By Dr. Kevin Boileau, Ph.D., J.D., LL.M.

 The Need for a Fair Loan Process

The news about the mortgage industry in the past few months has spurred a dialogue about the fairness of the home-loan process. Many consumers argue that loan-officer practices are manipulative and deceptive. On the other hand, many individuals who work in the industry argue that consumers must better educate themselves and take more responsibility for their choices.

Given these antagonistic perspectives, it is essential that brokers understand the allocation of responsibility between consumers and mortgage professionals.

Traditionally, if buyers and sellers have relatively equal access to resources and information, buyers must take responsibility for discovering that information. This is the standard of caveat emptor. On the other hand, if the balance of power is unequal, wherein buyers do not have equal access to resources and information, the burden shifts back to the sellers. This is the standard of caveat vendor.

With services such as medicine and law, responsibility typically is placed on the service-providers. For example, doctors and lawyers must proactively make certain that their patients and clients are fully informed before and during their transactions. This burden is solely on these professionals and not on their clients.

The traditional allocation of responsibility with professionals such as doctors, lawyers or Realtors is based on ethical standards. These professionals have specialized knowledge and a certification of substantive competency. They also have taken a pledge to a written code of ethics within their industry.

Furthermore, these professionals' fiduciary duties require the highest standard of good faith and fair dealing, as well as the charge to never put their own interests above their client's interests. There is an implicit economic tradeoff here: In exchange for a professional's honor, prestige and income, there is an agreement to owe fiduciary duties to clients.

Mortgage brokers and lenders, however, do not have an accepted code of ethics like these other professionals. They have had an ambiguous professional status for many years. Many consumers believe they can trust their mortgage broker or lender to look out for their best financial interests. The problem is that the mortgage industry does not have a well-formed code of ethics that requires a fiduciary standard of practice.

This lack of clarity on basic lending practices has allowed some unscrupulous brokers and lenders to take advantage of their clients. This is not to say that all brokers and lenders violate the trust of unsuspecting clients. But because there is no precise, written code of ethics, there are no standards of practice that have been agreed upon and publicized.

In light of this, it would be beneficial if a third party were to implement a uniform code of ethics that clarifies the fairness of residential loan transactions. This service could be provided and paid for by residential lenders and could be offered to consumers by experts from the private sector.

Such a system would consist of a set of subjective and objective criteria that would require borrowers to give informed consent to brokers before they legally obligate themselves to a loan.

The objective element would be based on criteria common to most consumers. It would involve a fair look at their overall financial situation. The subjective element would be based on consumers' individual situations; a loan officer or broker would be required to probe into specific aspects of a consumer's circumstances.

Ultimately, a loan officer would not be required to guarantee that consumers get the best loan, rather that the consumers make decisions based on an informed-consent standard, similar to the standard in other professions.

Requiring a professional with expertise, knowledge and power in a residential loan transaction to meet this standard can help to clarify the responsibility and fairness of the home-loan process.

Kevin Boileau, Ph.D., J.D., LL.M.
Jillayne Schlicke, M.A.
Co-Executive Directors
Ethical Lending Foundation
www.ethicallending.org
Seattle & Mercer Island offices