Do Lenders Have a Fiduciary Responsibility to a Borrower?

By
Mortgage and Lending with San Diego VA Home Loans/858-777-9751

I have been enjoying this banter about fiduciary capacity in the real estate transaction as it related to lending.  Clearly, this has been a fun "academic discussion" for me today and probably a pain in the patootie for many other posters in the Active Rain Real Estate Community.

A brief history:  Lenn Harley wrote a nice blog yesterday about The Evil Press. Normally, I would agree with Lenn that members the press are drama seekers with a lack of imagination and an inflated sense of self-importance.  Actually, I retain the opinion about the press.  In this instance, Lenn paraphrased an article about suggestions from a member of the press to steer clear of Realtor referred lenders.  I disagreed with her as you will see by my first comment.

I guess Lenn and I both slept on the thought because we simultaneously published blogs this morning about our positions.  Hers was more successful and received a gold star and numerous comments; mine was not. Comments included suggestions: (1) that I may be bitter because I am not on Realtor's preferred lists, (2)  Realtors are the best positioned to provide such referrals (over the buyer's primary financial advisor),  (3) and even a suggestion that the buyers don't have a primary financial advisor so the Realtor MUST assume that role in a vacuum.

The point of my blog was that Realtors overstep their boundaries when acting as a sub-agent to a particular lender. Referring to a "preferred" lender they potentially breach their fiduciary capacity.  A Realtor's interest is primarily to the transaction,  as is evidenced by the comments from Realtors in Lenn's subsequent post. I believed that to be a breach of fiduciary duty. After careful consideration, I am publicly capitulating to the thought that the Realtor should accept the role as a primary financial advisor as their fiduciary responsibilty. 

Do you want to know why?

Loan Originators have absolutely no fiduciary responsibilty to a borrower other than we should make loans that are consistent with published guidleines. The only responsibilty we owe is to our employers to make money and the lenders to prepare a complete an accurate loan package.  Now this will most likely upset my good lending friends here on Active Rain.  I hope I don't do that because I think there are some darn sharp lenders here.  Lenders who have advanced loan advisory to be a complete financial planning process.  I agree with them in principle. However, and this is a big HOWEVER....Direct lenders owe the borrower nothing.  Mortgage brokers establish that we have no fiduciary responsibilty in the "Mortgage Loan Origination Agreement" as published by the National Association of Mortgage Brokers.

Could a form be created that establishes a fiduciary capacity for mortgage brokers?  Of course.   Jack Guttentag, sometimes referred to as the "Mortgage Professor" of the Wharton School at the University of Pennsylvania created the idea of mortgage brokers as a fiduciary agent.  His "Upfront Mortgage Brokers Agreement" defines a  fee for brokerage services and puts the borrower and mortgage broker on the same side of the transaction.  Gone is the double dealing the mortgage cartel is famous for.  Fortunately, The Mortgage Profesor explains to the consumer that a four figure fee is not uncommon for arranging a loan.

I am grateful for the blogs here because it provides us a tremendous opportunity to engage in academic discussions to better our service offerings.  I have known about the Upfront Mortgage Brokerage Arrangement since The Mortgage Professor created it in 2002 and liked the idea of establishing a fiduciary agency to shop for the best loan for my borrower.  I believed then that it would eliminate the "double applications" that are so prevalent in our industry and increase my stature as a professional in Realtors' eyes.

If a Realtor were referring to an Upfront Mortgage Broker, they could make referrals based solely on fee comparisons and be assured that the mortgage broker was working in the buyer's best interest. My Realtors told me that it would be too confusing; they liked things the way that they are.  Oh well, it's 4 years later so maybe we can get that fiduciary duty off of your back and onto mine. 

My shoulders are broad enough.

Brian Brady is a NOT an Upfront Mortgage Broker ...yet.  He can be reached at (858)-699-4590

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Rainmaker
306,034
Brian Brady
San Diego VA Home Loans/858-777-9751 - San Diego, CA
VA Home Loans/San Diego

Bill,

I wrote this post and thought of you. I had pretty much figured that you would understand where I was going with this; and you did.  Our problem in the industry is that there is no REASON for us to act as a fiduciary other than a sound business philosophy.  I have often practiced the principles of UFMB but never thought to use an agreement to define my relationship as a fiduciary and granting me exclusive financing rights.   

I love your rules.  I will ask your permission to post them in our office.  License. Client, Referral Source, Commission.  (kind of has a ring like "Unit, Corps, God, Country", doesn't it?)

Good comments, Bill 

Oct 14, 2006 12:52 AM #5
Rainmaker
591,234
William J. Archambault, Jr.
The Real Estate Investment Institute - Houston, TX
Brian,

Post them, discuss them, live them. Criticize them?

I’d be honored.

Personally I always wanted them on stone tablets, but my wife thought that bordered on sac-religious, my son though I was letting my ego get the best of me and our daughter said OH" DAD, I printed on cheap paper and framed them.

Feel free to use anything I post. I do have an envelope in front of me with your name on it and a new CD that stuff is copyrighted. You should have it by the middle of the week.

Here’ an extra "f" I couldn’t get the edit command to let me add it, so here it is.

Bill

William J Archambault Jr

The Real Estate Investment Institute

http://www.reii.org

Oct 14, 2006 01:48 AM #6
Rainmaker
1,092,043
Bryant Tutas
Bryant Tutas-Tutas Towne Realty, Inc - Poinciana, FL
Broker/REALTOR, Tutas Towne Realty, Inc

Hey guys great discussion. Not sure how I missed all this discussion yesterday. Oh yeah, now I know, I was working. That work sure does mess up my day!

Anyway since I basicly work with Sellers I rarely if ever refer buyers to a particular LO. When I did do this, in the past,  usually I gave them a few to chose from. Personally I have no desire to be involved in the loan process at all. It is not my area of expertise and I don't want it to be.

I had made a coment on Lenn's most recent post about how I agreed with her that there was no way a LO could have a fiduciary relationship with a buyer because they are selling a product. After reading this post and the comments from Bill, I think I may have spoken from a position of ignorance.

Why couldn't a LO have a fiducairy? I guess as long as you have several, and I am sure most have numerous, Lenders, that you are able to shop for your client this could definitely be done. The key would be in the disclosure and an underdtanding of where the compensation is coming from.

I will be pondering this all day today. Thanks for the stimulation!!! It was good for me, I hope it was good for you:)

Oct 14, 2006 07:36 AM #7
Rainmaker
925,078
Tony Marriott
Haven Express @ Keller Williams Arizona Realty - Scottsdale, AZ
Associate Broker, REALTOR
Getting past the technicalities and legalese, when a lender asks to meet with me to get on my list for referrals, I have a simple test for them.  As an agent, if I do something that causes a negative financial impact to a party to the contract (Buyer or Seller), I will suck it up and cover it.  Luckily, I haven't had to.  As a lender, if you do (or fail to do) something that causes a negative financial impact to a party to the contract (Buyer or Seller), like fail to have loan docs to title in time to close on time, etc. - will YOU suck it up and cover it out of your commission?  If yes - you make the list.  If no - don't let the door.......
Oct 14, 2006 10:57 AM #8
Rainmaker
306,034
Brian Brady
San Diego VA Home Loans/858-777-9751 - San Diego, CA
VA Home Loans/San Diego

Good comments.  Bryant, as always, your comments are poignant.  The link to the "Upfront Mortgage Brokers Agreement" defines exclusive agency for the mortgage broker and is clear on compensation and the avoidance of hidden compensation.  Transparency is the key to the UFMG agreement.  More difficult borrowers could be charged greater fees and easy, slam dunk (Fannie/Freddie) borrowers without MI could be charged a very small fee.

Tony:  Speaking of fees for performance.  I think it can and should be outlined in the agreement.  Delivery of loan docs is often tardy because of borrower induced problems (not getting in the documentation, not disclosing credit problems or child support issues).  There are occasions, (rare, but they do happen) , where we just blow it or a wholesale lender blows it.  I think it is more than reasonable for the mortgage broker to assume those transaction penalty fees and have countless times in the past (ask anyone who worked for KW from 1999-2002 in the old Peoria location).  

Oct 14, 2006 11:27 AM #9
Ambassador
739,304
Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

aaarrgghhhh.... I just spent 10 to 15 solid 15 minutes writing about this.... and since I was writing this from within my company's remote desktop.... I got bumped out of the system, which seems to happen twice a week. And no decided to do it now... I just typed my fruit and it froze. I could hit send... 

Brian...I will have to get back to this later. I can't think straight and I am ANGRY. I had so many good points for both sides. I need to go collect myself.

 

 

Oct 14, 2006 11:29 AM #10
Rainmaker
306,034
Brian Brady
San Diego VA Home Loans/858-777-9751 - San Diego, CA
VA Home Loans/San Diego

Oh yes.  Bryant?  I did very little "work" yesterday as I pondered and discussed this issue.  I am amazed at how one topic can monopolize your time and thoughts.

This banter, yesterday,  provided me with an idea that I KNOW is relevant, the Upfront Mortgage Broker.  I don't care much for the term and prefer something like a Fiduciary Mortgage Broker but the legal guys will help me with that this week.

If you want to be a leader in an industry, you have to take time to think about the BIG issues.  Yesterday was a big issue day.  Now I have to explain why I didn't work hard to my wife.

Oct 14, 2006 11:31 AM #11
Anonymous
Dave Rosenmarkle

I have never seen a home sales contract that provided for lender initials or obligation to perform under the contract. Other than the wiggle-room writing on a Good Faith Estimate, I have not seen any lender document that in any way obligates the lender to perform in a certain fashion by a particular date.

it would be refreshing to see lenders have some kind of accountability in this process, but I really don't know how it come be implemented practically. When Realtors mess up, it usually comes out of our commission. When loan officers make a mistake, closing is delayed or doesn't happen at all with that lender.

It's easy to use the term "Fiduciary" when there are presently no requirements imposed on lenders and no accountability when the lender does not process the loan in an accurate or professional manner. 

 

Oct 14, 2006 11:41 AM #12
Rainmaker
306,034
Brian Brady
San Diego VA Home Loans/858-777-9751 - San Diego, CA
VA Home Loans/San Diego

Dave:  I suggest that you build that into your contracts on the addendum sheet.  I would have no problem signing that addendum (if the borrower had performed)

Tommie:  I, too, have held a series 7, 63 and 24 license.  Many of the sharpest originators came from that background.  We provide a "financial planning approach" to the business and have always treated our relationship as a fiduciary.  Now we need to use the agreement that defines it so we can have exclusive financing rights (for a fee) and do our job correctly

Oct 14, 2006 12:32 PM #13
Rainmaker
306,034
Brian Brady
San Diego VA Home Loans/858-777-9751 - San Diego, CA
VA Home Loans/San Diego

Afterthought, Dave.  YOU can create that fiduciary responsibility in your relationships with local lenders and on the contracts. 

If you're representing a seller, require his/her lender to acknowledge a performance clause on the contract with specific penalties; you'll find out if you REALLY have a buyer who is pre-approved and will have put the performance on the lender. 

Oct 14, 2006 12:35 PM #14
Rainer
95,645
Jason Price
Mortgage Financial Group, Inc - Eustis, FL

I thought we all were in the business to help our clients.  That in itself should be enough fiduciary responsibility without all the legal crap getting in the way.  But for the many bad wolves in sheep's clothing, I understand the need for it.  It is a shame that there is not some kind of uniformity in the industry as a whole.  Realtors having, but lenders/brokers not.

Oct 14, 2006 01:21 PM #15
Rainmaker
98,205
Robert D. Ashby
Robert Ashby Photography - Miramar, FL

Sorry for the late arrival on this one Brian.

I fully believe in the Upfront Mortgage Broker philosophy and I have been an UMB since I formed my own company in March 2004.  The mortgage professor site no longer includes the listings of current UMBs.  it has been passed on to the Upfront Mortgage Brokers Association (UMBA) now.  Check out their website for more details and to find one in your area.

Also, Tommie and Brian's comments about the "financial planning approach" is another key step in the ficuciary capacity of the mortgage professional.  I had my series 6 and 63 as well as Life and Health Insurance licenses and unfortunately let them expire when I focused on mortgages only.  I will eventually go get them again, but right now I work with financial planners and insurance agents (the right ones for investment grade contracts), so I do not feel the need to get the licenses again, yet.

For the borrower's out there, know that most lenders, especially here in South Florida, pretend to be acting in your best interests, but really are lining their pockets in the process.

Brian, thanks for strating this post...

Oct 14, 2006 01:43 PM #16
Rainmaker
98,205
Robert D. Ashby
Robert Ashby Photography - Miramar, FL

For a better understanding of the benefits, check out the following posts on my blog...

Mortgage Tax Deduction

$25,000 Mistake

There are other postings on this subject as well.

Oct 14, 2006 01:48 PM #17
Rainer
202,482
Eddy Martinez
Nationwide Funding Group - Highland Park, CA
Brian you are the man, if i had a dollar for all of the things i have learned from you id be a rich man!!!!!!!!
Oct 14, 2006 11:59 PM #18
Rainmaker
148,461
Home Design
Alpharetta, GA
Home Design and Real Estate

Great Post Brian....As usual..I like your comment before about being the resident wise-ass.   LOL

Oct 15, 2006 07:38 AM #19
Rainmaker
1,397,470
Maureen McCabe
HER Realtors - Columbus, OH
Columbus Ohio Real Estate

Congrats on the Carnival Brian!  

Oct 23, 2006 03:59 PM #20
Rainmaker
306,034
Brian Brady
San Diego VA Home Loans/858-777-9751 - San Diego, CA
VA Home Loans/San Diego
Thanks, Maureen.  I didn't notice it before but I'm glad I submitted an entry.    For those of you interested, this post was referenced un "Lending" at the Carnival of Real Estate
Oct 24, 2006 12:31 AM #21
Anonymous
William
Brian: Your post in 10/2006 said: "Brian Brady is a NOT an Upfront Mortgage Broker ...yet.  He can be reached at (858)-699-4590"  If you knew about the UMB since 2002, then why didn't you join?  Have you joined yet?  You don't seem to be listed on the www.upfrontmortgagebrokers.org site
Jun 12, 2007 03:20 PM #22
Rainmaker
306,034
Brian Brady
San Diego VA Home Loans/858-777-9751 - San Diego, CA
VA Home Loans/San Diego

I decided against it, William when I read more about Jack Guttentag.  He supports government regulated fixed mortgage brokerage fees that is anti-competitive.  

I now think that the UMB movement could result in higher costs to the consumer; I'm completely against that 

Jun 12, 2007 08:21 PM #23
Anonymous
Roger Ingalls

I came across this thread while trying to do some research on fiduciary responsibility for mortgage brokers.  Rather than write a bunch in a dead thread, please let me know if a more current one is runnning

 Hot topic in WA state, as it is almost certainly to be enacted into law.

Have seen links to your blog at RainCityGuide.

Good stuff

 

 

 

Mar 14, 2008 02:11 AM #24
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Rainmaker
306,034

Brian Brady

VA Home Loans/San Diego
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