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   ARTICLE   |   From Scotsman Guide Residential Edition   |   July 2014

Focus on Ethics and Best Practices

Originators should hold themselves to a high standard

With the advent of the Consumer Financial Protection Bureau (CFPB), just about every mortgage originator hears endless talking points on the subject of being fair and honest with their clients, both actual and prospective. Most of these points derive from the Equal Credit Opportunity Act, the Real Estate Settlement Procedures Act (RESPA), fair-housing laws and the aforementioned CFPB. Even so, many important points regarding how to act ethically with borrowers and industry colleagues are often overlooked in the written laws that regulate the industry.

That doesn't mean, however, that you should ignore these ethical considerations. Here are some points to consider when it comes to acting truly ethically and professionally.

Fill in the blanks

Many prospective borrowers, especially first-time homebuyers, are simply not aware enough to ask all the questions that they should, a fact that became apparent during the mortgage meltdown that took a foothold in 2008. Although the vast majority of loans being made today are of the fixed-rate variety, there are still many questions that a well-informed borrower should be asking you.

If they don’t, or won’t, ask these questions, originators themselves should take the reins in asking and answering them. For instance, with the recent changes in Federal Housing Administration (FHA) lending, mortgage insurance is now a life-of-loan event. If borrowers come up with an extra 1.5 percent down, however, they may qualify for a 95 percent conventional loan for which the mortgage insurance may — based on equity and loan performance — be able to be canceled after only two years.

For a prospective borrower who qualifies for a 95 percent conventional loan based on credit, income and assets but is otherwise blindly going for a 96.5 percent FHA loan, wouldn’t it be a best practice to at least recommend that the borrower look at conventional financing? After all, making an informed decision in this circumstance means the difference of tens of thousands of dollars on a 30-year loan.

"Despite the occasional temptation to the contrary, originators should avoid putting out a prequalification letter or automated approval that is not based on an analysis of documentation from the prospective borrower."

A recommendation of this type would also demonstrate the overall integrity of the company for which the originator works, as in most cases a government loan has greater profit potential to a mortgage company than a conventional loan. When weighing the profit of an individual loan against the financial well-being of a client, the client’s best interests should always rule the day.

Make no mistake: A reflexive habit of keeping the borrower’s best interests in mind over short-term gain will, in time, positively mold the reputation of your organization as perceived by the borrowing public, resulting in your bank or brokerage being financially rewarded in the end. People talk, and in this case, that should be a good thing. Regardless, this FHA versus conventional scenario is just one example of how suggesting detailed strategies to a borrower may enhance mortgage professionals’ reputation to their ultimate benefit.

Use your instincts

It doesn’t take detailed analysis, or even deep thought, to determine how to treat a client. It may sound cliché, but it all comes down to treating a borrower the way you’d want to be treated, be it by a car salesman, an attorney or a doctor. People simply don’t want to be misled or discover after the fact that they were treated in a way that put them at a financial disadvantage.

Understandably, this is especially true in the case of a mortgage loan. Because of the large monetary commitment over as many as 30 years, receiving the wrong advice from the wrong individual may result in a needlessly huge financial burden. In every transaction, take a moment to ask yourself: “Knowing what I know, would I want to be treated this way?” Unless the answer is a resounding “yes,” there may be some fine-tuning needed in the way you approach your clients.

This includes making sure that your prequalification letters and Desktop Underwriter/Loan Prospector (DU/LP) approvals actually mean something. Many mortgage professionals have been confronted by a Realtor partner requesting a quick prequalification letter so that an offer may be made in a competitive market for a desirable property, and just about any originator who has been in the business for more than a week should be able to manipulate a DU/LP report to spit out an approval. But despite the occasional temptation to the contrary, originators should avoid putting out a prequalification letter or automated approval that is not based on an analysis of documentation from the prospective borrower.

The solution, of course, to this potential dilemma of expediency versus accuracy is to train your Realtors to get you in front of a borrower early enough so that you can collect that borrower’s documentation and determine that person’s qualification long before an offer would be written. Only after you have prequalified a borrower based on documentation should the Realtor begin showing a buyer the property in question.

Disappointing an unprepared agent or that agent’s client may cause some friction in the short term, but upholding the value of your signature on a pre-qualification letter will only add to your reputation as a mortgage professional with integrity. That will pay you back many times over during a long career.

Treat each other well

It’s common knowledge that the mortgage industry is a competitive business, but that doesn’t mean it has to be ruthless. Every so often, a mortgage professional may get a call from a disgruntled Realtor who winds up lambasting another originator who, for whatever reason, got on the agent’s bad side. Originators all know the “two commandments” of real estate transactions: First, anything that can go wrong in a transaction will go wrong (which often seems true); and second, it’s always the loan officer’s fault (which isn’t typically true).

Once you’ve mentally rejoiced that you’re not the originator being skewered, resist the temptation to join in the cacophony. If a ball was dropped in a real estate transaction, it may have been dropped by one or more of any number of participants, including the real estate agent or even the borrower. Yes, it’s entirely possible that the deal’s originator did do something that could have been handled differently — such as offering a vacuous prequalification letter — but the point is that you weren’t involved in the referenced transaction and have no firsthand knowledge of where the weak links occurred.

In cases like this, if your previous experiences with the originator who is being lambasted were positive, you may want to chime in with something to the effect of, “Well, that’s surprising. I’ve only heard good things about that broker.” Even if you can’t say anything positive about the derided originator, keep any negative thoughts to yourself. By joining in and adding fuel to the fire, you’re only making yourself look weak and unprofessional.

To be sure, almost everyone who’s originated loans for a lengthy stretch of time has been on the wrong end of a conversation between a disgruntled real estate agent and an originator listening to the soap opera unfold. What goes around comes around, both good and bad, and originators should keep this in mind any time they pick up the phone and find an angry Realtor on the other end.

Examine your partnerships

Finally, when reflecting on ethical business practices, it’s pertinent to consider how originators allow their Realtor partners to send them business. This may sound a bit strange; don’t originators want Realtors to entrust them with their transactions as often as possible? After all, that’s how mortgage professionals provide homeownership to families and create careers for themselves and the real estate agents they work with.

Although this is all true, what needs to be acknowledged is that there are illegitimate ways to obtain Realtors’ business, and some of these illegitimate practices pervade the current market. For example, it’s become a somewhat regular practice for a listing agent to attempt to dictate what lender is used for particular buyers to make sure that their offers are considered for specific properties. This is a clear RESPA violation, and yet it continues. Certainly, a smart listing agent who does not already have a working relationship with a prequalifying lender may want to have a buyer cross-qualified with a lender that is already known and trusted. Alternately, a listing agent may have legitimate bad feelings for a particular lender or originator based on an unfortunate prior experience.

This information should be relayed to the seller to help decide whether or not to accept a specific offer, but for a listing agent to reject the time and work an originator put into grooming a prospective borrower just because the prequalification lender is “not their guy” is illegitimate and unethical, and should not be practiced.

Practices such as this are almost always motivated by some type of remuneration being given to the listing agent based on the choice of lender, which is also a violation of RESPA. The unfortunate dynamic here is that many buyers will not press the issue with a seller or listing agent lest they risk losing the house they want. So, when faced with this scenario, many homebuyers will simply hold their tongues and proceed with a lender they’ve never developed a relationship with.

What can mortgage professionals do about this type of occurrence? Maybe it’s time to show some bold behavior and refuse to take another lender’s developed clientele from them except in extreme situations. There’s a real opportunity for originators to enhance their professional stature with the real estate community by not accepting any deal thrown their way regardless of the motivation for doing so. There’s no reason why one originator can’t cross-qualify another lender’s borrower just to assure a loyal Realtor partner that there’s viability to the other lender’s prequalification. And if that borrower decides that you present a better financing option than the original lender, then the choice of lenders may open up again to the borrower in question.

Based on this method, a typical originator may gain and lose some business over time. The majority of borrowers, given the choice, will usually stick with their original prequalifying lender. This is generally due to familiarity and the plain fact that they do not want to have to jump through all the prerequisite hoops to get prequalified again.

In the end, however, this should be a determination made by borrowers in conjunction with their real estate agents. Neither the listing agent nor the seller should be holding a prospective buyer over a barrel to either switch lenders or be counted out of a transaction. Likewise, mortgage professionals should not be cooperating with what is an unethical way of doing business.

In short, when it comes to ethical practices, a rising tide lifts all boats. Keep that in mind as you work to make the American dream of homeownership a reality for as many people as possible.  


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