Mortgage Startups — It’s time for a Fiduciary in Mortgage

Startups love to say they are customer centric, but talk is cheap. If you want to prove you are customer centric, you can — adopt a fiduciary standard.

What is a fiduciary standard?

Put simply, a fiduciary standard would require mortgage brokers to provide customers with the best possible product given their situation and needs. Right now, brokers operate under a suitability standard, which requires only that a mortgage be “suitable” for their client. In reality, this means mortgage brokers too often do what is best for them, not what is best for their client. A fiduciary standard requires the opposite.

During the Great Recession, tens of thousands of brokers recommended products that met the suitability standard, but clearly were not in their customer’s best interest. Many brokers effectively took advantage of their customers while breaking no legal obligation (even though many others clearly did broach their obligation to provide a suitable product, surprisingly few individuals faced any legal repercussions). A fiduciary standard could help to curb such excesses.

This is not novel. A fiduciary standard has been widely accepted by independent financial advisors, even before the Department of Labor rule requiring all financial advisors act as fiduciaries. In fact, many of the new players in the industry embraced the rule. Both Wealthfront and Betterment wrote in support of the new rule, while some the large banks fought against it.

Benefits for consumers

The benefits for consumers are clear. A broker, who is bound by a fiduciary standard is no longer legally permitted to push a “suitable” product that has high fees, a high interest rate and pays them large commissions. Instead, they are required to recommend the best possible product.

On a typical $200,000 mortgage the difference between a “suitable” product and the best product can be immense. Reducing the origination fee by 0.5% would save the consumer, $1,000. Reducing the annual interest rate by 0.125% would result in a $5,000 reduction in interest over the life of the loan.

Benefits for brokers

If you are a mortgage startup, a fiduciary standard won’t just help your customers, it will also help your business. Consumers are coming to understand that a fiduciary means something (although a lot of education to raise awareness still needs to be done), which will give them the confidence to trust you with their patronage.

If enough mortgage startups embrace a fiduciary standard, you might just change the industry and force the 5,000+ mortgage brokers to better serve customers. For better or worse, startups in the Bay Area have power over public discourse that is vastly disproportionate to their size — use it.

It’s not that hard. During my two year stint in the mortgage industry, I had the privilege of working with an excellent legal team who assessed the feasibility of adopting a fiduciary standard as a mortgage brokerage and have concluded that it not just possible, but advantageous. If you work at a mortgage startup and are interested in exploring the possibility, feel free to reach out to me and I would be happy to facilitate a connection.

A better future…

It’s an exciting time for the mortgage industry — more startups are working on the problem than ever before. In the past, innovation in the mortgage industry created complex financial products and caused millions to lose their homes. If startups are going to foment a new wave of innovation, they should not repeat past mistakes. A fiduciary standard is a meaningful step to ensure customers come first.