Yoga Injuries, Dog Bites, and Cross-Selling Liability – NMP
Rob Chrisman always reminds me that in America anyone can sue anyone for anything.1 It’s not that simple, but mortgage companies often need a reminder.
Predict with Easy Math
First, however, Freddie Mac’s quarterly forecast recently predicted total creations to grow from $ 3.9 trillion in 2021 to $ 2.6 trillion in 2022. Well done to the economics / data team of Freddie for making a prediction like this with easy math for arithmetically challenged types like me to be able to easily calculate that the origination volume should decrease by a third next year.2
I don’t have any actual statistics to back that up, but if the story is a prologue, due to the fear of this decline in production, I predict the mortgage companies are going to have a lot more. discussions about who owns the client in the coming weeks: both with their LOs and aftermarket partners. Indeed, a common reaction to declining production volume is to look for ways to derive more revenue from fewer customers. So the timing of this article.
Who does the customer relationship really belong to?
Inevitably, a conversation about making more revenue from fewer clients leads to questions about conflicts of interest, especially for originators. I will come back to this shortly. These conversations, however, can also reveal one of the biggest lies3 (Okay, that’s a strong word, let’s just call it a “sales pitch”) in the business. That is, when someone above you in the mortgage chain tells you a variation of the theme that “you own the customer relationship and all they want to do is support you in it. effort “.
Some companies (and mortgage broker groups) try to make the concept of customer ownership a huge point of differentiation, but at the end of the day, they sell too much because everyone wants to find ways to make more income from “your” customer. For example, a wholesaler or subcontractor may not solicit clients of a principal for refinancing, but that will not prevent them from trying to sell your clients home insurance, tools for lawn and garden or Nespresso machines.
Meanwhile, the customer ownership debate is mostly centered around myopia which should benefit from the customer relationship. As a mortgage lawyer, I’m not often asked to think4 the increase in customer relations, which is generally measured in expected sales. On the contrary, I’m usually asked if something can be done legally and in a compliant manner. As I’ll illustrate below, this question, however, does not take into account the risks of a customer’s cross-selling (or upwarding) because the possibility is not always equal to what ‘she should.
Nobody wants to earn less next year
The client’s ownership issue crosses my desk frequently5 when a mortgage banker’s LO has a real estate license or wants to sell other products or services to the mortgage client, such as insurance, financial advice, or even something like LO’s spouse’s yoga studio subscriptions.6 Faced with the anticipated drop in overall production next year noted by Freddie Mac, some LOs might look around and say “if I could sell something else to my customers, maybe I could make up for the drop in commission.” “.
Putting aside the FHA conflict of interest rules regarding getting paid from two sources on the same transaction,7 most OL employment contracts prohibit duplication / compensation for full-time OL. The main reason for this ban is that a full-time LO is not distracted8 by selling other things and staying focused on producing as many loans as possible for the mortgage company. More importantly, this prohibition can also limit the employer’s liability for these other activities.
But what happens when a loyal “best producer” just wants to maintain his income levels in a declining market (beyond his control) and can be trusted not to lose focus or lose focus? efforts ?9 Isn’t that ok until they sell something else related to FHA transactions only? Well, this is where the uncomfortable truth about who really owns the client is revealed. In other words, if a mortgage company allows its employees to also sell insurance, financial planning, or even yoga classes to a mortgage client, the company will have no benefit,ten but can still be legally responsible for the other sale;11 at least that’s what the plaintiff’s lawyers and perhaps the regulators will say. And you will keep that downside risk even if that employee leaves later.12
Risky yoga and dog bites
Imagine what your mortgage consumer might say if your LO also sells home insurance that doesn’t fully cover a loss.13 Likewise, consider whether someone should be paralyzed by a risky yoga pose14 to LO’s spouse’s uninsured yoga studio after your LO sells a subscription to the mortgage client? Unfortunately, the mortgage company is likely to be sued for liability (and the company’s liability insurance policy may not cover the claim).15 If your LO acts both as an RE agent and as a mortgage originator for a buyer who thinks they have been scammed for hidden defects or promised repairs …16
I would add, however, that while mortgage brokers operate independently and are generally required to compensate wholesalers for what they do, given the extraordinary level of oversight and support that wholesalers currently provide to brokers, I wouldn’t be surprised to see similar claims brought in the future against wholesalers who knowingly allow brokers to sell other services to consumers (especially if a class of consumers files claims against a risk-proof broker. judgement).
Ironically, aside from conflicts of interest, potential liability, and distraction issues, perhaps the biggest problem with the many cross-selling ideas I hear is that, for the most part, cross-selling is really difficult to perform well. Even if you are successful, too much emphasis on cross-selling can also get you in trouble. You just have to ask Wells fargo.
1 This article should not be construed as legal advice and no attorney-client relationship is hereby created. See a lawyer licensed in your state if you are being sued or want to avoid being sued.
2 Freddie’s report also describes a 17% increase in home values which, if postponed, means an even larger drop in production on a unit basis. Please don’t force me to do the math, but it means more than 50% drop in units!
3 I’m not going to tell you the other biggest lies, but there’s a punch line somewhere.
4 But I often think about it. See www.mortgagemusings.com
5 Apparently, the offices of many other mortgage compliance folks see this as well due to the fact that it is a frequent topic on the Reg Lists message board.
6 I haven’t heard that one yet, but it seemed like a good example for this article.
7 You cannot put this aside if you are an FHA lender. In addition to a general sensitivity around conflicts of interest, the FHA has a strict stop prohibiting double netting on the same transaction.
8 “Distracted” is another way of describing a conflict of interest.
9 Tell me how much they will be paid to sell something else and I will tell you if they will be distracted.
ten Setting up an affiliate business deal to sell other products to your customers can be a good idea, but it can also tend to distract you from your own focus on mortgages.
11 There are several theories of liability that could be proposed, but the most obvious would be Senior Manager which says that employers are responsible for the actions of their employees when working for the employer. It is difficult to take off and change your hat while talking to a client.
12 Again, consult an attorney in your state for advice on any particular situation (s).
13 What they might say is something like: “the mortgage company made me take out insufficient insurance for me to qualify for the loan and therefore the mortgage company would have to pay for any uninsured loss.
14 All yoga poses are very risky for me.
15 Carefully read the exclusions of your insurance policy. True story: When I was in-house we were sued and our insurance company had to settle a dog bite case because our insurer’s dog bit a child while they had neighbors in the house. having dinner. The plaintiffs alleged that the underwriter spoke to neighbors about the loan request over dinner (unlikely for an underwriter, but whatever). We probably still would have been sued if the underwriter had tried selling yoga classes as well, but our insurer likely would have denied coverage for that.