Frequently Asked Questions
"How Are Mortgage Brokers Compensated?"
For their part in facilitating the lending transaction, the mortgage broker receives compensation. Total compensation to the mortgage broker comes in the form of origination fee (generally reflected as a percentage of the loan amount). The method of compensation can vary from transaction to transaction and in any specific transaction a broker’s compensation may be paid in one of two methods: Lender Paid or Borrower Paid.
Lender Paid Compensation:
If the mortgage transaction is set up as Lender Paid, the mortgage broker is paid an origination fee from the lender. On Lender Paid transactions, Mortgage Brokers have predetermined compensation agreements that spell out how much compensation they will be paid on every transaction with that given lender. This predetermined compensation cannot change from borrower to borrower, and can only change every 90 days. This was created to ensure that mortgage brokers give equal consideration to all borrowers. On a Lender Paid transaction borrowers do not pay the origination; the lender pays it on behalf of the borrower with a “lender rebate”. Depending on the amount of the lender rebate, it can also be used cover all other loan fees, making the transaction a true No Cost mortgage.
Borrower Paid Compensation:
If the transaction is borrower paid, then the borrower will directly pay the broker an origination fee. This origination fee must be disclosed to the consumer at the time of the loan application and cannot be increased from the original amount. Borrowers cannot use lender rebate towards paying the broker compensation. Therefore on a Borrower Paid transaction a No Cost mortgage is not an option.
At Preferred Financial we primarily transact only on Lender Paid because of the option to go with a No Cost loan.
Prior to the Mortgage Melt Down in 2008, mortgage broker compensation was not previously governed by law. Since then everything regarding broker compensation has changed, and continues to do so with the government reform under RESPA. Prior to 2008, the lender rebate was paid directly to the mortgage broker and could be as much as 5.0% of the loan amount. In most cases the mortgage broker never disclosed to the consumer that they were receiving commissions from the lender, nor were they mandated to. What most borrowers did not know was that the higher the interest rate, the more compensation the broker would make. Thus the reason for the change! Unscrupulous brokers would steer their clients to the lenders with the highest rebates even though it was not in their best interest.
Here at Preferred Financial we have always disclosed lender rebate to our consumers and have also always shared the rebate with borrowers in order to cover all of their fees for true No Cost loans.
After 2011, the government mandated that the lender rebate is the property of the borrower. The lender rebate to the borrower can still cover the closing costs including prepaid finance changes, taxes and insurance, but cannot be realized as cash. All brokers must now disclose up front what their compensation will be and it cannot be increased.
This forced the greedier Mortgage Brokers to show what they were making on every deal. Interestingly enough however, Mortgage Bankers still do not need to disclose their compensation to their borrowers because they are paid after the loan is closed and sold to the investor/bank. No surprise that in the last 7 years the number of Mortgage Bankers has exploded, while the number of true Mortgage Brokers has shrunk dramatically.
Read more about this in FAQ : Mortgage Broker, Mortgage Banker, Banks