Do Lenders Have a Fiduciary Responsibility to a Borrower?

I have been enjoying this banter about fiduciary capacity in the real estate transaction as it related to lending.  Clearly, this has been a fun "academic discussion" for me today and probably a pain in the patootie for many other posters in the Active Rain Real Estate Community.

A brief history:  Lenn Harley wrote a nice blog yesterday about The Evil Press. Normally, I would agree with Lenn that members the press are drama seekers with a lack of imagination and an inflated sense of self-importance.  Actually, I retain the opinion about the press.  In this instance, Lenn paraphrased an article about suggestions from a member of the press to steer clear of Realtor referred lenders.  I disagreed with her as you will see by my first comment.

I guess Lenn and I both slept on the thought because we simultaneously published blogs this morning about our positions.  Hers was more successful and received a gold star and numerous comments; mine was not. Comments included suggestions: (1) that I may be bitter because I am not on Realtor's preferred lists, (2)  Realtors are the best positioned to provide such referrals (over the buyer's primary financial advisor),  (3) and even a suggestion that the buyers don't have a primary financial advisor so the Realtor MUST assume that role in a vacuum.

The point of my blog was that Realtors overstep their boundaries when acting as a sub-agent to a particular lender. Referring to a "preferred" lender they potentially breach their fiduciary capacity.  A Realtor's interest is primarily to the transaction,  as is evidenced by the comments from Realtors in Lenn's subsequent post. I believed that to be a breach of fiduciary duty. After careful consideration, I am publicly capitulating to the thought that the Realtor should accept the role as a primary financial advisor as their fiduciary responsibilty. 

Do you want to know why?

Loan Originators have absolutely no fiduciary responsibilty to a borrower other than we should make loans that are consistent with published guidleines. The only responsibilty we owe is to our employers to make money and the lenders to prepare a complete an accurate loan package.  Now this will most likely upset my good lending friends here on Active Rain.  I hope I don't do that because I think there are some darn sharp lenders here.  Lenders who have advanced loan advisory to be a complete financial planning process.  I agree with them in principle. However, and this is a big HOWEVER....Direct lenders owe the borrower nothing.  Mortgage brokers establish that we have no fiduciary responsibilty in the "Mortgage Loan Origination Agreement" as published by the National Association of Mortgage Brokers.

Could a form be created that establishes a fiduciary capacity for mortgage brokers?  Of course.   Jack Guttentag, sometimes referred to as the "Mortgage Professor" of the Wharton School at the University of Pennsylvania created the idea of mortgage brokers as a fiduciary agent.  His "Upfront Mortgage Brokers Agreement" defines a  fee for brokerage services and puts the borrower and mortgage broker on the same side of the transaction.  Gone is the double dealing the mortgage cartel is famous for.  Fortunately, The Mortgage Profesor explains to the consumer that a four figure fee is not uncommon for arranging a loan.

I am grateful for the blogs here because it provides us a tremendous opportunity to engage in academic discussions to better our service offerings.  I have known about the Upfront Mortgage Brokerage Arrangement since The Mortgage Professor created it in 2002 and liked the idea of establishing a fiduciary agency to shop for the best loan for my borrower.  I believed then that it would eliminate the "double applications" that are so prevalent in our industry and increase my stature as a professional in Realtors' eyes.

If a Realtor were referring to an Upfront Mortgage Broker, they could make referrals based solely on fee comparisons and be assured that the mortgage broker was working in the buyer's best interest. My Realtors told me that it would be too confusing; they liked things the way that they are.  Oh well, it's 4 years later so maybe we can get that fiduciary duty off of your back and onto mine. 

My shoulders are broad enough.

Brian Brady is a NOT an Upfront Mortgage Broker ...yet.  He can be reached at (858)-699-4590