over again.

Mortgage brokers and LOs are fiduciaries. This means they must put their client’s interests above their own interests. There can be no undisclosed secret fee splitting. The consumer must be told everything, including fully disclosing and explaining your fee. Brokers and LOs are still coming to grips with what it means to be a fiduciary.

True story from the classroom this week:

I was delivering a 20 min lecture on fiduciary duties. One loan originator sitting in the front row with his arms crossed was not taking any notes while his colleagues were feverishly writing down everything on the board. At the conclusion he raised his hand and said, “My broker has an agreement that we have all our customers sign and in that form, it says that we are not their fiduciary so I don’t have to know any of this stuff.”

It’s going to take a while before some mortgage brokers and LOs choose to fully embrace these higher duties. Sooner if we end up with a court case.

Just take a look at this craigslist ad: Make $15,000 per month doing loan modifications….no experience necessary.

There are many options for getting help with a loan mod. Prices range from free to predatory. Washington state Licensees ought take great care before moving in this direction.

In closing, it’s worth mentioning that Indymac loan modifications are re-defaulting at a rate of 58% at the six month mark. This begs the question of whether a homeowner is well-served with a loan modification. This is something fiduciaries would ask themselves as well as disclose and discuss with their clients before recommending this option.

Fee for Service

In Washington State, SB 6381 mandates Fiduciary Duties for mortgage brokers and the LOs working under mortgage brokers. At the end of the bill, there is a small but powerful addition. Brokers/LOs can now charge a fee for service.

Before this law passed, the only way brokers/LOs could earn a fee is when a loan closed (with some very minor exceptions.) Unfortunately, this created an external motivational system whereas brokers/LOs were motivated to close lots of loans, whether or not the loans were good for the consumer.

Being able to charge a fee for service brings brokers and LOs closer to professional status. (Brokers and LOs are classified as emerging professionals. The only thing missing is a mandatory code of ethics with sanctions. For background on professional status, read this article.)

Q: Will you begin to enact a fee-for-service agreement with your clients?
If so, what are some of the services you might begin to charge for? (example: credit score coaching)

Recall a time in the past that you’ve signed a fee-for-service agreement with other professionals such as an attorney, a CPA, a paralegal, or a license mental health professional. If you have access to this agreement, find it and read it again. If you do not have access to an agreement like this in your own home office, google “fee for service agreement” and locate examples.

What will be the elements of your fee-for-service agreement?

Informed Consent Process

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

From the UW:

What are the elements of full informed consent?

the nature of the decision/procedure

reasonable alternatives to the proposed intervention

the relevant risks, benefits, and uncertainties related to each alternative

assessment of patient understanding

the acceptance of the intervention by the patient

Many LOs and mortgage brokers tell me that they have already enacted some of these processes informally with their clients. How can we begin to create a formal informed consent process?

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

Questions for Brokers and LOs:

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

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

Informed Consent for Mortgage Lending

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

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

He goes on to say that

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

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

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

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

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

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

Loan Modification Fees: Is it Justifiable for a Fiduciary to Charge for a Free Service?

Mortgage brokers and loan originators have become curious in learning about loan modifications. When I ask why, they say that they’re hearing there’s good money to be made doing loan mods. What? Wait a second. I thought loan modifications were done by the lender for free.

More and more spam is popping up in my spam bin targeted at LOs and selling “loan modification referral programs,” so I decided to call one of these LOs after sending an email late last night asking for more information and receiving no reply.

This particular person goes by the title of ”mortgage planner.” On her website, she advertises a wide variety of mortgage products including the pay option ARM and the hybrid ARM (are those even available anymore?) but there’s nothing on her website about loan modifications. None of the staff bios show any experience in doing loan modifications. Here’s what I found out. The upfront fee charged to the homeowner is $3500. But the LO assures me that all the work is handled by attorneys, she says. The borrower’s up front fee is placed into escrow. If a request for loan modification is accepted by the lender for loss mitigation (statistics were offered that 93% of loans are being modified) the full fee is due. If the loan does not get modified, $2,000 is refunded and the remaining $1500 is not. I asked the LO why a homeowner wouldn’t just work directly with an attorney. She said that she works with a network of attorneys with a high loan mod approval rate and homeowners are always free to hire their own attorney and not work with her.

I asked her how much of the $3500 goes to the attorney and how much of it she gets to keep. Her response was, “why are you asking me that?” To which I replied, “because if the attorney is doing all the work, then I’m wondering how much of that fee is going to you.” She said “Well I work with the clients. I put a package together and follow up with the lender.” I said, “but a few minutes ago you mentioned that everything is handled by attorneys.” If I were to guess, I’d say that the LO earned $2,000 for a successful loan mod and the remaining $1500 went to the attorney. There are forums out there confirming my guess.

In some states, including Washington State, Mortgage Brokers and their LOs now owe fiduciary duties to consumers. A fiduciary is a person who has the power and obligation to act for another under circumstances that require complete trust, good faith and honesty. Fiduciaries are obligated to avoid self-dealing and conflicts of interests in which the real or potential benefit to the fiduciary is in conflict with the best interests of his or her client. All fees earned must be disclosed to the consumer. The fact that this mortgage planner/LO felt uncomfortable discussing his portion of the $3500 and the actual work performed is a big red flag.

Loan modifications are performed by a lender with no fee to the homeowner. HUD-approved Housing Counseling Agencies perform loss mitigation/loan modification services for free. These agencies are supported by our tax dollars.

I suppose the argument is this: “Well the loan servicing departments are really busy and by paying our $3500 fee, you have a 93% chance of getting your loan modified.” But doesn’t the homeowner still have that same 93% chance going at it alone or with the help of a housing counselor?

If I had $3500 to spend, then I think I’d rather spend the whole $3500 on legal counsel, instead of just $1500. How many homeowners headed toward foreclosure have $3500 to be paid up front? One of the hallmarks of a sham operation listed on the FDIC website is if a lender requires an upfront fee, before any service is performed.

Loan originators, a fee for services rendered is fine, but what are those services being performed? This particular person shows zero experience in loan modifications and admitted to me that the attorneys are doing all the work. Is “gathering papers together” worth $2,000? A fee earned that is not commesurate with services rendered has been catagorized as an illegal kickback via RESPA’s Section 8. Loan Servicing companies are also subject to the provisions of RESPA. All lenders are subject to RESPA whether or not the LO owes fiduciary duties to consumers. Any amount over what’s considered normal and customary for services rendered is considered a junk fee and subject to challenge.

Sigh. I suppose we need to consider that we’re coming out of a mortgage orgy where LOs actually did just gather together some papers, threw them on the processor’s desk, and picked up a fat paycheck. Why wouldn’t they believe this could be their ticket back to the good old days?

Loan Originators, before you begin earning these referral fees for basically doing nothing and handing the file over to an attorney, consider what would happen if the homeowner did not feel that he or she was well served.

Your regulator ends up with a phone call, which turns into an investigation. Perhaps you’ll end up having to refund all those fees back to the consumer. It could happen.

Loan originators, my advice is to refer your financially distressed homeowners to legal counsel and free HUD counselors. Loan modifications are performed free of charge by lenders.

WA State residents: Governor Gregoire just appropriated 1.5 million of your tax dollars to housing counseling agencies all across the state that can help WA State residents FOR FREE.

As a fiduciary, is it possible to justify charging anything above zero when you know free services are available for your client?

Okay all you banker types. Help me analyze this trend. If banks/servicers are offering upwards of $3500 to outsource loss mit/loan mods, that can mean several things. It surely means that a large percentage of these people who are receiving a temporary interest rate freeze on their ARMs will be back in 3 to 5 years with their hand out again, asking for another loan mod; IF they even make it that far. 40% of recent loan mods have already re-defaulted. Random, desperate loan mods without common sense underwriting means we’re just pushing this whole mess further down the road, delaying the eventual recover until many years into the future.

Apparently one of these companies coming to town in September to sell this system to LOs immediately following the WAMB convention. They’re charging LOs a pretty hefty set-up and monthly fee to participate in their referral program. Someone is definitely getting rich quick off of desperate LOs.

If you’re interested in learning what it really takes to process loan modifications, I’ve been teaching Realtors how to successfully negotiate Short Sales for 8 years. Attend one of NAMF’s Short Refi classes (yes, this is approved for CE credits) and you’ll get a better feel for if loan mods are worth the time and effort.

Fiduciary Duties for Mortgage Brokers and LOs

In October of 2007, Andrea Negroni wrote an article for Mortgage Banking Magazine titled “Mortgage Brokers–What Fiduciary Duties Exist?” Negroni provides a framework for mortgage brokers to begin learning about case law already on the books where courts have imposed fiduciary duties on brokers.

The National Association of Mortgage Brokers has been quite insistent that brokers cannot and should not owe fiduciary duties to their clients. However, the court cases that exist begin with the application of the principal-agent relationship.

“Agency is a fiduciary relationship that results from the consent by one person (the principal) to another (the agent) that the other (the agent) act on his/her behalf or subject to his/her control. An agency relationship can be created either expressly by oral or written agreement, or it may be implied through conduct. For a practical example, when a mortgage broker tells a prospective borrower that he or she will obtain the best loan or the best rate and the borrower relies on him to do so, an agency relationship may result from the broker’s conduct.”

Fiduciary comes from the Latin word fiducia, meaning “trust.” A fiduciary is a person who has the power and obligation to act for another under circumstances that require complete trust, good faith and honesty. A fiduciary is said to have substiantially more knowledge and expertise in his or her area of specialization. A fiduciary is held to a standard of conduct and trust above that of a random person. Fiduciaries are obligated to avoid self-dealing and conflicts of interests in which the real or potential benefit to the fiduciary is in conflict with the best interests of his or her client.

For example, a mortgage broker must consider the best loan product for his or her client and not sell loan products on the basis of what brings him or her the highest commission. The best interest of the client must be primary, and absolute honesty is required of the fiduciary.

John Long sums it up in this Scotsman Guide article. In regards to Senate Bill 6381, mortgage brokers:

Must act in borrower’s best interests with the utmost good faith and fair dealing toward them;
Must disclose any and all interests to borrowers that are used to facilitate their request. That is, brokers must explain and determine that borrowers understand how everyone in the process benefits from the transaction;
Must disclose to borrowers all material facts known to the broker that might reasonably affect their rights, interest or ability to receive the intended benefit; and,
Must not steer or direct borrowers to accept a loan with a less-favorable risk grade than the grade they would qualify for under prudent underwriting standards. This is permitted, however, if borrowers are offered loan products within the risk catagory and choose the higher-risk-grade product after consideration.

National Loan Originator Licensing

The “Federal Housing Finance and Regulatory Reform Act of 2008? is here. Read the PDF if you’re feeling ambitious or here is the summary of the Dodd amendment. There’s a section inside Senator Dodd’s amendment that will give us national loan originator licensing. On page 34, the definition of a loan originator is as follows:

LOAN ORIGINATOR

A) IN GENERAL
The term ‘‘loan originator’’
(i) means an individual who
(I) takes a residential mortgage loan application; and
(II) offers or negotiates terms of a residential mortgage loan for compensation or gain;
(ii) does not include any individual
who is not otherwise described in clause (i) and who performs purely administrative or clerical tasks on behalf of a person who is described in any such clause; and (iii) does not include a person or entity that only performs real estate brokerage activities and is licensed or registered in accordance with applicable State law, unless the person or entity is compensated by a lender, a mortgage broker, or other loan originator or by any agent of such lender, mortgage broker, or other loan originator.

(B) OTHER DEFINITIONS RELATING TO LOAN ORIGINATOR.
For purposes of this subsection, an individual ‘‘assists a consumer in obtaining or applying to obtain a residential mortgage loan’’ by, among other things, advising on loan terms (including rates, fees, other costs), preparing loan packages, or collecting information on behalf of the consumer with regard to a residential mortgage loan.

This broad definition of “loan originator” means that we’ll be licensing LOs no matter where they work: broker, banker, consumer finance company, or credit union. There will be 20 hours of required, pre-licensing education and a national test delivered by the National Mortgage Licensing System and Registry. 75% to pass.

There’s way more to this bill than Nat’l LO licensing. 387 pages more. But that’s a good start. Here’s the MBAA recap:

WASHINGTON, DC – Senator Chris Dodd (D-CT) and Senator Richard Shelby (R-AL), Chairman and Ranking Member of the Senate Committee on Banking, Housing, and Urban Affairs, today announced that the Committee passed “The Federal Housing Finance Regulatory Reform Act of 2008,” legislation which includes major efforts to help prevent the rising number of foreclosures, to create more affordable housing for Americans, and to reform the regulation of the government-sponsored enterprises (GSEs) in order to improve their role in the housing finance system. The legislation passed by a vote of 19-2.

The Mortgage Banker’s Assoc has lots more to say to policymakers in regards to how ginormously specialer they are than mortgage brokers. Bankers don’t want to be lumped in together with brokers, especially with any law that will require fiduciary duties. According to Housingwire, MBAA says that “any legislation of a fiduciary relationship tied to borrowers should extend only to brokers and not to bankers, because brokers are an intermediary working with bankers on borrowers’ behalf; it also suggests that fee-level disclosures and limits on some forms of broker compensation, including yield spread premiums, need not apply to bankers’ own origination activities, because bankers are subject to greater supervision and regulation than brokers.”

Wait, didn’t a fair number of lenders on the implode-o-meter hold a banking charter?

Interestingly MBAA rolled over and gave in to loan originator licensing for LOs who work at a bank. See the bullet points at the end of this press release.

Along with national LO licensing, the act brings the “Hope Now” program which has been voluntary, into law, gives President Bush the government-sponsored entity reform he’s been looking for, and extends a hand to the affordable housing coalitions.

WA State Legislative Changes: SHB 2770, SB 6471, SB 6381

The Washington State Legislature has passed three new laws that will go into effect June 12, 2008.

SHB 2770
Governor Gregoire’s legislation implementing the recommendations of the Homeownership Task Force. This legislation impacts Banks, Credit Unions, the Consumer Loan Act (CLA), and the MBPA. The bill addresses prepayment penalties, negative amortization loans, the federal guidance on nontraditional mortgage products and subprime lending, and makes mortgage fraud a class B felony.
SHB 2770 PDF
SHB 2770 Summary
SHB 2270 Final Bill Report

Interesting highlights from the Final Bill Report:

The DFI must adopt a disclosure summary understandable to the average person that includes:
• the fees and discount points on the loan;
• the interest rate of the loan;
• the broker’s yield spread premium;
• the presence of any prepayment penalties;
• the presence of a balloon payment;
• whether or not property taxes and property insurance is escrowed; and
• other key terms and conditions of the loan.

A residential mortgage loan may not be made unless the summary is provided by a financial institution to a borrower within three days of a loan application. If the terms of the loan change, a new summary must be provided to the borrower within three days of the change or at least three days before closing, whichever is earlier.

Steering
A person subject to licensing under the MBPA or the Consumer Loan Act may not steer, counsel, or direct any potential borrower to accept a residential mortgage loan with a risk grade less favorable than what the borrower would qualify for under the lender’s existing underwriting standards. The licensee must prudently apply the underwriting standards to the information provided by the borrower.

Prepayment Penalties
A financial institution may not make or facilitate the origination of a residential mortgage loan that includes a prepayment penalty that extends beyond 60 days prior to the initial reset of an adjustable rate mortgage.

Negative Amortization
A financial institution may not make or facilitate the origination of a residential mortgage loan
that is subject to the Guidance and Statement if the loan includes any provisions that result in
negative amortization for a borrower.

SB 6471
This legislation amends the CLA and MBPA. All lenders, except those making loans under chapter 63.14 RCW, must have a license under the Consumer Loan Act. Lending is no longer allowed under the MBPA. Read the FINAL BILL REPORT link below. There is a lot of concern and confusion over this change. More info is forthcoming at the next Mortgage Broker Commission meeting on May 13, 2008.

SB 6471 PDF
SB 6471 Summary
SB 6471 Final Bill Report

SB 6381
Establishes a fiduciary duty relationship between a mortgage broker and his or her client.

SB 6381 PDF
SB 6381 Summary
SB 6381 Final Bill Report

Other links:
Here’s a quick overview from the Wash State Housing Finance Commission.

CE Forward Inc., dba National Association of Mortgage Fiduciaries