Q: If I deal with a mortgage broker, can I depend on the broker to protect me against overcharges by all the other players in the transaction?

Yes, no, maybe. Sorry about the ambiguity, but the answer depends on the source of the charge, on the type of transaction, and on the operating practices of the individual broker.

Dealing with a broker does protect you against excessive fixed-dollar fees by retail lenders. Some retail lenders have a bad habit of increasing their fees and finding new ones after borrowers have committed themselves, but this doesn’t happen when a broker is involved.

The fixed-dollar fees charged by the wholesale lenders that brokers deal with are known to the broker, who will inform the borrower as soon as the lender has been identified. These fees will not change unless the deal or the lender changes. There is no way that brokers can benefit from allowing lenders to charge their clients excessive fees.

Some brokers even guarantee the lender’s fee, meaning that they will pay the difference if the fees turn out to be higher than the broker stated. All Upfront Mortgage Brokers (UMBs) now provide such a guarantee, which becomes effective when the lender is identified.

Transaction taxes that exist in some areas are what they are. None of the parties to a mortgage transaction can affect them, or profit from them.

Charges by parties other than the broker, lender or government is where it gets sticky. These include mortgage insurers, title agencies and insurers, flood insurers, appraisers, credit reporting agencies, and escrow companies. Whoever is positioned to select these service providers has “referral power,” which is potentially valuable. Referral fees are illegal under the Real Estate Settlement Procedures Act (RESPA), but the enforcing agency (HUD) has the resources to pursue only the more flagrant and publicity-worthy cases.

The referral power of brokers is usually limited on house purchases. If the house is newly constructed, the builder has the referral power, and on existing house sales, Realtors usually have it. Exceptions arise where the buyer refuses to accept the referrals of the builder or Realtor, in which case referral power will shift to wherever the buyer places it, which could be a broker. If a borrower goes to a broker for a refinance, however, the broker usually has referral power.

How brokers use referral power when they have it varies widely between brokers. Some use it to benefit themselves. Their referrals will be to service providers with whom they have an understanding that the broker “will be taken care of” in some way that escapes the RESPA police.

Large brokers can legalize the collection of referral fees by developing a separate business entity, in collaboration with a third-party service provider, which provides the services to the broker’s clients. Many title insurance agencies come into existence in this way, though there are many more of them in Realtor offices than among mortgage brokers.

A second group of brokers accept that they have an obligation to find high-quality service providers, but accept no responsibility for their prices and receive no pay-off for referrals. Their view is that a borrower is always free to shop for better prices than those quoted by the providers the broker brings to the table.

The third group of brokers feels that they have a responsibility for both the price and quality of third-party services, and they negotiate lower prices for their clients. In effect, they use their referral power to benefit their client rather than themselves. Brokers in this group are most likely to guarantee third-party fees. 

No UMB can fall into the first category. Part of the UMB commitment is that, “Any payments the broker receives from third parties involved in the transaction will be credited to the customer.” UMBs fall into the second or third group. Because borrowers have a right to know, this information (along with other relevant facts) will soon be available on an information page about each UMB.

The writer is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at http://www.mtgprofessor.com.

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