Monday, June 16, 2008

Mortgage Broker Fiduciary Duty

Being a California Department of Real Estate (DRE) licensed real estate and mortgage broker, I owe my borrowers and (and sometimes lenders) a fiduciary duty. In fact, all DRE licensed mortgage brokers are agents and always owe their borrowers a fiduciary duty. However, in most parts of the country most mortgage brokers are not held to a fiduciary standard nor are they required to disclose that fact to their borrowers.

In the industry, some mortgage brokers hold themselves out as agents, consultants, and advisors whose job it is to "shop" for a loan for the borrower. While many of these brokers are not held to a fiduciary duty under the laws of their state, often times, by holding themselves out as consultants and advisors, they create an implied agency which carries with it an imposed fiduciary duty. As a fiduciary, the mortgage broker is required to put the best interest of the borrower above their own and to disclose all material facts, including compensation. This clearly provides a greater benefit to borrowers by demanding the highest legal standard of care along with providing additional borrower recourse that goes beyond that provided by RESPA. Considering that HUD's 2001-1 Statement of Policy effectively curtailed borrower class action suits for RESPA violations, borrowers have been left impotent in regard to meaningful recourse for lending abuse.

While some mortgage brokers are fiduciaries, other are intermediaries. Intermediaries are best defined as 'selling' access to money, and are not required to place their borrower's best interest above their own.

In the battle over industry reform, both the MBA and NAMB have taken conflicting positions. The difference between the mindset at the MBA is the polar opposite to NAMBs in regard to the role of mortgage brokers, and specifically, fiduciary duty. While the MBA recognizes the varying roles of the mortgage broker, the MBA holds that only those mortgage brokers that hold themselves out as agents should be held to an agency standard. This differs from NAMB's position in that NAMB completely denies that such standard actually exists.

Click here for a link to the MBA's comments in response to HUD's proposed RESPA rule.

And click here for a link to NAMB's comment in response to HUD's proposed RESPA rule.

As you can see, if you are willing to read all 154 combined pages, both organizations view mortgage broker responsibility differently:

Excerpt from MBA letter:

Brokers Who Claim to be or Act as Borrowers’ Agents
Should Be Treated As Agents Under the Law of Principal and Agent

If a broker asserts or acts in a manner that indicates that he or she is shopping for the borrower, the broker should be subject to the duties of agency. This would clarify that a broker is acting on the borrower’s behalf and has an obligation to act in the borrower’s best interests.

MBA believes that this is best accomplished through a declaration (or disclaimer) of agency relationship by the broker. This clearly would inform a borrower as to whether he should rely on a broker to shop for him. Mere imposition of an undefined standard of fiduciary duty on all mortgage brokers, irrespective of the borrower’s wishes, would likely increase liability and costs to both mortgage bankers and borrowers.

Now, let's take a look at what NAMB has to say:

Today, a real estate financing professional or entity acts in a mortgage broker capacity when the professional or entity works with both borrowers and lenders, though representing neither, to obtain a mortgage loan. A mortgage broker adds value by providing goods with quantifiable value, such as a customer base and goodwill, as well as facilities and services. A broker works with consumers to help them through the complex mortgage origination process. Accordingly, a mortgage broker's services may include taking the application; performing a financial and credit evaluation; collecting and completing documents; working with realtors; ordering title searches, appraisals, and pay off letters; assisting in remedying faulty credit reports or title problems; and facilitating loan closings.

Of course NAMB fails to cite that on FHA and VA transactions, the mortgage broker is always the agent of the lender, therefore, agency representation does in fact exist for mortgage brokers whether or not the right to representation is extended to the borrower. However, HUD's failure to recognize agency representation equally for borrowers is the topic of another post.

Needless to say, this could get interesting- especially if the MBA decides to press the issue of mortgage broker fiduciary duty beyond the current RESPA issue.

While I am a mortgage broker, I am not a member of NAMB and do NOT want NAMB speaking or lobbying for me. My view is simply that mortgage broker reputation and public trust are more important than immunity for the actions of bad actors which only promote borrower exploitation and RESPA abuse.

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