Loan Originators

Are Loan Originators Professionals?

When I ask the question “Are loan originators professionals?” to a group of loan originator students in ethics classes, almost everyone says “yes.” Anyone can do their job in a professional manner (adjective,) but not everyone is a Professional (noun.) Is your barista at Starbucks or the person who bags your groceries a professional? If you answer “yes,” what makes a barista different than a doctor or lawyer? When we use the word Professional as a noun, there’s a classic definition that we refer to here:

A Professional:

Has specialized knowledge in his or her field. This body of knowledge is generally agreed-upon by those in the industry and is typically described within state and federal law. A professional knows way more than the average random consumer about his or her area of expertise;
Is required to complete a minimum amount of formal, academic education;
Is tested for competency;
Is licensed;
Must maintain that license with mandatory continuing education;
Subscribes to a mandatory code of ethics in an industry that is self-regulating. This is different from state or federal government regulatory oversight. The industry itself regulates ethical conduct over and above state and federal law;
The self-regulating body enforces their code of ethics with sanctions for violations;
Owes fiduciary duties to clients. This means the professional has the highest prescribed duty of loyalty to the client, to put the client’s interests above his or her own interests.
Here is how loan originators (LOs) measure up against the above list:

Specialized Knowledge
There is a power imbalance between mortgage loan originators and the consumer. LOs know way more about how the machine we call mortgage lending works than the average random consumer will ever know.

Education
The SAFE Mortgage Licensing Act of 2008 requires 20 hours of pre-licensing education for licensed loan originators. The Dodd Frank Act of 2010 requires equivalent education for depository bank registered LOs.

Competency Test
The SAFE Act requires licensed LOs pass a competency test.
The Dodd Frank Act requires registered LOs pass an equivalent competency test.

Continuing Education
Licensed LOs now complete 8 hours of continuing education and any state required CE
Registered LOs complete the equivalent of the above.

Code of Ethics
There is no mandatory code of ethics for mortgage lenders. What codes exist at the national trade level, are voluntary and offer insufficient guidance. Currently there is no ethical oversight in mortgage lending by the industry. There may be individual company codes of ethics for employees.

Fiduciary Duties
Some fiduciary duties exist between loan originators and their clients. For example, Washington State prescribes fiduciary duties for mortgage brokers and the loan originators who work under the supervision of a mortgage broker. Other states may have also added this duty. But no such duty exists in all 50 states at the federal level.

Loan originators are classified as an “emerging profession.” We are living through a historic, transformational phase. On the other side of the transformation, which could come sooner than some people think, I believe LOs, no matter where they work, will owe fiduciary duties to consumers, even with LOs who work at a bank. If you look at the narrative history of any profession you see, over time, a steady increase in the number of continuing education classes required, more mandatory pre-licensing education, an elevation of duties owed to clients, more expansive ethical codes, and tougher licensing exams. Loan originators, no matter where they work, will eventually transform into professionals.

Many in the industry believe fiduciary duties means higher liability to the company. However, if done right, this may actually have the reverse effect by lowering the mortgage company’s liability.

Looking after the best interests of customers is almost always in the best interest of the company.

Once the mortgage industry decides to adopt a prescriptive and descriptive code of ethics AND ALSO a framework for industry self-regulation, an added benefit will be that government regulators and politicians will stop passing more laws directed at our industry.

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Questions.
1) Does your company have a code of ethics?  If so, post the link in the comment box and tell us if you think your company’s code has helped guide your (or your colleagues) as you’ve faced ethical dilemmas in your career.
2) Do you belong to a professional association?  (Example: NAMB, MBAA, NAPMW, NAMF, Mortgage Planners, and so forth)  If so, find their code of ethics and read it. Could their code of ethics be improved? If so, how?
3) The mortgage industry has lost thousands of loan originators over the past few years.  Some will eventually return.  When they do, what

Bellevue LO Sentenced

From the Seattle Times:

A federal judge today is expected to sentence a former Bellevue loan officer to prison for perpetrating what prosecutors say is one of the largest home-mortgage fraud cases brought so far in Western Washington.

Christopher Brooks, 39, pleaded guilty to conspiring to commit wire fraud in connection with fraudulent loan applications on 18 Puget Sound-area homes that went into foreclosure and were sold by banks at a loss of more than $2 million.

A grand jury indicted him and his co-conspirators last summer for obtaining about $27 million in fraudulent loans on more than 50 homes in the region. Brooks admitted to paying borrowers to take part in the fraud.

In a memo to the court, Brooks’ attorney acknowledged his client could be viewed as “a poster child” for the nation’s mortgage mess but said the court should take into account the complicit behavior of the banks and give him a lighter sentence.

Read the entire story here.  The attorney for the loan originator tries to put the blame on the banks for allowing so much mortgage fraud to occur during the bubble run up. As an educator, I’m amazed at how many loan originators agree with this attorney. They say, “Jillayne, the wholesale lenders encouraged us and taught us how to over state income and made us sell more of the toxic loan products to people” and there’s no talk of any personal responsibility of the individual LO’s role in the mortgage meltdown.

In the same conversation, loan originators also blame the consumer for not reading their loan documents.

How can LOs not wish any personal responsibility for themselves but demand personal responsibility for their consumers? Answer: They can’t. This is a contradiction that exposes an ugly truth.

Today the reputation of brokers, loan originators, and yes, BANKS is in the gutter. The real answer is that it’s beyond time for loan originators to stop shirking responsibility for their own conduct and embrace a higher duty to the consumer. We have to start rebuilding our reputation at some point. Let’s start right now.

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 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