Fiduciary Duties for Mortgage Brokers

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Last Friday, Governor Gregoire signed SB 6381 into law giving fiduciary duties to mortgage brokers.  This new law does not apply to loan originators who work for bank-mortgage companies (like WaMU, Countrywide, Wells Fargo, Chase, Bank of America, etc).   

Here are some of the highlights of what the law spells out for loan originators who work for mortgage brokers:

  • A mortgage broker must act in the borrowers best interest and in the utmost good faith towards the borrower
  • A mortgage broker shall not accept, provide, or charge any undisclosed compensation or realize any undisclosed remuneration that inures to the benefit of the mortgage broker on an expenditure made for the borrower.
  • A mortgage broker must carry out all lawful instructions provided by the borrower. 
  • A mortgage broker must disclose to the borrower all material facts of which the mortgage broker has knowledge that might reasonably affect the borrowers rights, interest or ability to receive the borrower’s intended benefit from the residential mortgage loan.  
  • A mortgage broker must provide an accounting to the borrower for all money…received from the borrower.

All of the above seems pretty straight forward to me and SHOULD all ready be happening when consumers work with a mortgage professional.  I have always put my clients best interest first–above mine.   The next two points are more surprising:

  • A mortgage broker may contract for  or collect a fee for services rendered if the fee is disclosed to the borrower in advance of the provision of those services. 

This will allow mortgage brokers to charge a fee for consultation, credit repair, working on preapprovals.  This could change how a Washington State mortgage broker is paid and how much they charge in origination.    

  • The fiduciary duty in this section does not require a mortgage broker to offer or obtain access to loan products and services other than those that are available to the mortgage broker at the time of the transaction.

I see this last point as a conflict with the entire bill.  What if the best loan for a consumer is FHA or VA and the mortgage broker does not have those loans available so they shoe-horn them into a loan they do have access to?  How is that acting in the clients best interest?  The other side of the coin is that if a mortgage broker has never provided a certain product (such as FHA or VA mortgages); how would they know if the consumer would be better off with these loans?

Note to Consumers and Real Estate Agents:  If you are a first time home buyer, have credit scores below 700 or are putting less than 20% down; ask your mortgage broker if they are able to provide FHA financing.  Those who have served our country should ask if VA financing is available

Jillayne Schlicke wrote an interesting post on this earlier this month at Rain City Guide.   This law is yet another reason why consumers may want to select a loan originator classified as a licensed loan originator working for a mortgage broker over a loan originator who works for mortgage-bank.

Comments

  1. I think one of the best things that may come out of all these laws is that brokers may held in higher standing that loan originators working at banks. We already know that top originators usually don’t work at banks, but I think laws like this may reinforce that notion. Ironically, I thikn the invisible hand of large banks has other intentions of making brokers less competitive, but I believe many of these laws may have the opposite effect with smart consumers.

    In regards to having access to loan products such as FHA/VA. I think one way to insure that LOs act on behalf of their clients instead of shoehorning into the only loans they have available is to allow referral fees. For instance, if I can’t do a certain type of mortgage, I should be able to get a referral fee of half the commission by referring the borrower to another loan originator who can provide that loan product.

    Right now, this is illegal and thus no real incentive for LOs to refer borrowers to other loan originators. Of course, I will do this whether I am getting paid or not in many circumstances, but it would be nice to get something out of it other than a thank you.

  2. It is too bad that we (unlike real estate agents) cannot be paid a referral fee…you’re right, Russ. I do refer out of state clients all of time…and sometimes if our seconds are not competitive (lower loan amounts, for example) I’ll refer to another source as well.

    You probably all ready act as if you have a fiduciary responsibility towards your client.

    Where this is also good is to make things clear to other professional parites, such as real estate agents.

    Once when I had a “subprime borrower” I expressed my concerns to the agent about home buying not being in the buyer best interest…I was snapped at and told this was not my decision to make. If I had a product that I could approve the buyer with, THAT was my job.

  3. Rhonda-

    The last provision of the bill is there because of legal battles. Acting in someone’s best interests within the product offerings of your company has been considered a standard you can reach. Suggesting a competitor has caused too many issues (should every Real Estate Client use Redfin, for example).

    The law wouldn’t stand if the MB was supposed to go outside of their own interests.

    Remember, i’m not a a lawyer.

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