Ignore Lender Payments to My Broker?
March 19, 2001, Revised November 9, 2006
"My broker claims that I should be concerned only with what I pay her, not with what the lender pays her for my loan. Is this true?"
No. You are the ultimate source of all income earned by the broker on your loan. You pay for lender rebates by paying a higher interest rate. If you are trying to figure how much the mortgage broker is making from you, you must include the rebates.
There was a time when brokers were compensated entirely by borrowers. Lenders posted one rate and one upfront charge called points or origination fee, expressed as a percent of the loan amount. (One point is 1% of the loan). Brokers would add their markup to the points.
If the lender quoted 6.50% with 1 point, for example, the broker might add 2 points as his markup. The broker would then quote 6.50% with 3 points to the borrower.
At some point, I can’t remember exactly when, lenders began to offer rate/point options. For example, in addition to a "basic" combination of 6.50% and 2.5 points, they might offer 6.25% with 3.375 points, and 7.25% with zero points. Over time, the number of options grew and came to include rebates. Today, multiple options such as those below are common.
Brokers tack their markup onto a rebate, just as they do with points. Assuming a 2 point markup, for example, the broker would quote 0.3 points on an 8% loan. Of the 2 points received by the broker, 1.7 would be rebated by the lender. But the borrower pays for the rebate over time through the higher interest rate.
A survey of brokers in 1998 found that borrowers paid about three-fifths of the brokers’ compensation in points and lenders paid two-fifths in rebates. The relative importance of rebates may be on the rise. In a data base covering 774 loans brokered in December 2000 and January 2001, I found that rebates accounted for about three fifths of broker income. Only one loan out of 5 had no rebate at all.
With the exception of Upfront Mortgage Brokers, information on lender rebates is difficult to get. Many conventional brokers view it as none of the borrower’s business. The Good Faith Estimate of settlement costs (GFE), which the broker provides the borrower within 3 days of receipt of a loan application, shows points as a settlement cost but rebates are shown in a variety of obscure ways. Frequently, they appear in a footnote marked "POC", which means paid outside of closing. Many borrowers miss it or don’t understand it.
Brokers can avoid showing lender rebates altogether by "table-funding" loans. At the closing table, the real lender provides the funds needed for the broker to close the loan in the broker’s name. Legally, this converts the broker into a "lender", and the real lender into a secondary market purchaser. The sale price is based on the rebate. In the case of the 8% loan with the 1.7 rebate, for example, the broker would sell the loan for a price of 98.30% of the loan amount. In this way, the rebate is concealed forever.
Some mortgage brokers table fund for no reason other than to avoid having to disclose rebates to borrowers.
Brokers usually make more money on transactions involving rebates. This may be because borrowers don’t know how much brokers make from rebates. Also, borrowers are much more careful about the cash they must pay out at closing because that is now, whereas the interest rate they agree to pay doesn't hit them until the future.
Borrowers can avoid overpaying for loans carrying rebates by dealing with an Upfront Mortgage Broker (UMB). UMBs set a price for their services at the outset of the transaction and credit the borrower for any rebates. The broker thus receives the agreed-upon amount on the transaction regardless of whether the borrower or lender pays it.
"My broker claims that I should be concerned only with what I pay her, not with what the lender pays her for my loan. Is this true?"
No. You are the ultimate source of all income earned by the broker on your loan. You pay for lender rebates by paying a higher interest rate. If you are trying to figure how much the mortgage broker is making from you, you must include the rebates.
There was a time when brokers were compensated entirely by borrowers. Lenders posted one rate and one upfront charge called points or origination fee, expressed as a percent of the loan amount. (One point is 1% of the loan). Brokers would add their markup to the points.
If the lender quoted 6.50% with 1 point, for example, the broker might add 2 points as his markup. The broker would then quote 6.50% with 3 points to the borrower.
At some point, I can’t remember exactly when, lenders began to offer rate/point options. For example, in addition to a "basic" combination of 6.50% and 2.5 points, they might offer 6.25% with 3.375 points, and 7.25% with zero points. Over time, the number of options grew and came to include rebates. Today, multiple options such as those below are common.
| Interest Rate | PointsRebates |
| 6.25% | 3.375 points |
| 6.50 | 2.500 points |
| 6.75 | 1.125 points |
| 7.00 | 0.750 points |
| 7.25 | 0 |
| 7.50 | 0.625 rebate |
| 7.75 | 1.125 rebate |
| 8.00 | 1.700 rebate |
| 8.25 | 2.250 rebate |
Brokers tack their markup onto a rebate, just as they do with points. Assuming a 2 point markup, for example, the broker would quote 0.3 points on an 8% loan. Of the 2 points received by the broker, 1.7 would be rebated by the lender. But the borrower pays for the rebate over time through the higher interest rate.
A survey of brokers in 1998 found that borrowers paid about three-fifths of the brokers’ compensation in points and lenders paid two-fifths in rebates. The relative importance of rebates may be on the rise. In a data base covering 774 loans brokered in December 2000 and January 2001, I found that rebates accounted for about three fifths of broker income. Only one loan out of 5 had no rebate at all.
With the exception of Upfront Mortgage Brokers, information on lender rebates is difficult to get. Many conventional brokers view it as none of the borrower’s business. The Good Faith Estimate of settlement costs (GFE), which the broker provides the borrower within 3 days of receipt of a loan application, shows points as a settlement cost but rebates are shown in a variety of obscure ways. Frequently, they appear in a footnote marked "POC", which means paid outside of closing. Many borrowers miss it or don’t understand it.
Brokers can avoid showing lender rebates altogether by "table-funding" loans. At the closing table, the real lender provides the funds needed for the broker to close the loan in the broker’s name. Legally, this converts the broker into a "lender", and the real lender into a secondary market purchaser. The sale price is based on the rebate. In the case of the 8% loan with the 1.7 rebate, for example, the broker would sell the loan for a price of 98.30% of the loan amount. In this way, the rebate is concealed forever.
Some mortgage brokers table fund for no reason other than to avoid having to disclose rebates to borrowers.
Brokers usually make more money on transactions involving rebates. This may be because borrowers don’t know how much brokers make from rebates. Also, borrowers are much more careful about the cash they must pay out at closing because that is now, whereas the interest rate they agree to pay doesn't hit them until the future.
Borrowers can avoid overpaying for loans carrying rebates by dealing with an Upfront Mortgage Broker (UMB). UMBs set a price for their services at the outset of the transaction and credit the borrower for any rebates. The broker thus receives the agreed-upon amount on the transaction regardless of whether the borrower or lender pays it.