Brokers and bankers should work together to educate consumers and better the industry's image

Tom Heath, owner, Rio Nuevo Financial LLC

As published in Scotsman Guide's Residential Edition, August 2008.

Mortgage brokers, banks and lenders are in business to help consumers get financing to purchase or refinance their homes. In many cases, though, the roles can be blurred in consumers' eyes.

Defining the roles of bankers versus brokers is important to helping consumers make better choices, however. Bankers and brokers must work in concert to ensure the mortgage industry's vitality and to restore the public faith in our purpose.

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This past May, the Mortgage Bankers Association (MBA) issued a report titled "Mortgage Bankers and Mortgage Brokers: Distinct Businesses Warranting Distinct Regulation" (PDF: tinyurl.com/6yl3fe) to help policymakers clarify the difference between bankers and brokers. In many ways, the MBA paper is well-intentioned but misguided.

There are a number of issues discussed in the MBA paper that must be made clear within the industry and for consumers.

Pay structures

One issue deserving clarification is the broker-commission process. A major argument in the MBA report is that consumers misunderstand the broker commission process and are therefore susceptible to broker "steering."

As a broker, I agree that customers must have a clear picture of their mortgage transaction. It is important to help them understand yield-spread premiums (YSPs) and par rates that banks offer to brokers. Many do not realize, however, that the par rate that banks offer brokers often is lower than the rate the bank would offer through its retail branches.

Bankers, on the other hand, earn fees in originating, underwriting and servicing loans and then selling loans on the secondary market, in addition to cross-selling items. The income the bankers receive on the secondary market can vary based on market conditions, but the higher interest rates they charge to borrowers typically bring better returns from the investors.

Unlike brokers, who must disclose their YSP, banks typically do not disclose how much of the offered rate comprises the servicing premium or for how long they expect to hold the loan or servicing rights before selling it on the secondary market.

Risk exposure

Although bankers are financially tied to a loan through its termination and have higher earning potential than brokers, brokers also are at risk.

Brokers often work with their clients for several months to get them into a situation where they can obtain financing. But brokers are not guaranteed income from this work. Customers are not financially or legally bound to the brokers.

Because of their agreements with lenders, which stipulate that brokers bear risk if a loan they originate is found to have fraud or is paid off within the first six months, brokers could be responsible for reimbursing the lender for their fees in such cases.

And because brokers typically are small businesses, as the MBA paper points out, having to repay their fees could tax their operating budget. Buying back a loan could put these brokers out of business -- in other words, maximum exposure.

Underwriting

In the May report, the MBA states that it agrees with the sentiment that brokers are more inclined to steer customers toward bad loans to earn high commissions and that bankers are more likely to practice sound lending practices.

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