As we ease into the election year and more ARM resets happen, with the inevitable payment shock and defaults, the mortgage business will be in for more savaging. This will happen in the halls of congress, on the campaign stump and in the mainstream press that is always looking for issues that will sell papers. For us, some of these issues will ring true (“Many of these loans should never have been made!”), while others will not (“Rapacious lenders only made these loans so they could foreclose on peoples’ homes!”). But surely as Michael Vick will never be People for the Ethical Treatment of Animal’s Man of the Year, the debate over the role of the mortgage broker will be in full rage by early next year. At the core of the debate will be, of course, the question of who the broker should actually be working for—the borrower, the lender or themselves. Like most issues, opinions are expressed with passion and conviction. In the final analysis, the opinions which matter most may be those in Washington D.C.; there could be decisions made there which will decide the issue for us and put the debate to rest.
On one hand, you have a highly qualified expert at the point of sale who gives very high levels of customer service to borrowers. On the other hand, you’ve got a lender who works hard to create a positive brand impression with both the broker and the borrower, but who has little control over the point of sale. The broker is ultimately paid by both parties to represent both of their interests in a professional, forthright manner, but with no accountability to speak of other than the prospect of doing future business with each of them. Now take it to another level of complexity, and you can begin to see what lawmakers are wrestling with. Borrowers understandably find the whole process bewildering, and so count on the originator to make it clearer. Many borrowers are more interested in monthly payments than what is best for them over the long term, and so can be attracted to teaser ARMs that may sink them financially down the road. Should originators be saddled with the responsibility of “saving them from themselves?” Lenders want to make loans that will pay reliably, but they have to stay competitive with underwriting guidelines that are both sensible and aggressive. This may be akin to walking a tightrope while carrying a sack of anvils—conceivable, but difficult. How do regulators balance all this without creating onerous conditions for all concerned? The answer may well be to redefine the role of broker are the borrower’s agent—their fiduciary.
“Fiduciary” is a somewhat loaded word. In the main, it is defined as someone who is entrusted with control over the assets of the beneficiary, in this case the borrower. The control in lending is not absolute, as in the case of executors of wills and trustees, but rather is an advisory role of recommending the safest and best course of action, such as the type of loan to be sought. It gets murky in these waters. A.W. Pickell, III, a past president of the NAMB and the CEO of LeaderOne Financial Corporation in Overland Park, Kan., has dealt with this issue for years, and he feels the controversy is somewhat overrated. “Here we need to define what fiduciary responsibility means,” he said. “Is it the lowest rate? Is it the fixed program? There is already in common law an understanding of good faith and fair dealing which should govern all the transactions by a broker.” In addition to common law, he cites the current agreements and contracts that exist with lenders and borrowers as an important factor in discussing the migration of the broker’s role from independent agent to fiduciary. “Since the relationship with the lender is spelled out in the contract with the lender, I do not think this can change. Secondly,” he adds, “NAMB already has an agreement that spells out the relationship between the originator and the consumer as that of an independent contractor, so I think that should remain.” This pretty well describes the NAMB’s position on the matter, but not all parties agree.
Regina Lowrie, immediate past chairperson of the Mortgage Bankers Association, has a different opinion. “Unlike mortgage bankers, who have ultimate responsibility for the actions of the mortgage originators, brokers have a unique role in the real estate finance industry to act as an agent for both the borrower and the lender,” she observes. “Given both the legislative and regulatory environment, it is not reasonable for brokers to continue to hold themselves out as independent agents with no responsibility to the borrower or accountability to the lender.” Lowrie brings a highly realistic perspective on the legislative and regulatory environment, having spent a good amount of time testifying before congressional committees and dealing with lawmakers.
Still, however, she does not necessarily believe the broker should have a formal fiduciary relationship with borrowers. “Brokers have always held themselves out to represent and shop for the best deal for the borrower,” she says. “Therefore, I believe there should be a clear role for the broker to disclose their relationship with the borrower. That does not mean to impute a ‘fiduciary responsibility’ on brokers, but rather a duty of care to act in ‘good faith’ to represent the borrower’s best interests.” Quickly donning her mortgage banker’s hat, she adds, “I would also say that the broker has a responsibility to the lender to deliver a quality loan.”
“Fiduciary,” with its legal implications, can be a scary word to many on whom it might be forced. To others, it is not intimidating at all. Steve Jacobsen, president of 105-branch Fairway Independent Mortgage Corporation of Sun Prairie, Wis., isn’t frightened by it. When asked about the downside for brokers in becoming fiduciaries, he replied, “No downside. That is the way it should have always been and in fact has always been,” he said. This, by the way, is highly indicative of the strong belief long-time origination professionals possess on the subject. Many have defended the legal position of independent agency on the part of brokers for the simple reason that the market will reward those who perform well and penalize those who don’t. “If we do not treat people fairly, we should not be in this business,” Jacobsen says. “The market is very astute and unless you consistently perform and add value to the consumers, you will not make it.” While this is true, there is also some irony; it can be argued that much of the dense, oily smoke that exists over the scene at the moment was caused by flash-in-the-pan newcomers who made loans that suited their own interests. They then bailed, leaving the long-term professionals to take the subsequent heat.
A highly interesting trend, and one that is complementary to the notion of brokers becoming more involved in borrowers’ financial matters, is the growing number of tools that place originators in the middle of the financial planning arena. While not the holistic, all-encompassing domain of traditional financial planning, the emerging practice of “mortgage planning” is providing some originators with a new approach. Companies like Mortgage Market Guide, Loan Toolbox, Mortgage Coach and Strategic Equity are offering the means for brokers to become more expert in the financial markets in general and mortgage planning in particular. Not only do tools like these make originators look more professional, they also move them more toward being the trusted advisor, if not quite to the role of fiduciary. Dave Savage, the CEO of Mortgage Coach, does not think that’s a bad thing. “There is no downside to mortgage originators becoming mortgage planners,” he says, as long as they confine themselves to the mortgage area and don’t present themselves as experts in other investments. “If mortgage planners are working with the homeowner and appropriate advisors, they’re providing a great service and are raising the bar in terms of originator professionalism.”
Being professional, of course, is a long way from becoming a fiduciary, but a growing number of people in the industry are seeing that expanded responsibility as the future role of the originator. The Upfront Mortgage Brokers Association (
Time and the powers that be in Washington will tell whether becoming the borrower’s fiduciary stays an option for brokers. If fiduciary status becomes mandatory by congressional fiat, many things change for the industry and all of its practitioners.***
