Subprime Solutions

This is part four of a four-part series of blog articles about the subprime mortgage problems. In part one I sketched the rise and fall of subprime loan products and their relation to predatory lending practices within a capitalist system. In part two, I examined the structural relationship between a professional and his or her client. In part three, I offered a business ethics case study comparing the Space Shuttle Challenger disaster to the subprime mortgage market collapse. In today’s part four, I assert three logical solutions to the current crisis in lending.

[photopress:gift_1.jpg,thumb,alignleft]The subprime crisis is a gift.  Mortgage lending can emerge from the subprime mess and transform itself. I have been co-writing about predatory lending and the ambiguous professional status of retail mortgage salespeople for over 5 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.  Consumers do not understand the subtle and obvious differences.  They DO know “lender

120 thoughts on “Subprime Solutions

  1. Hi Jillayne,
    “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”

    The CMPS exam can be done via home study or the 3 day exam. Our of the couple hunderd Mortgage Professionals who cared enough about their profession to commit their time and resources to attend, 25% failed the exam. I was shocked because at the exam, I was very impressed with the calibur of professionals who attended. This was not your regular mortgage sales seminar or WAMB event.

    Plus, CMPS is not just about home equity management. It covers many other financial aspects. It’s important for consumers and Mortgage Professionals to understand how home equity works. It’s not about tapping one’s equity…it’s all about working with consumers to develop a mortgage strategy or plan which may include doing absolutely nothing with their mortgage.

    Last note about CMPS, they have actually kicked loan originators out of the group when a complaint has been filed against them. Consumers may lodge complaints against CMPS individuals and action is taken if the LO is found to not be ethical.

    I’m not sure what articles you’re talking about regarding Barry Habib. Would you mind forwarding them to me?

  2. I belong to MMG and have access to his interviews. I was inquiring about this:

    “an entire slew of articles that catch lead Mortgage Planner instructor Barry Habib with his pants down”

  3. Hi Rhonda,

    Here you go:

    In this article, he advocates hybrid ARMS

    In this article, he encourages LOs to get their CMPS designation in order to create wealth for consumers, and also for CMPS referal partners because they need it too. Referral partners being estate attorneys, CPAs, insurance agents, and financial planners.

    In this article, he makes some very broad generalizations as to why ARMs are a good choice, but doesn’t analyze human behavioral norms. The basis for his argument is that homeowner’s get a new mortgage every 4 years (of course this pushes a psychological assumption that if the reader is not refinancing every 4 years, we’re not the “norm.” Refinancing every 4 years certainly does help the income and earnings of the mortgage salespeople.)

    Interesting that a year ago, he is advocating here for loan originators to be accountable for “suitability” standards, (which is nice; do you agree?) where industry trade groups are arguing that LOs cannot be held to the duty of deeming what’s suitable for consumers.

    In the CNBC interviews, which I don’t have transcripts of, but are readily available to anyone via the posted link, he repeatedly advocates the use of hybrid arms and interest only loans for the “right” people (but he doesn’t fully explain what “right” means).

    I guess I’ve never been a fan of encouraging homeowners to increase their mortgage debt burden and treating the equity as an arbitrage investment plaything.

    I’ve seen too many homeowners refi over and over again to leverage their equity for many reasons. When does all the serial refinancing stop in the opinion of a mortgage planner?

    The whole picture seems too self-serving. All the participants involved with the mortgage planner earn a fee. Let’s say I need a referral to an estate attorney, and I ask my mortgage planner for help. If the mortgage planner refers me to an estate attorney that’s part of the club, then am I going to pay a higher fee for his or her services, in order to cover the cost of the referral fee paid back to the mortgage planner?

    I did read in the CMP Code of Ethics that any fees earned from referrals must be disclosed to the consumer, but I’m asking a different question: is my fee that I pay the estate attorney going to be higher?

    The whole set-up seems kind-of self serving for the people involved: maximize referral fees for each other.

    But, as always, I am open to hearing your viewpoint.

  4. I guess I’m missing any big issues or where you can justify saying something as strong as Barry Habib’s pants have been caught down.

    The practice of referring a client to someone who is a professional is what should be done. A Mortgage Planner (or whatever they call themselves) should NOT be giving tax or investment advice. If the Mortgage Planner has professionals they trust and the borrower does not have a CFP or CPA, etc., than what is wrong with suggesting that they contact one?

    I’m not aware of any referral fees with the CMPS practice. I have referred clients to my past CPA and never received nor expected a referral fee and she has sent clients to me as well. I no longer work with this CPA because I did not like how she charged me on my last return with her and her explanation was less than satisfactory. I no longer refer her, either.

    This is no different than an agent recommending a Mortgage Professional or vice versa.

    Regarding Barry explaining various mortgage programs, I see nothing wrong with that. A Mortgage Professional should be aware of the products available and how they may be an option for their clients…at least one to discuss with the borrower. It does not mean that they should use to product.

    There are no bad mortgages, but if a consumer selects the wrong mortgage…then it’s a bad plan. This is why they need to work with a Mortgage Professional who will review all of their options and factor in what their goals are to develop a strategy.

    A 30 year fixed rate is great for most, but if someone is going to live in their home for 4 years and the 5 year fixed ARM is $200 less a month…shouldn’t the borrower know about each option and the the advantages or disadvantages are with each?

    PS: It’s CMPS if you’re referring to the designation that I’ve earned. 😉

  5. Good Morning, Rhonda and Happy Mother’s Day!

    Did you watch any of the CNBC videos? He was promoting hybrid option ARMS and interest only loans without fully explaining the product and telling viewers not to worry about housing prices.

    Here is where I stand: I believe the CMPS certification’s Code of Ethics is a good one; better than most. I believe the whole idea of the institute and designation is a brilliant marketing move for the owners.

    I further believe the CMPS designation offers a false sense of competency (for the consumer) when anyone can earn it if they just pass the test and attend a 3-day workshop.

    Designations I like?

    * A four year college degree in finance or economics.

    * The School of Mortgage Banking’s three week course and designation: AMP (Accredited Mortgage Professional)

    * Either of the NAMB certifications require industry experience:

    * I also like the NAPMW’s Master of Mortgage Lending certification, MML because the education is for anyone in the industry, not just for loan originators.

    In my perfect world, an LO would hold one of these designations and then be held to a higher code of ethics like the CMPS Code.

    In the real world, many new LOs start out knowing nothing and selling hybrid option arms and interest only mortgages and loans with prepayment penalties because they pay more commission.

    I think we both would agree that it is now time to change this.

  6. What do RCG readers think about:

    The Mortgage Professor’s Upfront Mortgage Broker’s Association?

    Internet Brand’s ( Borrower’s Bill of Rights?

    I like both of these ideas. the UMBA attacks a problem (fees changed upward at the closing table) with a solution (a written guarantee of fees.) I think this would make escrow closers very happy. In fact, if I were a closer, I would give an LO a discount off his or her escrow fee if he or she was an UMB.

    The reason I like’s Borrower’s Bill of Rights is because it takes ethical conduct out of the realm of industry oversight and puts it back into the corporation. The company is making a promise to its customers. Now if there were ethical problems, instead of a consumer being unable to receive help, the consumer could go right back to the retail source of the loan.

  7. With UMBA, lenders must pay a fee to join. Are there test? Expulsions? Are they a sponsor to BPI (I’ve noticed them on your site)? I still need to check out the link.

    My point is that any LO can guarantee their cost. I do this all the time if asked. And when not asked, it just happens. I priced a second mortgage wrong last week and the borrower will never know. I’m eating it. I honor my fees, too.

    Pledging and doing are too different things.

  8. In Washington State, currently only Mortgage Brokers are licensed. If a mortgage person works for a bank mortgage co. (like WaMu, Countrywide or Wells Fargo), credit union or thrift…they are not required to be licensed.

  9. Jillayne:

    I have very much enjoyed your series of articles. I am a mortgage banker here in Chicago. I also have a license. More importantly, I like to think of myself as an ethical loan officer who wants to help my clients as well as help them make the best decisions for themselves.

    Your series, for me, has started me to think about the loan officer’s responsibilities to his/her client. Here are a few thoughts in brief:

    1. Loan officers make money based on a percentage of the commission that their bank makes from selling the loan to the end lender, and the percentage of the commission varies with each loan, based on the “profitability” of the loan. So, unlike real estate agents who have a (for the most part) fixed commission, loan officers must, on one hand, be competitive and, on the other hand, try to make what they can per loan. Further, doctors have fixed fees (again, for the most part), and so their mission is the help (heal) their clients. Car dealers want to make as much money as possible. My point here is that there is a tension for the loan officer to do what’s best for the client yet be profitable.

    2. If loan officers were all making the same amount of money for each kind of loan (i.e. any loan officer doing a conforming loan on a 30 year fixed) would make the same yield spread (let’s say 2.5%), then, in a way, this would take the competitive “shopping” out of the picture, and borrowers would work with people based on experience, ethics, knowledge, etc. Just as they would choose their realtor, doctor, lawyer, etc.

    3. If I am working with a client who has 5 collections, a judgement that has been satisfied and needs to be proven satisfied with documentation that a client has to get from the courts and I am then going to spend three times as much time in helping this client, then I want to be compensated more than what I would earn from the “average” loan that I do. This goes back to what if every loan were compensated the same? Who is to judge what is customary, below customary, or too high (predatory)? Loan officers have different standards for what they earn. We do have to remember that this is a business. This is how we support our families.

    4. I absolutely agree that not just anyone should be able to be a loan officer. Period. It’s ridiculous that anyone in the country can do this.

    5. I like the idea of an oath. Though I still think this is tricky because, again, we are in a competitive situation. Think about it like this: realtors many times refer several loan officers so that their clients can “shop” and “get the best deal.” This may work, but I find that it often leads to confusion and deception and, at the closing table, numbers that have changed. I am not sure that an oath would change any of this.

    6. My doctor knows how to stitch the cut on my arm. I don’t know how to fix it myself and I don’t want to know. But I do want to have a sense that this doctor is knowledgeable and will have my best interests at heart. I have never felt that the person from whom I am buying my car is in the same category. So why do mortgage brokers seem to be like car dealers?

    6. I agree with Rhonda in that no loan is bad. Back to point #5, I want to be seen like a doctor, not a car dealer, as my reputation is everything to me. So hopefully my clients will know that if I were going to offer an Option Arm-type program, I am going to explain the ENTIRE program, good and bad points. Obviously not every loan officer does this.

    These are just a few thoughts. Hope they help the discussion.

  10. Hi Chris,

    How’s the market in Kansas City? Last time I was out there speaking at a nat’l convention, I went into a little town called Independance to the President Truman Museum and then had the best BBQ beef I have had in my life.

    Yes, I agree that licensing should be required. Right now it is only required in most states for loan originators who work for a mortgage broker. Employees of banks, credit unions, and consumer finance companies are often exempt.

  11. Hi Richard,

    Thank you for your well thought out comments. I want to try and summarize your six points by asking a new question of RCG readers:

    Q: How ought Loan Originators (LOs) be compensated?

    Possible considerations:

    The experience level of the LO

    How many loans has he or she closed?

    What different types of loan products is he or she familiar with? (An LO who only knows subprime is worth considerably less than an LO who has experience originating A, Alt-A, Subprime, and also FHA/VA, plus state bond loans, private money, and so forth

    The knowledge and competency level
    Does the LO have a college degree in finance or econ?
    Has the LO achieved any further designations?
    Does the LO routinely attend CE classes that are NOT sales-ucation?
    Has the LO passed a min state competency test?

    Higher ethical standards
    Does the LO belong to an industry trade assoc with a prescriptive code, and does that association enforce their code?

    And finally,
    Does the LO owe fiduciary duties mandated by state law?

    I assert that the more times and LO could say “yes” the the above, the more the LO could charge for his or her services, because you will be worth more in the eyes of the consumer.

    Consumers would have a choice between an LO who is just basically a salesperson compared with an LO who is an emerging professional.

    A doctor or lawyer charges more per procedure or per hour the more complex the case. An employee of an institution like a bank could negotiate a better fee split with his or her employer depending on the above factors.

    What do RCG readers think? Am I missing anything?

  12. Isn’t the discussion about sub-prime loans somoewhat irrelevant to the Puget Sound real-estate market? From what I’ve read, sub-prime loans have never been used in this region much, and it doesn’t seem as if the recent tightening in this product area has any impact on the local market. From what I can tell, it seems as if there is no drop-off in the number of qualified buyers out there, since inventory seems to be moving very quickly and we are still seeing many bidding wars.

    Maybe the tightening sub-prime lending standards will hurt some markets, but I can’t see how that can happen in the Puget Sound. Even if the Alt-A market cracks up, and there is a major tightening of standards for these products too, that shouldn’t hurt us in the Puget Sound. Isn’t it true that most of the buyers here have good down-payments and great credit histories, far better than the national average?

  13. Hi Sniglet,

    On the contrary, steady price increases in the greater Puget Sound area have made it challenging for new homebuyers to enter the market. That, coupled with heavy retail marketing of subprime products that allow a lower initial monthly payment means some homebuyers made a choice for subprime. All’s well and good provided the borrower can make the payment. If you do a county by county search on the website foreclosure dot com you will see many more foreclosures AND pre-foreclosures when compared with 2006 and 2005.

    Real estate agents tell me that the average time-on-the-market has increased in some areas. In popular areas like Seattle and Redmond, the market is stable. I am not a licensed real estate agent so I do not have access to their market statistical database, the NWMLS.

    I do not believe it is true that most buyers in the Puget Sound area have good downpayments and great credit, higher than the nat’l average. I believe like most markets, it is a mix. We could run a report on this through a title companies Metroscan system, but we would probably need to pay for it. Elizabeth Rhodes from the Seattle Times ran some numbers and concluded that everything is fine in SEATTLE but failed to add in the numbers for all of King County, Pierce, and Snohomish. She also indicated that there is a large number of subprime loans originated in South Pierce County.

    Also, there are an estimated 8,000 loan originators who work for mortgage brokers in Washington state alone. And that’s not counting the consumer finance companies.

  14. “Even if the Alt-A market cracks up, and there is a major tightening of standards for these products too, that shouldn’t hurt us in the Puget Sound.”

    Unlike Subprime, Alt-A makes up a large portion of local mortgages. 33% of Seattle area loans issued in 2006 were either I/O or Option ARMS, which make up a good deal of Alt-A products. I’d estimate that around 50% of local home loans issued in the last 2 years are something other than Prime fixed rate loans. This pattern is typical in markets where the median home price has increased well in excess of median incomes as buyers find it difficult to afford a home using traditional financing and lower debt to income ratios.

  15. Hi Jillayne,

    I have some thoughts on this – been so slammed to get them out, but this is a great topic and I happen to disagree with you, but as I said in my preliminary blog post about it (b/c I haven’t had time to write a full response) AND I QUOTE:

    “I have a problem with the concept of ethical lending associations, designations or other privately developed ethical lending platforms. Jillayne is smart and sharp, so I need to reason out a much longer response than this or she will hand me my lunch…”

    So give me a little bit and then you can hand me my lunch, regardless of post length. 🙂

    Thank you for bringing this topic to the forefront!

  16. Hi Jillayne,

    Great post you have here. 🙂

    It seems to me that based on various news articles, including those here on RCG, the mortgage industry has been screaming for regulation over the last several years. Based on your link to Barney Frank’s proposed legisation, perhaps it’s coming in some form or another (we’ll see what the next election brings).

    I’m curious to know your ultimate end point here? Are you for just industry self-regulation, just government regulation, or some combination of the two?

    Personally, I prefer less government, not more; and as such I feel pure gov’t regulation probably won’t provide the best result. However; I also don’t trust an industry to really legitimately self-regulate; and I say this primarily due to the vested interest problem…the mortgage industry is making way too much money to make any drastic changes from the status quo. By default, I’m backed into favoring some form of an industy-gov’t combo form of regulation. As I see it, the gov’t is going to have to set some minimum standards of conduct the violation of which produce real consequences for both individuals and companies. The industry can then add to these minimum standards to raise the standards of conduct for their members and invite greater consumer confidence in the industry.

    Is there a better scheme that may work?

  17. I don’t have issues with interest only ARMs or I/O fixed programs. The 30 year fixed rate 10 year interest only and 5 year fixed rate 10 year interest only programs are probably 2 of the more popular ones that I provide for clients. Many of these clients can afford the full amortized payments but opt for interest only for cash flow and investment purposes. As I’ve probably stated at least 100 times 🙂 I’m not a fan of option ARMs (neg am/deferred interest) aka pick-a-payment products.

  18. Hi Joe,

    We have some decent state and federal regulations that, if followed, would serve the consumer. It would be naive of us to believe that all mortgage lenders follow all state and federal laws all of the time.

    It would also not serve us well to believe that our state and federal government has enough resources to police every single transaction originated by every single loan originator. There never will be enough gov resources to do this.

    Right now the industry has ZERO self-regulation. The industry has a couple of choices, the way I see it:

    1) Do nothing.
    Possible negative consequences: harsher state and federal regulations and continued decline of status in the eyes of the consumer and in the eyes of fellow industry colleagues.
    Possible positvie consequences: continue to earn lots of money.

    2) Start self-regulating the industry.
    Possible negative consequences: unethical, predatory lenders would be kicked out of the industry.
    Possible positive consequences: same as above, plus, an increase in status in the eyes of consumers and industry colleagues.

    3) There would be new professional associations that would form, and self-regulate, offering the consumer a CHOICE between a loan originator who has only a retail relationship with the consumer and a loan originator who has fiduciary duties on behalf of the consumer.
    Possible positive consequences: Consumers would have a choice. A fiduciary duty loan originator would be worth more money.
    Possible negative consequences: loan originators would have to answer to a group of their peers if accused of violating a code provision.

    The above does not contain a full and complete list of possible consequences.

    I am hopeful that the subprime problems will lead to positive changes.

    So, for example, in Rhonda’s comment 22, if a client wanted a loan product that Rhonda believed was not in the client’s best interest, Rhonda would not be able to make that loan, and neither would her competitors.

  19. Hi Joe,

    In response to your comment: “As I see it, the government is going to have to set some minimum standards of conduct the violation of which produce real consequences for both individuals and companies.”

    This is the area where I think many of the people calling for action are missing the real opportunity in this mess. WE HAVE THE LAWS, WE HAVE THE REGULATIONS, WE DON’T HAVE THE ENFORCEMENT.

    There doesn’t need to be new laws, new regulations, new regulatory divisions. There needs to be more enforcement staff dedicated to enforcing the existing state and federal laws. Enforcement budgets at the state and federal levels are a joke.

    Instead of funding new legislation, fund enforcement. Spend money on hiring more auditors, more enforcement staff, etc. so that the laws we have in place have teeth. New laws with out the enforcement to back them up will be as ineffectual as the existing laws.

    If we focus on enforcement of existing laws we will see a dramatic improvement in the service provided by the industry.

  20. Jillayne,

    While I still haven’t had time to bullet-proof this, here are my major problems with using private professional organizations as the vehicle for self-regulation/governance:

    1. Private professional organizations themselves are not regulated, as you mention in your initial post these organizations range from “just having to look honest” to “testing” to adoption of some code for those that choose to associate with the organization. These are self-designed marketing vehicles more than they are true standards. Who is auditing these organizations to allow these claims to be made? To me, there isn’t any protection because they aren’t required to do anything to ensure that what they claim is actually occuring.

    If they were more widely and uniformly accepted and recognized by consumers perhaps there would be a modicum of pressure that would ensure that their members are holding up their end of the bargain; but look at the NAR – I don’t hear a lot of consumer uproar over their code of ethics being debased by individual members of NAR.

    2. They all set their own standards and they all vary widely. This makes it impossible to accurately judge the efficacy of their quality/ethics practices and how members of one organization stack up to another in terms of ethics/quality of service, etc.

    3. All of this leads to major inconsistencies in service across individual members within these organizations as well as the organizations themselves. This leads to consumer confusion in the marketplace and can foster a false sense of trust that can end up damaging the consumer in the long run. Especially if the enforcement of the organizations’ credos is non-existent or the credo is merely a marketing ploy to earn its members more business.

    I think we can all agree that the one thing the mortgage industry does not need is more consumer confusion.

    4. This confusion ruins the effectiveness of the good organizations who actually hold their members accountable vs. those that just use ethical lending as a marketing tactic. It renders the professional-organizaton based system nearly useless.

    5. It is difficult to accurately asses members who qualify or pledge to follow set organization guidelines or oaths. Even if a formal file review process is in place for initial membership it is far to easy to pass a few files vs. an entire book of business. Further, these organizations lack the manpower to effectively recertify a meaningful percentage of its members each year to ensure ongoing levels of standards.

    Further, some of the worst lenders can have crystal clean mortgage files – a comprehensive application process can weed out bad lenders but it also comes at a cost. Due to the confusion mentioned above does the organization that has the rigorous inspection standards deliver enough “juice” to its members to make submitting to a substantial application process worth it?

    6. Many of the criteria for membership are arbitrary and have no real relevance on levels of service or business ethics. A classic example is time in business. Many of the most jaded individuals are those that have been “in the fire” too long. Young, ethical, idealists who are out to rewrite the rules of the industry are automatically excluded based on a subjective and non-correlative criterion that hinders the fostering of an ethical business place.

    Why not get the new ones early before they learn the bad habits?

    My recommendation instead is for a national licensing system modeled after the NASD. The NASD, while not perfect has come a long way in cleaning up the Wall Street broker houses. But national licensing is topic for another post.

  21. Hi Morgan,

    You bring up a great point…enforce the existing laws. Certainly creating new laws that are then ignored as the current laws are ignored won’t solve anything. There has to be real consequences for violating the law, or the law is meaningless.

    Hello…legislators…are you listening? That includes you too, Barney Frank.

    Hi Jilllayne,

    OK, thanks for laying out possible courses the mortgage industry may take at this point unde comment #23. However, I’m hoping you’ll take a stand and advocate something here…be a force for positive change, so to speak. You work in this industry and have more knowledge of this subject than I do, so what do you think is the best course of action for the industry at this point?

    It seems to me at a minimum we need substantially more enforcement of our existing laws as Morgan advocates; but I think the industry should takes things a step farther, and also engage in a very thorough self-evaluation, followed-up with a thorough “house cleaning”. If the industry were to do this I believe it would go a long way towards increasing consumer confidence in the industry, and may even avoid burdonsome legislation it may otherwise have to contend with. What are your thoughts? Is there a better option?

  22. Hi Morgan,

    We agree on many points.

    A code of ethics without enforcement is useless. Professional organizations would have to have transparency in what they do, so the industry and consumers could see how a professional organization is regulating conduct.

    There never has been nor will there ever be enough government resoures to regulate every single transaction written by every single retail mortgage salesperson.

    In the historical context of any profession, you are always better off self-regulating rather than let the government regulate for you.

    In regards to your number 3, there is mass consumer confusion now. It couldn’t get any worse, could it? I assert that self-regulation by an industry organization will HELP the consumer because the professional organization will be NEUTRAL.

    Today, all consumers hear is “we’re a great lender” which is subjective. I can say I’m a great lender and you can say you’re a great lender and we’d both be right, because in our own eyes, “we’re great lenders.”

    Consumers need a neutral, objective third party to analyze the word “great” in the above sentence.

    In regards to number 4, which professional associations are you referring to?

    In regards to number 5, a professional association could come up with objective criteria to assess if a loan originator is conducting business in an ethical manner. In fact, I am working on just that.

    Further, just because someone follows all the state/federal rules does not make that person ethical. It makes them a person who knows how to follow rules.

    In regards to number 6, in my ethics class this morning, there was a brand new originator who did not have a whole lot of mortgage lending experience yet, but it became very clear early on that he was the most morally developed person in the room. The industry will always be filled with a mix of people with different levels of moral development. It sounds like you are advocating for mandatory ethics classes for all mortgage salespeople, which is exactly what we have here in WA state for LOs and Mtg Brokers.

    I support your opinion on national licensing. I have blogged about this over at Bloodhound blog, and here on raincityguide. Here is that link:

    Even with national licensing, we will still be left with what happens when the LO goes to work each day. Corporate culture/corporate environment have a profound impact on the behavior of employees.

    Thank you for taking the time to share your thoughts on these issues. The more we (the industry talks, the better the outcome.

  23. Hi Joe,

    You’re an attorney, correct?

    What do you think about the idea of “informed consent” for mortgage loan originators?

    I am co-drafting this right now. Would you like to review and comment on our first draft?

  24. Hi Jillayne,

    Yes, I’m an attorney.

    Yes, I’d be happy to review the informed consent rules/law you’re co-drafting for mortgage loan originators, and offer my comments. However, I’m busy with several projects now & to meaningfully contribute something it may take a little time…is that OK? Do you have a deadline on this project?

    Speaking in the abstract, informed consent may work well for the mortgage industry. Although I don’t practice in medical law, I’m aware the medical profession uses this scheme and it seems to work well there; so why wouldn’t it also work for the mortgage industry?

  25. Morgan hit the nail on the head! “My recommendation instead is for a national licensing system modeled after the NASD. The NASD, while not perfect has come a long way in cleaning up the Wall Street broker houses. But national licensing is topic for another post.”

    The LO who was on King5 news last night for fraud was kicked out of the stockbroker industry for “defrauding customers” amongst other things…..only to become…a Loan Originator. You can simply google his name and see he’s not allowed to be a stock broker. Imagine if we were doing that in the mortgage industry on a national level for ANYONE who originates a mortgage loan (banks, credit unions, brokers and correspondent lenders, thrifts…etc.)

  26. “In the historical context of any profession, you are always better off self-regulating rather than let the government regulate for you.”

    Poking my head in out of context. The above statement is why the DOJ suing NAR, after allowing them to self regulate for so many years is so very important. Self regulating is a huge privelege and responsiblity and requires that the self governing body regulate to the benefit of both members and consumers. When the governing body starts to forget WHY they were given the privelege to self regulate and becomes an us against them, us being the profession and them being the consumer, the government steps back in.

    It’s my understanding that this is the first time the government has been compelled to step in for 100 years.

    But the reason I popped in was this sentence that caught my eye in the sidebar comments, “A code of ethics without enforcement is useless.” I don’t think that is true, as the original Realtor Code of Ethics from back in 1990 (now changed) inspired me in a lasting way. The Pledge we took to uphold the lofty goal of supporting the values of property, the land and all that goes with the land, is something I have never to this day lost sight of. A well written code of ethics does not police…it inspires.

  27. Hi Ardell,

    Excellent points. Thanks for stepping into the dialogue.

    A good code would never tell the reader exactly what to do in all cases (that would be impossible and too much like the law), but it would be more than just an arbitrary sentence like:

    “our members pledge to follow all laws.”
    “our members will be honest.”

    A good code would inspire the reader to think carefully about all the possible consequences and what sort of person the reader would like to be. A good code would ask the reader to think about his or her motivations and duties to self and others. Does the code support foundational values within the industry? What are those values? If there are conflicting duties, a good code would inspire the reader to try and rank his or her duties; to put them in some sort of logical order.

    I am very curious to see how the DOJ investigation pans out.

  28. Hi Rhonda,

    Even with national licensing, I still assert that in order to truly emerge as a professional group, loan originators would need to self-regulate.

    A Professional:

    Has specialized knowledge in his or her field. This person 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.

    Readers can refer to part two of this series for a more in-depth analysis.

  29. Jillayne,

    Regardless of how the DOJ investigation pans out, there is no doubt in anyone’s mind that Alternative Models and Consumer Choices are being given the evil eye and the finger both at the same time.

    I so wish the industry would simply get on the stick, recognize where there’s smoke there’s fire and straighten up and fly right WITHOUT the DOJ having to get to the bottom of it all. There are many changes the “self governing” body could make to insure that the consumer is put back front and center. Instead they are too busy being defensive. It’s a darned shame.

  30. That’s been tried before Jillyane and it doesn’t work. Same way the majority of business who send their listings to can’t swing the vote for NWMLS not to cut them off. The big guys with the most votes, who aren’t even impacted by the vote, call the shots.

  31. Hi Jillayne,

    Thanks for your feedback. A couple of additional thoughts:

    I agree that professional organizations need to be transparent to have any semblance of credibility, and offer any value to the consumer. Otherwise the pledge, code or designation is hollow, useless and thwarted.

    There never will be enough resources to regulate every transaction and I am far from advocating that extreme position. What I am saying is that there needs to be a minimum, consistent, repeatable process and sampling that can give coherent results as to what is going on out there. More importantly there needs to be some teeth in the enforcement end to hold people accountable.

    I agree that it is in the industry’s best interest to self-regulate, no question about it. I was thinking as a consumer. I disagree that any early attempts to do so will prove effective or show meaningful change in the near future for the consumer and their experience with our industry.

    On the point of consumer confusion you use the singular of ‘industry association” – this is the crux of the problem as I see it for the industry and the consumer. There are too many competing organizations with limited scope, resources and expertise. There are too many competing codes, bills of rights, exams, designations, etc. For the few you listed in your OP their are dozens and dozens more local and regional “ethical lending” groups.

    As an example I was examing one such ethical lending organization here in California and one of their criteria for membership was a CA DRE Real Estate Salesperson license. Forget for a minute that there are 500,000 licensed DRE salespersons in the state (1 for every 9 adults); there are a handful of other ways to be regulated for lending in the state of California: DRE, CFL, DOC RMLA, Federal Banking laws, etc.

    This lack of comprehensive industry coverage and exposure leads to a piece meal and ultimately confusing experience for a consumer seeking out an ethical lender by referencing one of these organizations. At best it is of little real value to the consumer. I doubt anyone would argue that a borrower in California should consult only DRE licensed individuals for lending purposes. At worst it can lead to some “wolf in sheep’s clothing” claims.

    If, the industry can rally/appoint AN ORGANIZATION, ONE, that everyone agrees on (ha!) with principles that everyone agrees on (ha! ha!) then it makes sense. But the current model won’t work.

    My sarastic laughs aside it is a noble pursuit and an important one, but may be unattainable. I can’t see a federaly-chartered bank agree to costly, more stringent state-regulation-based guidelines, and I can’t see an organization based on loose federal requirements doing any good for persons and entities already required to meet more stringent requirements from their state regulators.

    I agree that there needs to be a neutral 3rd party who can objectively evaluate any claims, membership status, etc.

    Well, I don’t want to name names about which professional organizations that I am referring to in regards to just using the code of ethics as a marketing piece and little else; but suffice to say that there are many people who use codes of conduct more for brochures and less for self-governance.

    A professional organization COULD come up with objective criteria, but again the current system is flawed. Would you have different criteria for every different way you could be licensed in each state to lend money? Just looking at California what objective criteria would you use? Would you need an individual license to be in the club? Only the DRE requires an individual license, the DOC CFL and RMLA licenses don’t require originators to be licensed. On the other hand, the CFL and RMLA audit requirements are much more stringent than DRE audits, so who has the tougher standards and from which do we base the membership guidelines? The one that requires the individual license, or the one with the tougher audits? And how does that all factor in to the objective criteria?

    I think that all originators should go through some standard classes before beginning to sell. Again, looking at my home state, to sell insurance you have a full week of 8 hour courses mandatory before you can sit for your insurance license test. Appraisers have to apprentice for a year. Real estate salespeople? A couple of DVDs, an online test and you’re ready to go. Doesn’t add up.

    My main problem with a self-regulating entity at this point is that the requirements to lend vary so widely by state and by licensing bodies that the common demoninator for an objective standard would be so low as to not be of any value to anyone.

    I think this effort is important. I think it can succeed with one entity and one entity only at the helm. I think that it MUST be precluded by a national licensing system so that there is an agreed upon base line requirement for all lenders so that the association standard can be set at a worthwhile level.

  32. Ardell,

    As you point out in comment #31 you were inspired by the code of ethics; but I would argue the code of ethics isn’t needed for people of your moral fiber and professionalism.

    The code isn’t “needed” by you – you have a code, your own, and I guarantee that it is in many ways stronger than the NAR’s.

    So who is the code for? You? You don’t need anyone’s stamp of approval, and while I am sure you’d put a nice icon for a ethical-based designation on your blog, your selling point on the basis of ethics is your demonstrated commitment to ethics in general. Consumers are in good hands with you regardless of your membership in one organization or another.

    The code is to “clean up the industry” but what good does it do if the only ones that live by it are those that would have in the first place?

  33. Hi Ardell,

    Yes, I agree with you! The mortgage lending industry does not have an MLS, so I can’t make a good analogy between the two groups (real estate agents and mortgage lenders.) However, I do believe that the people who would like to affect change could go out and form a competing industry association. Yes, it would be smaller, yes, it would be fighting an uphill battle, and yes consumers would be able to see the differences between the two industry associations.

  34. Hi Morgan

    I hear this argument all day long, every day from loan originators in my ethics classes.

    Yes, some loan originators are already acting as if they had professional status. Some loan originators operate at the highest professional and ethical standards of practice. Be careful not to be myopic. Just because you deem yourself highly ethical does not mean the rest of the industry operates at the same standards you do.

    Consumers will judge you based on the lowest common denominator in your industry.

    Loan originators have NO AUTHORITY to claim that they operate with “the highest of ethical standards.” Right now, where we are, it is just that loan originator’s subjective opinion.

    Morgan can say “I am ethical.” That doesn’t make it so. It means Morgan think’s he is ethical.

    Do you see?

    The industry is in dire need of a neutral, third party to give OBJECTIVE criteria for determining who gets to say “i am ethical.”

    If every loan originator gets to say “I”m ethical” then we’re reducing everything to subjectivism, which leads to moral chaos, which is where the industry is RIGHT NOW.

  35. Oh NO! I wrote a huge, long response to your post Jillayne that is gone 🙁 I am going to cry…

    I agree there needs to be a third party, and I get completely what you are saying all I was trying to add is that a code of ethics and similar devices (like the law) compell those most likely to be in alignment with the stated goals of the organization already.

  36. Morgan, No need to cry… You got caught up in the spam filter, of which I’ve just rescued it.

    That’s the second time today that something good got caught because it was so long. I hope it doesn’t continue, but I’m watching the spam filter close at the moment… 🙂

  37. Hi Morgan,

    I am so sorry that happened! I have had that happen to me and I hate it! Errrrrr. When I write a long post I have trained myself to copy it before I hit post.

    You know what? I am going to AGREE with you! There is newer research in the field of organizational ethics that indicates written codes only serve to keep people at a lower level of moral development.

    Now, back to this idea of an independent third party (an industry professional association.) Yes, it is definitely true that the association will attract those most likely to already be operating ethically. In fact, those folks will WANT to have a third party desginate them “ethical” in order to set themselves apart from the competition.

    Guess what? That same professional organization will also attract unethical members. Why? Because there are many folks who would like the APPEARANCE of being ethical, but they have no intention of ever acting ethical. So I am taking the ironic position: attract unethical members to the professional organization, and then over time, teach them how to be ethical.

    I have this notion that everyone is capable of learning and everyone wants to learn (with some very minor exceptions.)

  38. Morgan… Something screwy is going on… I rescued your message, read it on this post, and then it just disappeared. I’ve NEVER had that happen before. And now I can’t seem to find it anywhere…

  39. Hey Dustin,

    Please disregard my most recent comment that got caught up in the spam filter as that was me just retyping from memory my earlier, lenghty one that met the same fate. You can let that one sit there.

    Thanks for your help!

  40. Jillayne,

    The only thought that’s coming to mind is something like ASHI for Home Inspectors, but I agree it’s no guarantee. Is that a better analogy?

  41. Hi Morgan,

    To summarize, we agree on many key points:

    1) if a professional association is going to attempt to help raise standards of practice, its challenge will be to balance the needs of many people in many states and not dilute the effects of its mission.

    2) Existing national associations such as mortgage bankers MBAA, mortgage brokers, NAMB, and mortgage women, NAPMW chose not to regulate ethical conduct. MBAA and NAMB do a terrific job with their lobbying efforts as trade organizations. NAPMW’s focus has always been education. The industry now needs more than what its existing organizations are offering. This opens a door for new associations.

    3) Reports of new associations forming regionally, to address ethical problems in lending are great news. Eventually one, two, or three groups will emerge as industry leaders.

    I would greatly appreciate feedback on our brand new, highly specific code of ethics. go to ethicallending dot org and click on “code.”

    Next, let’s talk national licensing.

  42. Hi Ardell,

    Yes, ASHI is a good example. There are about 4 professional associations for home inspectors. I like ASHI because they have different levels of membership depending on experience and mentorship. They have a code of ethics; it’s not too detailed, but it is a good start.

    Every emerging profession has to start somewhere 🙂

  43. Assignee liability is the best solution, which is exactly why it wont be passed. Whoever buys the bonds on the secondary market would assume the liability of how those loans were originated. The secondary market would then come up with a system to police brokers. You wouldn’t have this disconnect now where the liability is all over the place.

  44. Hi Morgan,

    I remember blogging about national licensing on bloodhound blog, however, I am too tired to go scrounging around to find my comments so I’m going to just reach back in my memory and see if I can recreate what was on my mind at that time.

    National licensing

    What do you think about this idea:

    Three tiers.

    First level
    Brand new loan originator
    He or she has gone through a minimum required education program similar to some of the existing state pre-licensing requirements, but perhaps a little longer. A 2 week, mandatory beginning class.
    He or she has passed a competency test and background check.
    Competency test includes basic ethics questions.
    This person can originate A paper conventional loans.
    This person’s loan files are signed off by his or her broker each time.
    Default ratios of closed loans are examined.

    This person would be working on earning his or her second tier certification by taking continuing ed classes that would lead to….

    Second tier
    A certain number of years of experience required
    OR a certain number of closed transactions
    More required education on different types of loan products such as Alt-A loans and FHA/VA loans.
    Testing for competency on this new content.
    Review test on pertinent federal regulations
    More difficult/problematic ethical dilemmas on this second tier test
    Clean report from state regulators: no enforcement actions.

    Third tier
    Follow the same path as above, and now this person must learn in great depth about the so-called “exotic” mortgage lending products, and also how to best match this loan product with the person who will most benefit from using this. I hear time and time again that interest only, pay option arms are great for the “right” borrower. Okay, so let’s all figure out who that right borrower is and make sure those are the folks getting the “exotic” loans. This is a very tricky task and one that bumps up against fair housing questions. Great care must be taken here.
    This will require a much more difficult exam (because these products are complex)
    Ethical dilemmas on this exam will be more difficult as well.
    A loan originator with this third tier of licensing will have a license to orignate all mortgage loan products.

    This third tier person will be highly knowledgeable and understand at a much greater depth, his or her ethical duties. This person can and will be worth more. He or she can charge more, and will earn it.

    Just like a very, very, good attorney has a higher hourly rate. We pay this fee when we need a good attorney, and we are very happy with the legal service we receive.

    I blogged about national licensing here on RCG at this blog post. It will happen:

  45. Hi Jillayne,

    I’m going to tap out for the night here, but I’ll be back refreshed with a review of the code of ethics and thoughts on the framework above. Cheers!

  46. Hi Cal,

    That’s an interesting theory.

    Let me see if I can play with it.

    Holding investors liable for predatory, abusive, or flat-out fradulent loans originated at the retail level sounds like asking individual investors who buy stock, to be liable for what that company does at the retail level.

    There’s an investor shield for laypersons like us who just invest in stock hoping to make a profit because there is no way for someone like me or you to know everything that’s going on at a particular retail establishment from day to day.

    One of my company’s consultants actually just wrote an article on this subject today on Here is the link. It will go behind the member’s only site at midnight:

    Assignee liability won’t happen because it will cut off the flow of investment money into the mortgage market.

    Besides, the investment bankers have way more money in their lobbying coifers. That’s why they are escaping liability with the current subprime meltdown. They wrote themselves out of being liable.

  47. It wouldnt cut off the flow of investment money, that is a complete over dramatization, it could reduce it or make interest rates go higher but the market knows a good thing when they got it. They would adjust and put the appropriate measures and controls in to reduce their liability.

  48. Hi Cal,

    The secondary market doesn’t want to police brokers. They already have systems in place to make wholesale lenders buy back some non-performing loans. Then, the wholesale lenders (depending on how their contract was written) make the retail mortgage brokers buy that loan back.

    The contracts say something like “you are assuring us that his loan was originated by following all pertinant state and federal guidelines.”


    “if this loan defaults within the first _____months, you will buy back this loan.”

    By the way, I agree with you that assignee liability (to stockholders) is an interesting concept in theory, but I’m just not convinced that it will happen. Kind-of like forced socialized investing.

    I like the idea on the retail side:

    For example, having retail mortgage lenders certify that they do not purchase any leads generated from deceptive sales techniques like bait-and-switch advertisements or deceptive mortgage spam.

  49. Morgan,

    I didn’t acknowledge your comment #39. I just read the Preamble to the Realtor Code of Ethics and it still gives me goosebumps.

    I don’t know what to say, except Thank You. I wonder how you “know” all that about me, but I woke up this morning realizing that I was so moved by your comment that I didn’t even acknowledge it. Real Estate is not merely the means by which I make a living. It is my “cause to get behind”. It is my way of life. It is all at once my Church and my Children, my Parent and my Spiritual Endeavor. I am blessed to have an occupation that fulfills every aspect of my reason to BE.

    I thank you for causing me to sit up and realize that this morning.

  50. Hi Ardell,

    Your reputation amongst the online community and your collective body of online work – blog, AR, comments, opinions, etc. lead me to “know” that about you. Unless you are completely different in person, which I doubt greatly because sincerity is too hard to feign over that large a sample.


  51. Hi Jillayne,

    Shoot me over a draft copy of your LO Informed Consent rule when you’re ready & I’ll happily share my thoughts with you…maybe even post a draft of it (or link to it if it’s quite long) on RCG to get a broader perspective from other writers, if you want? I don’t work w/in the mortgage industry, so it may be good to get additional input from others w/in the industry.

    Am I correct in assuming you’re writing this in a manner similar to the way a statutory body of law is written (i.e. complete with definitions, detailed comprehensive scope intended to cover entire subject matter, identification & enumeration of powers of regulatory authority, penalty provisions, etc.) ?

  52. Thanks for a great series of articles about the problems in the sub-prime lending market, Jillayne, you brought up some excellent points, as did many of the contributors to this discussion. I’m glad you found the Borrower’s Bill of Rights to be an example of a good practice in the industry.

    As we were developing over the past year, we knew that we could take the easy way out and be “just another

  53. It’s midnight on the West Coast so it must be time to talk about ethical lending. 🙂

    Jillayne, I got a chance to read through the Code of Ethics – thank you for pointing me to it. I have some brief comments, only because my day has been exceptionally trying so bear with me here! Please take all comments as constructive and not demeaning in any way, shape or form! 🙂

    I have looked at it primarily from an originator’s point of view and from a broker standpoint.

    The designation “Certified Lending Professional” (CPL) applies to anyone who lends money. So can car dealerships, payday loan outlets, etc. qualify for this designation?

    As a point of information for me, can you point me to an organization with a well-defined Code of Ethics that is not only embraced by members but ALSO embraced by the public? Where the public perception of the organization is improved by the presence of this code?

    In the sentence: “This Code of Ethics is a significant attempt to create common and clear standards of practice, which will allow our organization the ability to help mortgage broker members…”

    Is the term mortgage brokers meant to be interchangeable with mortgage lenders, correspondent lenders, mortgage brokers and federally chartered banks? I see different usage throughout the document and wasn’t sure if you were targeting specifically brokers (it seems that way) although the CPL was for any lender.

    Page 3, Fourth Duty – I think one of the major problems with originators today is they lack understanding of all mortgage products and uses. I believe that this should be a duty/goal. I understand it is somewhat addressed under competency but competency and a firm understanding of a wide-range of specialized knowledge could be construed as different things.

    Article 1 – Continuing education needs more teeth. Most con’t ed courses online are a joke. There is no regulation, there is no way to determine who really took the courses. I believe it should be proctored continuing education.

    Article 2 – Conforming is one thing, how about being able to understand and explain applicable laws and regulations?

    Article 3 (and in general) – Many of these Articles are clearer statements about existing laws (state and federal). The existing laws call for most of what is called for in this Code. Also, another general comment is that while this is supposed to be an objective Code nearly all measurements and requirements are subjective in nature (e.g. “reasonably prudent,” “group of similarly situated people” etc.).

    Article 5 – Could violate State and Federal laws (RESPA, state disclosure laws) if the disclosures are overly simplified and don’t address legally required elements. If they are comprehensive enough to comply w/state and federal requirements than I would argue that additional disclosure would only be more confusing and we should work to rewrite existing disclosures.

    Article 8 – This really doesn’t capture the industry reality well. 1. Usually prepayment penalties are used to lower the interest rate, and “usually” not used to maximize rebate. 2. The brokers have ZERO control over what the lender does or does not offer for different loan programs. Brokers aren’t the ones incentivizing their staff – it’s the lenders. Should a broker that is a CPL member sell rates that are .5 to 1 percentage point above the competition because they outlaw the use of prepayment penalties? I don’t think that is a reasonable request. Brokers cannot be held responsible for what lenders offer in terms of loan programs, and they usually cannot change lender rate sheets.

    Article 9 – CLPs as originators are not the underwriters of the loan and as such do not get to decide what factors are used or are not used in the credit decision. Only lenders get to set the underwriting guidelines that meet their investor purchasing desires. Brokers can’t be held responsible for how lenders underwrite files.

    On the solicitation of refinance customers at the period of 24 months, what if that borrower has a 1yr ARM?

    Article 10 – Ensuring accurate appraisals should be its own article or fall under a general “underwriting” article – which would make it difficult to put on brokers who rely on lenders to underwrite.

    Article 13 – Support staff. Most of the moving parts of a mortgage fall outside the control of any one entity. Especially in a broker relationship – can the broker staff be held responsible for lender staff in underwriting, account management? How about escrow, title, appraisal, credit – all separate entities – I know I would never take on the liability or responsibility for those entities.

    Article 15 – Trust fund handling is a big deal. Requiring separate trust accounts for each borrower can be very expensive. Some states require different accounting methodologies than others – small broker shops may not be able to feasibly open 50 new trust accounts each month.

    Article 17 – “insure”? I believe reasonable efforts is a better term. Brokers have ZERO control over the servicer the lender chooses. ZERO, how can you take responsibility for something you have no control over?

    Article 19 – Refinances with whom? Anyone? or just the CPL?

    Article 22 – What if the borrower is getting a bad deal? What makes a bad deal? Half-point? Quarter-point? Where is the delineation (objectively)?

    Like I have mentioned before I like the intent – its the execution that is exceptionally difficult. I appreciate the efforts you have obviously dedicated to this cause and they are admirable. Please do not take my comments in any way but truly interested and helpful in tone. I am not deriding this document or the authors. I simply believe (and am more convinced after review) that the hurdles to such a code are so great across such a diverse industry that to get this to a point where it covers everyone will leave it with very little legs.

    Bed time – I look forward to talking more about it!

  54. Hi Morgan,

    I am back in town now; thank you for the feedback. I will offer just one global comment for now: It seems that you are not hopeful that a code of ethics could be constructed in such a way as to be effective and fair. I have a more optimistic view.

    Thank you for the invitation to join you for a podcast interview. I am looking forward to it!

  55. Hi Jillayne,

    In rereading my comments I can definitely agree with you that I do seem overly pessimistic. I am glad that you have the passion and desire to push this through and I wish you all the success in doing so!


  56. I realize that many of the residential subprime and stated income loans have been problematic. However, there is a commercial lending benefit to keeping this loan type alive. Financial institutions like Ocean Capital in Rhode Island maintain an up close and personal policy with the commercial lending that they do to folks trying to start a business and who may not have a portfolio substantial enough to make them attractive borrowers to the big box lenders. Sometimes, you have to purchase the gas station, auto repair shop or motel to generate revenue. Subprime commercial lending is oftentimes the only opportunity for certain new business developoment and should be retained.

  57. Hi marianne,

    Thanks for stopping by

    This is a good example of a loan product that can be connected with good consequences, but can also, if mis-used, lead to bad consequences. When we’re out of balance what we usually see is justice (state or federal law) trying to bring things back into balance, to the detriment of customers of your firm.

    Commercial lending, on its own, apart from residential subprime, is regulated in a radically different way than residential, if I’m not mistaken. For example, RESPA does not apply to a commercial business loan.

    I’m guessing that commercial small business loans are still available for the majority of small business owners who apply. Yes?

  58. This “Mortgage Crisis” may be the best thing to happen to the mortgage industry in years. By simple way of attrition, the weak (aka unethical loan oficers) will find that their years of greed, fraud and shady lending practices, has left them with out any referrals and no loans in the pipe. I see it all day in CA. Almost every broker shop within 20 miles of my office is shut down, out of business. Making it more likely that those companies that held borrower satisfaction above everything else will find this next few years profitable.
    I liken the situation of mortgage broker plight to that of the auto mechanic. I canot tell you how many times I have had friends and family get taken for a ride by shady mechanics. Over charge for simple services, make up problems with the cars, scare people into paying for things that dont exist. I laugh thinking about it now, because once you ACTUALLY find a reputable mechanic you want to run to the top of your roof and scream to everyone that “there really is an honest mechanic.” You refer all your friends and family to them, you send them x-mas cards, you stop in to say hi when you’re in the area. (Maybe a little over-exagerated, but you get the point). The same basic thing exists for the mortgage broker. If you do good you get good back. Simple Karma infused in basic business principals.
    Where ethics dont prevail we need stiffer licensing laws. Several states still allow brokers from other states with no licensure in said state to originate loans. Where is the accountability? States, not the federal government need to tighten the belts.
    Self-regulation is a key point. I have called several brokers over the years as mentioned above, to have a candid conversation about their advertising. Most of the time I get harsh words telling me to go to hell, but I tried. Some brokers were receptive because sometimes, they interpreted the laws differently than me, and a 2nd set of eyes helped! Anytime a free market industry can self regulate relatively well, that is the way it should be.

  59. I’d like to see lenders and LOs understand that relationship with customers should be “fiduciary” rather than “retail” relationship. I think it should a combination of solution 1 (lenders & LOs should “owe fiduciary duties to consumers”) and solution 3 (self-regulation). If lenders and LOs cannot work effectively with these 2 solutions, then solution 3 (government regulation) would kick in.

  60. I think that the newly proposed “fiduciary” legislation will pass and I also welcome it. All LO’s, mortgage brokers, loan consultants, or whatever you call yourself should act this way anyway. It is good business and when your client has a smooth transaction and some extra $$ in their pocket, they will tell their friends about it and probably pass along a business card or two. Although we sometimes have to “sell mortgages”, we should always think of ourselves as financial planners.

  61. Again, lots to think about with this blog. Where is the mortgage industry as a whole going – Clearly the retail shops are struggling in today’s market and those remaining are awaiting the next re-fi boom (it is already here to some level). I applaud the efforts to up the ante on mandating professionalism and fiduciary responsiblities in the industry. It will take a while. Americans want that Dream house and they don’t want to wait. The lenders and investors are out there – waiting to provide it to them. Ben’s comment is correct too. Good business practices is good business.

  62. What you suggest here, has already been in place in the Insurance Industry. We hold a fiduciary trust with our client and are State regulated as well as requried to meet continued education and licensing criteria. If you are not ethical in your dealing with clients, then there can be civil & legal action taken. What the mortgage industry is experiencing is a metomorphus, and will emerge a better creature because of it.

  63. I think that you can require classes and training in ethics all year long and it still won’t get through to some individuals ( regardless of their title). However if it is required for these individuals to be held accountable, the industry could be a little more regulated in the issues of ethics. And yet again this will bring up the issue..” Who is going to oversee and enforce this?”

  64. I agree that it is cool to be an ethical lender. Ethical lenders will see their clients return again and again because they trust you. They know you will give them the best deal you can, they know you have their best interests in mind. I think the required classes and training and licensing are a good start to moving forward and upward.

  65. I agree the subprime needs to emerge and transform in to probably what it was originally created for, to help those that have some blemishes but are qualified to be homeowners. I also think that being ethical & profitable is what most of us set out to do and then here comes the meltdown. We can all bounce back from this if we truly believe in our professionalism and grow with the change.

  66. I feel that anyone who views the sub prime meltdown as a threat to the mortgage industry was probably not conducting their buisness in a fiduciary manner in the first place. To become a professional in your industry it is necessary to become a person who treats their clients in such a manner. I feel the best possible way to correct this melt down and to arise from it is to educate our clients in the manor that we have been educated. Teach them why loans work the way they do instead of pull shades over their eyes for personal profit.

  67. I agree LOs are professionals who should owe fiduciary duties to consumers just like a doctor or a lawyer does. The reality is that the requirements to be a LO are too easy. It seems everybody can be a LO if he/she knows somebody in need a mortgage. That is why current LOs are mostly sales people. Not everybody can be a doctor or lawyer without many years of learning, practicing and passing the tough tests. Now that we have the min licensing test but long way to go to reach the professional level…

  68. There should be a ethical lending body like the mls. that way the lo’s are more responable for there actions. and i agree with alot of your comments about being licenced. the lo’s that prayed on easy one time customers will be weeded out and have no refural business to keep them working. lo’s should be friends with their clients and not treat them like cattle. as a freind you want the best for your clients financialy and personaly.

  69. I am a mortgage planner and I did go through the CMPS 3 day course that you speak of in this article. I get 100% of my clients by way of referral. Just like titling yourself a manager does not make you a manager. Titling yourself as a mortgage planner or a loan consultant does not make you one necessarily. You have to earn the title by way of customer satifaction. And the only ways you know your clients are satisfied are if they come back to you again and / or they refer their friends and family to you. If everybody got rid of doing business with leads and just went with a grass roots approach, business would definitely be done more ethically. Because your business would die very quickly if / when you make a bad name for yourself and you get no further business.

  70. Very good article. I agree whole-heartedly with your recommendations for improving the industry. The requirement of a code of ethics committing the originator to act on behalf of the best interests of the homeowner is overdue. I hope that the extreme reduction of retail mortgage salespeople in the market, due to licensing requirements, has cleared out the bad apples. Only time will tell.

  71. I agree absolutely with this article. I have worked for a couple of the companies cited in the article, until I realized what they were doing. I know first hand what they did to their customers. I have since been very diligent to be up front and honest in all my communications with my clients. They may not like what I have to say, but they know I am telling them the truth. They may not be getting the loan they hear advertised by the unethical lenders, but they know the loan they are getting from me is a legitimate loan that can be backed up and won’t put them in a worse position in the future. As I have commented on a couple of other articles, if we want to build “Cutomers for Life”, we have to be honest today, so they will feel comfortable coming to us in the future and referring others to us. Actually, this is a much easier way to do business in the long run. Once a firm referral base is established, we no longer have to go out into the market place and solicit new business. We can just continue to do business with established customers and their referrals.

  72. I totally bebieve in reputation, code of ethics, and communications. If you can be honest with your customers and make them happy, they always come back and refer their friends and family to you and that’s how you keep your business going.

  73. I think self regulation is always the best bet. Unfortunately this is not the system we live. Free enterprise has always set the tone for the market variables,such how much a service is worth. Intangles such as, is this a good deal for the consumer has for some been a fleeting thought.
    After sixteen years in the business I have seen the fallout from the big predatory lenders mention in the article. It has created a unnatural gentrification throughout the country. It has once agian been used to polarize various ethinic classes and neighborhoods.
    Only a true profeesional would always put the needs of the client before themselves. Hopefully the required new standards in our state will set this motion in place.
    Finally as professonals when we see unfair practices we should report it to the NAMB, etc. How many time have you looked at a GFE and have seen how the previous lender has devoured the homes equity by charging outrageous fees.
    Over the past sixteen years how many times have we seen ten percent charged on a one-hundred thousand dollar loan.
    We should all be gratefully those days are ending in our community.

  74. Excellent solutions in this article!
    I welcome the fiduciary implementation to the industry. When you consider all the confidential information that the LO has, there should be a code of ethics implecated. As you stated, “a 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 is no less important than a medical or legal procedure.” I couldn’t agree more with you! Thanks for a great outline on this topic.

  75. Personnaly I am not sure just how effective this will be for the industry or not. In actuality, it is up to each individual in the mortgage industry to take responsibility for their own actions. Obviously, if mortgage individuals do learn more about finance and how to use mortgages to help their clients with their overall financial situation then it can be excellent for the consumer. But how does it help your clients if you know if DFI can inspect a mortgage broker on the weekend or weekday?

  76. Great Article and right on Point! I really have to agree with this
    “Some view the subprime meltdown as a threat. I see it as an opportunity to put the industry back on track ethically, lead retail mortgage salespeople towards transforming into emerging professionals, rope predatory lending back into where it came from: the fraud corral, and open a national dialogue on self-regulation.”

    Relates to just looking at the bigger picture and how it can turn us into salesperson with great morales and good ethics. This benefits us all most importantly further educates us LO’s and in return help us build a bigger and better cliental in the future.

  77. Trading consumers respect for $$ will eventually kill ya. Better a good name then Money. I like the thought s of fiduciary responsibility first froma retail pov. There is always I suppose a certain disconnect with some buyers but overall we should make them know and feel we are for THEM.
    The industry should move ahead based on consumer satisfaction and reasonable lending practices.
    Lets keep ppl like congressman Frank from making higher taxes his “legacy” when we should be SELF regulating.
    Great point on seeing this subprime deal as a way to learn and grow and not let this happen again

  78. What a great article and one to practice by. Our own personal code of ethics is what will keep us afloat during this trying time. And I do agree with you in regards that this subprime fright can only bring out the good for the home mortgage future.

  79. Jillayne, yes I agree that the subprime crisis is a gift to our industry and yes we can all emerge from this mess and transform this. In the past years we have treated our consumers for profit. But its going to take time to regain the confidence of the consumer. But the changes that are hepping now in our state help this process.

  80. We do have a fiduciary responsibility for our clients. We are taking what is most often peoples largest investment, and helping to show them the best that is available to them. We have to treat this with high regard and have the upmost code of ethics in this.

  81. Its sick to here that consumers are being cheated. We do business to earn a profit, but in a legitimate way. The client deserves a fiduciary relationship becuase your being portrayed as a proffesional.

  82. I agree with the solutions offered in this article. It is only appropriate for those in the mortgage business to act in the client’s best interests. And yes, I agree that this subprime crisis may be a gift after all. It could very well be a wake up call and trigger a change for the better.

  83. I agree with self regulation, anything we can do to keep the governments fingers out of our businesses is a step in the right direction. As professional entrepenuers it is our responsiblity to keep each other in check.

  84. I agree that the subprime crisis will lead to a new transformation within the mortgage industry. It starts with the need to add stricter guidelines and more continued education to those who choose the mortgage profession as their career. Through adopting self regulation in the industry, continued improvement will be able to take place.
    With more and more mortgage personnel practicing ethical lending, it will hopefully drive out the not so ethical based business practices of some. Like Jillayne says its not only cool to be and ethical lender it’s profitable as well!! Ethical based business practices should be of top priority to all mortgage personnel.

  85. The Code of Ethics this good undertaking. Tests also is good. But I think it is possible to make it more. For example to pass the general state Law on the basic items of a professional etiquette – honesty, truthfulness, a transparency, the full information and….

  86. The fact that in Washington now Loan Originators must get licensed and take classes is, I believe, a great step in the industry. Several of the more unsavory “Loan Officers” are looking for work. What I don’t like about the new WA requirements is that bank, credit union, and finance company mortgage sellers do not have to get licensed as well. They are providing the same service/information that I do (well they don’t have to disclose YSP…what is that??) and can be as unfair to a client as the worse broker.
    As far as solution #2…I so agree with you, but good luck. The Fed’s are coming hard after this issue…Mostly I think to look good at election time. I am sure that most regulators don’t know anymore about lending then most consumers.

    The first broker I ever worked for had The National Association of Mortgage Professionals “Code of Ethics” framed and on his office wall and would go over each item with each new hire and frequently bring up issues during staff meetings.

  87. I believe if we self-regulated and required actual education courses and had stricter licensing requirements, a lot of the people who join this industry for the wrong reasons will eventually fade out of the picture. It will become harder to achieve the status of a loan “officer” and I’m actually surprised it hasn’t been more difficult from the start. Realtors have exams, continuing education and licensing requirements in order to represent buyers and sellers in the largest investment of their lives…why don’t loan officers, the people who place homeowners into loan programs that will affect them for the rest of their lives, have to be licensed professionals with an educational background that supports the decisions they make and advice they provide? I believe that if we enforce stricter requirements to maintain employment or even begin employment in this space, we will end up with an industry of professionals who genuinely enjoy helping others in a professional manner with the utmost integrity.

  88. Licensing and on going educational requirements are serving to thin the numbers of Loan Officers. The Sub Prime mess should serve to thin the numbers of “Mortgage Companies”. The financially stable companies will survive and thrive in the end. A bit like a natural thinning of the herd. If you as a loan officer and you as a company don’t have your clients best interest in mind, it will be a short time until you are out of business. The number of mortgage companies where a potential borrower can “shop rates” is lessening and a flight to respectable, ethical, stable mortgage companies will occur. Thank goodness.

  89. Rebecca wrote:

    “Realtors have exams, continuing education and licensing requirements in order to represent buyers and sellers in the largest investment of their lives…why don’t loan officers, the people who place homeowners into loan programs that will affect them for the rest of their lives, have to be licensed professionals with an educational background that supports the decisions they make and advice they provide?”

    This begs the question: Why don’t both constituents earn a 4 year degree or equivalent experience BEFORE they can practice? Isn’t “the largest investment of a person’s life” worthy of some minimum level of education and experience? Seems reasonable to me.

  90. My question is , as richard cohen mentioned, if the compensation is big different between a mortgage program that suits the borrower’s needs the most and a program that gives higher ysp, how a loan originator act between the interest of his and the interest of his client?? is it totally depending on his ethics and morals?? how can this be regualted??

    solution #3, i agree that anyone would like it better to be corrected by a colleauges than by a state or government. also it is a healty sign that the industry is going the right direction.

  91. I think it would be a great idea to start a group of responsible, ethical lenders. Self regulation also sounds good but its a pipe dream. We are going to get a few more disclosures added to the stack over all of this and I’m sure consumers wont understand those either. After that well get some handbooks to pass out explaining the disclosures. Someone wrote that we need to simplify disclosures and I agree.

    You mentioned Habib talking bout taking equity out and investing it. I don’t believe that was directed for aunt Penny to take a Pay option ARM on her house, use the equity to invest in a new product called asbestos. I’m sure he was referring to the Savvy investor who is paying 6% interest on his home and rolls some of his equity into a higher yield. All the while maintaining a level of income that sustains his payments.

    You even mention CNBC not having him back for a while. The problem I think we all have is CNBC and every other network Constantly bombarding the consumer telling them home interest rates are going down and the fed is lowing rates again, etc. We all know the fed doesn’t directly control long term mortgage rates. following a fed cut to the fund rate sends a volatile mortgage market on a roller coaster ride. The only thing the consumer hears is “another rate reduction” I find it challenging trying to explain why Anderson cooper cannot guarantee your mortgage rate will go down and that in this volatile market its best to lock in and close.

  92. I agree that the subprime crisis can be a great thing. Although I would feel some strain due to less subprime clients, the crisis is causing many lenders to get out of the industry because they can’t sustain enough profits. So, lost potential subprime clientele would be made up for by being among the remaining in the industry–as honest loan originators. If this crisis ran its course and weeded out the dishonest LOs, followed by many remaining lenders to adopt self regulation and join ethical associations, the consumer would be in a more powerful position than they’ve ever been before. For that to happen, it does require many LOs to take action, which may mean less profits. This could happen if the consumer were to demand an LO that is part of an ethical association that states their fees in advance, and their ethical ways of doing business.

  93. Self-regulation in the mortgage industry is the key and will prove to be much more effective than any more government regulations. Acceptance of fiduciary responsibility by LOs will also go an extraordinarily long way in promoting ethical behavior.

  94. Every customer I have originated a loan for I have had a fiduciary relationship with. The only way to grow your business over time and get repeat customers is when you have their best interests in mind.

  95. Hi C Seal,

    Actually no one person gets to say “I have a fiduciary relationship with my clients” and by simply saying it, that makes it so.

    Fiduciaries usually operate under a set of guidelines set forth by a neutral body of like-minded professionals that have come together to spell out what means to be a fiduciary in that profession. Sometimes this is the law, sometimes it is a professional association, most of the time these work in tandem.

    There is no such thing in mortgage lending.


    In Washington State, the legislature is very close to passing such a law that would require fiduciary duties, and in the framework of the proposed legislation, the lawmakers are starting to lay down some guidelines as to what an LO/broker must do and what an LO/broker must not do when it comes to the relationship between an LO and a consumer.

    Putting a client’s interests ahead of your own means slow, steady growth.

    Corporations are designed to maximize profits (within the bounds of the law)

    So how does a mortgage broker remain profitable while also slowing down enough to make sure that a client’s “best interests” are put in front of an LO and broker’s desire to make immediate profit?

  96. Please excuse me, Jillayne, on using the incorrect word to describe the relationship I have with my clients.

    What I was trying to say is that I always put the interests of my clients ahead of mine, and do my best to educate them on the choices they have available to them. If that means I make less money, or no money at all, so be it.

    It is hard to tell someone that they should not be even looking for a home, need to repair their credit, or save up some money, but it has to be done. More than likely that person will come back later.

    Most true professions offer the most income to those “professionals” who have perservered, learned their trade, and achieved slow, steady, growth over time. Mortgage lending should be the same, and is, with brokers who have been ethical all along, slowly building relationships. Those brokers have a continuous stream of people who call them daily, who know they will not be gouged or put into a loan that they don’t want.

  97. I agree with the flat rate fees. I like your line about the subprime crisis as a gift. Mortgage lending can emerge from the subprime mess and transform itself. It needed to happen and sooner the better!

  98. I couldnt of said it better myself!!! :The industry has traded consumer respect for massive profits. Mortgage lending can emerge from the subprime mess and transform itself. I see it as an opportunity to put the industry back on track ethically and Self-regulation is a sign that an industry is moving forward and growing up……The subprime crisis is a gift in disguise….(hidden blessings) =)

  99. I agree that the best regulation comes from within. Self-regulation is definately the most efficient, cost effective and easiest to implement solution to the ethics problems now quite evident in mortgage lending. As more and more people are driven to find honest LOs that are taking the time to get licensed and have a more solid grasp of the thics behind lending, hopefully the industry will change. Consumers all need to be aware of the dangers inherent in obtaining a mortgage and LOs should do their best to inform them of those dangers of their own accord, not because the government tells them they need to.

  100. So many interesting comments here in addition to the article itself. I do agree too that the subprime meltdown was not necessarily a bad thing as it was a reality check for many. The unfortunate affects of the subprime boom will be very, very long lasting however. As many agents, brokers, articles, third parties in this industry, etc, may suggest , govt regulation or self regulation need to be a part of the subprime solution, this however is obviously easier said than done. This industry has so many elements that need to be regulated and has so many elements that affect the market economically, the solution to this or even steps to the solution will be a tough battle. I wholeheartedly agree with all the suggested solutions but considering demographics in this industry, to implement or count on these suggestions effectively will be difficult. Not be a skeptic here but this buisness is sales by nature and the stricter requirements to originate may weed out some but will not elimate many or all of the bad. However, at the same time, licensing requirments I think were a must and a good thing at least from the standpoint of calling this industry a credible profession and not just anyone can do it. In addition, after the fall out of subrime lending, lenders tightening up the guidelines on even the conforming side of things as well, this naturally will rid of many of the lo’s out there looking to make the quick buck unethically, its a start at least. Bottom line, I’m all for govt/state regulation implemented as much as it can help and self regulation for as many honest lo’s can offer it. Lets keep things positive and keep moving forward.

  101. As I stated in my last response it all comes down to the people. There can be many state and federal regulations but in the end these people have to choose their own path. I can’t agree more that this is an opportunity acting as a filter for those who want to realize the word profession over the word money. With the way our Business Model is set up, over time the professional and the Greedy are separated. I still believe after time goes by if you don’t decide to be an Ethical Mortgage professional, yet you’ve passed state and federal requirements; word of mouth and reputation will get the worst of you. Fortunately we live in a very tight community.

  102. This is great:

    1. Competitive Rate Quote
    2. Rate Quote That Won’t Change
    3. Accurate Explanation of Credit Status
    4. Fair Fees
    5. Upfront, Full Disclosure of All Lending Fees
    6. Accurate Closing Date
    7. Immediate Notification of Underwriting Issues
    8. Confirmation of a Rate Lock
    9. Exceptional Customer Service
    10. Advocacy With Lender/Underwriter
    11. No Surprises at Closing
    12. Help After the Closing

    As far as I can tell, the Broker I’m going to start working for, follows all of these. I’ve worked with him as a customer 3 times and as far as memory serves he has followed this code, whether inintentionally or not, all 3 times. This is one of the reasons I look forward to working for him & I will sure follow these.

  103. I agree that the subprime crisis is a gift. Most crises are, if viewed in the right way. I like your approach.

    As a technical editor, I’m all for using the correct names for things, so I agree with that proposal in general. I don’t think the average consumer would know the difference between a “mortgage professional” and a “licensed loan orginator,” though. I didn’t even know there was a difference until reading your articles today, and I’ve been working at this brokerage for almost a year now (just as an assistant, granted). While it’s good for people to use accurate names for things, I’m not sure that works as one of the top three solutions for the problem of deceptive mortgage-lending practices. Further, I could see the argument being made that people are used to businesses using deceptive advertising and that consumers make their decisions based on other things than what businesses call their products, services, or employees. On the other hand, something could be said for outright lying, as well as the subliminal effects of words; maybe there are studies on this.

    About solution number 2, I say yes! If there’s going to be increased governmental legislation (and enforcement), the money should come from the industry, not taxpayers.

    About solution number 3–a random thought: would a competitor really point out a mistake in a friendly way? That would be great, but I think it’s more likely that a competitor would tell a prospective client not to trust anyone who makes mistakes, and that competitor wouldn’t communicate with the erring firm at all.

  104. Great solutions! I especially appreciated the link to the wikipedia definition of a fiduciary relationship. EXCELLENT!!! I also understand the comment you made above stating that you can’t have a fiduciary relationship without a set of guidelines outlining what that fiduciary relationship looks like. I am glad that the State of Washington is working on such laws. The combination of such laws as well as self-regulation within the industry would really help to clean up the problem people within the industry.

    I am planning on reading the code of ethics you have put together for the Ethical Lending Foundation. I stand with you in this fight to bring more ethics into the mortgage industry!

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