In Part 4, of a six-part series, Inman News columnist Jack Guttentag states as follows:
“In sum, regardless of why borrowers refinance, the question of whether they receive a net benefit from it is for borrowers alone to answer. Loan providers do not have the information needed to second-guess them.”
He goes on to say that: “on the other hand, borrowers often make their decisions on the basis of incomplete and sometimes misleading information. Instead of requiring lenders to assume responsibility for borrowers’ decisions, let’s make them responsible for providing borrowers with the information they need to make better decisions.”
The Ethical Lending Foundation supports Guttentag’s theoretical position that holds residential lending professionals (all retail mortgage salespersons, no matter where they work) to a certain standard of practice. What the industry must determine is exactly what this standard of practice should be. We would like to make a few comments sketching our own position in this matter.
We can first start with the idea of professional “responsibility,” which implies that lending workers must focus their attention on the needs and interests of their clients. We believe that this requires at a minimum that lenders fully inform their clients of the relevant information and consequences to their potential borrowers. This obviously mandates a standard of truthfulness and completeness. Anything less than this opens the door to moral subjectivism and a moving standard that manipulates the hopes and dreams of borrowers.
Nevertheless, Ethical Lending Foundation believes that the standard could be and should be higher. ELF believes that the standard should include a fiduciary duty that absolutely requires the informed consent of borrowers to the terms of their loans. Informed consent has both an objective and a subjective standard.
Criteria have already been formulated to determine the risk category of a borrower. Lenders ought to be required to carefully explain the category within which a borrower falls. However, there should also be a subjective standard; here, lenders would be required to probe into the financial situation of a borrower if that lender determines that the borrower is unsophisticated. Each lender would be required to make sure that a borrower asks the relevant questions and receives full and complete answers to them. This is analogous to a layperson gaining the benefit of informed consent at a surgeon’s office or a lawyer’s office. Surgeons and lawyers do not guarantee results, for a fiduciary standard does not require it. Analogously, lenders would not be required to guarantee a particular kind of result to a borrower. It would be up to each borrower to determine his or her value choices in the face of complete and accurate information; the duty of each lender would be to facilitate informed consent. In fact, a form attesting to informed consent could be provided. It would make sure that each borrower was alerted to the recommendation of seeking third-party review of loan documents and that the borrower had ample time and opportunity to do so.
This procedure could be carefully addressed by way of a written code of ethics or state/federal regulatory guidelines. We do not see any good reason why the standard for mortgage lenders should be any lower than the standard for lawyers and medical doctors.
Jillayne Schlicke and Kevin Boileau are co-executive directors of the Ethical Lending Foundation.
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