The need for greater clarity was a driving force in the recently completed negotiated rulemaking process under the Real Estate Settlement Procedures Act. Both industry and consumer groups participated in the effort to reach a consensus on how much disclosure of mortgage broker compensation is required.

However, the process served primarily as an education for everyone involved. The difficulty in reaching a consensus among the industry and consumer participants is but a symptom of the larger issue: how should this rapidly evolving industry be viewed?

The attempts at negotiated rulemaking expanded the participants' knowledge of the role and legal status of the industry's various components. On the federal level, the issues facing the mortgage industry involve policies, forms, practices, and internal procedures.

However, a large piece of the compliance issue involves state, not federal, law. Unless the industry can clearly identify its duties under state law, it will forever be subject to federal attempts to impose burdensome or inappropriate duties.

Similarly, compliance with federal law cannot be a safe harbor from potential liability under state law unless the mortgage lending industry's duties under state law are clear. How can compliance with federal law satisfy state law requirements when the state rules are even less clear than federal law?

The retail mortgage lending industry is subject to great variations in state regulation. There is little agreement both inside and outside of the industry as to its legal duties. It is not even clear how participants - particularly mortgage brokers - should be classified.

Are mortgage brokers merely intermediaries between borrowers and lenders, or are they acting on behalf of borrowers? Does a table-funding broker - who briefly provides mortgage funds at the loan's closing - differ from other brokers? Do mortgage brokers have an obligation to educate loan applicants about the secondary market? Is a mortgage broker part of the lending chain, or simply a facilitator?

It is not hard to predict that this legal uncertainty under state law will likely focus first on mortgage brokers, as it did in the Respa rulemaking proceedings.

Because brokers interact directly with consumers, they can be expected to be one of the first objects of scrutiny. Further, we believe that scrutiny will largely involve the duty owed to borrowers by mortgage brokers. This theme is already being played out in the media, the legislatures, and the courts.

The legal question being asked is: Does a mortgage broker owe a fiduciary duty to an applicant for a mortgage loan? Common sense tells us that it will be extremely appealing for courts and others to impose such a duty. The size of the transaction and its importance to consumers and the community will subject mortgage brokers' practices to high standards.

More than 40 states have some sort of licensing or certification system for mortgage brokers. A number of these states give mortgage brokers a fiduciary duty to loan applicants. In the District of Columbia, as well as California, Minnesota, the Dakotas, and some other states, mortgage brokers are regulated by the same laws as real estate brokers, thus creating an agency relationship and the resulting fiduciary duty.

Since real estate brokers successfully (and now, we think, regrettably) fought for and won their agency status, they have had fiduciary duties to property sellers. Moreover, real estate brokers representing sellers have been found to have a fiduciary duty to homebuyers in cases where the buyer was led to believe the broker was working for the buyer. Extending this principle to mortgage brokers, in spite of their different role, has raised the specter of "fiduciary" even where it is not mandated by statute.

In other states, the mortgage broker laws may specifically state that a broker is acting on behalf of the borrower. Further, some mortgage brokers may conduct their business in a way that might cause a fiduciary duty to be imposed.

Unlike retail lenders, mortgage brokers do not generally purport to offer a limited stock of low-cost, brand-name loans. Rather, many offer to find a loan tailored to the borrower's needs and financial abilities.

While puffery may be a protected form of speech, a representation such as, "I can get you the best loan in town!" could create a fiduciary duty under the law of any state.

What would be required of mortgage brokers as fiduciaries is far from clear. The virtues applied to such persons are those more proverbially applied to Boy Scouts: honesty, loyalty, obedience, and diligence. There can be little doubt that a massive change would be required in the mortgage broker industry if such standards were applied.

Furthermore, there is no single definition of fiduciary duty. The concept ranges from a trustee that "stands in the shoes" of its client to a businessperson who has a duty to conduct business in good faith and with fairness to customers.

The entire mortgage lending industry needs to be aware that application of a fiduciary duty to one link of the lending chain could have an adverse effect on the other links. A mortgage broker, as the person to whom the borrower goes for a mortgage, is a vital link in this chain. Simply requiring the disclosure of the relationship is not enough to avoid weakening the other links. Most lenders, we believe, would argue against a broker's or a lender's having a fiduciary relationship with a borrower.

Could a fiduciary duty akin to that for real estate brokers be imposed on mortgage lending? We believe such a standard could be imposed.

If the mortgage lending industry does not define the roles of its participants, particularly mortgage brokers, others will impose their own definitions. In the first half of this century, the consumer finance industry successfully supported uniform state legislation that formed the foundation for the industry's growth.

In the 1960s, the credit industry unsuccessfully opposed Truth-in- Lending legislation. As originally proposed, the Truth-in-Lending Act would have required a single disclosure, the annual percentage rate. The end result was very different, creating paperwork never imagined originally.

We believe that the lesson is clear. The mortgage lending industry must take the lead in defining reasonable professional standards for itself at both the state and federal levels.

Ms. Burt is a lawyer in private practice in Denver and former vice president of government relations for the National Association of Mortgage Brokers. Mr. Jones is of counsel at the law firm Jones Day Reavis & Pogue in Chicago.

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