In the U.K., a Single Set Of Rules for Brokers

Last week, I discussed how the pricing of mortgage broker services in the United Kingdom is much more transparent than in the United States. The system in the United Kingdom provides no leeway for brokers to price opportunistically; that is, they can't vary the price according to what the borrower can be persuaded to pay. In the United States, opportunistic pricing is pervasive, and average broker fees are much higher.

Another major difference in the two systems is how mortgage brokers are regulated. In the United Kingdom, a series of sweeping changes beginning in 1997 placed most financial regulation under an overseer called the Financial Services Authority. The FSA is an independent, nongovernmental body, but it is answerable to the Treasury and ultimately to the Parliament.

In 2004, the FSA took over regulation of the mortgage sector, including mortgage brokers. Mortgage brokers in the United Kingdom are thus subject to a single set of rules, and borrowers know where to go to register a complaint. (All FSA rules described here apply to loan-officer employees of lenders, as well as to brokers.)

In the United States, brokers have to obtain separate licenses for every state in which they want to do business and are subject to different rules in each state. A nationwide licensing system would streamline the process of applying for licenses and ultimately create a national database of mortgage brokers and loan officers that could be accessed by borrowers. We are years away from that, however, and even if it materializes, every state will retain its licensing authority. Brokers already are subject to some federal laws, mostly a few provisions of the federal Truth in Lending Act and the Real Estate Settlement Procedures Act, both of which soon may be tightened.

In the United Kingdom, the FSA has ruled that every broker and loan officer must pass a competency exam. Richard Hobson, a Seattle mortgage broker, was a broker in the United Kingdom and took the exam. He told me it was far more difficult than the one he took to be licensed in Washington. And that state is one of the few that require an exam.

The FSA has three sets of disclosure rules. At their first meeting, the broker gives the borrower an initial disclosure document. It indicates whether the broker has access to mortgages from all lenders in the market, only some lenders or only one lender. It also provides complete information on the broker's fee -- including the amount, when it is due and how it relates to lender fees paid to the broker. If the broker also sells insurance, a common practice in the United Kingdom, the same information is required for the insurance transaction.

There is no counterpart to the initial disclosure document in the United States. However, proposals from the Department of Housing and Urban Development and the Federal Reserve would require fuller disclosure of broker fees.

The second set of U.K. disclosure rules applies after the broker, in consultation with the borrower, has identified one loan program that appears to meet the borrower's needs. This is called a "key facts illustration," and it is a kind of amalgam of the good-faith estimate and the truth-in-lending disclosure documents in the United States. The key facts illustration is a little better because it is only one document, with as much useful information and less useless information.

The third disclosure, which has no counterpart in the United States, is the mortgage record of suitability, which has two major parts. The first is a statement of the borrower's circumstances that bear on the mortgage selection. It includes how the borrower intends to use the loan proceeds and what features of the loan the borrower views as most important.

The second part of the record of suitability is the broker's comment about all major features of the recommended loan and why the broker is recommending it. This includes the broker's statement regarding why the loan is affordable to the borrower, now and in the future.

One consequence of the FSA rules is a heavy compliance burden, which makes it difficult to operate as a one-person firm. Most brokers belong to larger firms, which can provide compliance as well as other types of support.

Last year, I wrote a column arguing that making brokers and loan officers responsible for determining mortgage suitability was not workable because most of them were transaction-oriented and strongly averse to providing any information that might jeopardize a deal. But Hobson disagrees, arguing that brokers in the United Kingdom are relationship-oriented and view borrowers as potential clients for life. He is a firm believer in the U.K. system and is using the model in his Seattle business.

Why is a relationship as opposed to a transaction orientation much more common in the United Kingdom? I plan to write about this as soon as I understand it better.

Jack Guttentag is professor of finance emeritus at the Wharton School of the University of Pennsylvania. He can be contacted through his Web site,http://www.mtgprofessor.com.

© 2008 Jack Guttentag

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