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

Updated 4/17/2024

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 may specifically disallow Dual Capacity

Alaska

Colorado

Florida

Kansas

Maryland - No "double dipping"

Texas

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 - With Proper Disclosure

Connecticut

District of Columbia

Kansas - If properly disclosed

Michigan (MI DFI)

Nebraska

Nevada

New York

North Carolina (maybe)

Texas - With proper disclosure

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 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.

How to create a compliance library for your company

Creating content takes weeks and months. That's why many people purchase off-the-shelf training subscriptions for compliance training. But in truth, much of this material is the same stuff that's been trotted out for years. Why not take the material directly from the source (e.g., government agency, regulator, or mortgage insurance company) and just document that our employees have taken it with a quiz? 

This allows you to devote your training program development to those areas where there is a gap or where your specific situation needs more attention. 

Step 1 - Assemble the Playlist

We did this here on YouTube. It's a great resource for compliance managers who need to have more than their line employee's training. Visit https://www.youtube.com/@Mortgagemanuals/videos

You can curate playlists with the content you want your employees to see.

Then it's just a matter of developing a quiz to ensure the students have gotten the message. You can create a quiz in Chat GPT, or use our models here:

https://www.mortgagemanuals.com/annual-aml-training.html

Gramm-Leach-Bliley FTC Safeguard Rules Updated 6/2023 - Regulators asking lots of questions

Changes published in 2021 went into final effect in June 2023. Now, regulators are stepping up their review.

We've been seeing the impact of the updated CyberSecurity examinations prompted by the December 2021 FTC rule revisions. Regulators are dumping massive checklists into the exam load, and most companies don't have the bandwidth to address it. It's a hefty load, but it's worth going through to establish a baseline. 

Click here for the updated rule 

Click here for the CSBS Model Examination Form for non-banks 

The word you will see the most in an examination citation is "implementation." This means that, no matter how good your model policy is, if you're not doing - or have evidence that you can do - the things the rule requires, you'll likely be cited. 

Like every good compliance program, policies and procedures are simply part of a complete IT Security Plan. There are 4 pillars of every compliance program: 

1. a compliance officer, 
2. policies and procedures
3. training, and 
4. testing/auditing. 

Most of the policies we've seen are precisely that - policies. There is very little procedure. In other words, the model form says, "We will comply," but doesn't say, "This is how we comply." This is the most significant difference between our products and those written by lawyers or compliance experts. 

Location of IT Security Questionnaire Items in 2-9 IT/CyberSecurity Plan

 

States Strictly Enforcing GLB Compliance

• DC
• Maryland
• Massachusetts
• Virginia
• Texas
• New York

Remember to add those non-policy items

• List of hardware (investor)
• List of software and cloud services
• List of vendors (investors, office tech, processors, etc. )
• Cyber Insurance Policy

Tools for Self-Training

MortgageManuals.com provides training for our customers' Non-NMLS employees. 

Tools for Self-Audit

We provide the tools for a self-assessment, but if you want a third party risk assessment we do that here.