Attempts to pinpoint the causes of the housing crisis and prevent a recurrence have focused on mortgage brokers and home loan origination practices. Legislators have taken steps to impose fiduciary duties on residential mortgage brokers, and courts sympathetic to distressed borrowers have recently decided, in a number of cases, that mortgage brokers owe fiduciary duties to borrowers. An escalating legal trend toward recognition of the fiduciary duty of residential mortgage loan brokers is apparent.
While there is little uniformity or predictability in this area, a review of the law reveals that mortgage brokers can no longer persuasively claim to be mere intermediaries in the home loan origination process.
The question of whether mortgage brokers have fiduciary obligations to prospective borrowers was reviewed in an October 2007 article in this magazine written by Andrea Lee Negroni and Joya K. Raha, titled "Mortgage Brokers--What Fiduciary Duties Exist?" The handful of cases and state statutes discussed in that article predicted a trend favoring such an obligation. Requests for updates on the law of mortgage broker fiduciary duty have been so frequent, and changes in the law so rapid, that Mortgage Banking and that article's authors felt a sequel was needed.
This article identifies legal developments since 2007, which reinforce the authors' view that in the context of loan origination, mortgage broker fiduciary duty may eventually be the rule rather than the exception. The discussion of the theories and principles of fiduciary duty and the fiduciary relationship between principals and agents is derived from the 2007 article.
Theories and principles of fiduciary duty of mortgage brokers
The law of fiduciary duty can be divided into the following general categories: 1) express fiduciary duty imposed by statute; 2) fiduciary duty based on an agency relationship; and 3) fiduciary duty based on the special relationship of the parties (e.g., mortgage broker and would-be borrower). Within these general categories, there is some overlap. For example, some statutes impose fiduciary duty on mortgage brokers when an agency relationship exists between them and their borrower clients.
Fiduciary duty is the highest standard of care under the law. It traditionally includes the duty of loyalty and the duty of care.
The duty of loyalty is the obligation undertaken by the fiduciary to exercise his power in a manner that he believes in good faith will best advance the interests or purposes of his principal, and conversely, not to exercise his power for personal benefit. The duty of care requires the fiduciary to act in good faith, as one believes a reasonable person would act, in becoming informed and exercising the power of a fiduciary.
Other fiduciary duties that may fall on mortgage brokers include the duty to disclose all loan information to the borrower (e.g., loan fees, interest rates, prepayment penalties and yield-spread premiums [YSPs]), and the duty to act in good faith and to deal fairly (e.g., avoiding secret fees or undisclosed fee-splitting arrangements).
Fiduciary duty may be enhanced when a mortgage broker has special skills or experience. A mortgage broker with extensive knowledge and experience will likely be held to a higher standard of duty and care than a novice broker. The broker's duty will also be elevated to a higher standard if a consumer has limited knowledge of the complexities of the mortgage transaction, if the consumer relies exclusively on the broker's knowledge and expertise, or if the consumer is elderly or otherwise vulnerable.
Federal legislative reform
Recent federal legislation has helped to spur legal reform of mortgage brokerage at the state level. The Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act), enacted on July 30, 2008, sets minimum licensing and registration standards for individual mortgage loan originators and encourages the states to adopt similar provisions, with the goals of enhancing consumer protection and reducing fraud. …