A mortgage broker acts as an intermediary who brokers mortgage loans on behalf of individuals or businesses.
Traditionally, banks and other lending institutions have sold their own products. As markets for mortgages have become more competitive, however, the role of the mortgage broker has become more popular.
In many developed mortgage markets today, especially in Canada , the United States , the United Kingdom , Australia , New Zealand and Spain , mortgage brokers are the largest sellers of mortgage products for lenders. Mortgage brokers exist to find a bank or a direct lender that will be willing to make specific loan an individual is seeking. Mortgage brokers in Canada are paid by the lender and do not charge fees for good credit applications.
Many mortgage brokers are regulated to assure compliance with banking and finance laws in the jurisdiction of the consumer. The extent of the regulation depends on the jurisdiction. Only one state within the United States has no laws that govern mortgage lending.
Most banks are profit-making, private enterprises, however, some are owned by government, or are non-profits. Central banks are normally government-owned banks, which are often charged with quasi-regulatory responsibilities, e. Central banks generally provide liquidity to the banking system and act as the lender of last resort in the event of a crisis. The nature and scope of a mortgage broker's activities varies with jurisdiction.
For example, anyone offering mortgage brokerage in the United Kingdom is offering a regulated financial activity; the broker is responsible for ensuring the advice is appropriate for the borrowers' circumstances and is held financially liable if the advice is later shown to be defective.
In other jurisdictions, the transaction undertaken by the broker may be limited to a sales job: The work undertaken by the broker will depend on the depth of the broker's service and liabilities. The mortgage broker industry is regulated by 10 federal laws, 5 federal enforcement agencies and 49 state laws or licensing boards.
The banks have used brokers to outsource the job of finding and qualifying borrowers, and to outsource some of the liabilities for fraud and foreclosure onto the originators through legal agreements. During the process of loan origination, the broker gathers and processes paperwork associated with mortgaging real estate. A mortgage broker works as a conduit between the buyer borrower and the lender banks and non-bank lenders , whereas a loan officer typically works directly for the lender.
Many states require the mortgage broker to be licensed. States regulate lending practice and licensing, and the rules vary from state to state. Most states require a license for those persons who wish to be a "Broker Associate", a "Brokerage Business", and a "Direct Lender".
A mortgage broker is normally registered with the state, and is personally liable punishable by revocation or prison for fraud for the life of a loan. A loan officer works under the umbrella license of an institution, typically a bank or direct lender. Both positions have legal, moral, and professional responsibilities and obligations to prevent fraud and to fully disclose loan terms to both consumer and lender.
Agents of mortgage brokers may refer to themselves as "loan officers". The purpose of the NMLS is to improve and enhance mortgage industry supervision, create better communication from state to state, and to create consistency in licensing requirements and automate the licensing process to the greatest degree possible. Loan officers who work for a depository institution are required to be registered with the NMLS, but not licensed. Typically, a mortgage broker will make more money per loan than a loan officer, but a loan officer can use the referral network available from the lending institution to sell more loans.
There are mortgage brokers and loan officers at all levels of experience. A large segment of the mortgage finance industry is commission-based. Potential clients can compare a lender's loan terms to those of others through advertisements or internet quotes. In the s, mortgage brokers did not have access to wholesale markets, unlike traditional bankers.
Today, mortgage brokers are more competitive with their access to wholesale capital markets and pricing discounts.
A mortgage broker has lower overhead costs compared to large and expensive banking operations because of their small structure. Larger companies are less competitive since they provide their sales representatives their fixed rate sheets. Loan officers often cannot reduce their companies' profit margin and may be higher or lower than the marketplace, depending on the decision of managers. Mortgage brokers can obtain loan approvals from the largest secondary wholesale market lenders in the country.
For example, Fannie Mae may issue a loan approval to a client through its mortgage broker, which can then be assigned to any of a number of mortgage bankers on the approved list. The broker will often compare rates for that day. The broker will then assign the loan to a designated licensed lender based on their pricing and closing speed. The lender may close the loan and service the loan. They may either fund it permanently or temporarily with a warehouse line of credit prior to selling it into a larger lending pool.
The difference between the "Broker" and "Banker" is the banker's ability to use a short term credit line known as a warehouse line to fund the loan until they can sell the loan to the secondary market.
Then they repay their warehouse lender, and obtain a profit on the sale of the loan. The borrower will often get a letter notifying them their lender has sold or transferred the loan.
Bankers who sell most of their loans and do not actually service them are in some jurisdictions required to notify the client in writing. Brokers must also disclose Yield spread premium while Bankers do not. This has created an ambiguous and difficult identification of the true cost to obtain a mortgage. The government created a new Good Faith Estimate version to allow consumers to compare apples to apples in all fees related to a mortgage whether you are shopping a mortgage broker or a direct lender.
The government's reason for this was some mortgage brokers were utilizing bait and switch tactics to quote one rate and fees only to change before the loan documents were created. Although ambiguous for the mortgage brokers to disclose this, they decide what fees to charge upfront whereas the direct lender won't know what they make overall until the loan is sold.
Sometimes they will sell the loan, but continue to service the loan. Other times, the lender will maintain ownership and sell the rights to service the loan to an outside mortgage service bureau.
Many lenders follow an "originate to sell" business model, where virtually all of the loans they originate are sold on the secondary market. The amount of the SRP is directly related to the terms of the loan.
Generally, the less favorable the loan terms for the borrower, the more SRP is earned. Lender's loan officers are often financially incentivized to sell higher-priced loans in order to earn higher commissions. Even large companies with lending licenses sell, or broker, the mortgage loan transactions they originate and close.
A smaller percentage of bankers service and keep their loans than those in past decades. Banks act as a broker due to the increasing size of the loans because few can use depositor's money on mortgage loans. A depositor may request their money back and the lender would need large reserves to refund that money on request. Mortgage bankers do not take deposits and do not find it practical to make loans without a wholesaler in place to purchase them.
Therefore, mortgage lending is dependent on the secondary market, which includes securitization on Wall Street and other large funds. Loans must comply with their jointly derived standard application form guidelines so they may become eligible for sale to larger loan servicers or investors.
These larger investors could then sell them to Fannie Mae or Freddie Mac to replenish warehouse funds. The goal is to package loan portfolios in conformance with the secondary market to maintain the ability to sell loans for capital. If interest rates drop and the portfolio has a higher average interest rate, the banker can sell the loans at a larger profit based on the difference in the current market rate.
Some large lenders will hold their loans until such a gain is possible. The selling of mortgage loans in the wholesale or secondary market is more common.
They provide permanent capital to the borrowers. A "direct lender" may lend directly to a borrower, but can have the loan pre-sold prior to the closing.
Few lenders are comprehensive or "portfolio lenders". That is, few close, keep, and service the mortgage loan. The term is known as portfolio lending, indicating that a loan has been made from funds on deposit or a trust. That type of direct lending is uncommon, and has been declining in usage. The laws have improved considerably in favor of consumers. A mortgage broker must comply with standards set by law in order to charge a fee to a borrower. The fees must meet an additional threshold, that the combined rate and costs may not exceed a lower percentage, without being deemed a "High Cost Mortgage".
An excess would trigger additional disclosures and warnings of risk to a borrower. Further, the mortgage broker would have to be more compliant with regulators. Costs are likely lower due to this regulation.
Mortgage bankers and banks are not subject to this cost reduction act. Because the selling of loans generates most lender fees, servicing the total in most cases exceeds the high cost act. Whereas mortgage brokers now must reduce their fees, a licensed lender is unaffected by the second portion of fee generation.
This is due to the delay of selling the servicing until after closing. Therefore, it is considered a secondary market transaction and not subject to the same regulation. As of , in the United States the federal law and most state laws do not assign a fiduciary duty on mortgage brokers to act in best interests of their customers.
An exception is California , where a ruling of the Supreme Court of California did establish fiduciary duties of mortgage brokers. Mortgage fraud is when one or more individuals defraud a financial institution by submitting false information willfully. Some mortgage brokers have been involved in mortgage fraud according to the FBI. Predatory mortgage lending is when a dishonest financial institution willfully misleads or deceives the consumer.
Some mortgage consultants, processors and executives of mortgage companies have been involved in predatory lending. Another unethical practice involves inserting hidden clauses in contracts in which a borrower will unknowingly promise to pay the broker or lender to find him or her a mortgage whether or not the mortgage is closed.
Though regarded as unethical by the National Association of Mortgage Brokers , this practice is legal in most states. Often a dishonest lender will convince the consumer that he or she is signing an application and nothing else. Often the consumer will not hear again from the lender until after the time expires and then they are forced to pay all costs.
Potential borrowers may even be sued without having legal defense.More...