mortgage brokers

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

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

Mortgage Industry Codes of Ethics

Read the Code of Ethics from these three trade organizations.  Don’t worry; it will be a very fast read.

National Association of Mortgage Brokers
National Association of Mortgage Women
For the Mortgage Banker’s Code, follow this link and click on “cannons” from the menu on the left.

What’s missing?
Could some of these phrases be re-worded?  If so how? 

For example from the Mortgage Broker’s Code, the phrase “Mortgage brokers shall conduct their business in a manner reflecting honesty.”  This could mean brokers simply have to look like they’re being honest.  I would re-word this to say something like, “brokers shall be honest when conducting the business of mortgage lending.” 

It seems to me that they all sound the same. I wonder if they all just copied and pasted from the Mortgage Banker’s Code.  Now let’s take a look at some of the newer trade associations.

Upfront Mortgage Brokers Association
National Association of Responsible Loan Officers
Certified Mortgage Planners
National Association of Mortgage Fiduciaries (link coming soon)

Can you see how the industry is beginning to transform?

Do you have a code of ethics at your company? If so, please provide the link in the comment box.  If not, ask your manager why and tell us what he or she says.