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The Varied Roles of Mortgage Brokers in Lending

Mortgage Library: Shopping for a Mortgage: Mortgage brokers: The Varied Roles of Mortgage Brokers in Lending

Today there are two main types of mortgage brokers--those that represent the borrower and those that do not. Mortgage brokers may fill one role in one transaction and a different role in another. The first type of mortgage broker represents the borrower and generally has an agency relationship with, and a fiduciary duty to, the borrower. This type of broker has two variants: a mortgage broker that does not receive fees from any source other than the consumer, and a mortgage broker that does receive fees from a source other than the consumer, namely, the lender. An agency relationship may arise under State law or may be created by agreement between the mortgage broker and borrower. Although State law is largely undeveloped in this area, in some States mortgage brokers may be found to have a fiduciary responsibility to the borrower even in the absence of a contract provision.

The second type of mortgage broker does not represent the borrower. This type of mortgage broker makes mortgage loans available to borrowers either from one or a number of sources of funds with which the mortgage broker has a business relationship. This type of mortgage broker is not the borrower's agent; rather, brokers of this type present themselves as entities that try to sell borrowers mortgage loans as would other mortgage loan providers in the market. If this type of mortgage broker only makes mortgage loans available from one source of funds, the mortgage broker may or may not be functioning as the lender's agent.

Differing Methods of Mortgage Brokers in Originating Mortgage Loans

Some mortgage brokers process loans and close loans in their own names. However, at or about the time of settlement, they transfer these loans to lenders that simultaneously advance funds for the loans. This transaction is known in the lending industry as "table funding." In table-funded transactions, the mortgage broker does not furnish the capital for the loans. Instead the lender provides the capital and, immediately after the loan is consummated, the mortgage broker delivers the loan package to that lender, including the promissory note, mortgage, evidence of insurance, and assignments of all rights the mortgage broker held.

In some transactions, mortgage brokers originate loans that are closed in the mortgage brokers' names, fund the loans temporarily using their own funds or a warehouse line of credit, and sell the loans after closing. These mortgage brokers function similarly to mortgage bankers, but they do not service loans.

Still other mortgage brokers function purely as intermediaries between borrowers and lending sources. They originate loans by providing loan processing and arranging for the provision of funds by lenders. The loans are closed in the names of the funding lenders.

Mortgage Broker Compensation

Compensation for the services of mortgage brokers frequently comes from fees paid by the borrower. Compensation may or may not also come from "indirect" fees paid by the lender providing the mortgage loan funds. Frequently, mortgage brokers offer the following payment methods for the fees or points the borrower pays directly:

1. the borrower may pay from his or her own funds at closing,

2. the mortgage loan amount may be increased to finance the mortgage broker fees or points (which increases the amount the borrower borrows), or

3. some combination of 1. and 2.

Frequently, mortgage brokers offer payment options that enable the borrower to pay lower fees and points, or even no fees and/or points, in exchange for a higher interest rate, or higher points and fees for a lower interest rate. If the borrower pays lower fees and points and agrees to a higher interest rate, then the lender will pay the mortgage broker a fee that reflects the higher interest payments the lender will receive from the borrower. In other words, indirect fees paid by lenders to mortgage brokers are largely based on the interest rate of the loan entered into by the borrower and the amount of points and direct fees paid by the borrower. Typically, one or more times a day, lenders set prices that they are willing to pay to mortgage brokers for loans delivered to them. The price to be paid for a loan is generally expressed as a percentage of the loan amount. These prices are based on the interest rate of the loan arranged by the mortgage broker and the points and fees for the loan as compared to the price (a combination of an interest rate and points) that the lender would purchase the loan for that day.

The price that the lender will pay is, in turn, based on the value of the loan in the secondary mortgage market (i.e., the market price). Generally, the greater the difference between the rate a loan is entered into with the consumer and the market price for the loan, the greater the total compensation that will be paid to the broker. The price may also reflect factors such as the type of loan, the "lock-in" period, and the creditworthiness of the borrower. The price that the lender pays the mortgage broker, therefore, is based on the differential between the combination of rate and points that is the par or market rate for a loan at a given time, and the combination of rate and points at which the loan is entered into with the borrower. The lender may also make additional payments to the mortgage broker at or after settlement attributable to the number of loans provided over a given period. These additional payments constitute a "volume-based discount."

This article is citation from the House of Urban Development Proposed Mortgage Broker Rule

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