What is a Loan / Mortgage Broker?
A loan/mortgage broker acts as a third party to secure a loan for the consumer. When you engage a broker there will be an extra fee for his services.
Brokers typically get paid in two ways: the fees, or points, and an often-overlook rebate that brokers receive from the lender. This back-door rebate is paid when brokers successfully sell you a loan with an above-average interest rate. Other times, rebates are paid for including a prepayment penalty clause or some other lender-friendly feature.
For example, if a broker can sell you a fixed-rate loan at 8.1 percent when the average rate is 7.8%, the broker might earn an addition 1% in fees. The rebate is paid by the lender, but the costs are passed to you in the form of a higher rate.
Brokers are required to disclose the rebate before you sign the paperwork, but it doesn’t have to be a part of the good-faith estimate of loan costs you receive upon application. In the final disclosure form, it may be listed ambiguously as a “yield spread premium.”
There’s nothing improper about the rebate, as long as you know about it. Remember to ask. Take the rebate into account when negotiating with the broker over his fee. If you are paying the broker a 2% loan fee up front, and the lender is paying him another 1% rebate, that’s a 3% fee, which is pretty high. Ask the broker to reduce your interest rate or fees.
How Much Should a Broker get?
The size of the fee varies based on the loan size, but 1% to 2% of the loan amount is usually enough. Take into account how complicated your loan is. If you barely qualify and the loan officer has to scramble for approval, a higher fee may be appropriate. For a no-hassle refinance, you should expect to pay less. Generally speaking, if a broker is pocketing more than 2% in profits (including the rebate, but not “hard costs” like appraisal, credit, title, etc), you deserve an explanation.
Consumers looking for a loan should avoid the “advance fee” loan broker sometimes listed in the classified ads of newspapers and free publications.
Collecting brokerage fees in advance of making the loan is illegal in Indiana. So, right off there is a clue that the broker may not be on the level. Much more important, most if not all have never gotten a loan through one of those operators.
The scam works basically like this: The scam artist runs an ad offering consolidation loans and includes a toll-free telephone number. The prospective borrower calls and the scam artist takes some credit information then promises to call back. After a delay of perhaps an hour, the borrower gets a call back full of good news: the loan has been approved, usually at a very favorable rate and with a monthly payment that the borrower can handle. The scam artist then says he/she needs a certain amount of money—ranging from a few hundred to almost two thousand dollars—as a fee before the loan can be disbursed. The money must be sent as a cashiers check or money order and by Federal Express or United Parcel Service. Once the victim has sent the money, there is no loan and no further contact.
The problem lies in evasiveness, skillful fraud, and even an international border. Some of the companies are from Canada, presumably so there will be little or no involvement of law enforcement from the United States. People who send money find that the company’s telephone is no longer in service just a few days later and there is not a government agency to help. Every regulator and law enforcement official has said “We simply can’t catch up with them.”
Caution and common sense are the best defenses against being victimized. First, if you are creditworthy, there are hundred of lenders in this State who are happy to service you. If you are not creditworthy, sending your money hundreds of miles and to a foreign country isn’t going to help. Second, the advance fee and the Canadian address are dead giveaways that something isn’t right.