Mortgage Brokers and Loan Originators Will Owe Fiduciary Duties to Consumers
Jillayne Schlicke on 03 6, 2008
…in Washington state. It’s only a matter of time: The Washington State House and Senate have both passed SB 6381. The March 4th House vote was 93 Yeas, 0 Nays, 0 Absent, 5 Excused.
This bill will now go to Governor Gregoire’s desk where she will likely sign it.
There are other state legislative changes on the horizon including SB 6452 which takes aim at yield spread premiums, requiring mortgage brokers/LOs to refund the difference between any YSP that was quoted at application time, and the final YSP earned at escrow, essentially wiping out a way for a broker/LO to earn a higher fee if interest rates go down on the wholesale side, but the consumer, being unaware of how the mortgage market works, is fine with a higher rate. This bill is still in committee but also looks likely to pass. Yes, yes, I know YSP can be helpful for consumers who do not want to pay any closing costs. The ability to structure loans this way is not effected. Instead, the ability for a broker/LO to earn a higher YSP than initially disclosed would go away. The majority of brokers and LOs I talk to do not have a problem with SB 6452. It makes the broker’s compensation transparent. Those who are able to justify their fee are completely fine with being accurate and honest up front in regards to their compensation.
SB 6381 on the other hand, will radically change the way brokers and loan originators interact with the consumer.
Fiduciary duties does not mean a broker/LO will have to promise to obtain the best rate or the lowest fees or the best loan program. Instead this means the broker/LO will be required to put their client’s interests ahead of their own interests to make the loan. Fiduciary duties will be the subject of great debate during the next many months after the Governor signs this bill and it is sent to the state regulators for rule-making hearings.
Interestingly, there is a small sentence at the end of this bill that is largely going unnoticed by the broker/LO community because of the fear of the unknown surrounding fiduciary duties:
“A mortgage broker may contract for or collect a fee for services rendered if the fee is disclosed to the borrower in advance of the provision of those services.”
Earning a fee for service changes, for the better, how brokers and LOs could be compensated. Right now, a broker/LO can only earn a fee if a loan is made (with some very minor exceptions.) This compensation system creates a structure where brokers/LOs are externally rewarded for making lots of loans, whether or not a mortgage loan is in the best interest of the client.
Many (not all) Brokers/LOs spend countless hours in a consulting and education role helping homeowners restructure their finances, improve their credit score, and so forth. However, the broker/LO cannot earn a fee for such services. ONLY when a loan is made can they earn a fee.
That will change after this bill goes into effect.
The consequences will be a separation of the men from the boys and the women from the girls. Those with the knowlege, skills, education, patience, experience, and other highly honed consultive skills will be able to charge more for their services and they will be worth it.
Memorizing sales scripts for how to “close” the customer is so 2007.
About the Author: Jillayne Schlicke
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24 Responses to “Mortgage Brokers and Loan Originators Will Owe Fiduciary Duties to Consumers”
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Jillayne:
Thanks for the post.
I vigorously supported the proposed changes (w/phone calls, emails, comments), and I owe a nod of thanks to you for helping me to see the latent benefits of the changes, instead of the just the potential liabilities.
One thing to note, however, is the addition of a small change when the bill passed the House (it originated in the Senate), relieving mortgage brokers of the fiduciary duty to inform clients about products that were not available to the mortgage broker at the time.
I would have preferred no change, but I accept it as reasonable. That change may still get rubbed out, I think, when the two bodies hash out the differening versions.
Suppose a small one man broker shop only had 3 lines to represent, 2 that offered a wide range of prime products, and one that offered subprime products, and did not have the ability or authorization to do FHA, VA, and a number of other products.
That broker would NOT be penalized for not offering those products, even if the broker KNEW that it would be in the clients best interest to be in a product that the broker did not offer.
The difference can be staggering.
I priced out a loan yesterday that would be considered subprime or FHA, and would NOT qualify for conventional Fannie or Freddie, even at Expanded Approval Level 3.
The best rate subprime (with price constant) that I found was at 12%, and the same loan in FHA was at 6.375%.
Bottom line is, the borrower still has to ask the right questions.
Such as,
Would this loan benefit substantially from a product that is NOT available to you?
Jillayne:
Here is the amended language:
EFFECT: Language regarding other state law requirements for fiduciaries is removed. Language prohibiting a broker from compromising a borrower’s interest is removed. Language requiring the disclosure of all interests to the borrower is added.
A mortgage broker is not required to offer or obtain access to loans or services that are not available to the mortgage broker at the time of the
transaction.
The Director of the Department of Financial Institutions must adopt rules to implement the section.
Do you know whether or not that has been adopted into the proposed law for the Guv to sign?
jillyanne
thanks so much for the up date, as you predicted in your class the way we get paid will change, i think for the better,maybe i am to liberal in my thinking but i would rather charge for my time and get paid for it even if i can’t get a loan for a client. spending countless hours trying to get a client’s credit cleaned up so we can get them the best loan will now become worth it, if i am reading the last line correctly. Am I?????
thanks
Ron
Jillayne,
Okay, as MB/LO’s we can charge upfront for services but if the client can go down the street to the bank and get the same service for free why wouldn’t they? Seems like an uneven playing field to me.
Hi Cathy,
This puts the burden of transparency of service onto the mortgage broker/LO to show the consumer that the services offered through a broker/LO are superior to the services offered through a bank.
This is what brokers/LOs have been telling me for years: We are better than bank LOs.
So….okay then; you’re better.
I don’t see how brokers/LOs could say this is unfair. IF it is true that brokers offer better products, better service, more experience, more educated LOs.
Brokers/LOs will soon be able to use market differentiation to gain clients:
“Brokers/LOs owe fiduciary duties to our clients, bank LOs do not.”
I believe it is a mistake to ask that all LOs be treated the same. This law is a gift to brokers and LOs.
Hi Ron,
The answer to your question is YES.
Hi Roger,
In your example, it would be very difficult for an LO to explain, with good logical reasons, how the subprime loan would have been “in the client’s best interest.” However, this may be what LOs will be required to do: Provide good logical reasons as to why specific loan programs were recommended when compared with other programs.
The last-minute change in the bill definitely protects brokers who do not offer FHA loans. However, I am going to predict that mortgage brokers that do not offer FHA loans will shrink in numbers when compared with brokers who DO offer FHA loans for sheer survival purposes.
Hello Roger,
I have wanted to contact you for some period of time now, to thank you, for posting,in its’ entirety, the poem entitled the
Sensitive Plant, in responce to my use of some portion of it in an attempt to characterize Jillayne at the time. I should have aplauded your efforts back then, but, I was so taken aback by the circumstance that I could not so do. Now, in a calmer moment, I am greatfull the opportunity to so do has reappered. One question if you don’t mind, did you make the link from your own memory, or did you search the computer some how?
Sincerely,
Chris Worsley
Chris:
You are most welcome.
The mortgage world seldom has room for poetry, prose is a luxury, and profanity the lingua franca of the trade!
I believe I Googled the phrase. I think I was delirious with some Christmas cold or something at the time.
I’m pretty good with lyrics, but there has to be music to go along with it for me to remember, and one or two drinks to get me started!
Thank you for introducing a paean of such beauty to these mundane proceedings!
I have always felt is my duty to explain what the available options are for the consumer–to provide education so THEY can make an educated choice.
It will be interesting to see how this all pans out.
I can remember transactions where I did not feel it was in the clients best interest and when I expressed my concerns to agents, I was often told it’s not my job to decide what is right and what is wrong…if I can provide a mortgage, do so.
This could become a very grey area. Will I now be able to waive a banner and tell an agent or borrower, I have a responsibility to you (which I all ready acted as if I did without legislation) and no…you cannot have this mortgage.
Will this changes how a mortgage originator without FHA/VA argues for a different product like Fannie Flex–which may actually be better but because the LO doesn’t have it, they are now not acting appropriately because they didn’t send them down the street?
I’m bringing up these points as a lender who has FHA/VA and teh whole bag of works… There is still a responsibility that consumers must take in understanding their debt and how mortgages work.
This is going to be interesting.
Hello Jillayne,
I vaguely recall, that the last time I endeavored to place an off point comment on one of your well writen Rain City postings, that it was very similar to this one. As I remember, it was also a discussion of a blizzard of well intended laws such as to bring an attorney to grief. Perhaps, you recall my comment. I well recall your follow up (am I a radical…). Well, it is lost now to the past in the torrent of motion which characterizes Rain City.
Be that as it may, my current off topic comment, is a re-posting of something I sent to The Tim at the Bubble Blog. It is, as follows:
Hello Tim,
For your consideration.
Have you ever posted a chart measuring the price of real-estate, overtime, relative to the price of gold over the same time?
Going forward, the afore mentioned classic tool of measurement, for land, and other commodities,might be well leavened, by an estimated cost of “space born’ real-estate and commodities.
Sincerely,
Chris Worsley
Hello Roger,
Thank you for aknowledging my comment and answering my enquirey. You sound as if you are quite capable of adorning your posts, or this webb site, in any fashion you might choose. Of course, it would be ‘off point’.
Thank you,
Chris
Jillayne, do you think more loan originators will leave the industry? Does this law impact all (including mortgage bankers) who originate residential mortgages?
Hi Chris,
I would be interested to read anything that The Tim comes up with in relation to gold and real estate prices.
Hi Rhonda,
I don’t think this particular bill will have any effect on LOs leaving the industry. I have fielded a number of calls today from mortgage brokers who are worried about the additional liabilities.
If folks are thinking about a career shift, I have found that these things are multi-factorial.
This law is a state law that affects mortgage brokers and LOs licensed under the state’s Mortgage Broker Practices Act and also will effect some entities licensed under the Consumer Loan Act, meaning, those consumer loan lenders that also broker loans.
This law, when signed, will not apply to state or federally chartered banks or mortgage banks.
This is good news because brokers and LOs have a chance now to differentiate themselves.
Rhonda:
Relax. You will be just fine. No one is out to get someone who works as hard as you do, and as transparently. If there is ever a trial, you can call me! For all the good it will do….:)
Anyone that has an LO# or MB# will fall under the scope of the law.
To be sure, there will be changes, and there will undoubtably be mountains of additional paperwork, much of it redundant, and more confusing to the borrower. And there will still be crooks, just less of them. And there will be newbies, just less of them.
But ask this question;
Do you think there are more, or less, financial advisers today, than there were before they were required to act fiduciarily? Was that industry financially devasted by the change?
I don’t have the answers, the questions are rhetorical, but I think illustrative of what may soon occur in our business.
You and I have exchanged opinions on brokered lending vs correspondent lending, myself preferring the former, and you preferring the latter, each capably and justifiably defending our views, and neither locked into a position set in stone.
This week, I locked my first correspondent loan, as the pricing and terms were very attractive.
For those playing at home, not in the biz, one of the key differences differences between brokered loans and correspondent loans, is that the proposed (and exisiting) laws do NOT require the broker or loan originator to disclose the YSP on correspondent loans, even though the correspondent lender knows perfectly well what the YSP incentive is.
The new fiduciary bill does not adequately address this, but perhaps DFI will.
The proposed law states that we MUST disclose any conflicts of interest and ALL compensation.
It will be interesting to see how that conflict plays out.
Regarding the correspondent loan that I locked, I considered NOT disclosing the YSP, but concluded that to not do so would be contrary to all that I have advocated for, even though it is legally permissable.
I am sure I am not alone in this concept, but I suspect it is currently rare. Every broker with correspondent lines will tout the advantage to the prospective LO by saying “and you do not have to disclose the YSP, just like the banks”.
We’ll see what happens with that.
I’m sure, once again, I will march left as the industry marches right.
Most of us will end up in the same place, regardless!
Jillayne:
What is the story with the 300 mortgage companies that are NOT regulated be DFI?
First I heard about it was in Phoung Le Cat’s blog today. There is a proposal to have them be regulated like everyone else.
http://blog.seattlepi.nwsource.com/consumersmarts/archives/133755.asp#extended
Yes, I tried to do some cursory research, but how do you search for a negative?
Found the latest numbers for licensed mortgage brokers is now only 1,380 (down from the last number I saw of 1,900), and LO’s at 6,337, which is up from the last number I remember (5,700 or so, at EOY 2007)
http://apps.leg.wa.gov/documents/billdocs/2007-08/Pdf/Bill%20Reports/Senate%20Final/6471.FBR.pdf
Hi Roger,
It looks like that law passed, too. To me it looks like housekeeping. Those companies are already licensed by DFI, they’re just licensed as consumer loan lenders.
A consumer loan lender that also brokers out is also subject to the state’s Mtg Broker Practices Act already. Looks like the law you are referring to will ultimately be signed.
http://apps.leg.wa.gov/documents/billdocs/2007-08/Pdf/Bill%20Reports/House/6471.HBA%2008.pdf
http://apps.leg.wa.gov/documents/billdocs/2007-08/Pdf/Bills/Senate%20Passed%20Legislature/6471.PL.pdf
It’s going to be a long year ahead for DFI.
It appears that SB 6381 was just signed on Friday. I agree with you, Jillayne…this is one more reason why a consumer might consider a licensed loan originator/mortgage broker over a banker as we owe fidiciary duties…a LO who is not licensed and works for a mortgage-bank.
A fundamental of real estate brokerage relationships is that all parties should know who is working FOR them and AGAINST them. That is, real estate agents and brokers have to disclose whether they represent the seller, buyer, both, or neither. This common-sense principle is in contrast to the old days, when someone might walk into a real estate office, get schmoozed by an agent, reveal confidences, and not realize that the agent was actually working for the seller all along. That is not supposed to occur any more.
Mortgage brokers have been surfing in a grey area regarding their legal and business relationship to borrowers. The borrower chooses them, based on advertising that implies that they will work on the borrower’s behalf to obtain the best loan. The borrower pays for the mortgage broker out of the closing statement (whether revealed or not). But until now, the mortgage broker has been a “free agent;” not required to provide the best deal, free to push a borrower to a higher-interest loan or one with other objectionable terms if that will maximize the YSP. Of course not all mortgage brokers did this, but now there’s a law against it. Now there’s no question that the mortgage broker is working FOR the borrower rather than for the lender or for him/herself. And that’s a very good thing. Not a panacea; I think I read that mtg brokers in California are already fiduciaries, and that didn’t prevent mortgage fraud and abuse. But a good start.
Vince,
Good comments, what does MAI stand for?
MAI used to stand for “Member of the Appraisal Institute” – however, since lots of folks with other designations and no designations are now Appraisal Institute members, it actually stands for nothing. But it’s the Appraisal Institute’s designation for commercial appraisers who have met standards for experience and education, submitted a demonstration report, and passed a comprehensive exam. I think most people in the industry would recognize it as the most significant designation for commercial appraisers, from the leading professional organization.
I agree that with any changes that are made, clients still have to ask the right questions as you mentioned Jillayne. I personally stress education, education, education in hopes that it will help them ask the right questions as many consumers are in unfamiliar territory when it comes to mortgages and all aspects of it. I’m far all the changes proposed and passed already. I know it varies but we are such a key service to our society if provided and regulated the right way and we have duties in our profession to make sure we all work on behalf of the clients interest. In the big picture, the article is right “The consequences will be a separation of the men from the boys and the women from the girls”, this is the way it should be and should bring the integrity back into our industry.
[...] Fiduciary duties for Washington State loan originators who don’t work for a bank-mortgage company will be here this summer (effective June 12, 2008). Are you ready? How will you feel if a loan originator with fiduciary duties believes that a home buyer should take six months to a year to improve their credit and have at least 3-6 months of reserves? When this legislation first came out and Jillayne wrote about it. I thought it was an advantage for brokers. Yes, once again it’s more legislation on brokers (excluding mortgage bankers) for the sins of ALL loan originators regardless of institution. Wouldn’t everyone want to work with a loan originator who has a legal responsibility to look out for their best interest (mortgage broker) verses one who has no legal responsibility (mortgage bank)? Perhaps some agents would rather their clients not work with someone who has fiduciary responsibilities. Consumers…you may want to ask your loan originator whether or not they owe you any fiduciary duties. [...]