The differences between mortgage lending and mortgage brokerage activities are not well understood by the borrowing public, by consumer advocates, or by policy-makers and regulators. Confusion about the specific functions and responsibilities of mortgage lenders and mortgage brokers has even led some legislators to propose a “one size fits all” approach to regulating the residential mortgage industry.
A mortgage broker is legally defined as “a person (not an employee or exclusive agent of a lender) who brings a borrower and lender together.” A mortgage broker commonly assembles and completes mortgage applications and may negotiate borrowing terms with a number of lending institutions. Borrowers tend to believe that a mortgage broker negotiates these terms on their behalf, though that may not necessarily be true. When working with mortgage brokers, consumers tend to stop shopping among mortgage brokers and mortgage bankers.
By comparison, it is well understood that a mortgage banker is essentially a vendor looking to sell a mortgage at a price that is both competitive and profitable. Consumers compare mortgage bankers’ prices among both mortgage bankers and mortgage brokers.
The level of financial risk borne by a mortgage broker is significantly different from that borne by a mortgage banker. By definition, a mortgage broker does not put any capital at risk as part of a mortgage transaction. Rather, the mortgage broker simply connects a borrower with a mortgage banker. The incentives of a mortgage broker are purely to originate a loan. Once a loan is closed, the mortgage broker is immediately paid and has no further responsibility for the loan. Lenders have little expectation of being able to recover losses from mortgage brokers. The typical response to mortgage broker problems is for the lender to stop doing business with the mortgage broker and for the consumer to seek redress from the lender. Ordinarily, mortgage brokers operate with considerably fewer assets than mortgage bankers. On the other hand, the mortgage banker’s incentive is to assure performance of the loan and in that way the mortgage banker’s interest is aligned with the borrower’s interest. This is true even when a loan is sold into the secondary market, as an investor can force a repurchase if certain contractual standards are not met. Accordingly, mortgage bankers keep a significant amount of capital in reserve to meet their obligations. Consistent net worth and bonding requirements would significantly increase mortgage broker accountability.
Where a mortgage broker harms a borrower and/or a mortgage banker, the mortgage broker is rarely sufficiently capitalized to provide relief to the borrower or the mortgage banker to recover losses. A mortgage banker, on the other hand, underwrites an applicant and provides its own funds. The mortgage banker assumes the credit, compliance, and fraud risk associated with a loan.