Loan Officer Doubles As Agent – Goes To Court, Jail, & Poorhouse

There is nary a week that goes by where I don’t read about homebuyers suing someone who acted as both a real estate agent and a loan officer.

It never surprises me either, as it is just too easy for attorneys to claim that the individual forced their clients to take a higher rate – because every buyer can always find a lower rate somewhere.

With the recent NAR Settlement, there has been much talk of agents becoming loan officers – which I think will never work because there is simply way too much to know to become a competent loan officer and/or because margins are too thin; paying real estate agents for loans will result in higher rates that borrowers in many markets will simply not tolerate. Competition is brutal – and a 1/8% higher rate costs LOs loans all the time nowadays.

Similarly, there are many loan officers now thinking they can double as agents. But, prominent compliance attorneys and industry professionals continue to strongly advise against it.

Why LOs Might Not Want To Double As Agents

1. Conflict of Interest. Renowned mortgage blogger Rob Chrisman shared this article by prominent compliance attorney Brian Levy today: Double Dipping & Conflicts of Interest. Clients will always wonder if loan officers are putting their LO interests over their agent interests or vice versa. This article about agents becoming loan officers is also good: In Wake Of NAR Settlement, Dual Licensing Carries RESPA, Steering Risks.
2. We’re Too Dumb. I often say that agents will not have the time to learn enough to become competent loan officers (see above), but it goes the other way too. Yes, there are many simple transactions that loan officers could handle, but if things get complex…not so much. Years ago, I got involved in two transactions myself while working full-time as a loan officer (I’m a licensed broker too) that involved major condition issues. I quickly realized I was in way over my head, and I had to pay two far more experienced agents to bail me out (without their help, I likely would have been subject to massive liability risks). Just like with loans, there is often far more than what meets the eye when it comes to real estate transactions.
3. Don’t Have Time. A few weeks ago, I mentioned a study that showed agents work an average of 85 hours on a single transaction. Similarly, a single closed loan can also require far more time than almost everyone outside the mortgage industry understands. It is unlikely that a human being will have time to play both the agent and the loan officer roles competently.
4. Too Easy To Get Sued – Always a Lower Rate Somewhere. I have mentioned this numerous times now, including above, but every borrower can always find a lower rate somewhere, somehow. This is both because there are online lenders that try to take market share with zero margins (and very little competence as well) and because rates change every day. Borrowers, however, often don’t fully understand this. So, the litigious types may notice that they could have obtained a lower rate … somewhere, somehow… and look for a reason to sue – especially if they are prompted by shark-like trial attorneys sending out letters and emails inviting them to sue.

Related Asides:

This Is What Is NOT Steering: Referring Clients To One LO.

We have the most risk averse team on the planet; they never jaywalk, drive 26 mph in a 25 zone, or remove mattress tags. As a result, we also have a prominent compliance attorney on speed dial – who is equally conservative. And he says that agents don’t need to refer “three LOs,” and that they are at zero risk of “steering” claims, as long as they don’t force their clients to use that LO. So, if agents have LOs that they like or trust the most, they can feel free to refer clients to them without fear.

Kickbacks Put Agents At Risk.

We had an agent refer us a nice clean refi recently that we turned down. The reason? The agent wanted us to kick back a referral fee. That agent was obviously unaware that lenders get audited and that a check written out to an agent would likely be spotted and questioned. And – it is not just the lender that paid the referral fee that would get in trouble; the agent receiving the referral fee would be subject to equal risk.

Could Loan Officers Really Go To Jail?

“Steering,” in terms of lending, is the illegal practice of steering a borrower away from a more favorable loan product towards a less favorable product – and it is a RESPA violation. RESPA violations are subject to both civil and criminal prosecution, but I personally have never heard of or seen a criminal prosecution. So, it seems unlikely that anyone would go to jail – but saying they will makes for a good clickbait headline. 😊