Tuesday, February 28, 2023

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

Updated 9/21/2023

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. 

Loan Originator Compensation Rules


In a conundrum for "true" buyer brokerage (where the buyer pays the agent's commission), dual agency cannot exist due to the requirement that the borrower cannot pay the loan originator anything outside of the commission on the loan. If you recuses yourself from the fee, it appears this would be acceptable. 

Is it acceptable to Have a Real Estate License?


Mortgage originators with a real estate license sometimes find it easier to generate business because their experience in real estate adds professional credibility to real estate agent referral sources. However, this does not mean 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 mere existence of a conflict can require a lender to repurchase a loan, regardless of whether there was a negative outcome. 

FHA Allows it - USDA Does NOT


Recently FHA Clarified that it WOULD allow non-credit (not underwriters, valuations, quality control, etc.) related parties to act as both agent and loan originator. However, on 3/31/23, USDA clarified this was a conflict of interest and specifically DISALLOWED this. 

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 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)
North Carolina (maybe)

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 that the customer receives services and pays fees to the same individuals for multiple services. 

Unless it's Specifically Codified - Best Practices Dictate "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.


HMDA Data Reporting Process Changes - LOWER THRESHOLDS

Substantially lower reporting thresholds mean most LENDERS must report HMDA data - Implications for non-delegated correspondents

As you may be aware, a Federal District court ruling in September 2022 changed HMDA reporting thresholds. The previous lookback formula stated that if you made credit decisions on 100 mortgages in each of the previous 2 years, you were required to report in the current year. The ruling reduces the threshold for reporting based on the number of mortgages with credit decisions to 25 in each of the previous 2 years.
Section of manual describing threshold changes

Implications for Non-Delegated Correspondents


It has come to our attention that equal numbers of wholesalers do NOT report HMDA data on correspondent loans as those who do. The HMDA rules stipulate as the credit decision maker must report (in other words, the underwriter/approver), but not all companies follow this edict. Some believe that if your name is on the note, you are the lender of record, and so reporting is your responsibility. YOU MUST CHECK with each wholesaler to find our what their procedures are. If they do not report for you, and you have over 25 loans closed, you must report HMDA data. 

Retroactively Effective



Since the ruling reverses a previous regulation it now applies retroactively. If you were previously not a reporter because you made fewer than 100 loans in each of the previous 2 years, you most likely are now. If you’re a broker, you’re not making credit decisions, so this does not impact you, UNLESS you are denying loans. The CFPB has stated that it will not penalize those organizations which now must report due to the change who are now implementing the new reporting.

We have updated our HMDA Policy to reflect these changes. You may download it here:


Download Updated HMDA Policy


Insert it in your Section 2-42 of your 2-0 Compliance Module

Download Updated HMDA Policy