Let me try using a concrete
example. M is a mortgage broker in California standing between a borrower
B and a lender L. This morning L faxed M its prices for the day. Each
"price" consists of a) the interest rate, b) points (an upfront
charge expressed as a percent of the loan), and c) the "lock
period" for which L will guarantee the rate and points. Among the
rate/point combinations L offered on 30-year fixed-rate loans with terms
locked for 45 days was 7%/1.5 points and 7.625%/-1.5 points. In other
words, L wants to be paid 1.5 points for a 7% loan but will pay 1.5 points
for a 7.625% loan.
M makes a living by adding a
markup to the points quoted by L. If the markup is 1.5 points, then the
deals M offers to B are 7%/3 points and 7.625%/0 points. M makes the same
amount, regardless of which option B selects, but the disclosure
requirements are quite different. If B selects 7%/3 points, the Good Faith
Estimate of Settlement (GFE) that must be given B within 3 days of receipt
of B's loan application would show:
Points: 1.5
Mortgage Broker Fee: 1.5
But if B selects 7.625%/0
points, the GFE would show:
Points: 1.5
Mortgage Broker Fee: 0
In the second case, the GFE
would have a footnote or parenthetical statement indicating that M has
been paid 1.5 points by L.
It would be difficult to
design a disclosure rule more confusing than this one. It may allow M to
bamboozle B into believing that M's services are free, which they are
anything but. B's willingness to pay the 7.625% rate is what puts the 1.5
points in the broker's pocket. Indeed, if B agreed to pay 8.5% for which L
would pay 3 points, M could make 3 points on the deal and the GFE would
still show a Mortgage Broker Fee of 0. The fact is that mortgage brokers
make their largest markups on loans where they are compensated by the
lender rather than by the borrower.
Attempts to change the
disclosure rules so that payments by lenders to brokers would be more
obvious and understandable to consumers are strongly resisted by brokers
who claim, with good reason, that it would disadvantage them relative to
lenders. Suppose M got out of the mortgage brokerage business and went to
work for L as an employee. Instead of quoting a wholesale price to M to
which M added a 1.5 point markup, L now provides M with retail prices that
already include the markup. M now offers B 7%/3 points and 7.625%/0
points, just as before, but because B is now dealing with a lender rather
than a mortgage broker, the markup has disappeared from sight. It is now
part of L's internal record-keeping which L is not obliged to show to
anyone but its accountants and the IRS.
Confusion associated with
different disclosure rules for mortgage brokers and lenders is compounded
by the fact that consumers often cannot tell whether they are dealing with
a broker or a lender. The core difference is that brokers do not fund
loans while lenders do, but consumers may not be aware of the difference.
Some mortgage brokers that have grown in size and reputation, acquire the
capital and credit lines needed to fund loans. They thus become lenders,
but they seldom change their name. During their transition from broker to
lender, they may act as a broker on some deals and as a lender on others!
In recent years, many smaller
mortgage broker firms have reorganized as "net branches" of
lenders. The brokers become lender employees in the eyes of the law while
operating with much the same independence and discretion that they had
before. Not the least of the benefits of this arrangement for the
ex-brokers is that they avoid disclosing their compensation to consumers.
If you know you are dealing
with a broker and want to know how much the broker is making from you, you
must include any fee paid the broker by the lender. The better way to
protect yourself, however, is just to shop for the best terms. Then you
don't have to worry about the broker's markup, or whether or not you are
dealing with a broker or a lender.
Copyright Jack Guttentag 2002
