Seattle mortgage broker adopts U.K. model
Part 2: Differences between U.K., U.S. mortgage brokers
By Jack Guttentag, Monday, June 23, 2008.(This is Part 2 of a two-part series. Read Part 1, "Transparency is king in U.K. mortgage system.")
Last week I noted that the pricing of mortgage broker services in the United Kingdom was much more transparent than in the United States. As a result, the U.K. system provides no leeway for brokers to price opportunistically, meaning to vary the price according to what the borrower can be persuaded to pay. In the U.S., however, opportunistic pricing is pervasive and average broker fees are much higher.
The regulation of mortgage brokers also is very different. In the U.K., a series of sweeping changes beginning in 1997 placed most financial regulation under a new Financial Services Authority (FSA). FSA is an independent nongovernmental body but it is answerable to the Treasury and ultimately to the Parliament.
In 2004, the FSA took over regulation of the mortgage sector, including mortgage brokers. Mortgage brokers in the U.K. are thus subject to one set of rules, and borrowers know where to go to register a complaint. All FSA rules described below apply to loan officer employees of lenders as well as to brokers.
In the U.S., brokers have to obtain separate licenses for every state in which they want to do business, and are subject to a different set of rules in every state. A new initiative to create a nationwide licensing system would streamline the process of applying for licenses, and ultimately create a national database of mortgage brokers and loan officers, which could be accessed by borrowers. We are years away from that, however, and even when it materializes, every state will retain its licensing authority.
Note: Brokers are subject to a few provisions of the federal Truth in Lending Act and the Real Estate Settlement Procedures Act, both of which soon may be tightened.
In the U.K., FSA has ruled that every broker and loan officer must pass a competency exam. According to Richard Hobson who was a broker in the U.K. and took the exam, it was far more difficult than the one he had to take to be licensed in the state of Washington. And that state is one of the few that require an exam.
The FSA has three sets of disclosure rules. At their first meeting, the broker gives the borrower an Initial Disclosure Document (IDD). The IDD indicates whether the broker has access to mortgages from all lenders in the market, only some lenders or only one lender. It also provides complete information on the broker's fee -- including amount, when payable, and how it relates to lender fees paid to the broker. If the broker also sells insurance -- a common practice in the U.K. -- the same information is required for the insurance transaction.
There is no counterpart to the IDD in the U.S. However, proposals from both HUD and the Federal Reserve would require fuller disclosure of broker fees.
The second set of U.K. disclosure rules applies after the broker, in consultation with the borrower, has identified one loan program that appears to meet the borrower's needs. This is called a Key Facts Illustration (KFI), and it is a kind of an amalgam of the Good Faith Estimate and the Truth in Lending disclosure documents in the U.S. The KFI is a little better because it is only one document, has as much useful information, and less useless information.
The third disclosure, which has no counterpart in the U.S., is the Mortgage Record of Suitability, or MROS, which has two major parts. The first is a statement of the borrower's circumstances that bear on the mortgage selection. It includes how the borrower intends to use the loan proceeds, and what features of the loan the borrower views as most important.
The second part of the MROS is the broker's comment about all major features of the recommended loan, and why the broker is recommending it. This includes the broker's statement regarding why the loan is affordable to the borrower, now and in the future.
One consequence of the FSA rules is a heavy compliance burden, which makes it difficult to operate as a one-person firm. Most brokers belong to larger firms that can provide compliance as well as other types of support.
An article I wrote last year argues that making brokers and loan officers responsible for determining mortgage suitability was not workable because most of them were transaction-oriented and strongly averse to providing any information that might jeopardize a deal. But Richard Hobson argues that brokers in the U.K. are relationship-oriented and view borrowers as potential clients for life. He is a firm believer in the U.K. system, and is using the model in his Seattle, Wash., business.
Why is a relationship as opposed to a transaction orientation much more common in the U.K.? I plan to write about this as soon as I understand it better.
The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.
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Submitted by David Podgursky on June 23, 2008 - 6:32am.
http://www.themortgagegotoguy.com
I really think that a differentiation needs to be made between a traditional mortgage broker and a loan originator/loan officer. I know it varies state by state but it still begs for some authoritative definition.
By all accounts, a retail lender's loan originator has little or no loyalty to the consumer as there is no liability to that person if something goes wrong or if the consumer finds a better rate elsewhere. The consumers get to deal with a "loan officer" who is trained in bank products and bank software and who is liable to the shareholder, not the personal/financial well being of the consumer whose money they are "protecting in their vaults".
I have seen bank employees originate Equity Lines (while they were at 7-8%) for refinances instead of 1st mortgage products because they pay better no matter what the detriment to the client may be! The reason is that they get paid better on Equity Lines than Mortgage Products that they end up passing on to "trained" processors.
In comes the "opportunistic" mortgage broker - the stereotype that the Mortgage Bankers Association and their new Pres Mr. Kittle love to play up. (isn't it funny how the MBA likes to pass laws to protect the consumer from one segment of the industry while they rape and pillage the others?) Sure - we can choose to send a client's loan to Wholesale Lender X instead of Lender Y because it pays us .25% more. Will .25% be enough to get the consumer down .125% or some fraction of a percent that they will NOTICE on their monthly bill? >>> that's how most brokers analyze the rate.
We have a minimum for a transaction fee and we target that number. Even the transparent softwares like Ratespeed operate as such... show the client the rates 6-6.5% and how much out of pocket they will pay at each .125%.
A good broker is not trying to get rich on each individual and will offer MORE than just loan origination and submission. We are consultants and fiduciaries that help with credit and finances. We can usually meet or beat bank numbers as we do not hide fees in our APRs only to reveal them at closing!!
One client taking offense to an independent contractor can be catastrophic to a career... we ARE liable to the consumer.
So... the issue then becomes transparency could withdraw some of the true mortgage professionals' ability to maintain a personal level of service as we crank out numbers without being able to differentiate between clients.
Some clients ARE worth more. Some have more consultation or more processes through which we must guide them in order to effect a closing. Too much transparency keeps us from being able to value our time accordingly.
http://www.themortgagegotoguy.com
Submitted by Jason Berman on June 23, 2008 - 7:32am.
This article doesn't disclose that the national database proposal from (CSBS & AARMR) doesn't apply to all originators. If consumers & RE agents want transparency and full disclosure; any national database must include all originators including those that reside in the federal banking system.
MBA & others love to bash mortgage brokers but bad apples are everywhere. Some of the worst offenders hide behind bank charters so they don't have to disclose their onerous charges.
Independent mortgage brokers are essential to a healthy and efficient mortgage marketplace. If they are forced out of business through uneven regulatory burdens, costs to purchase or refinance will increase and consumers & RE agents will quickly remember what lending used to be like before the proliferation of the broker channel.
Submitted by Lonny Coffey on June 23, 2008 - 9:03am.
It is interesting in reading Jack's comments. How do you make a group of folks who may overcharge based on opportunity live by some broad guidelines imposed by a Government entitiy. Given that the Government is proving itself to be more incompetent daily it would be up to the mortgage industry to check unethical practices. Given that FNMA and FHLMC have now entered the arena (in my opinion) of price gouging based on credit scores that have nothing to do with a borrowers ability to pay, what are the chances that any entity can truly regulate ethical treatment of the consumer. Nice to talk about but little chance it will really happen.
Submitted by Jillayne Schlicke on June 23, 2008 - 11:43am.
Lonny asks: "How do you make a group of folks who may overcharge based on opportunity live by some broad guidelines imposed by a Government entity."
There never has been nor will there ever be enough government resources to regulate every single licensee and every single transaction.
I've been writing about this for years here on Inman and elswhere. The mortgage industry must begin to self-regulate ethical conduct, much like attorneys do. Tell all the attorney jokes you want but when we really need a good attorney, they are worth their fee.
The legal industry ruthlessly regulates their Code of Ethics.
At this point in time NAMB, MBAA, NAPMW, or any other national association is regulating ethical conduct of mortgage lending workers.
This leaves room for other associations to rise up and fill that space. I am attempting to do this with the Nat'l Assoc. of Mortgage Fiduciaries, I know that the Mortgage Professor was associated with the Upfront Mortgage Brokers Assoc, there are other national groups out there as well.
It's time for the mortgage industry to transform into a profession with a prescriptive code of ethics, much like Realtors did over 100 years ago. Some mortgage folks are already there, others will have to be pulled kicking and screaming.
Question for the Mortgage Professor or anyone who might know the answer: How does the U.K. regulate ethical conduct of loan originators?
Submitted by Lonny Coffey on June 26, 2008 - 1:56pm.
Jallayne I agree absolutely with what you say. I hope someday it will happen. I have been a mortgage banker since the mid 70s and would welcome some legitimate accountability for sure.