Fiduciary Duty & the Mortgage Marketplace
April 8th, 2008
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Fiduciary relationships require the highest duty of care. According to Black’s Law Dictionary, fiduciary relationships usually arise in one of four situations: (1) when one person places trust in the faithful integrity of another, who as a result gains superiority or influence over the first, (2) when one person assumes control and responsibility over another, (3) when one person has a duty to act to act for or give advice to another on matters falling within the scope of the relationship, or (4) when there is a specific relationship that has traditionally been recognized as involving fiduciary duties, as with a lawyer and a client or a stockbroker and a customer.
But, what about the lender? Does the relationship between lender and borrower qualify as a “fiduciary relationship?”
Generally speaking, for national lenders and their mortgage subsidiaries it is argued that the answer is no. Absent special circumstances, the relationship between a lender and a borrower is merely that of a creditor-debtor, not that of a fiduciary. However, in certain situations, courts have implicitly recognized imposing fiduciary duties on lenders based on policy grounds. For instance, a lender may be considered a fiduciary when it “takes control” of the borrower, or when “moral, social, personal, or domestic” relationships are shown to exist between the parties. (Cases cited in American Bar Association – Business Tort Litigation (2d Ed.)) Further, when the lender undertakes to perform a task on behalf of the borrower, then it is likely that the lender has made itself a fiduciary for the borrower, based on the law of agency. (Id.)
Should the fiduciary duties extend more liberally to the lender-borrower relationship? The answer should be a resounding YES. Often times, when a loan officer or mortgage broker is helping to arrange a loan for a borrower, that loan officer/mortgage broker is, in reality, acting as the agent for both the lender and borrower. For instance, certain loan officers/mortgage brokers will work predominantly with a few lenders. Instead of acting solely in the borrower’s best interests, these loan officers/mortgage brokers simply act as an intermediary between lender and borrower. Therefore, in the foregoing situation, the lender should be considered a fiduciary via the law of agency.
More importantly, however, is the fact that procuring a home loan is likely the biggest monetary obligation a person will have in his/her lifetime. Consequently, any missteps in the loan transaction process can lead to dire consequences for the borrower. It is for this reason that the law should impose more liberally a fiduciary relationship between borrower and lender, especially in the residential home loan marketplace where the average borrower is not as sophisticated as the lender. If fiduciary relationships were more liberally imposed, we would likely see lenders implementing more safeguards before underwriting a loan. If this were the case, the mortgage meltdown might not have been as catastrophic to our national economy.
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Attorney Tyler F. Belong is a partner at the San Diego law firm of Hogue & Belong. Mr. Belong is also a founder of the Mortgage Accountability Association.
Attorney Jeffrey L. Hogue is a partner at the San Diego law firm of Hogue & Belong. Mr. Hogue is also a founder of the Mortgage Accountability Association.
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May 22nd, 2008 at 8:01 am
You did not mention that in California, and a few other states, mortgage brokers owe borrowers a fiduciary duty. In California, mortgage brokers that are licensed by the Department of Real Estate are agents. While lenders are principals in a mortgage transaction, mortgage brokers are intermediaries or agents.
Furthermore, mortgage brokers often hold themselves out as consultants, advisors, or other title that implies that the mortgage broker is working in an agency capacity.
In regard to FHA and VA loans, the mortgage broker is always the agent of lender, and always owes the lender a fiduciary duty.
Unfortunately, on government transactions, the mortgage broker is usually acting as an intermediary only to the borrower and as a fiduciary to the lender.
I wonder why relationship disclosures are not required for mortgage brokers and why the mortgage industry seems to be oblivious to agency concepts.
Even in California, where agency applies, industry practice does not generally recognize or comply with agency principals.
I agree that the industry would be better off if fiduciary duties were properly imposed.
December 16th, 2008 at 3:33 pm
As I understand it, mortgage brokers have a fiduciary duty, but lenders do not. What about businesses, like Financial Freedom, for example, who are in the business of selling “reverse mortgages,” usually to seniors. Along with selling the reverse mortgage,they also sometimes sell annuities or other insurance products as part of the package. Do these people owe a fiduciary duty to the homeowers who take the reverse mortgage?