Mortgage Broker Fees: What Is Adequate Disclosure?
October 8, 2001, Revised January 10, 2008
The California and Florida approach to mandatory disclosure of mortgage broker fees warn borrowers of how they might be overcharged, but do nothing to prevent over-charging.
"In a recent column, you proposed that HUD impose new disclosure requirements on mortgage broker fees. But California already has such requirements, and I think many other states do as well. Do these requirements do the job?”
No, they don’t. In fact, they are close to worthless.
The acid test of whether a disclosure is useful is whether it helps a borrower of average intelligence to compare broker fees. That’s the test I will use.
The state disclosure requirements that I have seen fall into two groups. The largest group of states requires that brokers disclose exactly how they can take advantage of the borrower, without doing anything to prevent it. California falls into this group. The California borrower learns that:
* The retail price a mortgage broker offers you—your interest rate, total points and fees—will include the broker’s compensation.
* In some cases, either you or the lender may pay the mortgage broker all of its compensation.
* Alternatively, both you and the lender may pay the mortgage broker a portion of its compensation. For example, in some cases, if you would rather pay a lower interest rate, you may pay higher upfront points and fees.
* Also, in some cases, if you would rather pay less upfront, you may wish to have some or all of our fees paid directly by the lender, which will result in a higher interest rate and higher monthly loan payments than you would otherwise be required to pay.
* The mortgage broker also may be paid by the lender based on (i) the value of the mortgage loan or related servicing rights in the marketplace or (ii) other services, goods or facilities performed or provided by the mortgage broker to the lender.
Among the states, California requires the largest number of words to say that the broker may be paid both by the borrower and the lender. But even when the point is made concisely, it doesn’t help the borrower who is trying to compare broker fees. Knowing that the broker may be paid by the lender helps only if the borrower knows what that payment is, and he doesn’t learn that until the loan closes, if then.
An alternative approach requires brokers to specify the range of total compensation from both borrower and lender. In Florida, for example, the broker must disclose that “Business will receive a sum in range of % to % of the total loan amount…the exact amount of which will be disclosed at closing…”
This may appears to protect the borrower, but appearances are deceiving. The prevailing practice among brokers in Florida is to enter a range of 0% to 5%. One broker told me that he was taught to do this in the course he took in mortgage brokerage. This leaves the broker with complete freedom of action, while providing the borrower with no usable information.
Nor would it be any better to require disclosure of the maximum fee alone. In that case, the brokers would all enter 5% and the result would be the same.
The only approach that will really help the borrower compare broker fees is to require that the broker disclose total compensation from the borrower and the lender. This is the approach I used in developing the Upfront Mortgage Broker certification - see Upfront Mortgage Brokers.
An alternative and workable approach is to require that yield spread premiums -- payments made by the lender to the broker -- must be credited to the borrower, who must then explicitly authorize their payment to the broker. See Eliminating Yield Spread Premium Abuse.
The California and Florida approach to mandatory disclosure of mortgage broker fees warn borrowers of how they might be overcharged, but do nothing to prevent over-charging.
"In a recent column, you proposed that HUD impose new disclosure requirements on mortgage broker fees. But California already has such requirements, and I think many other states do as well. Do these requirements do the job?”
No, they don’t. In fact, they are close to worthless.
The acid test of whether a disclosure is useful is whether it helps a borrower of average intelligence to compare broker fees. That’s the test I will use.
The California Approach to Mortgage Broker Fee Disclosure
The state disclosure requirements that I have seen fall into two groups. The largest group of states requires that brokers disclose exactly how they can take advantage of the borrower, without doing anything to prevent it. California falls into this group. The California borrower learns that:
* The retail price a mortgage broker offers you—your interest rate, total points and fees—will include the broker’s compensation.
* In some cases, either you or the lender may pay the mortgage broker all of its compensation.
* Alternatively, both you and the lender may pay the mortgage broker a portion of its compensation. For example, in some cases, if you would rather pay a lower interest rate, you may pay higher upfront points and fees.
* Also, in some cases, if you would rather pay less upfront, you may wish to have some or all of our fees paid directly by the lender, which will result in a higher interest rate and higher monthly loan payments than you would otherwise be required to pay.
* The mortgage broker also may be paid by the lender based on (i) the value of the mortgage loan or related servicing rights in the marketplace or (ii) other services, goods or facilities performed or provided by the mortgage broker to the lender.
Among the states, California requires the largest number of words to say that the broker may be paid both by the borrower and the lender. But even when the point is made concisely, it doesn’t help the borrower who is trying to compare broker fees. Knowing that the broker may be paid by the lender helps only if the borrower knows what that payment is, and he doesn’t learn that until the loan closes, if then.
The Florida Approach to Mortgage Broker Fee Disclosure
An alternative approach requires brokers to specify the range of total compensation from both borrower and lender. In Florida, for example, the broker must disclose that “Business will receive a sum in range of % to % of the total loan amount…the exact amount of which will be disclosed at closing…”
This may appears to protect the borrower, but appearances are deceiving. The prevailing practice among brokers in Florida is to enter a range of 0% to 5%. One broker told me that he was taught to do this in the course he took in mortgage brokerage. This leaves the broker with complete freedom of action, while providing the borrower with no usable information.
Nor would it be any better to require disclosure of the maximum fee alone. In that case, the brokers would all enter 5% and the result would be the same.
The only approach that will really help the borrower compare broker fees is to require that the broker disclose total compensation from the borrower and the lender. This is the approach I used in developing the Upfront Mortgage Broker certification - see Upfront Mortgage Brokers.
An alternative and workable approach is to require that yield spread premiums -- payments made by the lender to the broker -- must be credited to the borrower, who must then explicitly authorize their payment to the broker. See Eliminating Yield Spread Premium Abuse.