Mortgage Broker Duties to Borrower
When home buyers buy a home, they work with real estate sales people or brokers. Most states require that these people be licensed. In addition, Realtors act as an agent for at least one of the parties to the real estate transaction, typically the seller.
A home buyer may also contract with a Realtor to act as their agent — a buyer’s agent. Acting as another’s agent establishes a fiduciary (legal) obligation, requiring the agent to look after a client’s best interests. Agents who put their own interests above those of the client can face stiff penalties: loss of license, fines, even jail time.
Nobody Is Looking After the Borrower’s Best Interests
No such relationship exists in the mortgage lending market and licensing requirements vary substantially. While banks that lend money typically undergo a significant amount of federal or state oversight, not all states require the licensing of mortgage brokers (currently Alaska and Colorado have no licensing requirements). Even for those states with licensing requirements, the amount of “rigor” varies significantly from state to state.
Inconsistency and Lack of Licensing Exasperates the Problem
Less than one-third of the states in America require that all loan officers / loan consultants be licensed. These people are the individuals who work with borrowers. Because of the lack of licensing requirements, most borrowers put their loans into the hands of loan officers who have:
- Little or no training
- Not passed an exam to work in the industry
- Little or no experience
- No criminal background check
There are many laws and regulations, of course, 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, openly fraudulent behavior and deceptive advertising. None of these, however, 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, then, are lenders looking after? In short, their own. Lenders serve two basic task masters. First, they must be competitive in the marketplace. Second, they must provide a good a return to their investors. Surprisingly, there is no incentive nor requirement to provide a borrower with the best available loan.
Most loan officers earn all or a substantial portion of their income from commissions. Typically, the larger the loan and the higher the points, the more money loan officers earn. This means that the system has a built-in incentive for loan officers to try to charge more points and to sell a borrower on the largest loan that they can get approved, regardless of whether the borrower can really afford it.
On top of that, predatory lenders tend to gravitate toward naive borrowers and know how to spot a easy mark.
What Is a Borrower to Do?
The only person who can and will look after the borrower’s best interests is the borrower themselves. This means that they need to approach the process of obtaining a loan with a strong dose of skepticism. It is also imperative that borrowers shop, compare lenders and get all promises in writing. Borrowers should question everything. If the lender does not want to answer the questions or does not provide satisfactory answers, they should be eliminated from consideration.
Closing Note From Your Guide, Elizabeth Weintraub:
You may be asked to sign a Mortgage Loan Origination Agreement. Read it. It will likely cover three points:
- Nature of Relationship. The mortgage broker will not represent you nor be your agent. In addition, the mortgage broker does not guarantee you will receive the lowest price or best terms available in the marketplace because mortgage brokers are limited in scope by the number of lenders each represents.
- Services Provided. This section will detail some, not all, of the services a mortgage broker will provide.
- Compensation. The fine print says the mortgage broker could 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.
This does not mean, however, that you could get a better rate by yourself on the open market. Most mortgage brokers are competitively priced and deal in wholesale loans.
