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Comparing a Mortgage Broker to a Direct Lender

By
Mortgage and Lending with Oak Valley Mortgage-California Home Loans and Refinancing

Reason: Representation

Mortgage Broker: Fiduciary duty to the borrower to get the best loan possible. Packaging the loan to highlight the strentghs of your loan scenario and minimizing the weaknesses.

Direct Lender: Represents the lender.

 

Reason: Customization

Mortgage Broker: Offers numerous programs from many lenders and investors at very competitive rates.

Direct Lender: Offers a limited number of programs that need to fit "their box."

Reason: Flexibility

Mortgage Broker: A "problem loan" can be moved from one lender to another, while obtaining the best rate available for your situation.

Direct Lender: Once a loan is denied, the borrower must try a different lender.

 

Reason: Certification

Mortgage Broker:  Licensed by the Department of Real Estate, enhanced with the knowledge of many lenders and loan programs...as opposed to just one lender's!

Direct Lender: No licensing required with limited programs available.

 

Reason: Costs

Mortgage Broker: Can offer numerous rate and fee combinations, as well as lower processing fees.

Direct Lender: Offers limited rate and fee combinations.

Scott Gormley
Broker/Owner
Oak Valley Mortgage
2006 Chico Assoc. of Realtors Affiliate Chairman
Direct: 530.592.8362
Fax: 530.267.5555
Website: http://www.caloan.com/

Blog: http://www.caloanblog.com/

"You find the perfect home, we'll find the perfect loan!"

Comments (27)

Ann Guy
NA - Allentown, PA

Scott, I love seeing post on the positive side of being a broker.  We are flexible and work hard for our customer, not a lender.  Therefore we do try to get the best possible deal available for our customer. 

Eddy and John, in my state (PA) you must have a Broker's license in order to operate as a broker. A direct lender is a seperate license, as well as a mortgage banker.   There are not many out there who want to do all that; you spread yourself too thin. 

Jan 12, 2007 05:58 AM
Marc Blasi
Palm Beach Gardens, FL

Scott-

Good explanation - I've talked to people about this, too many of them think that if they go straight to the Lender that they will save $.   The lender wants to push their own stuff and make the most $ possible, not necessarily get the Client the best deal.

Jan 12, 2007 07:51 AM
Eddy Martinez
Nationwide Funding Group - Highland Park, CA
Ann in California you can do both as long you follow state guidelines and state max fees. Of course like you said every state is different.  
Jan 12, 2007 08:35 AM
Thomas Frankito
Bank of America Home Loans - Mentor, OH

Wow, this definitely isn't the case over here.  I am a mortgage banker and have more products then most. The company takes the stand of "do what's right for the borrower"  Most broker's that I know don't take the fiduciary duty seriously which is the problem.  Most banks which is what you are talking about do have limited programs.

Jan 12, 2007 04:32 PM
Brian Brady
Matthews Capital Markets - Tampa, FL
858-699-4590

Mortgage Broker: Fiduciary duty to the borrower to get the best loan possible.

Scott:  What contract are you using to establish a fiduciary relationship?  The NAMB mortgage brokerage agreement specifically outlines that we are NOT fiduciaries. 

Jan 12, 2007 05:39 PM
Scott Gormley
Oak Valley Mortgage-California Home Loans and Refinancing - Chico, CA

Brian,

I guess this is a matter of personal interperetation and the way you think your business should be conducted. In my opinion, I don't need things to be written on paper to be fact. I'm NOT a member of the NAMB, so I can't speak for their guidelines, nor do I recall the need to comply to their guidelines..Just as an agent doesn't need to be a Realtor and abide by their guidelines...

I feel that I have 2 fiduciary duties as a California Mortgage Broker...I can't speak for other states, as laws and ways of conducting business vary from state to state. 

I have one responsibility to my clients to obtain the best loan possible that fits their individual scenario

and...

I have a responsibility to the investor/bank to put together files that are solid and not outright fraud. If I see back end ratios that are too high, I won't bs it for the sake of getting the loan done. It's setting the client up for trouble and the loan could fall through in a few months. Just because the product is avialable doesn't necessarily mean that you should do the loan. You said when you went to a CAMB meeting a while back that you saw 100% Option Arm Loans..

I pose the qustion, "Would you put a client in that type of loan?" Even if the person is a saavy investor, I wouldn't feel comfortable with the possible consequenses..

Another on of my pet peves...Banks not needing to disclose closing costs because they fall under a CFL license. As a broker needing to break everyting down on the GFE, shouldn't the banks need to do the same to create a level playing flield for clients to truly see which loan is better for them?

Finally, I think it's crap that loan officers of direct lenders are often not licensed by the DRE because they fall under a "Consumer Finance License" with the bank...

Scott

Jan 13, 2007 04:21 AM
Anonymous
Gollum

Brian Brady-

Notwithstanding the wording of the statutory law, I think mortgage brokers lead customers to think that the mortgage broker has a fiduciary obligation and that the broker pursue the fiduciary obligation. For example, the advertising slogan, "Countrywide, we're on your side."

Consumers listen to advertising slogans. Typically, the don't read statutory law.

Jan 13, 2007 07:18 AM
#14
Brian Brady
Matthews Capital Markets - Tampa, FL
858-699-4590

Scott:

I feel that I have 2 fiduciary duties as a California Mortgage Broker

You can't serve two masters and be a fiduciary, Scott.  That's the problem with our industry. 

Another on of my pet peves...Banks not needing to disclose closing costs because they fall under a CFL license. As a broker needing to break everyting down on the GFE, shouldn't the banks need to do the same to create a level playing flield for clients to truly see which loan is better for them?

Sure, I agree.  What do you do if the lender intends to service the loan and assume interest rate risk; impossible to disclose. 

Finally, I think it's crap that loan officers of direct lenders are often not licensed by the DRE because they fall under a "Consumer Finance License" with the bank...

A real estate license prepares you very little for  the mortgage business in California, Scott.  It took me 10 hours of studying hours to prepare for the DRE salesperson's test which I passed.  CFL brokers are better supervised and have a lower complaint ratio than DRE brokers.  We have both licenses and always opt for the DOC supervision because it protects the customer better.  CAMB would have you feel otherwise but they need to defend their dues.  NASD-type national licensing is the answer with high proficiency standards.  Alas, that would eliminate 50% of the DRE and CFL originators.

Gollum:

I think mortgage brokers lead customers to think that the mortgage broker has a fiduciary obligation and that the broker pursue the fiduciary obligation

Countrywide isn't a broker.  However, mortgage brokers patently lie when they explain fiduciary responsibility to a consumer and receive both customer paid processing fees and lender compensation.  It's just a fact.  The industry needs to change.

Am I being pedantic with my comments, maybe. If we are really going to effect change in the industry, we have to start in California.  Let's get licensing away from the DRE; they are a joke. 

Jan 15, 2007 02:26 PM
Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

Gollum....  you hit the nail on the head.

Overall....  sorry Scott, but half of what has been said is not true. You are making a direct lender look like they can't offer as much. It goes both ways..... overall, a direct lender will be the best scenario for the client.

Here is why.... many direct lenders have underwriters on site.... and can still turn around and broker out a deal. Basic fact.  Chase?   They broker out a lot of their sub prime stuff.... so.... getting back to what you think, which is your opinion....  too many holes in these statements. Here is the easiest saying ever to remember... " We all get the money from the same place. "    What does this mean?  I don't care if you are a banker, broker, direct lender, correspondent......  you all have the option of being comepetitive if you want. And if you try to tell me that one broker can offer the best and only the best because they have 90 investors to sell to...  you leave it to the imagination of the client, making them think that they all have great rates. Did anyone explain that the difference might be an 1/8% or 1/4 point?  This goes back to profit margin. So..I can drop my profit margin a tad and now have what you have. But wait.... you charge $300 more in fees than me?  We don't know this.... but so many people in this business try to explain one thing and leave another issue alone... kind of like smoke and mirrors.

Sorry if I am sound rude here. But I don't care if you access to 90 to 100 other lenders. All the pricing is going to be very close. The Negative part with using brokers... you are at the mercy of that lender as a broker....   a direct lender, many have their own underwriters and can get deals turned around a little quicker. Just a fact. If you utilize this system and it's got an excellent infrastructure.....  this is the best scenario.

So....  every talks about educating the client. hhhhmmmm... in such a manner that it might sound better from you..... or from you.... or from you..  (showing that I am not directing this to anyone in particular)

Scott.... you said... "Another on of my pet peves...Banks not needing to disclose closing costs because they fall under a CFL license. As a broker needing to break everyting down on the GFE, shouldn't the banks need to do the same to create a level playing flield for clients to truly see which loan is better for them?"   I have a problem with this, because one needs to disclose correctly what they are talking about, which I don't think you did in this case. One of your pet peeves is a lender not disclosing correctly.  You talk about closings costs don't need to be disclosed by bankers. Can you prove this?  This sounds so misleading. The ONLY thing that doesn't need to be disclosed by a banker is the YSP. The Yield Spread premium. Again, this is the only thing. You said Closing Costs....  

Anyhow.....I will probably make some enemies from these statements. But we all wave the white flag, screaming that we need to educate the clients. Then you have realtors on here that say....wow, thanks for making me aware of this. or thanks for educating me.  I have a pet peeve...  in most cases, these are opinions and or misleading facts. Before one speaks, they should get the facts straight. And that comment is not directed towards anyone....but the white flag waivers....  Last/.... was this said in the right manner.... probably not.  But I am tired and the show 24 got me pumped up. And...maybe it was just how some comments were written also. So I think nothing should be left behind... and everything be thrown on the table.

Jan 15, 2007 03:08 PM
Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans
wow...Brian.... you jumped in front of me....  I started my comment about 3 hours ago and I got stuck on the phone. In any case....  there you have it...
Jan 15, 2007 03:10 PM
Scott Gormley
Oak Valley Mortgage-California Home Loans and Refinancing - Chico, CA

Ok guys,

I don't go down easily, but I can admit when I'm wrong. I think that is fair, many don't fess up, make an argument or defend their ideas...

Brian-Ok, Mortgage Brokers are actually Dual Agents...Looking out for two parties (Lender and Client)

Is the direct lender (loan officer under the CFL license) going to look out for the client as well..or just the lender?

You said:

A real estate license prepares you very little for  the mortgage business in California, Scott.  It took me 10 hours of studying hours to prepare for the DRE salesperson's test which I passed.  CFL brokers are better supervised and have a lower complaint ratio than DRE brokers.  We have both licenses and always opt for the DOC supervision because it protects the customer better.  CAMB would have you feel otherwise but they need to defend their dues.  NASD-type national licensing is the answer with high proficiency standards.  Alas, that would eliminate 50% of the DRE and CFL originators.

Let's compare apples to apples. I believe there is a difference between the testing requirements, course requirements and responsibility of a salesperson to a broker. Hence, 1 broker per office. Otherwise..it wouldn't be that way and loan officers and agents wouldn't be so open to offering a split. You compared your salesperson's license to a CFL broker. I'd like to compare my broker's license to a cfl broker's license. Apples to Apples. NASD type national licensing..I'm game. Weed out the competition and keep the right people in the game. But, varying state laws would probably make that a tough one...

Jeff-The closing costs statement was a typo..It should have been YSP. I was tired and mistyped that part (Not an excuse) I knew that it was YSP and you are correct :)

Which brings me to, the "overall cost of the loan."

You said:

So..I can drop my profit margin a tad and now have what you have. But wait.... you charge $300 more in fees than me?  We don't know this.... but so many people in this business try to explain one thing and leave another issue alone... kind of like smoke and mirrors.

This would be known if the YSP was disclosed on your end as a direct lender! Is it fair that the client doesn't understand the true cost of the direct lender loan, because the YSP isn't disclosed? I know I have to show mine on the Good Faith Estimate.

Scott

Jan 16, 2007 03:16 AM
Scott Gormley
Oak Valley Mortgage-California Home Loans and Refinancing - Chico, CA

And just as a sidenote....

I'm humored when Associates of mine that work for BIG, NATIONAL DIRECT LENDERS get frusterated and have a hard time competing with my wholesale pricing to their retail pricing on their own companies' products!

I think it stands to reason though...On the wholesale side, direct lenders and banks save themselves the cost of doing business:

Office space,supplies,utility bills,advertising,insurance and health benefits

While still bringing business through the doors with mortgage brokers....

Scott

Jan 16, 2007 03:27 AM
Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

Scott....  I will read the comments more in detail.....  but you seem to be a good guy. It has nothing to do with a typo or making mistakes... but I sometimes have to feel like I need to call someone out. You stood up to it and actually said it was a mistake. I can live with that and sorry if I sounded harsh. No excuse on my end, but it's been a bad couple of days also......

In regards to your other comments in input....  I will get back to it. For the most part, you have a case....I think it's split down the middle when all said and done. Why do I say this?  Because I have been doing this for 14 years .... and at one point I worked for the largest lender...  I have worked for a few top 50 companies... some mid sized companies and a few small ones....  again....it's not far off...in my opinion.

Jan 16, 2007 04:07 AM
Brian Brady
Matthews Capital Markets - Tampa, FL
858-699-4590

Brian-Ok, Mortgage Brokers are actually Dual Agents...Looking out for two parties (Lender and Client)Is the direct lender (loan officer under the CFL license) going to look out for the client as well..or just the lender

Nope, Scott...CFL brokers serve two masters also.  We're hardly better.  CFL licensees CAN broker, Scott.

Let's compare apples to apples. I believe there is a difference between the testing requirements, course requirements and responsibility of a salesperson to a broker

A real estate broker's license is much more knowledgeable in real estate brokerage Scott, than a CFL responsible individual.  There is no test for lending proficiency in California.  We need a national origination license similar to the NASD or no licensing whatsoever.

Which brings me to, the "overall cost of the loan."

Not my comment.

Jan 16, 2007 07:42 AM
Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans
Brian.... very good point in regards to the cost segment,......  I am just too damn tired to be holding debate or conversation.....  I just agreed to the typo in regards to the YSP...
Jan 16, 2007 07:47 AM
Scott Gormley
Oak Valley Mortgage-California Home Loans and Refinancing - Chico, CA

Ok boys...I appreciate the comments and cross fire. I think it's important and needed in our industry to get some sense of order. Someone needs to do it :) Overall, a productive blog!

Scott

Jan 17, 2007 04:54 AM
Johnnie Taylor
CFB - Lexington Park, MD

I have read this blog from top to bottom and I want to comment cautiously.

I have worked for a mortgage broker as well as a lender. I think alot of the positives and negatives depends on the individual loan officer and their ethical or unethical practices.

 I am currently working with a lender who gives me pricing as good as or better than most wholesale divisions. I also have the ability to broker, if necessary. But, I have rarely found it necessary.

As far as YSP/SRP disclosure goes, I have mixed feelings. I understand that we want to have open disclosure to the borrower, but, lets look at this from a capitalistic stand point. How often have you walked into McDonalds and they disclosed to you how much profit they are making on each burger?

I think that lenders, brokers, and loan officers deserve to make a living as well. What I do believe in as well is the education of the client. If you can round out your services with financial strategies and follow-on services, then perhaps you are justifying the YSP/SRP that is being earned in the back end. If you are being more patient, professional, and more attentive than the next lender/broker....then perhaps you know how to make that extra fee or margin worth it to the customer.

Also, I think that lenders and banks should not be confused. Banks truly are pigeon-holed. Finance companies fall into this category as well. Banks are looking for the super A credit borrowers and finance companies are looking for troubled credit borrowers.

 Correspondent lenders, Mortgage Brokers, and certain investor-driven lenders do have the flexibility of going from one niche to another. I, personally, have found that it is easier for a client to work with a correspondent lender or investor-backed lender.

Usually these lenders have all their matrices and guidelines in some sort of system. This makes preapprovals and searching programs an effort that takes minutes instead of hours or days.

Even if a broker has access to 240 lenders, we all know that they generally have maybe a pocket 10 that they use for the majority of their clients. If things are outside of their pocket 10, then they have to go on a hunt for the right place to fit.

But, all this is very subjective to alot of different factors. No matter whether its a lender, broker, or a bank, I think it more depends on the individual representative/loan officer and their professionalism, skill, and ethics.

Jan 18, 2007 08:28 AM
Jeff Belonger
Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ
The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

Johnnie.... this was perfectly explained. I think you hit it all and you did a great job. I am glad someone had a middle of the road take on the YSP issue also. So many lenders and sorry, many people on AR are screaming for YSP to be disclosed. You are just confusing the client. In my honest opinion, I think it's easier for them to get the clients mind off the other important things, fees, APR...etc etc...  my example I always stand by:  If my rate and fees are lowrer, than company B, but why my YSP is greater, why care as much. My deal is better. As you mentioned, it comes down to service and follow up. The McDonald's example was perfect. Yael Warman made the same comment in one of my blogs.

And the 240 lenders thing.... another great example. It drivess me crazy when lenders use this to sell their client. When I get a client that tells me this, they usually become mine, but I will say part of what you mentioned.

Again, great job of dicipering this in layman's terms.

Jan 18, 2007 09:06 AM
Anonymous
Bulk Sayle

When you walk into McDonald's you can find out how many grams of fat are in a big mac.

Seems to me "Direct Lenders" were used as agents of the "banks" to perpetrate fraud on consumers so they could qualify and the "banks" could package and sell the paper to wall st. who would "broker" it back to some one else e.g. pension funds.

Feb 28, 2008 08:20 AM
#26
Anonymous
first time home buyer

Thanks to everyone for shedding light on each different perspective. As a first time home buyer...I found this debate/convo very informative. Most of all...I appreciate the insight from Johnnie (#24) Your info was detailed ..informative and not too defensive to either side. Thanks to everyone! I appreciate it.

Apr 07, 2009 06:19 PM
#27