Mortgage Brokers and Their Duty to You

When someone is ready to buy a home they work with real agents or brokers. Most states require that people who are selling real estate to be licensed.   Also, theses agents and brokers act as an agent for one of the parties in the real estate transaction, usually the seller.   A home buyer may also contract with an agent to act as their buyer's agent. Acting as an agent to represent their interest in a transaction establishes a fiduciary obligation which requires the agent to put their client's interests first. Agents who put their own interests above those of their client can face loss of license, fines, even jail.

Is Anybody Looking After the Borrower's Interests

No fiduciary relationship exists in the mortgage market and licensing requirements vary substantially by State. While banks generally undergo a significant amount of federal or state oversight, not all states require the licensing of mortgage brokers. Even for those states with licensing requirements, the level of qualification varies significantly from state to state.

Lack of Licensing and Oversight Exasperates the Problem

Less than one third of states require that all loan officers be licensed. These folks are the individuals that work with borrowers. Because of the lack of licensing requirements, most borrowers put their loans into the hands of loan officers who have:

·         Not passed an exam to work in the industry

·         Little or no training

·         Little or no experience

·         No criminal background check

Whether you are buying into the market or the market there are many laws and regulations designed to help protect mortgage borrowers. Federal laws such as the Truth-in-Lending Act, the Fair Housing Act and the Real Estate Settlement Procedures Act, all serve to protect consumers from discrimination, fraudulent behavior and deceptive advertising. None of these impose regulations that require a lender to look after the borrower's best interests.

Lenders and Loan Officers are Looking After their Own Interests

Whose interests are lenders looking after then? Their own. Lenders serve two basic tasks. They must stay competitive in the marketplace and they must provide a good a return to their investors. Interestingly, there is no incentive or requirement to provide a borrower with the best available loan terms. Most loan officers earn all or a substantial portion of their income from commissions. Generally, the larger the loan and the higher the points, the more money these loan officers earn. That means that the lending system has a built in incentive for loan officers to charge more points and to get a borrower to get the largest loan that they can get approved.  This is regardless of whether the borrower can really afford it.

What Can a Mortgage Borrower to Do?

The only one who can look after the borrower's best interests is the borrower themselves. This means that these borrowers need to approach the process of obtaining a mortgage with a strong dose of due diligence. It is imperative that borrowers shop and compare lenders and loan programs and get all promises in writing. Borrowers should question everything. If the lender does not want to answer the questions or they should be eliminated from consideration.

If you are asked to sign a Mortgage Loan Origination Agreement, read it carefully. It will likely cover theses three points:

1.  Services Provided. This section will detail some, not all, of the services a mortgage broker or lender will provide.

2.    Nature of Relationship. The mortgage broker or lender will not represent you nor be your agent. The mortgage broker does not guarantee you will receive the lowest price or best terms available in the marketplace because mortgage brokers and lenders are limited in scope by the number of lenders each represents.

3.    Compensation. The fine print says the mortgage broker or lender may be paid by both you and the lender. If the mortgage broker is paid directly by the lender, you will pay this fee indirectly by paying a higher interest rate or an extra point.