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Mortgage Educator Condemns Financial Planner Alliances

Mortgage Institute criticizes tag team approach

August 4, 2005

By staff

Financial planners disregard the suitability of getting a home loan to make investments, according to a mortgage educator -- who says tag team arrangements with loan originators "leads to a growing opportunity for fraud."

The Mortgage Institute For Financial Services Professionals claimed in a recent announcement that there is a proliferation of "tag team mortgage planning," marketing schemes in which homeowners are advised to invest their home equity without having their financial situation and objectives analyzed for suitability.

The "tag team" is a two-prong marketing approach where the mortgage originator persuades the homeowner to pull equity from their home, then refers them to a product-oriented financial planner who convinces the homeowner to put the equity into investments, according to the institution's director Leon Morris.

Recommending the home equity be used to make riskier investments elsewhere without any determination of suitability "leads to a growing opportunity for fraud and misrepresentation, even if it's committed inadvertently," Morris said. "Consumers may not realize risk differentials or potential pitfalls in investing 'other people's money,' which is what a mortgage, including home equity lines, represents."

But The Financial Planning Association, a 27,500-member organization for the financial planning community, says it mandates that its members "will adhere to a code of ethics that reflects their commitment to help clients achieve their life goals."

Among seven principals outlined in its code of ethics is the principle of integrity. "Integrity demands honesty and candor, which must not be subordinated to personal gain and advantage."

Another principle the association includes is competence, which "includes the wisdom to recognize the limitations of that knowledge and when consultation or client referral is appropriate."

Despite the risks involved, the Mortgage Institute's Morris noted that because a home is an exempt security, home financial advise escapes the scrutiny of the Securities and Exchange Commission, the National Association of Securities Dealers and the Federal Reserve Board.

Regulators should be concerned that there are no requirements for determining suitability when advising a homeowner to access home equity for purposes of making investments, which is "analogous to trading on margin," Morris said, adding that the institution recently made a request to the SEC to explore the need to further define "suitability."

The institute says its "Residential Mortgage Planner" designated mortgage originators and real estate agents are taught a scientific process that is used to assist homeowners in making mortgage-planning decisions without taking undue risk with home equity.

"Mortgage originators and real estate agents want the knowledge and skills necessary to provide sound ethical mortgage planning advice rather than relying on a tag team mortgage planning scheme for a quick commission," the institution director said. "Many recognize that a consumer's mortgage decisions shouldn't be made in a vacuum and see the benefits of blending sound mortgage advice with ethical financial planning strategies."

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