A Transparent DRE Fumbles the Big Picture

On Friday, April 13th, 2007, CAR sent out a press release entitled: DRE Clarifies Mortgage Broker’s Duty to Explain Loan Terms. The purpose was to let real estate agents know that, thanks in no small part to CAR, the DRE had clarified a previous bulletin that “intimated that buyers’ agents have a fiduciary duty to completely explain payment option ARMs and similar loan products to their clients”. The new bulletin made clear that “it is the fiduciary responsibility of each licensee who represents the borrower in obtaining a loan to completely explain the terms and discuss the relative merits…” thus laying the onus where it belongs: on the originator of the loan (click here for the press release as well as links to the bulletins). What frightened me in this press release was the last paragraph:

…in the previous version of this article, the DRE stated that a buyer’s agent “should be aware of the type of loan being used to finance the purchase,” and for payment option ARMs or similar loans, “the licensee should confirm that all of the terms and possible effects (both positive and negative) have been explained by the mortgage broker or lender.” These statements have now been deleted from the article by the DRE. (emphasis mine)

Through the DRE, CAR has protected its members from liability regarding a service they are not providing and this, of course, is a benefit. But to summarily dismiss the idea that the agent should even be aware is downright irresponsible. Worse yet, in cases where the client is being put into a loan product that may cost them their home and their financial future, the agent need not even confirm that their client understands what is happening.

This sounds like a prime example of a labor organization doing a great job protecting themselves and their members, but missing the entire point of their existence. If the agent is not looking out for their client, who is? You may think that the loan originator is looking after the clients’ best interest when it comes to the financing aspect of a transaction, but are they? Let’s take a closer look. A loan originator has NO fiduciary relationship to the client. You may find that hard to believe – I know I did – but it is true never the less. A real estate agent has a fiduciary relationship, meaning at its most basic level that the real estate agent will put the clients’ needs before their own. There are monetary and legal ramifications to a fiduciary relationship. Loan originators, on the other hand, are not bound by fiduciary obligations and rarely exhibit them. Most often, in fact, loan originators are giving clients a “less than the best” deal in order to increase their own profits – quite the opposite of a fiduciary relationship. Is this the normal, even encouraged practice within the industry? Yes, it is. Is this understood outside the industry? No, outside the industry this is generally smoke and mirrors. One example should suffice: can anyone guess why so many people are currently in Neg-am or Option ARM loans when it is so clearly the wrong investment vehicle for them? Here’s a hint: those particular programs were paying loan originators up to 3 and sometimes 4 times more than other loan programs.

So… the DRE has clarified a position and transferred the liability from the real estate agent to the loan originator, which is where it belonged in the first place. The successful real estate agents I have talked to, however, know that they put their commission, and more importantly their future business (read: referrals), in the hands of the loan originator on every transaction. If a client ends up with the wrong loan program down the road (or worse), do they go back to the loan originator that was referred to them, or do they go back to the agent that gave them the referral. Worse yet, do they just not come back at all? Shouldn’t the agent demand – doesn’t the client deserve – a loan originator that exhibits a fiduciary responsibility whether required to or not? The DRE can change the wording all they want, but in the end it is the agent with a financial (and one hopes moral) obligation to make sure their clients’ loan is appropriate. If any part of this is confusing or disconcerting, you are not alone. Speak to a lender that practices transparent lending for a full explanation. In the case of mortgages “ignorance may be bliss”, but it costs tens of thousands of dollars. Choose your originators wisely.

Filed under: LENDERS, REALTORS, CAR, DRE, responsibility, transparency