Unethical or Illegal? Dual Agency/Dual Capacity, Double Compensation in Loan Origination

It seems obvious, but the fact that an originator might represent someone else's interests in a transaction creates an inherent conflict of interest. The real estate agent works for the seller, and the loan officer owes his fiduciary responsibility to the borrower. Conflict occurs when the loan originator can receive compensation elsewhere in a transaction besides the mortgage, such as:

• real estate commission
• insurance sale
• title/closing/escrow transaction
• appraisal/valuation
• financial services
• accounting

The question at issue: whether it's merely unethical to "double-dip" or illegal and prohibited? The answer lies in the location of the property. If your state prohibits dual agency or has rules against dual compensation, then it's illegal. 

Since acting as a real estate agent (where you represent the seller) and a loan officer (where you represent the buyer) is a conflict, you should not allow both. However, it may be acceptable for you to have a business where you actively sell real estate as a licensed real estate agent and separately originate loans as a licensed mortgage loan originator. There is no conflict if you recuse yourself from participating in the transaction. 

Is it acceptable to Have a Real Estate License?

Mortgage originators who have a real estate license sometimes find it easier to generate business because of their experience in real estate adds professional credibility to real estate agent referral sources. However, this does not mean that the mortgage company or bank finds this acceptable. The POTENTIAL for conflict creates enough possible risk to lead the mortgage company to create a hiring policy that prohibits this arrangement unless the license is affirmatively inactive. 

This stems from the fact many secondary market contracts and loan purchase eligibility warranties often cite the requirement for no conflict of interest in the loans sold or purchased. The existence of a conflict can require a lender to repurchase a loan, regardless of whether there was a negative outcome or not.  

Dual agency in Real Estate Transactions Prohibited

Eight states have made dual agency in real estate illegal: Alaska, Colorado (although dual capacity for LO is allowed), Florida, Kansas (allowed for broker), Maryland (Prohibited from receiving finder's fee -aka broker fee), Texas (Dual Capacity For LO allowed), Wyoming, and Vermont. This means this is one indicator that, regardless of role, a loan originator who is also a real estate agent could run afoul of this. Some states allow what is known as "Dual Capacity."

Real Estate Rules Where Undisclosed Dual Capacity is a Violation

Massachusetts Massachusetts also does not allow acting as a real estate attorney and a broker on the same transaction. 

States that do not specifically disallow Real Estate Agents and Originators to Receive Commissions on Both Transactions - known as "Dual Capacity"

Arizona (Mortgage Broker License)

California (DRE Licensed)

Colorado

Connecticut

District of Columbia

Kansas

Michigan (MI DFI)

Nebraska

Nevada

New York

North Carolina (maybe)

Texas

Virginia

Washington

We will add to this list or you can send your citations as we collect more information.

Affiliated Business Arrangement Disclosure

At a minimum, the relationship must be disclosed using the Affiliated Business Arrangement Disclosure (AfBA). Further, there should be a prominent disclosure of the fact that the customer is receiving services and paying fees to the same individuals for multiple services. 

Unless it's Specifically Codified - Best Practices Ddictate "Don't Do It"

Sources

“Required Disclosures by State - American Mortgage Network.” American Mortgage Network - Funding The American Dream, 22 Nov. 2022, https://www.amnetmtg.com/required-disclosures-by-state.

How much information can I share with a real estate agent?

As we get into a more competitive real estate environment, where all-cash offers aren't the only way for a buyer to make an offer that might be accepted by a seller, these questions surface again. Specifically, how much about a customer can we share with a listing or selling agent? 

Understanding Real Estate Agent's Role

First, understand that real estate agents, for the most part, have a fiduciary responsibility to the seller. While selling agents (who work with buyers) say they work for the buyer - and may even have the buyer brokerage disclosure or contract signed - the real estate agent is paid by the seller. So information about a customer's profile, the likelihood of getting financing, and other transactional information a loan originator may possess can be pretty valuable to a seller. 

Loan originators often pass this information out to the agent who referred them to the transaction as a way of currying favor with the agent. You must carefully monitor and limit this data flow for many reasons. For example

• While negotiating a contract, a seller wants to obtain the highest price and net proceeds. The buyer wants the opposite. If a loan originator offers a prequalification or pre-approval letter, the seller wants to know if the buyer can afford more. The loan originator capitulates and says, "well, he can afford another $200,000 in the loan amount," the seller may counter-offer a higher amount. The buyer, however, asked for prequalification for a certain amount, and the originator's disclosure took away the buyer's leverage. 
• While processing a transaction, the seller accepts backup contracts, perhaps more favorable than the current contract. With the information that financing is still pending or in question, the seller may act in ways that further diminish the buyer's ability to consummate the transaction to obtain a more favorable sale.
• The loan is denied, and the seller wants to know "why?" The seller is trying to figure out if the borrower did something wrong - acted in bad faith, perpetrated fraud, or another scheme - that kept the property off the market during the financing contingency period. The seller wants to keep the buyer's deposit because they needed to actively pursue financing. 

Pre-Qualification is NOT an Approval; it's an Opinion

A buyer asks for your opinion on how much he or she can afford by asking to be prequalified. You should address that pre-qualification letter, certificate, or other documents to the prospect, not the real estate agent. Then, if the real estate agent has questions about the customer's qualifications, such as where is the money for the down payment coming from, what their monthly debts are, how they receive their income, etc., the agent should address it to the prospect. 

Prospects should be careful about what information they provide to a real estate agent because they risk exposing their Personally Identifiable Information or their Non-Public Information to identity thieves. Real estate firms generally are not regulated by entities that insist on secure data because most real estate-specific information is public knowledge. 

On the other hand, the agent will likely communicate the information to the seller in support of an offer to purchase, so a prospect may feel compelled to share more information than prudent to advance their home purchase. 

To avoid disclosing this information, a prospect should actually obtain the financing in question via a loan application, loan underwriting, and loan commitment, subject to a final property selection; a pre-approval. With this in hand, the customer does not have to provide additional documentation supporting an offer contingent on financing because the financing has already been obtained. 

How Much Can You Share?

Technically, none. Your customer has a right to limit the information you share and under what circumstances the information is shared. To share any information a prospect gives you, you should review a copy of the sales contract (offer) to see if the customer has already authorized the lender to share information on loan status. Otherwise, you should obtain authorization to release information to the agent(s) or builders; Consent to deliver loan status updates, generally. 

Loan Status vs. Personally Identifiable Information or Non-Public Information

Loan status simply details what is in and out on a loan file and provides dates when certain tasks have been performed on a transaction. This is a good example of how this information could be shared (Source: AZ Association of Realtors). There is no NPI or PII in any of this material. 

When the loan originator provides Non-Public Information or Personal Financial Information, such as credit scores, payment history, or any other information gathered during transacting business or in conjunction with a loan application, this is a clear violation of the Gramm-Leach-Bliley Privacy Act. It MAY be permissible in a situation where there is an affiliated business and the sharing of information would be NECESSARY to conduct business. 

So, NO. Don't Share Private Information

In other words, a customer may share their own information, but you, as a financial service provider, may not provide any non-public private information. 

Planned Refinances - Compliance Minefield

Buyer refi program:  "If you use us for your purchase loan and you refinance within 3 years, we will credit back at the close of your refinance, appraisal fee, and certain other fees......"  

Can this be done as a Broker, and if so, how is it disclosed?

These are popping up all over the place. Of course, you CAN do them (and lots of people do informally), but creating a program around this and advertising this runs afoul of the "planned refinance" rules of the agencies.

Pricing from the lenders is based on actuarial tables that include estimates of how long a loan will stay on the books. Further, many servicers offer a "loan modification" element to retain the servicing on a loan while moving the underlying loan from one security to another. 

To understand why this is a big deal, the cash value of mortgage-backed securities for mortgage lenders is small and gets capitalized as an income stream. Even when retained as a swap or other secondary marketing asset or hedge, the secondary market for mortgage-backed securities' primary use for lenders is a tool to achieve equilibrium - you might make money in secondary in a falling rate environment, but you intend to break even or just not lose money. So a lender makes money by building a servicing platform and collecting monthly payments for a small spread. That small spread, multiplied by thousands of loans, creates a solid cash flow model. Planned refinances disrupt that model. 

Further, creating an agreement to refinance out of a higher rate loan runs into the UDAAP higher cost loan rules and makes it look like a predatory lending strategy: Take this higher cost loan today, and we'll give you a lower cost loan in the future..." Regulators, particularly those interested in enforcing anti-predatory lending practices, have a keen interest in these types of arrangements when they surface. It's not the kind of attention most lenders want. 

Finally, the practical considerations of a planned refinance agreement create a minefield of legal issues. How do you guarantee that you will be in a position to provide the cost credit? What provisions do you make if the company goes out of business or is shut down? How do you create an independent index that a reasonable consumer can follow to trigger the rate, and what if rates end up going lower than the refinance trigger? 

There is nothing wrong with a loan officer creating a database of past customers and discussing a possible future refinance. "I'll call you when rates get to x.00%" And you could market that as a personal service: "The Rate Watch."