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.
Predicting With Easy Math
First, however, Freddie Mac’s quarterly forecast recently predicted that total originations will decline from $3.9 trillion in 2021 to $2.6 trillion in 2022. Shout out to Freddie’s economics/data team for making a prediction like that with easy math for arithmetically challenged types like myself to easily be able to calculate that origination volume is predicted to decline by 1/3 next year.2
I don’t have any actual statistics to back me up on this, but if history is prologue, as a result of fear of that production decline, I am predicting that mortgage companies are going to be having a lot more conversation around who owns the customer in the coming weeks: both with their LOs and secondary market partners. This is because one common reaction to lower production volume is to seek ways to squeeze more revenue out of fewer customers. Thus, the timing of this article.
Who Actually Owns The Customer Relationship?
Inevitably, a conversation about squeezing more revenue from fewer customers results in questions about conflicts of interest, especially for originators. I’ll get to that shortly. Those conversations, however, can also reveal one of the bigger lies3 (ok, 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 some variation of the theme that, “you own the customer relationship and all they want to do is to support you in that 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 are overselling because everyone wants to find ways to squeeze more revenue from “your” customer. For example, perhaps a wholesaler or subservicer won’t solicit an originator’s customers for refinance, but that won’t stop them from trying to sell homeowner’s insurance, lawn and garden tools or Nespresso machines to your customers.
Meanwhile, the debate about customer ownership is mostly myopically centered around who should get the benefits from the customer relationship. As a mortgage industry lawyer, I don’t often get asked to muse4 on the upside of a customer relationship which is usually measured in expected revenue. Rather, I typically just get asked if something can be done legally and compliantly. As I’ll illustrate below, that question, however, misses the risks in cross (or up)-selling a customer because can doesn’t always equal should.
No One Wants To Make Less Next Year
The customer ownership issue frequently crosses my desk5 when a mortgage banker’s LO has a real estate license or wants to sell other products or services to the mortgage customer such as insurance, financial advice or even something like subscriptions to the LO’s spouse’s yoga studio.6 Faced with the anticipated drop in next year’s overall production 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 the commission decline”.
Setting aside the FHA conflict of interest rules about getting paid by two sources on the same transaction,7 most LO employment agreements prohibit dual employment/compensation for full time LOs. The primary reason for that prohibition is so a full time LO doesn’t get distracted8 by selling other stuff and remains focused on producing as many loans for the mortgage company as possible. Critically, however, that prohibition can also limit the employer’s liability for those other activities.
But what happens when a loyal “top producer” just wants to maintain their income levels in a declining volume market (beyond their control) and can be trusted not to lose focus or effort?9 Isn’t that ok as long as they are not selling something else in connection with just FHA transactions? Well, here’s where the uncomfortable truth about who really owns the customer gets revealed. That is, if a mortgage company permits its employee to also sell insurance, financial planning or even yoga lessons to a mortgage customer, the company will get no upside,10 but may still legally be responsible for the other sale;11 at least that’s what the plaintiff’s lawyers and maybe the regulators will say. And, you will keep that downside risk even if that employee later leaves.12
Risky Yoga And Dog Bites
Imagine what your mortgage consumer might say if your LO also sells homeowner’s insurance that doesn’t fully cover a loss.13 Similarly, consider if someone were to be paralyzed by a risky yoga pose14 at the LO’s spouse’s uninsured yoga studio after your LO sold the mortgage customer a membership? Unfortunately, it is likely that the mortgage company will be sued for liability (and the company’s liability insurance policy may not cover the claim).15 If your LO acts as both RE agent and mortgage originator to a homebuyer who thinks they got ripped off over latent defects or promised repairs…., well, at least buyers never feel that way, right?16
I would add, however, that even though mortgage brokers operate independently and are typically required to indemnify wholesalers for what they do, given the extraordinary level of oversight and support wholesalers provide to brokers presently, I wouldn’t be surprised to see similar claims brought in the future against wholesalers who knowingly permit brokers to cross-sell other services to consumers (especially if a consumer class brings claims against a judgment-proof broker).
Ironically, aside from the conflicts of interest, potential liability, and distraction concerns, perhaps the biggest problem with the many cross-selling ideas I hear about is that, for the most part, cross selling is just really difficult to execute well. Even if you’re successful, overemphasizing cross-selling can get you in a boatload of trouble too. Just ask Wells Fargo.
Footnotes
1 This article is not to be construed as legal advice, and no attorney-client relationship is created hereby. Consult a lawyer licensed in your state if you are sued or want to avoid being sued.
2 Freddie’s report also described a 17% increase in home values which, if carried forward, means an even greater drop in production on a unit basis. Please don’t make me do the math, but that means over a 50% decline in units!
3 I’m not going to tell you the other biggest lies, but there’s a punch line in there somewhere.
4 But I do muse often. See www.mortgagemusings.com
5 Apparently the desks of many other mortgage compliance folks see this as well based on how it is a frequent topic on the Reg Lists email forum.
6 I haven’t actually heard that one yet, but it sounded like a good example for this article.
7 You cannot set that aside if you are an FHA lender. In addition to a general sensitivity around conflicts of interest, FHA has a hard stop prohibiting dual compensation on the same transaction.
8 “Distracted” is another way to describe a conflict of interests.
9 Tell me how much they’re going to get paid for selling something else and I’ll tell you if they will be distracted.
10 Setting up an affiliated business arrangement to sell other stuff to your customers may be a good idea, but that can also similarly tend to take away your own focus on mortgage lending.
11 There are several theories of liability that could be offered, but the most obvious would be respondeat superior which says that employers are responsible for the actions of their employees while engaged in work for the employer. It’s hard to remove and change hats while talking to a customer.
12 Again, consult a lawyer in your state to obtain guidance with any particular situation(s).
13 What they might say is something like, “the mortgage company induced me to buy insufficient insurance so I could qualify for the loan and so the mortgage company should pay for any uninsured loss.”
14 All yoga poses are highly risky for me.
15 Read your insurance policy exclusions carefully. True story: when I was in-house, we got sued in, and our insurance company had to settle, a dog bite case because our underwriter’s dog bit a child while they had neighbors over for dinner. Plaintiffs alleged the underwriter talked to the neighbors about applying for a loan during dinner (unlikely for an underwriter but whatever). We probably still would have been sued had the underwriter also tried to sell yoga lessons, but our insurance provider probably would have denied coverage for that.
16 Sarcasm.
