I went to a mortgage whore, he said my life’s a bore April 14, 2008
Dear Jillayne,
I have two residential loans that have been referred to me, one from a mortgage broker in Colorado and another from a credit union. Both LOs have already taken the loan application, gathered all the supporting documents, and sent the loans through the lender’s automated underwriting system. The credit union is unable to make the loan because the dollar amount is too large for their institution. The mortgage broker in Colorado is not licensed to do business in WA State. Both of these LOs would like their client taken care of but because of the amount of work they’ve done already, they would like to get paid on these files. Of course I would disclose all fees to the consumer, but is this even possible to do?
John.
Dear John,
Because of the subprime and now prime mortgage market meltdown, we are going to see some incredible changes taking place in state and federal law during the next decade. One of the main problems with the mortgage lending laws today is that mortgage brokers can only earn a fee if a loan is made. This sets up an external motivator for an LO to make lots of loans, whether or not the consumer needs a loan. This should and will change. Someday you will be able to earn a fee for, let’s say, giving a borrower valuable financial advice relating to their mortgage loan, similar to how you might hire a CPA to advise you on matters within their scope of knowledge.
Let’s first take the example of if YOU were in the position of referring a loan to another broker. Let’s say you didn’t have FHA approval, your cousin Vinnie over at XYZ brokerage did, and you wanted to earn a fee of X for sending the loan to Vinnie. This is not allowable under many state laws governing mortgage lending (and for WA state, see the MBPA.) You can only earn a fee when a loan is made and the loan originator as presented to the lender on this transaction was Vinnie. If Vinnie hands you some cash outside of escrow, this is called an “unearned fee.”
RESPA directs us not give or receive an item of value in exchange for a referral of a federally related loan.
So now, back to your situation, if you GIVE another LO a referral fee outside of escrow, you’d be in violation of the provisions of Section 8 of RESPA. HUD would call this an unearned fee.
Now that we have the basic tenants of RESPA out of the way, let’s get right to the heart of your question. Let’s say you want to fully inform the lender of this fee and quote it on the GFE and the HUD I. What would you call that? A referral fee? No. Your lenders aren’t going to allow that due to the provisions of RESPA. An “administration” fee? Again, you’re hiding a referral fee. This is deceptive and subject to challenge by the borrower and by your wholesale lenders, federal and state regulators and any attorney.
Your question is very common, and a good question.
Many, many, many mortgage brokers and LOs go ahead and do it anyways, considering their chances of being caught by HUD are relatively low. That may be true. However, the chances of getting caught by the state regulators are much higher.
Once a loan originator goes down that path, you get a reputation for a guy who is willing to do it and you’re name gets tossed around as the go-to guy. Kind of like the girl in high school who gets a bad reputation for you know what. You become the mortgage whore. Now the problem with becoming the m-whore is that your reputation eventually works its way to the state, potentially triggering an audit. Imagine refunding all those fees.
I’m not trying to use fear to motivate you, because personally, I hate being motivated that way. Instead, think about the long-term consequences, and about the business person you wish to become.
Instead of a referral fee, how about promising these folks that you will treat their referral clients with the utmost respect and honesty, and you will give your mutual clients a fair loan at a fair price.
Now I know times are economically tough for many in our industry. Long term success in mortgage lending means having to think about all the possible consequences of our actions.
Unless, of course, you’re a corporate CEO. But until that time, I wish you good will in your quest for the right decision.
- Posted in : General Real Estate
- Author : Jillayne Schlicke
Comments»
Sweet post as usual, Jillayne.
I’d be interested in hearing from the professionals ’round these parts as to how frequently they’ve seen this nod and wink go on.
I’d be happy to weigh in if you would clarify what “nod and wink” means.
Sliding a referral fee under some other name on the GFE and HUD 1.
biliruben,
I’m with Jillayne that likely being paid for a file or paid to refer would help rather than hurt. (I think we agree on that.)
For instance I know of a family that was in contract on a house. The only way they might have been able to close is if their lender turned over the file to another lender. The first lender had counseled the people and helped build up their credit score for many months beforehand. The lender wouldn’t hand over the file to another lender. The ending wasn’t pretty.
If the first lender could have sold the file to the second lender, everyone likely would have been better off. Why shouldn’t they get paid something for doing 90% of the work?
Same if someone doesn’t want to do FHA and goes to a lender who is not qualified to do FHA and then the only answer to close is to do FHA. There should be some compensation for the lender who needs to refer that loan out now and the completed file.
Used to be borrowers paid an application fee in advance, I’m not sure reinstituting that practice is a sufficient remedy…but it would help.
Hi Ardell,
In regards to the first lender not “turning the file over” to the second lender, although it’s true that the file and all the documentation stays with the first lender, the borrower can make a request, in writing for copies of the following documents:
Credit Report
Preliminary Title
Appraisal
After receiving a request from the borrower, in writing, the first lender must hand over copies of these documents to the borrower within 5 days.
Obviously, we’re assuming here that the borrower has paid for the documents. The most expensive is the appraisal.
This is from one of my favorite federal laws, ECOA, the Equal Credit Opportunity Act, and is often re-stated in state laws governing mortgage lending.
Even though the first lender did lots of work, they were not able to help the homebuyer. The second lender is going to do the same amount of work as well as take on the risk. Theoretically, the second lender would want to collect the entire fee.
In the future, IF we do allow “referral fees” to be paid, I am all for disclosing this to the borrower so that the borrower can have the opportunity to challenge and negotiate the fee to, in this example, lender number one, who was not able to perform.
I completely agree. In fact, I would by happy to pay, lender, agent and anyone else involved in a real estate transaction like I pay a contractor. Fee for service or an hourly wage with cash out of my pocket. Being forced to amortize these fees into my 30 year mortgage blows. I would guess this would both increase competition and increase quality of service.
You didn’t answer my question, however.
Hi biliruben,
I believe the practice is widespread, but I have no evidence or proof. Just a hunch.
It is one of the most frequently asked questions in the classroom, as well as questions I receive via email, such as the question from John, above. Names and identifying details have been changed to protect the writer’s privacy.
biliruben,
Sliding a referral fee to whom? If the loan rep is also an agent, the agent can pay a referral fee to “the other agent” who also happens to be “the lender”. The problem is that it is legal for many to profit from the loan if it is an affiliated business. It is legal for many to profit if they have a real estate license and also do loans.
Then the people who can’t do it legally get mad and feel shorted when they see others doing it legally.
So the practice is legal when the real estate company has an ownership interest in the Title, Escrow or Lending side. It is also legal when the lender is also a licensed agent. That’s why the law has become difficult for many to understand.
If the issue is that an agent should not be allowed to refer to a lender for money, then brokerages should not be able to own these secondary services and lenders should not be able to also have real estate licenses. Otherwise the spirit of the law cannot be followed and it has no teeth or consitency.
biliruben,
Would you pay in advance regardless of outcome? Would you waive a fiduciary relationship? Should agents offer both options?
Clearly if the agent got paid whether you bought or sold or not, would change the pricing. Clearly if you were assuming all responsibility and liability for your decisions, commissions would be lower.
Advices cost more than actions.
Yes, I would pay in advance regardless of outcome, as long as the chances of a good outcome were presented forthrightly and the fee were modest.
As an example on the agent side, I am currently confronted with paying my listing agent north of $2000 an hr if we receive an offer this afternoon. I am willing to pay 1/50th of that and take on the risk myself. I think most people would make that decision if given the option.
Why would I waive fiduciary? An agent or broker can’t act in my best interest if paid an hourly wage?
You still haven’t answered my question.
With the new WA State law that gives mortgage brokers fiduciary responsibilities, I believe it also allows mortgage brokers to charge a fee for services.
Yes, Rhonda is correct.
I’ll be attending as many of the rule-making meetings as possible so I can bring us up to speed.
“You still haven’t answered my question.”
Sorry, thought you were talking to Jillayne. I have not seen anyone paying money back and forth between lenders and lenders, or lenders and agents, except in the legal manner I noted, that being affiliated business and shared profit or agent to agent referral where agent was also a lender.
I have never, ever had a lender ask me for a referral fee or pay me a referral fee, nor have I seen that happen.
The only time I have been offered and declined referral fees or finders fees from non-agents in 18 years were for odd services, like a security system provider or a roofer. Never from a home inspector, a lender, a title company, or an escrow company.
Great to hear, Ardell. Thanks.
Going way back to when I started in the business in 1990 and through 93 or so, the company (coldwell banker at the time) used to pay agents $50 for placing a home warranty, before that system was changed. I once had a Title Rep offer me tickets to a ballgame that she couldn’t use, but I don’t like sports and declined. Never have I been offered a quid pro quo.
I recommend for the sake of recommending and many reasons…but money coming to me is not one of them nor an option. Nor do I see it being so for anyone, so if they do it, they at least have the sense not to tell me. I’m not the kind of person you tell those things to, and I think I’m the last person someone would tell for that reason. So my experience and knowledge on kickbacks and winks and nods is not likely the norm or a valid reflection of what may or may not be happening.
Jillayne likely hears more in classrooms than I ever will. Escrow people may see more than any agent will ever see, but likely wouldn’t say if the issue was “covered up” legally and gray.
I’m also not the person to tell if you are cheating on your husband or wife LOL! Not because I will tell them, but because I will forever think less of you for having done so.
I had an agent once ask me to pay him a fee if he took the loan application of his clients that he was sending to me. I declined and we don’t work together. He claims many LO’s do this…not this LO.
Like Ardell, I’ve never had anyone lender, title, escrow, inspector, whatever, offer to pay me anything either. We work in a pretty savvy area, so maybe Jillanne’s getting questions from other areas of Washington where things run a little looser?
I do agree that loan companies should be able to pay each other a referral fee. I assume attorneys can pay each other referral fees, CPA’s too, so why no lenders?
Hi leanne,
I travel all over the U.S. and call Seattle home. I get over to the other side of the state about 4x/year. The majority of my classes are here in the Puget Sound area.
The reason why lender are not able to do this is because it is currently a violation of state and federal law.