More financial advisers are becoming licensed mortgage loan originators as full-service brokerage firms look to be one-stop shops for wealthy investors, but some regulatory gray areas are causing concern.
“Personally, I think extending a mortgage is difficult, and investing in stocks is difficult,” said Christine Clifford, vice president of Access Mortgage Research & Consulting Inc. “I would not want to do both.”
Even as interest rates have hit record lows and brokers have helped clients refinance or purchase second homes in recent years, firms have been placing additional restrictions on what brokers can say and how they are compensated for mortgages. Advisers can face additional hurdles from increased paperwork to negative feedback from frustrated clients if it takes too long to qualify.
“The amount of documentation and information they need to provide is quite a bit relative to where it was eight to 10 years ago,” said William B. Jones, a senior vice president at Wells Fargo Advisors.
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Mortgage lending has been a top priority for a number of full-service firms in recent years. On top of record low rates last year, sales of high-end homes to wealthy clients have been ticking up this year; investors benefited from strong performance in the stock market last year.
And household financial assets have increased 13% over the past year, putting more purchasing power in the hands of some big-time buyers, according to a research report last month from Bank of America's Michelle Meyer.
“This is quite beneficial for higher-income households who are looking to buy expensive properties,” she wrote in the report.
Many mortgages for wealthier investors are done as jumbo, or nonconforming, loans, meaning that they may require only interest rate payments or provide other incentives.
“We are indeed seeing growth in the number of advisers seeking or expressing interest in mortgage licensing,” Wells Fargo spokesman Anthony Mattera said.
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If executed properly, mortgage referrals can help build an adviser's practice, Mr. Jones said.
He said that he was involved in 28 deals last year, and most, which were fixed-rate, took less than two months.
That helped deepen client relationships, score additional referrals and bring in more assets, Mr. Jones said.
Clients can sometimes qualify for better rates for jumbo mortgages if they have more assets at the firm.
“This is one of the ways to get to talk to people about their overall picture,” Mr. Jones said. “So I have referrals that have become clients after.”
Although that can be alluring, the process can be complicated, Ms. Clifford said.
For wealthy entrepreneurs who don't show a significant portion of their income on a W-2 form, it is especially difficult and may require extra paperwork to tally all the assets.
At one wirehouse firm that she didn't identify, Ms. Clifford said that the process could take between six and nine months.
“I know some people who have walked from the brokerage firms after nine months of pain,” she said. “[The firms] are trying to balance between the legal opinion and consumer experience.”
“Mortgage” can also be a somewhat sticky word for brokers as well, since state regulations differ regarding the extent to which a stockbroker can be involved in the process without being licensed as a mortgage loan originator.
“License requirements vary widely by state,” Mr. Mattera said. “Some require the individual adviser to be licensed, others require the branch to be licensed, and some require that the firm hold the license.”
Mr. Jones, who is based in California, said that he is able to receive a one-time percentage of the total amount of the loan when the deal closes.
Mr. Mattera declined to specify the percentage but said that Wells Fargo has a mortgage team in Minneapolis that decides which brokers need to be licensed.
Although Mr. Jones is able to receive a form of compensation without being licensed, brokers in other states may have a tougher time.
William Carrigan, securities examiner at the Vermont Department of Financial Regulation, said that brokers and advisers registered with the state who don't have a mortgage loan originator license aren't allowed to make anything beyond a “generic introduction.”
That means brokers who don't have a license can make clients aware of where they could obtain a mortgage, but aren't allowed to provide information beyond what is publicly available — such as the current mortgage rate — or the terms of a mortgage that a broker could help secure for the client.
Moreover, if the broker steers clients to a particular originator within the mortgage arm of the bank, then they would have to become licensed in Vermont, Mr. Carrigan said.
If there was any compensation received in exchange, they would also need to be licensed or disclose it as an outside business activity, he said.
“From an internal-policy-and-procedure standpoint for the broker-dealer, they've got some supervisory issues potentially,” Mr. Carrigan said. “They need to ensure that these reps are not out there making recommendations to clients to do a cash-out and refinance, and then use the proceeds to invest in securities.”
In 2012, Morgan Stanley said that brokers in certain states who weren't licensed as mortgage loan originators wouldn't receive any compensation or commissions related to mortgages that they had referred and that anything already earned that year would be taken away.
That followed a similar rule for Bank of America Merrill Lynch advisers.
UBS AG issued a memorandum last year that put internal referrals on hold in Massachusetts as the firm sought to clarify new rules, according to a former employee of the firm, who asked not to be identified because of the sensitive nature of the topic.
UBS spokesman Gregg Rosenberg declined to comment.
There was a drop-off in referrals in Massachusetts in 2012, as most advisers didn't want to go through the process of getting licensed, according to a former employee at Morgan Stanley, who asked not to be identified.
Licensing can take up to 60 days and requires passing a test and background check, and taking 20 hours of pre-licensure education courses, according to Donald Frommeyer, president of the National Association of Mortgage Brokers.
