by Brian Brady
Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL
Realtors have to stop complaining about the sorry status of the lending industry.
Why?
They have the power to make a difference but refuse to take action. I have often heard the Realtors’ cry for licensing of loan originators and a plea for lending advisers to adopt a fiduciary capacity when originating a mortgage loan. Steve Berg makes an excellent case on The San Diego Home Blog for abolishing dual capacity, licensing originators, and establishing a fiduciary capacity for loan originators. The problem? Realtors are waiting for the lending industry to do this. That just ain’t gonna happen.
Realtors assume a fiduciary capacity for buyers. With that capacity comes a responsibility to assure that the buyers is getting good loan advice. The challenge? It’s the money, stupid!
How can the NAR really protect the consumer from unscrupulous loan originators? Adopt a standard which closely aligns itself with what the NAR membership wants. NAR membership wants to deal with licensed originators. NAR membership wants an independent fiduciary duty imposed upon originators.
Here are three ways Realtors can adopt to truly align their buyers with the originators they want:
1- Stop referring loans to originators at federally chartered banks. These banks are exempt from licensing and are limited in their product selection. The only way a fiduciary relationship can be established for your buyer is to refer him/her to an independent mortgage broker who is able to shop ALL of the big banks and smaller mortgage companies.
2- Insist on loan commitments from originators who are General Mortgage Associates of the of the National Association of Mortgage Brokers. To date, this is the only national organization that has stated that its membership must act in a fiduciary capacity to the borrower. In practice, the NAMB doesn’t give a damn but at least they state that they do.
3- Prohibit the membership from originating loans. That means that all affiliated business arrangements and common ownership of lending institutions and brokerages must be terminated. It further means that splits for individual Realtors (from employing brokers) will be smaller because the income generated to the broker from the affiliated lender has disappeared.
Steve Berg’s suggestions are timely. Unfortunately, they’ll never materialize because the big banks have too many relationships with real estate brokerages. Realtors have the power to make difference and change the industry for the better. They can leave an indelible mark by adopting a standard that will force the mortgage industry to change. It’s just gonna cost them a whole bunch of money- I don’t think they’re up to the task.
Jillayne Schlicke says:
Hi Brian,
Is this a satire piece or are you 100% serious here?
September 23, 2007 — 8:21 pm
Jillayne Schlicke says:
Point number 1 is 100% false. Let me tease apart each claim:
“banks are exempt from licensing and are limited in their product selection.”
Banks carry a state or federal banking charter. Their banking license requires them to maintain: an auditing department, a compliance department, and an education/training department. (Gee, the last several thousand mortgage brokers I’ve met had NONE of these departments.) Banks run background checks on their employees, often screen for drug use prior to employment, put their employees through an education and training program, and their files are subject to routine audits. Banks are also able to broker loans too.
“The only way a fiduciary relationship can be established for your buyer is to refer him/her to an independent mortgage broker who is able to shop ALL of the big banks and smaller mortgage companies.”
Mortgage brokers are under no obligation whatsoever to act in a fiduciary capacity towards their clients. A consumer might be lucky enough to select a broker/loan originator who voluntarily chooses to act this way, but just being able to “shop for a client” does not equate to mandatory fiduciary duties, which would be spelled out in state of federal law. NO state that I am aware of has yet enacted mandatory fiduciary duties for loan originators who work for a broker.
A broker/LO doesn’t get to say “I’m a fiduciary” and then it’s so. A fiduciary relationship is a legal relationship. It’s the highest form of a legal relationship that exists in the United States. Each state’s law would carefully spell this out.
Point 2: “Insist on loan commitments from originators who are General Mortgage Associates of the of the National Association of Mortgage Brokers. To date, this is the only national organization that has stated that its membership must act in a fiduciary capacity to the borrower. In practice, the NAMB doesn’t give a damn but at least they state that they do.”
Brian, are you nuts? WTF? In order to become a General Associate of NAMB, one must simply have a high school diploma or GED and pass a test. There is no prior experience required. The test, to me, looks like a formality. Only 16% of the content is state and federal law and a full 15% of the exam is on sales and technology. The immediate past president of NAMB testified in WaDC that brokers do NOT work on behalf of consumer, the broker works for himself. There is absolutely NOTHING in their code of ethics or anywhere on their website indicating members owe fiduciary duties. If anything, NAMB has gone on record many times as being against mandatory fiduciary duties. Please give us at least one reason why you would recommend members of an organization that “doesn’t give a damn but states that they do?”
Point 3 “all affiliated business arrangements and common ownership of lending institutions and brokerages must be terminated.”
NAR is a powerful trade organization. Lobbying congress to reform RESPA so that NAR members (the brokers and owners,) will be able to make LESS money will never happen.
Brian, you end your blog article with this gem: “Realtors are waiting for the lending industry to do this. That just ain’t gonna happen.”
That’s right. It’s always somebody else’s fault, and somebody else’s problem to fix.
Brian, WAKE UP! The mortgage brokerage industry must do these things, not the Realtors.
September 23, 2007 — 9:07 pm
Brian Brady says:
Jillayne,
Read the referring article, first. Realtors complain about the state of the lending industry but their employing brokers are the contributing part of the problem. So are the builders.
Bank originators are not licensed, operate solely for the interest of the bank, and while they MAy broker, the originators are severely penalized (financially) to broker a loan away from a bank product, regardless of the client’s interest. Just ask a bank originator.
If Realtors want a licensed fiduciary, the NAMB offers the only solution. NAR can affect a change by insisting that Realtors use NAMB originators. Do I think it’s stupid. Of course. All occupational licensing is stupid.
I don’t think the industry’s broken; Realtors do. They can solve that problem by enacting my suggestions…but they won’t- for the very reasons you’ve cited.
Realtors can just say no to biased originators…BUT…it’ll cost them a bunch of money.
I’m the solution, not the problem, Jillayne.
September 23, 2007 — 10:07 pm
Anonymous says:
Hi Brian,
Can you please provide a reference link to NAMB that shows readers how NAMB members are fiduciaries?
Never in a million years would NAR make such a move. Never in a million years SHOULD NAR make such a move.(Insist NAR members use only NAMB originators) 1) There is FAR too much money coming their way from banks, credit unions, & consumer loan lenders in the form of sponsorship dollars; 2) There are some exceptionally fine originators who work at banks; and 3) At this moment in history, the entire mortgage brokerage industry has been thrown in the gutter, lower on the scale than used car salesmen.
Brian, you’re not making sense. First you’re saying “use fiduciaries.” Then you’re saying “all occupational licensing is stupid.” which is it?
“I’m the solution.” What does this statement mean, Brian?
Thanks.
September 24, 2007 — 5:27 am
DB says:
I know here in NC real estate agents have higher standards (or should I say, or at least is legally responsible for more junk) than many of our neighboring states but reading here on BHB and RCG about so many things going on in other parts of the country, it often confuses me. Do you guys have any laws at all?
In fact, a good majority of the articles and stuff people contibute in Greg’s medal thing do not make sense to me as our laws are so different, some of the things you guys do and what we do, just do not make sense.
I can’t say much about mortages and loans but you know something, I have not a freaking clue some of the things you guys talk about.. like escrow agents and title agents. What do those guys do? Darn if I know? Down here, our lawyers do pretty much everything while us agent bare the responsibility of double checking.
And about having a HS diploma and stuff to be a loan originator. NC is starting to require appraisers to have a college degree (not just any but in areas like business). Next is going to be real estate agents.As for mortgage brokers and stuff, very few get involved in that business without a college degree here. Besides most can’t afford to even be bonded to even apply to get a license.
September 24, 2007 — 8:02 am
Reuben Moore says:
> …while us agent[s] bare the responsibility….
Just curious, when did you receive a North Carolina real estate license?
September 24, 2007 — 8:34 am
DB says:
06
September 24, 2007 — 9:14 am
DB says:
Ruben: With that comment, you should look at the laws in VA and SC and see how much their agents are legally responsible for and compare them to how much the NCREC holds us responsible for. They are no where close to being responsible to either buyers or sellers as we are here in NC.
A lot of people see NC as rather weak as we are still a Cavet Emptor state, and we are also a pure race state, but as agents, you and I both know how much responsibilities the NCREC throws upon us even through our clients may not bare as much responsibilities.
As for attornies, etc. You know just as well as I do that a good percentae of agents in our states leaves most of the work to the attornies. Title searches, closing, etc 99% of it falls upon the attorney. Yet it’s not him who is responsible if things go wrong but the agent.
You being a NC I am sure know better than most what I am trying to say I guess.
September 24, 2007 — 9:21 am
DB says:
And after writing 3 research papers in a span of two days, I can’t spell worth two cents!
September 24, 2007 — 9:23 am
Steve Berg says:
Brian – Thanks for the link. My intent in creating the “Top Ten List” was simply to offer what I see as practical solutions going forward, from a working real estate agent perspective and based upon what we experience on many day-to-day transactions. My comment pertains to your comment #3 regarding affiliated companies. At least in my little world, Prudential is the Broker and First Capital (FC) is the mortgage affiliate.
As agents, we are under no obligation to refer clients to FC and we receive no compensation from FC if we do refer clients. It is an autonomous relationship from my perspective. I do make referrals because they have earned the business by providing outstanding service to my clients which, of course reflects positively on me.
I guess I don’t see how requiring FC to be separately licensed and have an Agency/Fiduciary relationship with their clients adversely impacts their revenue, the Broker’s revenue or my split.
September 24, 2007 — 9:28 am
DB says:
…. and I just violated North Carolina Real Estate Licensing law about 4 times for making that comment.
September 24, 2007 — 9:30 am
Brian Brady says:
Steve-
Your suggestions were excellent and timely (if you think licensing of originators is important).
The PruCa/FC relationship is a classic case of the ABA influencing the customer relationship. The profits from FC subsidize the recruiting efforts for PruCa by allowing them to offer high commission splits to the agent.
The common ownership of both companies influences the relationship the originator has with the customer; the originator is beholden to the transaction and referral source. That influence taints the financial advice given.
I’m sure your originator is a good one and that the relationship you’ve cultivated is solid. You and Kris, however, are the exception rather than the rule. I can speak from personal experience that the ABA model is tainted; the pressure to “upsell” is prevalent.
My real point here is this: CAR, AAR, or NAR can make a preemptive move towards independent advice by prohibiting its membership from engaging in any lending activity. They can “anoint” a mortgage association as the standard. They don’t have to wait for the government; they are their own country.
September 24, 2007 — 10:56 am
Jillayne Schlicke says:
Hi Brian,
I’m still waiting patiently for you to provide us with a link that proves that NAMB members are required to act as fiduciaries…..If you’re still looking, you might as well give up because you’re not going to find it.
September 24, 2007 — 5:20 pm
Brian Brady says:
Oh, Jillayne- I’m not looking. I read the best practices manual when I took the course some 3.5 years ago.
Why the confrontation, Jillayne? I’m the solution, not the problem…remember?
http://www.raincityguide.com/2007/08/04/its-going-to-be-a-wild-ride/
(9th paragraph)
September 24, 2007 — 9:09 pm
Jillayne Schlicke says:
Brian,
What is blogging, but transparency? Here is what I see: You’re sidestepping the issue, and creating a confrontation where there is none in order to evade taking responsibility for your assertions.
The information about NAMB members being fiduciaries is flat out wrong. You could bring great harm to a consumer who is referred to a NAMB member by one of your Realtor readers with the false believe that a NAMB member is acting in the best interests of the consumer.
It takes courage and humility to admit a mistake on an
under-researched topic. Please update the original post.
You can start your research here:
http://en.wikipedia.org/wiki/Fiduciary_duty
and here:
NAMB President Harry Dinham’s testimony before congress, March 2007
http://www.house.gov/apps/list/hearing/financialsvcs_dem/htdinham032707.pdf
Page 8 of the PDF:
“The consumer is the ultimate decision maker on the product, the price and the services purchased in conjunction with obtaining their financing. No merchant, no government and no company should superimpose their own moral judgments on what is a basic American privilege of homeownership. 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.”
and from Appendix A:
“Since not all mortgage brokers offer the same loan products or are approved with all lending sources, it would be impossible to assure the “best” mortgage options to every customer, thus making fiduciary responsibility unattainable.”
September 25, 2007 — 8:48 am
Jillayne Schlicke says:
Brian,
Can you please provide a reference link for your readers to back up the assertions made in the original post?
If you are unwilling to do this, can you please provide logical, rational reasons why you would chose NOT to fully research, and then correct any outdated information you may have “possibly” read three and a half years ago?
September 26, 2007 — 7:04 pm
Brian Brady says:
It’s an opinion piece, Jillayne.
September 27, 2007 — 6:29 am
Jillayne Schlicke says:
Would you still recommend Realtors do number 2 or have you changed your opinion?
For example, there is a higher caliber of certification at NAMB. I think it’s called a CMC. Let me go get the link. Here it is. This designation requires 5 years of experience:
http://www.namb.org/namb/Certification_Home.asp?SnID=1350985233
Brian, do you hold any NAMB designations?
I noticed that you’ve posted this same blog article on three other blogs. On the activerain version, you’ve changed the blog article to reflect only California’s laws. This is much more accurate and in line with your original assertions.
September 27, 2007 — 7:44 am
Brian Brady says:
Jillayne,
This isn’t a high school report, its an opinion. Let me be clear about a few things:
1- I think licensing loan originators without a rigorous education in financial planning is pointless. It would solely benefit the licensing organization. Licensing originators without adequate financial planning training offers a consumer a false expectation that the originator is qualified; that mitigates the need for due diligence . THAT is very dangerous. It’s putting a loaded gun into the hand of a 12 year old and giving him a “license to kill”.
2- Blogging is about opinion, also. Good Realtors are understandably upset that they are prone to inadequate licensing standards. They can mistakenly (in my opinion) believe that licensing, in any form, will somehow clean up the lending industry. My suggestion is that if they feel strong enough about this opinion, they can align themselves with an organization that educated its membership to act as a fiduciary. Ethical instruction is timeless so the “date” of the course I took from NAMB is irrelevant.
3- You and I agree that self-regulation is the answer. We disagree on the requirements for licensing. My standards for employment in our industry are much higher than the ones you advocate. I simply can’t support what you advocate; it doesn’t go far enough and could potentially lull the consumer into a false sense of security. I can, will, and have offered to publicly support your cause if it were meaningful.
4- Working within the existing organizations is not a bad idea. Realtors, through the NAR, could specifically communicate what they want in originator licensing to NAMB. NAMB has the membership and power to give the Realtors exactly what they want. While I think it would be pointless, it would specifically address the concerns so many licensed Realtors have. Furthermore, it would allow the NAR to make a public move that appeared to protect the consumer (I don’t think it would).
5-You opened the commentary with a question and didn’t give me time to respond.
This post is the equivalent of dinner conversation. The cited article says “originators need to be licensed.” This originator says, “I don’t think so but you can make a proactive move and look good by doing it.”
That’s all this post is, Jillayne. You can say that it doesn’t go far enough and would potentially hurt the consumer- I’ve been saying the same thing about your proposals for months.
In the interest of disclosure, Jillayne, I hope you are successful in your pursuits from a purely selfish motive- it will line my pockets because there will be less competition.
September 27, 2007 — 8:47 am
Jillayne Schlicke says:
From number 2
“Good Realtors are understandably upset that they are prone to inadequate licensing standards. They can mistakenly (in my opinion) believe that licensing, in any form, will somehow clean up the lending industry. My suggestion is that if they feel strong enough about this opinion, they can align themselves with an organization that educated its membership to act as a fiduciary.”
Once again, this is a mistake. NAMB does not educate its members to act as fiduciaries. They advocate the opposite.
If, for example, California state law requires LOs to become fiduciaries, suggesting that Realtors refer consumers only to CAMB members would present a false reality. If this is a state law requirement, then any LO in Cali ought to receive Realtor referrals.
September 27, 2007 — 10:47 am
Jillayne Schlicke says:
Also from number 2:
“Ethical instruction is timeless so the “date” of the course I took from NAMB is irrelevant.”
Normative moral theory, in and of itself such as Kantian deontology, JS Mill’s work in utilitarianism (consequentialism) and Aristotle’s virtue ethics have stood the test of time. This is radically different than applied professional ethics, which is what we’re talking about here, when we speak of applying ethical theory to behavior by a person who holds a role that prescribes duties required by law. Apples and oranges.
Applied professional ethics does change over time. For example, the Realtor’s National Code has been re-written many times. Ethical dilemmas change from year to year, which is why NAR requires its members to take the ethics class once every 4 years.
September 27, 2007 — 10:48 am
Jillayne Schlicke says:
From your number 3:
“You and I agree that self-regulation is the answer. We disagree on the requirements for licensing. My standards for employment in our industry are much higher than the ones you advocate. I simply can’t support what you advocate; it doesn’t go far enough and could potentially lull the consumer into a false sense of security. I can, will, and have offered to publicly support your cause if it were meaningful.”
I will bet that if we sit down together in a room for 8 hours, the two of us could come up with an incredibly good model for minimum standards for any LO, no matter where they work (banker, broker, consumer finance company, etc.) In fact, I think we would agree on more items that disagree 🙂
I have done very little research work in the area of licensing standards. Instead, my area of focus has been on increasing ethical standards.
Having now spent 2007 teaching loan originators their exam prep course, I now know that there absolutely must be some minimum standards put into place here in Washington state. Of course I would benefit financially because I’m an educator. I would never try to hide that fact or dispute it. However, my motives are not only out of self interest. The industry owes more to consumers and originators than what we’re currently doing.
September 27, 2007 — 11:00 am
Brian Brady says:
“In fact, I think we would agree on more items that disagree”
Oh, yes. I would stipulate.
I may be misunderstanding your questions. Are you asking why I am “endorsing” NAMB (or CAMB) and questioning if my endorsement is tied to personal membership in those organizations?
September 27, 2007 — 11:27 am
Brian Brady says:
“I will bet that if we sit down together in a room for 8 hours, the two of us could come up with an incredibly good model for minimum standards for any LO”
I’d welcome that opportunity
September 27, 2007 — 11:28 am
Jillayne Schlicke says:
“Are you asking why I am “endorsing” NAMB (or CAMB) and questioning if my endorsement is tied to personal membership in those organizations?”
No, I honestly have no idea if you’re a member or not. I tried to figure that out by visiting your websites, but couldn’t.
I’m concerned for the endorsement of NAMB/CAMB members when, NAMB membership clearly does not equate to fiduciary duties.
If it is true that in Cali, LOs must owe F-duties to clients, then why advocate Realtors use a CAMB member if F-Duties would be required of ALL LOs, whether or not they were a CAMB member?
When a state law mandates something, it makes the association’s “re-statement” of that law irrelevant.
September 27, 2007 — 12:53 pm
Brian Brady says:
“If it is true that in Cali, LOs must owe F-duties to clients, then why advocate Realtors use a CAMB member if F-Duties would be required of ALL LOs, whether or not they were a CAMB member?”
Good question, Jillayne. All LOs in CA do not owe a fiduciary duty to their clients; DRE-licensed salespeope who originates do. CAMB members must all be DRE licensed and hold themselves out to be committed to a higher standard. So…CAR ( a non-governmental association) can insure that their members’ requests of licensed, fiduciary originators for their clients by aligning their interests with CAMB.
“When a state law mandates something, it makes the association’s “re-statement” of that law irrelevant.”
Okay, then CAR can make a pre-emptive move and state that they will only accept contracts from legally licensed originators. That will eliminate the bank and DOC licensee companies. While that would be debilitating on the way most Realtors in California do business, it certainly would solve the licensing issue with one fell swoop.
Let me change gears here because the commentary never addressed Steve’s best suggestion. Would you, Jillayne, advocate a separation of real estate brokerage and loan origination so as to avoid the mere appearance of impropriety.
September 27, 2007 — 1:44 pm
Jillayne Schlicke says:
“Would you, Jillayne, advocate a separation of real estate brokerage and loan origination so as to avoid the mere appearance of impropriety?”
No.
Why? Because, if done legally and according to the spirit of the way RESPA was written, Affiliated Business Arrangements (AfBAs) can provide an additional source of revenue for:
mortgage brokers
real estate brokers
loan originators
real estate agents
and a host of other business owners.
AfBAs, in the form of a real estate agent also acting as an originator (leaving aside the argument of how good a job he/she is doing) can (not saying it does, just that it can) save the consumer money. HUD is okay with anything that saves the consumer money.
Instead, I would advocate that HUD actually regulate RESPA, instead of giving the industry a federal law with almost zero federal oversight.
Everything seems to be left to the states. If that’s the case, then let’s allow state law to dis-enfranchise portions of RESPA that HUD is not doing a good job regulating, such as AfBAs/CBAs.
Now each state would determine if they want their licensees to engage in AfBAs. But RESPA governs ALL AfBAs, so this would mean we’d need to also address the impropriety surrounding AfBA title companies, escrow companies, and so forth.
There’s a lot of money being made on AfBAs, Brian. I don’t think there’s a good chance that this would go through in any state whether at the legal level, or at the association level.
So I believe a better path would be to advocate that HUD actually enforce the laws (RESPA) that it has been charged with overseeing.
But perhaps I’m overly optimistic that my solution would actually happen. We’ve been waiting how many years now for RESPA reform?
September 27, 2007 — 2:12 pm
Brian Brady says:
“There’s a lot of money being made on AfBAs, Brian. I don’t think there’s a good chance that this would go through in any state whether at the legal level, or at the association level”
Which is why national originator licensing will never really grab hold, Jillayne. The banks won’t buckle and most originators will work for a federally-chartered institution.
So, have we both concluded that:
1- Realtors may say they want originator licensing but don’t want to lose their big bank support?
2-Realtors say they want a separation of functions(due to potential conflicts of interest) but don’t want to give up their AfBAs?
September 27, 2007 — 6:09 pm
Brian Brady says:
“So I believe a better path would be to advocate that HUD actually enforce the laws (RESPA) that it has been charged with overseeing.”
Question, Jillayne: Don’t HUD-approved lenders have to abstain from licensees originating loans? I remember that they went so far as to forbid a HUD-approved lender to hire licensees in 2000? I’m pretty sure that was repealed
September 27, 2007 — 6:12 pm
Jillayne Schlicke says:
Yes, we both agree on those two last points! How ’bout that!
In answer to your question, HUD approved lenders receive an exemption letter from complying with state mortgage licensing laws (remember, I can’t speak for all 50 states as licensing laws vary. this is just a generalization) but those entities are still subject to other federal laws governing mortgage lending and state laws governing fair dealings in business.
I still assert that we’d all be better off if HUD enforced it’s own law (RESPA) in regards to regulation of proper AfBA/CBAs.
If it can’t do that, then let’s let our states collect more licensing fees and vigorously regulate RESPA. Without regulation, why even have RESPA?
Mortgage lenders (bankers, brokers, etc) would not be allowed to complain (in my perfect world) about higher government fees as long as they continue to shun self regulation and let the government do the regulating.
September 27, 2007 — 10:40 pm
Brian Brady says:
“I still assert that we’d all be better off if HUD enforced it’s own law (RESPA) in regards to regulation of proper AfBA/CBAs.”
A third common agreement point. We can expand that, Jillayne to include proper disclosure of “incentives” and “cost savings”; the consumer will find neither when using an AfBA owned by a real estate brokerage or builder (if rate comparisons were part of the disclosure). If we expanded that to include improper loan recommendations, the AfBas would really be in trouble.
“Mortgage lenders (bankers, brokers, etc) would not be allowed to complain (in my perfect world) about higher government fees as long as they continue to shun self regulation and let the government do the regulating.”
hmmmmmmmmm…I might buy that but remember, I’m not really complaining. I’m comfortable with the ways things are now. I think the free market will force the bad apples out of business. The tightening surely is thinning the herd.
September 27, 2007 — 11:42 pm