Whose side is loan broker on?

WASHINGTON – A new disclosure form is in the works that could go a long way toward letting borrowers know exactly where their mortgage originator’s allegiance truly lies.

The National Assn. of Mortgage Brokers will soon proffer a model form that describes the various relationships mortgage brokers and loan officers might have with their clients and asks them to check the option under which they will be working.

Once initiated and signed, the form either creates or doesn’t create a fiduciary bond between the borrower and the broker or loan officer. And if it does not – if the originator is operating in any way other than as the full agent of the borrower – the customer will be forewarned that the broker or loan officer might not have the consumer’s best interests at heart.

If any of this sounds familiar, it should. It is exactly where the real-estate-brokerage business was, say, 30 years ago. That’s when the concept of buyer brokers was merely a lightbulb in the minds of a few pioneering real estate professionals who believed home buyers needed someone to work for them and only them.

Back then, buyers believed that the agent who so dutifully drove them from house to house to house was “their” agent, when in fact the smiling, friendly salesperson was duty bound to act on behalf of the seller.

Nowadays, real estate agents in most states are required to disclose their allegiance: They work on behalf of the buyer or the seller, both the buyer and the seller, or neither the buyer nor the seller but rather as an intermediary or facilitator with no fiduciary responsibility to either party.

Such full and complete disclosure is so commonplace these days that it is easy to forget that the real estate business had to be dragged, kicking and screaming, into agency disclosure over three decades. But let’s hope the mortgage business is more open to such revelation and on a much faster timetable.

If it is, the national mortgage brokers group’s Role of the Mortgage Originator form could go a long way toward protecting unknowing borrowers from being led into loans they can’t handle. And possibly giving them some kind of recourse against predatory originators who violate their trust.

That mortgage brokers are offering the model disclosure form is not without some irony. After all, it is brokers who are most frequently accused of preying on borrowers who trusted their originators to get them the best deal possible, given their own particular circumstances.

To be sure, brokers bear a good share of the responsibility for the mortgage mayhem that now threatens to force millions of borrowers out of their homes because they can’t make the payments on loans they never should have taken. Now, though, lenders have tightened their purse strings by once again adhering to their guidelines. And loan brokers will soon be stepping up to the plate with a model disclosure form.

“We’re pretty close,” said Roy DeLoach, executive vice president of the 25,000-member association.

The form is similar to one created in 1998 by the broker group, save that it is designed to be universally applicable to all originators. But although DeLoach maintains that the original form is in widespread use, it is doubtful that many borrowers paid more than passing attention to it if, indeed, they ever saw one at all.

Here are the options offered under a draft of the association’s model disclosure form:

* Exclusive agency to the product or funding provider. Under this choice, the originator is unable to act exclusively on the borrower’s behalf when providing loan-arrangement services.

* Independent contractor. No fiduciary obligation is owed to any entity, including the borrower. Although the originator works with various lenders, there is no guarantee of the lowest price and best terms available in the market.

* Limited agency. In the course of providing his services, the originator may act as a “special agent” to lenders to facilitate the appraisal process or provide the required disclosure statements such as “Truth in Lending.” But again, the originator is unable to act exclusively on the borrower’s behalf.

* Full agency. This choice is akin to a binding contract, assuring that the upfront originator will act only in the borrower’s best interest, all the while exercising reasonable care, skill and diligence on the borrower’s behalf.

Once a box is checked, the nature of the relationship between borrower and originator is out in the open, signed, sealed and delivered. There can be no hiding behind smiles and handshakes.

If there is a problem with the model disclosure form, it is that it could get lost in a sea of documents. But if it is presented when a borrower makes initial contact with the originator, that issue is all but eliminated.

Another problem: The form is voluntary. The association’s leadership is hoping to “plant the seed” with local legislators and let them make it the law in their domain. In that way, full fiduciary disclosure finally would be mandatory in the mortgage transaction, much as it is now in the sales transaction that precedes it.

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Lew Sichelman can be reached at lsichelman@aol.com.