Banker, Broker, Consumer Lender or Credit Union? Part 2 July 5, 2007
This is part two in a four part series in which I outline advantages and disadvantages of different types of lending institutions. I will also offer suggestions to empower the reader on how to help yourself before and during your loan process. Part one covered banks, part three will cover consumer loan lenders, and in part four we delve into credit unions.
Part 2: Mortgage Brokers and Correspondent Lenders
A mortgage broker is an entity that acts as a middleman between a bank or lender (the source of the funds for the mortgage loan) and a homebuyer or refinancing homeowner. Loan originators (LOs) work for mortgage brokers. Mortgage brokers are able to obtain the mortgage money at wholesale cost, and then mark it up and sell you the retail price, which is how they make money. There are many well-qualified mortgage brokers and loan originators out there, though some might not be permanent members of your community. Mortgage brokers are regulated by state and federal laws. Some state laws are more strict than federal laws.
Some of the perceived advantages of working with a loan originator licensed under a broker are that the LO can (for a fee when the loan closes) shop for the consumer to find the best rate or program available for the consumer depending on the consumer’s unique circumstances. Although it may be true that there are hundreds of different banks and lenders out there, it is rare that all mortgage brokers would have signed contracts with ALL these banks and lenders. It is more likely that the mortgage broker has signed contracts to broker loans to a limited number of favorite lenders.
In many states, loan originators who work for a broker must be licensed, submit fingerprints for a background check, pass a competency exam, and maintain their license with continuing education. This is not the case for LOs who work for a bank, credit union, or consumer finance company. Loan originators are classified as an emerging profession. This group is struggling to distance themselves from their retail sales reputation and trying very hard to set themselves apart when compared with LOs who work at other institutions.
Some of the perceived disadvantages are that some mortgage brokers are often not set up to do FHA lending, which requires an enormous amount of paperwork, 
compliance and auditing. FHA has other requirements such as paying loan originators as W-2 employees. A great number of LOs who work for mortgage brokers are paid as 1099 contract workers. I spoke with a gentleman today on the phone who was asking questions about learning to become an LO. He said he has taken 3 loan applications already and it looks pretty easy; what more could there be to learn? Yes, that’s right, no experience is necessary to take a loan application. Books for sale tell us even a complete idiot could be successful. The gentleman on the phone only wanted me to teach him how to pass the competency test and did not care about learning any of the state and federal laws governing mortgage lending. Let’s hope his broker will care.
How to help yourself
Before applying for a loan with a loan originator who works for a mortgage broker, inquire with your state’s regulator to determine if the mortgage broker or LO has any enforcement actions filed by its regulator. While you’re at the DFI website, run the name of your loan originator in their database and make sure the LO is licensed. LOs must display their license number anywhere their name appears: business cards, on the loan application, flyers, websites, and so forth.
When you interview an LO, ask how many loans he or she has originated, how long he or she has been originating, and what percentage of loans originated are prime v. subprime. For example, if you have a great credit score (every person should know his or her credit score before applying for a loan) and the LO has only ever done subprime lending, the two of you are mis-matched. Why let this LO practice on you? Instead, let new LOs practice on friends and family. like real estate agents do.
Mortgage brokers do not service their own loans. Find out which company will probably purchase your loan and, together with the LO on speaker phone, call the loan servicing company from the LO’s office to find out how long it will take you to talk to a real person.
Scrutinize all fees shown on the Good Faith Estimate (GFE) carefully. Mortgage broker LOs are required to disclose their fee on line 808. Watch for junk fees. If the LO processes his or her own loans, the LO may not charge the consumer a processing fee and then collect that fee for himself or herself. Padding fees is not allowed. For example, if the appraisal fee is $450, the LO is not allowed to quote $650 and pocket the $200 difference. In Washington State, LOs who work for a broker are required to re-disclose if fees increase from the time of the initial GFE. This means a new GFE and new Truth-in-Lending form, and a written letter of explanation three days prior to SIGNING the loan documents if fees that benefit the broker (LO) increase from the time of the initial GFE.
Some mortgage brokers operate net branches. This means a loan originator can work out of his or her home, pay a small monthly administration fee and operate under a broker’s umbrella. All net branch locations must be licensed. Net branch mortgage brokerages could have hundreds of small, one-person shops operating all over the state, with just one designated mortgage broker in charge. Compliance, training, processing and underwriting are housed at headquarters.
Correspondent Lenders
Correspondent lenders are institutions such as mortgage brokers that correspond with other banks. The sponsoring institution might even give a correspondent lender a valid warehouse line of credit (compared to what Novastar just got nailed for, which we would say was a sham correspondent line.) There are strict legal and fiscal requirements for becoming a correspondent lender. For example, the mortgage brokerage firm must have more assets. For this reason, many small, one-person mortgage broker shops will probably not qualify to become correspondents. A mortgage brokerage firm that is large enough and fiscally sound enough to correspond usually has a strong foothold in the community, a compliance, auditing, and training department, and a no tolerance policy for predatory lending.
Loan originators love to work at a correspondent lender because they are better able to compete with banks. Banks do not have to disclose the yield they make on their loans, when the loans are sold. Mortgage brokers and LOs must disclose their yield on the Good Faith Estimate and again on the HUD I. This is unfair, but that’s the world we live in. Brian Brady suggests an intriguing idea: Obtain a Good Faith Estimate from a bank and also from a broker for the same interest rate, fees, and loan program. The broker will be able to show you the bank’s yield.
Brokers who move on to become correspondent lenders do not have to disclose their yield when they close with their sponsoring institution, and they can show their loan fee on line 801 of the GFE and HUD I, just like a bank.
Correspondent lending relationships, though sometimes thought of as exclusively a mortgage broker practice, can happen between banks as well. For example, a small state bank could decide to correspond with a large mortgage banking company.
Important: a loan originator does not work on behalf of a consumer. An LO works for himself or herself and performs a service for a fee. An LO has no duty to put a consumers interests above his or her own interests. They have other duties such as duties to follow state and federal laws governing mortgage lending. However, the relationship is retail. This means the relational duties an LO owes consumers are like the duties your fast food server owes you. There are some LOs in the industry who already act as if they held professional status, putting your interests before their own. There are some industry trade organizations who are working to help move the profession of loan origination forward. I happen to run one of them, but there are others out there diligently trying to move loan originators forward along their logical path as emerging professionals.
Also: Avoid lead generation companies. Their advertising tactics are as close to bait-and-switch as they can legally get, or flat out non-compliant with federal truth and lending laws and yes, I would be happy to name them: Nextag, LendingTree, and Lowermybills.com are some of the biggest banner ad spenders on the web, utilizing some of the most deceptive advertising I’ve ever seen, but there are others, too. Just open your spam bin, or visit Jennifer Hershey, a ficticious person who sounds very knowledgeable but doesn’t even exist. All leads from this site are sold. In fact, information you give to lead gen sites will be sold repeatedly to many hungry mortgage brokers who have not built up a solid reputation yet so they must pay for leads. But hey, LOs at a mortgage brokerage can “make six figures their first year” which is rarely possible at a bank.
In part three we’ll learn about Consumer Loan Lenders. As I heard around the dinner table many times growing up, if you select one of these lenders, you get what you deserve. Yikes! Stay tuned.
Sphere: Related Content- Posted in : General Real Estate
- Author : Jillayne Schlicke
Comments»
Hi Jillayne, In the mortgage biz, I’ve only worked for one Correspondent Lender…we do broker loans that do not meet our requirements to fund from our credit line. Here are a few other pointers about Correspondent Lenders
1) They receive better pricing: this is because they take the risk for the loan. Loans that do not perform within a certain period of time wind back up in the Correspondent Lender’s credit line. I can typically beat a bank rate at that bank!
2) The loans are processed, underwritten, and loan docs are prepared at our office (I’d assume all Correspondent’s work this way, but like I said, I can only speak from my experience).
3) When we do have to broker a loan (not fund from our credit line) we do disclose YSP. I prefer to not broker…which has nothing to do with showing the YSP and EVERYTHING to do with maintaining control of the transaction.
Good morning, Rhoda,
Thanks for your comments. In regards to repurchasing loans, brokers without a correspondent line are required to do that also.
Having processing, underwriting, and doc prep right there in the office usually translates into better, faster, and higher quality of service for consumers.
Q regarding 3), can you help us understand how a loan that’s brokered would not be able to be “controlled” by the originating LO?
Thanks!
Speaking from my personal experience (which is all I can do, of course), when I “broker” a loan (meaning it is not closing as a correspondent), we still process the loan, however underwriting, doc drawing and the funding takes place outside of our company.
I am at the mercy of the firm I have brokered the loan to. Of course, I’m selective with which companies I’ll broker to. If they don’t perform, I don’t care what their rate or product is.
When I don’t broker, my processor is drawing the loan documents and I know exactly when they’re going to escrow, what our pipeline of business is, how to priortize transactions…etc. The underwriter has her office just down the hall and so does the funder. It’s cozy!
If we need an “exception”, as a correspondent, management can decide if the risk is acceptable.
I’m a control freak!
Good article, good comments.
Also, several banks (like Interfirst and Amtrust) will give brokers a ‘delegatable’ status which means the broker can underwrite their own loans, acting as a correspondent, but still not requiring the broker to hold a credit line. Amtrust calls this ‘Amtrust Advantage’ and Interfirst calls it their ‘platinum’ status.
Ultimately, the more control you hold over a loan, the more your risk is too if that loan doesn’t perform, so we’d best underwrite accurately…
Hi Rhonda and David,
Both of you have brought up excellent points to help a consumer who is trying to decide between a bank (no fee loans!) or a mortgage broker (no fee loans!)
It looks like being a control freak is a positive attribute for a loan originator.
[...] For part one of this series, I will provide reasons for and reasons against choosing a bank as your lending institution. Part two will cover brokers and correspondent lenders, part three will delve into consumer finance companies and in part four we’ll look at credit unions. [...]
[...] If you enjoyed part four of this four part series on different types of mortgage lending institutions, here are links back to the other three: Part 1 Banks and Mortgage Banks Part 2 Mortgage Brokers and Correspondent Lenders Part 3 Consumer Loan Lenders [...]
Hi Jillayne!
This is Claire Harris. I am thrilled to find you again and the terrific work you’re doing! Great job!
C
Hi Claire,
Thanks for stopping by RCG! Send me an email and let me know how you’re doing!