Fiduciary Duties

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.

    Solutions to the Mortgage Lending Crisis

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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