The ‘double-edged sword’ of dual licensing

Launched in the fourth quarter of 2023, Real-Finity Mortgage LLC has already funded more than $13 million in mortgages in Texas, California and Florida, with plans to expand to other markets in the U.S, according to the company. It has a small team of about 26 people and more are expected to join in the coming months.

”We are basically allowing real estate agents to offer mortgage products much cheaper to the end consumer than anybody else out there,” Luca Dahlhausen, founder and CEO of Realfinity, said in an interview with HousingWire. ”This is a huge opportunity for the consumer because you’re essentially potentially cutting out a middleman, creating much better economics.”

Dahlhausen added that working as a loan officer is an opportunity for real estate agents to ”control the transaction” and ”ensure that the client is being taken care of” while increasing their compensation. 

For example, Realfinity pays LOs 1.4% of the loan amount, with a $5,000 cap, which adds to the typical buyer-side agent commission of up to 3%. In a $420,000 property transaction, the company estimates that this would represent nearly $5,000 in LO compensation added to the $10,700 agent commission. Other potential business opportunities are created down the road through refinances. 

Dual licensing isn’t exactly a new practice. Michael Read, owner of New Jersey-based broker shop Bridgeway Mortgage and Bridgeway Real Estate Services, was an early adopter of the dual-licensing model. An originator since 1999, Read got his real estate license in 2014 and opened up his real estate brokerage in 2019. Working as both an LO and agent was a way to better serve his clients, he said.

”There are a lot of moving parts in a purchase transaction; I thought this would streamline the process, making a better experience for all parties and at the same time generate more revenue,” Read said.

Read works as both a buyer’s agent and an LO for the same client in approximately 20% of his transactions. In these cases, he generally takes the customary 2.5% to 3% real estate agent commission, plus 1.5% of the loan amount in LO compensation. He’s among the very few LOs in New Jersey who practices dual licensing, and it sometimes provokes a strong response from the agent on the opposite side of the table.

”I have had agents tell me, ’You’re not getting any of my mortgage business anymore,’ he said. ”It’s something I didn’t anticipate, but I understand it.”

Due to major policy changes from federal agencies and the proposed settlement agreement by the National Association of Realtors (NAR) in the commission lawsuits, more companies and professionals are venturing into dual licensing — also called dual capacity. But it is a controversial practice, more than a dozen real estate and mortgage executives, professionals and attorneys told HousingWire.

Those betting on dual licensing say they feel more confident in the rules and that it’s a chance to increase professionals’ compensation amid a shrinking market. Meanwhile, other industry participants are skeptical that dual licensing works effectively, especially at scale. They cite gray areas in the current regulations and some operational challenges.

Why talk about it now?

Dual licensing has picked up over the past two years as mortgage volumes have ”dried up” and the Federal Housing Administration (FHA) issued guidance ”out of the blue” regarding conflict of interest and dual employment in single-family, FHA-insured loans, according to Colgate Selden, a founding member of the Consumer Financial Protection Bureau (CFPB) and an attorney at SeldenLindeke LLP.

Selden is referring to a clarification issued in a mortgagee letter by FHA Commissioner Julia Gordon in late 2022, noting that participants who have ”a direct impact on the mortgage approval decision are prohibited from having multiple roles or sources of compensation, either directly or indirectly, from a single FHA-insured transaction.”

The restrictions pertain to four types of employees: underwriters, appraisers, inspectors and engineers. Real estate agents and loan originators are not mentioned. According to attorneys, there are no restrictions for Fannie Mae and Freddie Mac loans. 

Another impetus for discussions regarding dual licensing was the NAR’s announcement in March that it will pay $418 million in damages to settle sell-side real estate commission lawsuits. The trade group has also agreed to abolish its ”Participation Rule,” which required sellers’ agents to offer compensation to buyers’ brokers in order to list a property on a Realtor association-affiliated Multiple Listing Service.

For some industry experts, as buyer agent commissions may decrease due to the changes promoted by the case, they would be more likely to act as mortgage LOs.

In March, Mortgage Bankers Association (MBA) President and CEO Bob Broeksmit said that dual licensing could be a market reaction to the settlement.

”One of those models could be that you, as lenders, license your LOs as real estate agents and offer the buying agent service for less than a 3% fixed fee point. And some of you will say I want nothing to do with that. Others of you will say that is a great retention opportunity for my loan officers and the market will figure all this out,” Broeksmit said. 

Ken Sax, the designated real estate broker at Washington state-based Professional Realty Services International, said industry professionals are more likely to explore dual licensing opportunities during major shifts in the market. 

”This is something we see at different times during the real estate cycle, and it is coming back into play because business is down and referrals are down, so the incentive to do something is there,” Sax said. ”This happened during the recession period.” 

Risky business for LOs?

From the mortgage perspective, acting as a real estate agent could increase commissions in a transaction, which would be advantageous amid a shrinking origination landscape.

But lenders and LOs say they could risk their relationships with real estate agents, who are a primary source of leads. In other words, they could cannibalize their own business. That’s why some players have started their ventures on dual licensing on the real estate agent side.

”On the surface, it could be bad for loan officers. If I am a Realtor and I send a lot of business to John Doe, who is a mortgage broker, but all of a sudden John Doe has a real estate license, I likely won’t send him any business, which is pretty obvious,” said Chip Stella, director of brokerage development at LandVest | Christie’s International Real Estate. ”It is a double-edged sword for loan officers; they can generate business from both sides, but their referral pipeline may go away.” 

Some LOs say they simply don’t want to take on the responsibilities — and time commitments — of a real estate agent.

Nick Caccia, an East Greenwich, Rhode Island-based producing sales manager at CrossCountry Mortgage, said that getting a loan to the closing table is hard enough, especially with interest rates where they are. Having to be somebody’s confidant, go to open houses and advise on the real estate part would be ”tough,” he said. 

Princeton Mortgage CEO Rich Weidel said he doesn’t see a large-scale opportunity for loan originators to obtain a real estate license, for one simple reason: For many loan originators, the job is to bring value to Realtors.

”Now I do see the opportunity for real estate agents, particularly top real estate agents, to get their mortgage license and be able to provide additional value,” Weidel said. “I talked to a Realtor last week who’s considering getting his [loan originator] license. He did an open house on Sunday and had 70 people come through, but many were not prequalified yet. Could that Realtor capture some of those 70 buyers as potential mortgages, whether they work with that Realtor as a buyer’s agent or not? I think there’s some potential there.” 

Read, the mortgage broker and real estate agent in New Jersey, said it’s difficult to scale a dual-licensing business. Because his operation is small, he can serve clients in both capacities. If his operation were much larger, that level of service would be difficult to maintain. 

”Being a good Realtor is hard. Being a good loan originator is also hard. Being very good at both is very hard,” he said. ”Some of the best loan originators I know would struggle selling a home.”

Agent conflicts of interest?

For real estate agents, dual licensing means increasing their compensation in the same transaction after investing time and money to get the education and approvals to become an LO. The basic rule is that to be a loan originator, you have to be licensed and be sponsored on an MLS by a licensed or exempt entity.

Mark McLaughlin, a board member at Realfinity, said that real estate professionals have been familiar with the mortgage process throughout their careers, ”so they don’t really need training on the attributes of a mortgage.”

”What they’ll need is product knowledge — they all have different types of down payments, interest rates and amortization schedules,” McLaughlin said. 

Some agents mentioned feeling uncomfortable at the thought of working in a dual capacity. 

”If you are an agent working with a buyer, this means that you leave no stone unturned, you hunt for off-market properties, and you take them out on property tours for hours. How is someone going to be able to do all of that, as well as the increasingly hard demands of being a really good lender and financing specialist?” said Gretchen Pearson, broker-owner of Berkshire Hathaway HomeServices Drysdale Properties.

”In most instances, when we look at what is best for the consumer, one person doing both jobs is devaluing both of the roles. It’s like now the client had a halftime lender and a part-time real estate agent,” Pearson added. 

Selden said that those who see conflicts arising argue that, theoretically, the real estate agent’s fiduciary obligation is to work in the homebuyer’s best interest — to find the right house for them and negotiate the best deal. Thus, if the agent works as an LO, the fiduciary obligation to the buyer may flow into the mortgage transaction.

The main risk here is the real estate agent feels an incentive to get the deal done and finds whatever financing is available — but not necessarily the best financing option for which the buyer qualifies.

According to Selden, however, this risk is lower when the LO works for a mortgage brokerage firm, which send loans to several lenders. This assumes the buyer has not already waived the real estate agent’s fiduciary obligation, which often occurs anyway.

”There’s that potential underlying tension,” Selden said. 

”I think that is a slippery slope relative to people doing unsavory things or business practices to keep deals together now that they have twice as much skin in the game,” Stella said. ”If you are a dual-licensed professional and there is a deal that is on the ropes, what are you going to do to keep that deal together? Sometimes people are motivated by money and they make decisions that aren’t in the best interest of their client.”

Dahlhausen, from Realfinity, said that regulations are simple, clear and logical. ”The only conflict of interest that could be is if the loan officer would, by any stretch, have the ability to approve a loan. I don’t understand why this is even a topic out there … Conflict of interest is a non-issue.”

’Spiderweb’ of compliance

Different states have distinct approaches to dual licensing, with many allowing it, others imposing conditions and some prohibiting it entirely. Realfinity, which has largely invested in dual licensing, estimates that the practice is now permissible in 45 states.

Among the regulatory concerns, there is the Real Estate Settlement Procedures Act (RESPA) Section 8 rule and its regulation, which states that ”a company may not pay any other company or the employees of any other company for the referral of settlement service business.”

One way of addressing this restriction would be to hire real estate agents to perform in a dual capacity. But experts believe that there are legal uncertainties and potential sham arrangements. 

”If I’m a legitimate employee of the originator, then I should have a good argument,” said Troy Garris, co-managing partner at Garris Horn LLP. ”But if I’m just an employee by name, the lender doesn’t have control over me, I don’t attend training, I don’t show up at their offices, or I am simply a third party working as a real estate agent who sends loans over, that could constitute a kickback.”

Another challenge concerns the LO comp rule. Loan originators may not receive compensation based on the terms of a transaction, nor may they receive compensation from both the consumer and another party, such as a creditor (i.e., dual compensation). In this case, independent mortgage brokers could have an advantage because they can be paid by borrowers or lenders.

”In this scenario where people are operating in dual capacities, most will probably be paid by the lender as a loan officer. But, at the same time, in a related but separate transaction, they may be compensated for buying the house, potentially directly by the consumer — or the seller’s agent,” Garris said.

”Part of the argument here is that there are two different transactions, the real estate and the mortgage transactions. So, does it violate the LO compensation rule? Could the CFPB say, ’Well, it’s just all one big deal?’ I think all of that is up in the air right now.”

Players acting in a dual capacity should also disclose the situation to the customer. It is important to let consumers know they don’t have to use the mortgage services of a dual-licensed agent and can freely choose any lender or broker they prefer.

”You have to work through the rules to ensure compliance. It’s doable in many areas — there is a way, at least with the limited amount of guidance that we have, or perhaps even no guidance,” Garris said. 

He added that there is a risk the CFPB will implement some limitations in the future. ”It’s kind of an unknown so far, but especially given the challenging circumstance that we’re in, there is pressure to find ways to get loans. This is one more way that people think about it. So, I expect it to grow.”

Princeton Mortgage CEO Weidel also said that to do this in compliant fashion, real estate agents need to do enough work to be bona fide employees of the mortgage company.

”Now there’s not a definition of what that means. And that’s what we’re all grappling with. But if you’re just like, ’Hey, Realtor, get your mortgage license, you don’t have to do anything and we’ll pay you 50 basis points,’ that’s illegal,” he said. 

”I think people are now interested in it,” Weidel added. ”We’ve got all of these different regulatory bodies that create a spiderweb of compliance you must line up. But when you dig into it all, I think there’s a path to do it. We are open to experimenting with it. We are interested in top-performing Realtors who want to do it in a compliant way, learn the business’ and provide value for the borrower.”