{"id":7117,"date":"2009-09-03T06:00:05","date_gmt":"2009-09-03T13:00:05","guid":{"rendered":"http:\/\/seattlebubble.com\/blog\/?p=7117"},"modified":"2013-09-08T09:06:13","modified_gmt":"2013-09-08T16:06:13","slug":"fiduciary-standards-in-lending-and-on-wall-street-can-it-work","status":"publish","type":"post","link":"https:\/\/seattlebubble.com\/blog\/2009\/09\/03\/fiduciary-standards-in-lending-and-on-wall-street-can-it-work\/","title":{"rendered":"Fiduciary Standards in Lending and on Wall Street: Can it Work?"},"content":{"rendered":"

Question for discussion:<\/strong> In Washington State, can Loan Officers operate within the framework of a Fiduciary<\/a> duty to their clients when the lending industry is structured with incentives that may be in conflict with the new standard?<\/p>\n

Jane Kim of the Wall Street Journal wrote an excellent article<\/a> in this past weekend\u2019s issue regarding Wall Street brokers (selling investments) being placed under Fiduciary standards in dealing with customers.<\/p>\n

Currently, Wall Street brokers are held to what is termed \u201csuitability standard,\u201d which is a more lenient standard than that of a fiduciary.\u00a0 In contrast, Registered Investment Advisers have operated for a long time under the more stringent \u201cfiduciary\u201d standard\u2014a legal standard that compelled them to act in the best interests of customers.\u00a0 The proposed higher standard forces disclosure of potential conflicts of interest (i.e., if they make more money off of an investment offered vs. others) and promotes recommendations of investments that may be less costly to the consumer and more tax-efficient.<\/p>\n

While Wall Street struggles with reform as part of its regulatory overhaul, the mortgage industry has also implemented reform by introducing a similar \u201cfiduciary standard\u201d for mortgage brokers and loan officers.\u00a0 Prior to this reform in the mortgage industry, those who originated loans had no obligation to work in the best interest of their customers.<\/p>\n

\u201cIn most states, mortgage loan originators still have no fiduciary obligation to work on behalf of their client’s best interests. The state of California mandated fiduciary duties for only mortgage brokers even during the height of the real estate bubble and Washington State added fiduciary duties for mortgage brokers and loan originators in 2008 but this still leaves consumer loan company loan officers (LO\u2019s) and bank loan officers with more of a salesperson’s status. \u00a0I’m sure there are some LOs who work at a bank, credit union, or consumer loan company (they like to say “mortgage banker” or “correspondent lender”
\nbecause it sounds better) who do regularly look after their clients’ best interests but this is just mere subjectivism.\u201d<\/p>\n

\u2013 Jillayne Schlicke<\/a>,\u00a0 Founder of the National Assn. of Mortgage Fiduciaries<\/p><\/blockquote>\n

[post continues, click below]<\/em>
\nMuch of today\u2019s economic problems are directly associated with lending-gone-wild<\/a>.\u00a0\u00a0 Countless cases of fraud both locally and throughout the country have been exposed resulting in massive losses for lenders and consumers, even those caught innocently in its wake.<\/p>\n

One of the questions unanswered: How can the mortgage community effectively work the way a fiduciary standard is intended when the current lending structure is one in which incentives provided to the loan originators seem to undermine their ability to work in the best interest of their client?<\/strong><\/p>\n

For example, if you have two perfectly credit worthy borrowers, gainfully employed and with similar financial resources that are purchasing a home, it is common that you can have one borrower obtain a loan interest rate at about 1\/4 to 1\/2 percent less than that of the other borrower.\u00a0 Sometimes the spread may be larger.\u00a0 Why?\u00a0 It may have to do with incentives commonly called yield spread premiums or rebates from the lender paid directly to the mortgage broker\/loan officer for originating the loan at a specific interest rate.\u00a0 This is retail lending. There was nothing wrong with this system when it operated under the prior \u201csalesperson\u201d framework where a Fiduciary duty was absent.\u00a0 Today,\u00a0the Washington State licensed loan originators, working under a Fiduciary standard with the incentives at hand, may have an inherent conflict that didn\u2019t exist before.\u00a0 I find this terribly ironic.<\/p>\n

A loan sold to the consumer at 5.0% interest rate may provide a payout\/rebate to the loan originator of only .125% (1\/8th<\/sup> of one percent) of the loan amount but a loan sold to the consumer at 5.25% may bump that paid incentive to the loan originator up to .5% (1\/2 of one percent) of the loan amount (note:\u00a0 the rebates are earned fees over and above the commonly standard 1% fee charged).\u00a0\u00a0 If the interest rate is sold at 5.5%, the incentive provided for the loan originator may be even greater.\u00a0 The checks and balances to this scenario is that consumers shop and therefore a loan officer must compete in fees and rate or they will have little chance of making the loan.\u00a0 In addition, there is no way of knowing what rate will be offered to the consumer at loan application including any rebate back to the loan originator until the loan program and rate is locked.\u00a0 Rates can and do change daily and even several times within the day.<\/p>\n

\u201cDuring the bubble run up and predatory lending days, loan originators would routinely lowball their Good Faith Estimates or simply not disclose this rebate existed. At closing the consumer would see the higher fees but have no time to object.\u201d \u2013 Jillayne Schlicke<\/a><\/p><\/blockquote>\n

What is the solution?<\/strong><\/p>\n

It could be that a loan originator could guarantee their rate and fees (subject to restrictions and conditions) on the new Good Faith Estimate or GFE (coming this January 2010) that has been recently overhauled by HUD to provide a clearer understanding of the fees and loan program that is being offered.\u00a0\u00a0 There has been push-back resistance of this new Good Faith Estimate by the lending industry, and some of it for arguably good reason.\u00a0\u00a0 According to Jillayne Schlicke, the National Association of Mortgage Brokers (NAMB) has lost this round to influence a change in the newly proposed GFE.<\/p>\n

Many in the lending industry have elected to avoid the disclosure of yield spread premiums (shown on a Settlement Statement) by working at a company that is licensed as a consumer loan company or by working at a bank.\u00a0 In other cases, the loan officer may work under a correspondent lending company or other similarly structured business model.\u00a0 Under these business models the loan is originated and closed in the name of the lending firm where the loan officer works and shortly after closing (almost simultaneously) the loan is sold to an investor such as Wells Fargo or Chase Bank.\u00a0 This business structure avoids disclosure of any rebates or yield spread premiums and, if the loan was brokered and not closed in the name of the correspondent or consumer loan company name, the awkward situation when a consumer may ask (while signing their closing papers) what the separate figure or YSP disclosure is on their Settlement Statement.<\/p>\n

Working within a framework of a “Fiduciary Standard” is not an easy task because of so many competing interests, potential conflicts of interest and regulatory standards that may or may not be practical in all situations.\u00a0\u00a0 Jane Kim, in the article she writes in this weekend\u2019s edition of the Wall Street Journal summed up the problem facing Wall Street brokers well:<\/p>\n

\u201cTrying to define what constitutes a fiduciary duty is like trying to define the duty to not commit fraud\u2014any application of it depends on the client\u2019s particular facts and circumstances.\u201d<\/p><\/blockquote>\n

New Era?<\/strong><\/p>\n

On January 1st<\/sup> of 2010 (the date that HUD begins requiring use of the newly updated Good Faith Estimate document<\/a>), it could be new era when a loan officer says to their client, \u201cI charge \u201cx\u201d amount to make your loan and when I lock your rate if there is a rebate or yield spread premium excess beyond what I charge in aggregate, you will receive the benefit of that money in the form of a credit or partial credit to reduce your closing costs.\u00a0 We won\u2019t know that that amount is until your loan is locked.\u00a0\u00a0 I don’t control what those rates and rebates offered will be.\u00a0 The ability for you to float your lock and play the market may also work in your favor and also work against you if rates rise.\u00a0 Together we will communicate to make sure we obtain the very best terms for you.\u201d\u00a0 That would foster long-term business relationships like no other.<\/p>\n

To conclude, I don\u2019t think there has to be over-concern in the lending community with regards to the new Good Faith Estimate and properly disclosing earned fees.\u00a0 From my perspective, a lot of the uproar and concern by the mortgage broker community is energy misplaced.\u00a0 Consumers have no qualms about paying for services provided they know what to expect and can appropriately budget for their expenses if they are informed in a transparent way.\u00a0 Since late 2003, when our escrow office opened, there have been only a select few cases where clients have chosen not to close a loan because of confusion over fees or under disclosed matters that have come to light after receiving their Settlement Statement.\u00a0 I would argue that in those few cases, had the consumer been communicated with properly and all earned fees were explained in a manner that made sense, the loans would have closed and everyone would have been happy, including the escrow and title firms that are paid only <\/em>if a loan closes.\u00a0 There is nothing more frustrating for title firms and escrow companies closing transactions than to have a client across the table walk away because of rates, fees or “unknowns” that take the consumer by surprise.<\/p>\n

(thanks goes to Jillayne Schlicke for collaborating with me and editing this post)<\/p>\n","protected":false},"excerpt":{"rendered":"

Question for discussion: In Washington State, can Loan Officers operate within the framework of a Fiduciary duty to their clients when the lending industry is structured with incentives that may be in conflict with the new standard? 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