Despite the tarnished reputation of the reverse mortgage, a mortgage referral service says that it can help independent insurance agents act as a conduit for the loans, collect a plum commission - and do so legitimately.
The concept, however, is being looked at suspiciously by financial advisers and attorneys.
“I don’t think it’s great for a fiduciary to get involved in getting a piece of a mortgage origination fee - that’s a conflict,” said Ian Weinberg, chief executive of Family Wealth & Pension Management LLC. The Woodbury, N.Y., firm manages $150 million.
“Insurance agents know insurance,” Mr. Weinberg said. “What makes an agent an expert on mortgage financing?”
For agents who create an alliance with The Wealthbridge Network, the Los Angeles-based mortgage referral service, the emphasis isn’t so much on the agent’s expertise with mortgages but rather the good rapport he or she has with a client, according to chief executive Steven E. Branstetter.
“We thought of having the actual insurance agents be the distribution for forward and reverse mortgages,” he said. “What we found was that the public was thrilled with dealing with the agent as opposed to the bank.”
Agents have been quick to join, with 1,600 signing up within the first week of the firm’s official July 1 launch. Although life and health agents have jumped into the deal, most of the new participants work in property/casualty.
In order to participate, agents must go through a screening process. They must have been in the business for at least five years, and they are subject to credit and background checks.
The company will also run the insurance licenses of prospective agents to ensure they have clean track records.
“If you’re with a company that sells annuities with a 20% surrender charge, that tells me a lot,” Mr. Branstetter said. “We have no qualms about cutting ties with people we’re not sure about.”
Participating agents won’t be required to become licensed mortgage brokers, as they won’t be writing the actual loans.
Instead, when a client demonstrates a need for a regular or reverse mortgage, or a refinancing, the agent points him or her toward Wealthbridge, which handles the paperwork from there. In return, agents can collect 25% of the 1% loan origination fee as a commission, though that compensation varies according to the term and amount of the loan.
For the most part, that money has been going toward building agents’ practices, Mr. Branstetter said. “It’s simply a referral basis,” he said.
Despite the pre-emptive checks taken on by the firm, attorneys worry that the due diligence is insufficient and that agents could be opening themselves up to legal liability.
Background checks, for instance, won’t reveal any disciplinary records from the Financial Industry Regulatory Authority Inc. of New York and Washington, said Steven B. Caruso, an attorney in New York with Maddox Hargett & Caruso PC of Indianapolis.
Also, agents could be violating Finra’s conduct Rule 3030, which prohibits those associated with member firms from conducting business outside that firm’s scope without written consent.
FIRM’S APPROVAL
“If you have a registered [representative] who is referring people to this outfit to get mortgages, they can’t accept any compensation of any form or type without the firm approving it,” Mr. Caruso said. “I’d be amazed if brokerage firms are approving this relationship.”
Furthermore, fiduciaries - which can include insurance agents under state laws - must report their commissions to their clients, Mr. Caruso said.
Participating agents are told to take proper disclosure measures and to make sure that they notify their broker-dealer, Mr. Branstetter said. Agents in the program noted that the participating banks performed suitability checks by interviewing clients.
When Daniel Wells, who sells variable life insurance and annuities, as well as home insurance, with Farmers Financial Solutions LLC of Agoura Hills, Calif., referred his mother to Wealthbridge for a reverse mortgage, an officer from the bank interviewed her in person and told her what needed to be done with her irrevocable trust in order to make the mortgage work.
Her three trustees were also aware of the recommendations and asked questions to ensure that the mortgage made sense. A suitability check followed.
In order to participate with Wealthbridge in the first place, Mr. Wells said, he had to request permission from Farmers Financial, his broker-dealer. However, he said, “[Farmers] has nothing to do with it; it’s not marketed with them at all.”
LEGAL LIABILITY
Agents are not only responsible for seeking permission to conduct this business, they are first in line for legal liability in the event that a mortgage recommendation goes awry, Mr. Caruso said. The agent’s employer - the broker-dealer - would be second in line for legal action.
Third in line would be the mortgage referral service because it does not have the same duties and re-sponsibilities as a person who is registered with Finra, Mr. Caruso said.
In terms of enforcement, the participating agents aren’t considered employees of Wealthbridge. As a result, the firm can’t dig into agents’ records to find out if they are making those disclosures, nor can it punish them the way an employer could, Mr. Branstetter said.
Much depends on ensuring that scurrilous agents are eliminated at the screening level. “Enforcement begins with the selection process, so you get the right folks with good histories,” Mr. Branstetter said.
Attorneys predicted that mortgage referral services will grow as individuals with even stellar credit have difficulty obtaining a mortgage. In that environment, those who make referrals should keep an eye on where they send clients.
Similarly, referral services will have to work even harder to keep bad apples out of the mortgage business.
“It can be a legitimate service if you have a business model that seriously evaluates the credentials of people who refer clients to you,” Mr. Caruso said.
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