Must Mortgage Brokers Reveal All Charges?
October 11, 1999

"I'm persuaded that I can do better going to a mortgage broker than to a lender but I have received conflicting and confusing information about whether or not a broker must disclose all the money they make on a transaction to their customers…Can you clarify?"

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.
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