Macroeconomic policy regarding the balance of responsibility between professionals and consumers is constantly oscillating between two poles. The extreme position is to hold either side completely responsible for any harm that occurs in a transaction. Outside of strict products liability (and similar cases), the law tries to strike a balance by holding both sides responsible in some proportion to promote both justice and economic utility. One could think about mortgage lending with a similar conceptual framework, allocating responsibilities for knowledge, understanding and truthfulness onto both sides of a transaction. Even so, we still face the question about whether we want to institutionalize and regularize a system of rights and duties in this industry.
We can choose to regard mortgage-lending transactions as retail transactions, with the assumption that both parties are on relatively similar footing in economic power and knowledge. In this case, duties are specified by contract and by relevant laws. On the other hand, we could acknowledge that no matter how much responsibility we put on consumers for gaining sufficient knowledge and understanding about a proposed transaction, mortgage lenders, by and large, will usually have a superior understanding. Because lenders are in the business of lending, they will naturally have greater access to relevant tools, resources and knowledge about their transactions. We ought to hold them to that natural presumption. It seems reasonable to acknowledge this through the ethical codification of the balance of rights and duties between professionals and consumers.
Moreover, if we accept the assumption that lenders are normally in a superior bargaining position because of their greater access to the relevant knowledge, then we could codify it by specifying that they have fiduciary duties that require the highest good faith and fair dealing toward their consumers. Arguing that lenders do or should not have this higher degree of responsibility because consumers can always shop around is not persuasive. This is because most consumers will often lack the amount of knowledge and degree of understanding to properly evaluate competing claims for business. Furthermore, they will often be unaware of what they do not know. It seems reasonable to put the burden on lenders to make sure their clients understand all relevant information. In contrast, it seems unreasonable to put this burden on average consumers because they do not have the same level of access to relevant information as lenders do.
In light of what we have said, let’s make a few comments about the National Association of Mortgage Brokers’ suggestion that educating children about lending mathematics may overcome transactional problems associated with lack of knowledge and understanding by consumers.
It is our position that relevant and accurate education can always help ameliorate harmful conflicts in any industry. A more sophisticated education about the mathematics of loan obligations can certainly enhance a consumer’s sophistication when he or she becomes a borrowing adult, but we are still left with the other side of the equation. This is the degree to which mortgage lenders owe responsibilities to fully inform and educate consumers about their proposed transactions. Leaving this allocation of economic power in an ambiguous state seems rife with possibilities for abuse and manipulation. On the other hand, clearly specified ethical duties, no matter what their degree of obligation, can make great strides in educating consumers about the very dynamic of their loan transactions and concomitantly, what they can expect. Mandating a fiduciary obligation creates professionals and meets this need.
Given that NAMB is committed to educating consumers it would seem a logical and reasonable conclusion that they would fully support a well-drafted code of ethics by which all lending workers — who would then be called lending professionals — must abide. This code of ethics would mandate a fiduciary duty would specify an affirmative duty to educate a consumer in a transaction.
Jillayne Schlicke is president of BPI Consulting Group and co-executive director of Ethical Lending Foundation. She has co-authored several articles with Dr. Boileau, is a consultant and national public speaker, and is in the process of developing the BPI Leadership Institute.