Agency - Part 2

Last week I discussed agency as it applies to real estate agents. Now I'd like to talk about agency as it applies to the mortgage brokers.

Most states require that mortgage brokers be licensed. In California , we are licensed by the Department of Real Estate, the DRE as we call it. You'd think that some of the same rules that apply to real estate agents would also apply directly to mortgage brokers. For example, when you list a home with a real estate agent, you sign an agreement that, among other things, spells out the commission to be earned upon sale, say 6 percent of the selling price.

The DRE is emphatic in its insistence that real estate agents are bound by agency law. You would think it would have occurred to someone to have that same laws apply to us on the financing side too. I believe that a borrower ought to be able to "hire" a mortgage broker as his agent just like a property seller “hires” a real estate broker, but that is not a regulatory requirement. Nor is it likely to change because the almost the entire mortgage brokerage industry does not want it to change.

About ten years ago, HUD ruled that mortgage broker compensation had to be revealed on the closing statement when a transaction is completed. You should have heard the howls! "They have no right to know what I'm making!" "You don't know who much the car dealer makes, why should I have to disclose it?"

Why is this agency thing important then? After all, if you walk into a bank, they don't have that agency obligation. Their job is to make money for their institution just as the Nieman Marcus salesperson's job is to sell you something. You don't have any right to know how much they make on your transaction.

I don’t believe that getting a mortgage is like buying a car or a suit. It is more like buying a home or putting an investment plan together. Most people are not knowledgeable about these areas and they ought to get the advice from an expert, someone who can share his/her knowledge to work out the best solution for the customer.

I think that the customer's best interests are served when the advice giver does not benefit in any way other than from the compensation agreed to. That's the way CPA's and lawyers work, and that is theoretically the way real estate agents work. That's also the way a "for fee” financial planner works, getting a fee for advice, not a commission from something he sells you.

The option is what the industry trade groups push, that we are "independent contractors," some kind of "middlemen" who do not owe an obligation to anyone. We should not be bound by any laws or regulations or standards of ethical conduct. We should be free to charge what we can get away with under circumstances where the average borrower can't figure it out until it's too late to do anything about it. I think that may be a good thing for greedy brokers, but I am positive that is not the best arrangement for the borrowers.

Now, all of the agreements we brokers have with lenders specifically say that we are not THEIR agents! The DRE says that when matters end up in court, the judges invariably determine that the mortgage broker did have an agency relationship with the client. So why not start out that way?

Even though our state law does not spell that out precisely and even if the industry does not want it, I think that borrowers should have a right to expect us to be their agents. You have every right to enter into a contract with a mortgage broker that spells out the objective he is to help you accomplish and what you will pay for that service. A copy of the agreement I use is at my website, www.loan-wolf.com/retainer.htm. Feel free to copy it into your word processing program and modify it to fit your needs.

Note that any broker you show this to will be surprised! I have even heard of brokers refusing to do business that way, actually turning down the chance to make a sure $2,500 but giving up the opportunity to make $5,000. Pretty greedy! However, any Upfront Mortgage Broker will work under that kind of agreement. You can find one at www.mtgprofessor.com.

I want to hear stories from anyone who uses this form.