The president of the National Association of Mortgage Brokers made a speech before Congress on March 27, arguing that “NAMB remains opposed to any proposed law, regulation or other measure that attempts to impose a fiduciary duty, in any fashion, upon a mortgage broker or any other originator.” NAMB’s president goes on to explain why he thinks mortgage brokers “should not, and cannot, owe a fiduciary duty to a borrower.”
He makes the following argument: “The consumer is the decision-maker, not the mortgage broker. Mortgage brokers do not represent every loan product available in the marketplace, nor do we have the ‘best’ loan available. Rather, the mortgage broker enters into contracts with various lenders and is then able to offer such lenders’ loan products directly to the consumer. This is a critical point because there is no ‘best’ result. What is ‘best’ depends upon three inter-related concepts: product availability, price and service. Focusing solely on a price of a product may not yield the “best” result for a consumer. Only the consumer can determine the ‘best’ combination of factors that fit their needs.”
In contrast to NAMB, we argue that mortgage brokers and all mortgage loan originators at all types of lending institutions can and ought to have fiduciary duties toward each and every consumer that comes through their doors. To help with our discussion, let us address what it means to be a professional.
Traditionally, a professional is someone with specialized knowledge and a certification of substantive competency, along with a pledge to a written code of ethics within an industry. Some examples of professionals are medical doctors, lawyers, CPAs and Realtors. Furthermore, the typical standard of practice of a professional is at the level of a fiduciary duty. This requires the highest standards of good faith and fair dealing, as well as the charge to never put one’s interest above the interest of a client. Put simply, it is a relationship of trust. There is an implicit economic tradeoff here. In exchange for the honor, prestige and income of a typical professional, there is an agreement to owe fiduciary duties to clients.
Historically, we have seen and are continuing to see the emergence of new professional groups. For instance, in the past few decades we have seen the rise of paralegals, who operate alongside lawyers and judges, and who provide a valuable service within the legal community. Law enforcement is also becoming more professionalized, as barriers to entry rise and the standards of competency and ethics increase. This brings us to the question about the status of residential mortgage loan originators who work for many different kinds of lending institutions, including broker, banker, credit union or consumer finance company. If they belong to a professional class, then they would have to follow an ethics code with fiduciary duties. In contrast, if they are not professionals then mortgage products and services should be treated like any other retail establishment, and fiduciary duties do not apply.
Mortgage lenders have been in an ambiguous status for a number of years, which is perhaps at part of the root of the default/foreclosure problem with which we are dealing. Huge numbers of consumers actually believe that they can trust all mortgage lenders to look out for their best financial interest. They walk into lending establishments with the expectation that their lenders owe them fiduciary duties. The problem is that there is no well-formed code of ethics that requires a fiduciary standard of practice. This incongruence of basic assumptions then allows some unscrupulous lenders to take unfair advantage of their clients. This is not to say that all lenders violate trust or take advantage of unsuspecting clients. Yet, because there has not been a precise, written code of ethics, there are no standards of practice that have been agreed upon and publicized, much less the instantiation of a fiduciary duty in this regard.
The industry of mortgage lending is at a historical crossroads. It can either become a professional group with fiduciary standards or it can remain a retail establishment in which most of the burden of information is with consumers. Yet, they can no longer have it both ways. Yet, let us be clear that mortgage loan originators working at all types of lending institutions can owe fiduciary duties without representing to consumers that they are finding them the “best loan” or getting them the “best result.” A fiduciary standard simply would not put this burden on loan originators.
By way of analogy let’s clarify. Medical doctors, lawyers and Realtors do not have to promise that they will get their clients/patients the best surgical results, the best legal results or the best deal on the house in order to discharge their clear fiduciary duties. Instead, they are promising to do the best job they can; to fully inform their clients of all relevant information and risks, and to carefully make sure that their clients have been provided with the necessary tools and understanding to make a fully informed decision. Mortgage brokers, bankers, lenders and consumer finance companies could easily adopt a fiduciary standard for their loan originators if they chose to, and it would be both practicable and fair.
Jillayne Schlicke and Kevin Boileau are co-executive directors of the Ethical Lending Foundation.
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