Mortgage Bankers Highlight Broker Role

Mortgage brokers are independent intermediaries between prospective borrowers and mortgage bankers, according to Mortgage Bankers and Mortgage Brokers: Distinct Business Warranting Distinct Regulation released by the Mortgage Bankers Association today. They forward loans for underwriting and funding to multiple mortgage bankers, who “have a significant financial stake in a loan’s performance” and generally suffer losses when a loan defaults.

“Brokers can — and do — provide substantial benefits to borrowers and mortgage bankers and contribute to the efficiency of the mortgage industry,” MBA said. “Brokers are an important distribution channel for mortgage bankers’ loan products and, in particular, can enhance mortgage bankers’ ability to serve traditionally underserved borrowers and communities.”

But while brokers have no legal obligation to do so, they often promote themselves as “trusted advisors” who shop multiple wholesale lenders to identify and evaluate the best loan, the report said. This perception reduces the amount of comparison shopping done by a broker’s customer even though consumers’ expectations of brokers often don’t match the actions and responsibilities of brokers.

Prospective borrowers look to mortgage bankers as a knowledgeable source of information about their own products and generally will research and compare between lenders, which earn most of their loan profits from interest, loan servicing and asset sales.

MBA noted yield-spread premiums can help borrowers reduce up-front closing costs, though they could wind up saddled with higher interest rates when brokers simply use them to augment earnings. And YSPs can provide brokers with incentives to place the borrower in inappropriate, more expensive loans.

“The importance of YSPs as a source of broker revenue, coupled with the fact that YSPs are not well understood, increases the risk that some mortgage brokers will steer borrowers to costlier mortgages because they provide the mortgage broker with more lucrative YSPs,” the study said.

The nation’s 8,900 mortgage bankers, on the other hand, don’t promote themselves as “trusted advisors,” which MBA said justifies their not needing to disclose gains on secondary market sales. In addition, gains on loan sales are not guaranteed for lenders, and losses are also possible.

Mortgage banking, which requires significantly more capital resources than brokering, is subject to substantially more regulation and oversight. Lenders approved by Fannie Mae, Freddie Mac or the Federal Housing Administration are required to have a $250,000 net worth.

But licensing laws vary depending on the state for mortgage brokers, who bear little or no ongoing risk after the loan closes. Furthermore, state regulators have limited enforcement staff and resources.

Another distinction noted by MBA was that lenders have to report and disclose data on mortgage lending activities under HMDA, and brokers don’t.

The paper highlighted that representatives of the mortgage broker industry have called for identical standards for brokers and mortgage bankers because both are originators and a level playing field is needed.

“However, a one-size-fits-all approach to regulation is not the same as achieving a level playing field and ignores the fact that there are profound differences between the two industries warranting distinctive regulation,” the report stated.

The report suggested mortgage bankers’ in-house originators are less likely to steer borrowers into bad loan programs than brokers because of the degree of control over employees.

MBA said it supports measures that clarify broker compensation and responsibility, boost net worth requirements and forces legal implementation of agency for brokers who claim to be acting as agents. The trade group is also calling for mortgage broker bonding and rigorous licensing requirements.

“MBA believes that consumers and the market would be better served with clear information on the amount of total broker compensation, its sources and the broker’s functions early in the process,” the group said. “Such information would encourage consumers to comparison shop among brokers just as they currently do among mortgage bankers, help the consumer understand how compensation derived from rate can be used to pay origination charges and other settlement costs, and increase the likelihood that the consumer ends up with the most favorable loan terms.”

Roy DeLoach, executive vice president for the National Association of Mortgage Brokers, told MortgageDaily.com the report was “disappointing.” He noted MBA is trying to fix problems with mortgage brokers and ratings agencies but isn’t spending enough time fixing the problems of its own members even though they underwrote and funded the loans.

DeLoach explained that NAMB members must pass a criminal background check and are required to complete continuing education.