January 3, 2020
Mortgage brokers can play multiple roles when it comes to handling a potential sale or purchase of a property. Whether a mortgage broker is acting as the agent of the borrower when it comes to negotiating a loan from a lender or putting together a loan package by bringing together a borrower and lender, there are many risks involved that need to be handled carefully.
Every mortgage broker faces certain risks depending on the position they are put in to help out their clients, making it important to understand what kind of risks to avoid and what kind of mortgage broker insurance to purchase.
Errors and Omissions Insurance
Borrowers and lenders cannot assume that a broker has this kind of insurance in place. Mortgage brokers are not required in some states, such as California, to carry this kind of coverage. To borrowers and lenders, working with a mortgage broker who doesn’t carry this kind of insurance is a built-in risk, which will only keep business away from brokers.
Carrying this kind of mortgage broker insurance can protect brokers in the present time as much as it can in the future as operating with this kind of coverage shows responsibility and accountability. While, again, this coverage isn’t a must in some locations, it does help to insure a business as much as possible.
Licensing
In some states, a real estate broker’s license is required in order to perform mortgage loan tasks. If a mortgage broker delegates the task of soliciting or negotiating loans secured by real property, it has to delegate those tasks to someone with a valid and up to date real estate license. An endorsement for mortgage loan origination (MLO) may also be required if a mortgage broker wants to execute residential mortgage loan origination tasks.
Loan Forms
In general, mortgage brokers have form documents which they use in connection with loan transactions. Forms that were once considered legitimate may have, in the meantime, become obsolete or unenforceable, such as when a mortgage broker uses an arbitration provision. In this scenario, they should see if it is too one-sided to be enforced.
If a mortgage broker works in residential mortgage, they also need to see if the forms are compliant with requirements surrounding Truth-in-Lending, Real Estate Settlement Procedures, and TRID. If not, the broker and lender may, in fact, subject themselves to certain regulatory issues, damages, and penalties.
Advertising
Mortgage brokers depend on advertising to pick up new business. Keeping a stable of returning clients is a good thing to have, but not everyone will have the need for continued work with a broker. With this in mind, it’s important to advertise services and display what is offered. But if a broker advertises they offer a certain service just to get new business and in fact don’t offer that service, such as negotiating and arranging loans, this can end up with them being put into a legal issue. Reviewing advertising on a regular basis to make sure everything offered is accurate, compliant, and current will help to avoid major legal problems down the road.
About Associations Liability Insurance Agency (ALIA)
The ALIA Team (part of the Riverton Insurance Agency Corporation), specializes in helping real estate professionals find the affordable and comprehensive liability insurance they need, without the hassle. ALIA dates its roots to 1991 with the founding of FREA, Foundation of Real Estate Associates. In 2013, ALIA was created to work with multiple insurance companies thereby broadening the portfolio of products to customers. For more information about our products and services, contact us today at (800) 882-4410.