Your Mortgage : Mortgage Brokers Pressured to Disclose Fees

Despite a 31-year-old state law, many mortgage brokers are still reluctant to provide home buyers with a detailed breakdown of their loan fees and commissions. The problem has gotten the attention of California Real Estate Commissioner Clark Wallace, who is making a concerted effort to make sure mortgage brokers understand a law that he said is “crystal clear.”

In 1991, two-thirds of all home buyers in California used mortgage brokers, who take loan application to third-party lenders such as banks and thrifts that actually provide the financing. According to the California real estate code, a mortgage broker is a legal agent of the borrower and is obligated to provide a detailed accounting of the fees and commissions that are charged.

These costs are often part of the “points,” which are paid by the borrower when the loan closes. One point represents 1% of the total loan amount, or $1,000 on a $100,000 home loan. On a typical mortgage, borrowers pay loan fees of about two points. Of that, the broker usually receives one to 1.5 points for originating the loan. If there are no points, the broker gets paid by the lender and it is charged off to the borrower through a higher interest rate.

But it doesn’t matter how the broker gets paid; both the amount and sources of the broker’s compensation must be disclosed, according to the California Department of Real Estate (DRE).

Despite these requirements, “the majority of mortgage brokers don’t make the complete disclosures,” said mortgage expert Guy Puccio who is an adviser to Real Estate Commissioner Wallace. Puccio said disclosure is important to consumers so “they are able to make an informed decision about what their real borrowing costs are and who has the best loan.”

The lack of compliance with the law is confirmed by a variety of real estate experts who give differing accounts of why some in the industry are ignoring their legal obligation.

“We have to do a better job of training (some of our members),” said Pamela Strickland, a member of the board of directors of the California Assn. of Mortgage Brokers in Sacramento. There has been an explosion in the number of mortgage brokers, and Strickland concedes that some aren’t familiar with the law. In the last two years, the number of home loans closed with a mortgage broker has increased dramatically--from less than 50% of all sales in 1990 to 68% in 1991. It is expected to be even higher this year.

Strickland also pointed to “confusion” among mortgage brokers about which fees must be disclosed.

Most brokers understand that fees paid by borrowers must be disclosed, but they neglect to disclose fees paid by the lender. In many cases, lenders such as banks and thrifts pay the mortgage broker for bringing in the loan. Brokers are also paid bonuses by lenders for reaching a certain volume of loans.

Regardless of who pays the fees, the law requires “all compensation to be disclosed,” according to John Liberator, chief deputy in the DRE.

However, he concedes that “it’s not always clear exactly when the information must be disclosed.” Ideally, it should be made available when the broker provides an estimation of loan costs, which is required after the borrower makes a loan application. But in some cases, the fees and commissions haven’t been determined when the application is made.

The final opportunity for disclosing the fees is when the loan is funded at closing. But Puccio argues that at that point, “it is too late for borrowers to use the information to their benefit in any negotiation.” By law, all loan commissions paid to the broker are negotiable.

The DRE is working to correct the problem through an educational program that has put Commissioner Wallace on a speaking tour with mortgage broker trade groups around the state. The regulatory agency is also expected to amend its 7-year-old mortgage disclosure form, which will “do a better job of specifying what must be disclosed,” said Wallace.

But Liberator added, “brokers shouldn’t wait for the new form to disclose everything to borrowers--that’s been their obligation for a long time.”

Average Rates for Residential Mortgages

Average rates for residential mortgages as of May 29, 1992.

Survey Conventional Mortgages Adjustable Mortgages Area 15 Year 30 Year Composite 1 Year Composite National 8.33% 8.73% 8.54% 5.87% 6.24% California 8.45 8.82 8.64 5.94 5.93 Connecticut 8.31 8.74 8.55 5.78 6.07 Wash. D.C. 8.25 8.61 8.44 5.51 6.03 Florida 8.33 8.71 8.54 6.03 6.22 Mass. 8.30 8.74 8.53 5.82 6.26 New Jersey 8.28 8.69 8.49 5.78 6.42 N.Y. Metro 8.35 8.77 8.57 5.89 6.40 New York 8.44 8.84 8.65 6.00 6.48 N.Y. Co-ops 8.62 8.92 8.82 6.43 7.09 Pa. 8.19 8.58 8.39 5.77 6.04 Texas 8.32 8.70 8.51 6.03 6.22

SOURCE: HSH Associates, Butler, N.J.