Should a variant of the fiduciary relationship that exists between corporate officers and shareholders, or the one between stock brokers and their clients, be extended into the mortgage broker-homebuyer dynamic?
And, when an industry is under fire, such as the mortgage industry is today, would it be wise for the principals to get out-front and lead the reform effort?
These questions come to the fore in connection with the crisis in the subprime mortgage market.
Hearings are ramping up and Congress and President Bush are readying initiatives to come to the aid of millions of Americans who may lose their homes and nest eggs because lenders enticed them into shoddy mortgage schemes.
The Center For Responsible Lending, a nonprofit group in Durham, N.C., foresaw a lot of the mess late last year, issuing a study projecting that almost 20% of the subprime mortgages issued in 2005-2006 would tank.
And, although it’s certainly no panacea, the National Association of Mortgage Professionals, a trade association that launched in June, offers an interesting proposal to protect the reputations of honest brokers and to curb abuse by the bad apples in the lending industry.
An article in Smart Money notes that NAMP is calling for legislation that would alter the retail relationship between mortgage broker and borrower, introducing a fiduciary element into the mix.
A fiduciary relationship is supposed to be one that is free of conflicts of interests. The mortgage lender-borrower relationship would seem to be rife with them. But, if a stockbroker and a client, with all of their conflicting agendas, can have a fiduciary relationship, I don’t see the bar to creating one between mortgage broker and home buyer, either.
As the subprime crisis shows, the mortgage industry needs a quick shot of ethics and oversight. After all, lenders provide advice on one of the most important and complex investment decisions, purchasing a domicile, which a consumer can make.
NAMP believes the industry itself should develop the outlines of such a fiduciary relationship and would support legislation creating one if the industry doesn’t step up to the plate and develop one itself.
Perhaps if the industry doesn’t upgrade its own standards and rules, the federal government or states will take matters into their own hands.
It certainly would be wise for the mortgage industry to get its act together to drive these and other reforms.
Any new rules should apply to mortgage bankers and credit unions, too, and not just mortgage brokers, according to NAMP, which has fewer than 1000 members. “There are thousands of loan officers that produced the exact same type of mortgages,” a NAMP spokeswoman told me. “They just aren’t called brokers because they function, or hide, under the guise of a direct lender. It happens all over the country. The lenders themselves need to shoulder their share of the blame.”
Adding a fiduciary-relationship component to the existing retail relationship between mortgage lender and consumer would mean higher standards of training, certification and redress procedures, NAMP stated.
From my vantage, it looks like the mortgage industry had better opt-in to these types of standards quickly or legislators likely will impose them.