Their common question: Did the broker take the time and have enough concern for the borrower to prepare accurate initial disclosures? Or does it appear as though there is something to hide?

Settlement statements

Another area of investigation deals with how some brokers alter their fee structure to take advantage of "free money" -- or funds third-party sources give to a borrower that do not come from the borrower's pocket at closing. The two most-common sources of free money are seller-paid concessions and prorated property-tax or utility funds.

With seller concessions, due-diligence firms are adding up all broker-related fees on the final settlement statements and comparing them to the amount of the concessions. They then look at the initial GFEs to see if brokers' fees changed once they discovered the borrower was receiving seller concessions.

Some brokers have argued that seller concessions do not cost borrowers anything. When looking at the ethical treatment of borrowers, however, due-diligence firms feel differently. If the broker did not charge fees that required borrowers to use up the seller concessions, the concessions could be used to offset nonbroker costs, thus benefiting the borrower.

Other times, brokers have increased their fees between the initial GFE and the final settlement statement by using prorated tax and utility funds to cover the amount of cash-to-close a borrower needs. Few borrowers understand how the numbers on their final settlement statement add up. Often, they only know the amount they must bring to the closing table to buy their home.

More states are issuing laws limiting brokers to 5 percent total compensation per mortgage. Due-diligence firms are adding up total broker fees and YSPs to determine whether brokers charge borrowers the full 5 percent routinely.

For mortgage brokers, being ethical now entails far more than simply having borrowers sign a stack of disclosures about stated-income levels, occupancy intent, and agreements to certain YSPs and upfront fees. These disclosures are viewed as minimal requirements for ethical brokers. Brokers must now go the extra mile to demonstrate that they operate with a strict set of ethical rules.

Driving this, lenders and investors are requiring brokers to be more accountable, and they are employing due-diligence firms to dig deeper into closed loans to find suspicious activity and patterns, as well as to report the originators of those loans.

Especially with pending legislation on the horizon, when new requirements come down the line, it is always better to get on board early and adapt your business rather than to wait for the "ethics police" to show up at your door with a subpoena.

David L. Hippensteel is a member of the Gerson Lehrman Financial Group Councils, consulting globally in the areas of mortgage fraud, mortgage-investor due-diligence underwriting, mortgage structuring and consumer-credit management. Hippensteel is an adjunct faculty member of Bryant and Stratton College's business-development department. He can be reached at refimortgages@wi.rr.com or (414) 801-7368.

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