Mortgage broker fee agreement

Going for broker -- A decade ago, mortgage brokers were nearly

PEORIA - With home mortgage rates hitting record lows, buying a house or refinancing a current home loan becomes tempting.

But sorting through the loan process can be complex and confusing to first-time homebuyers and even to the seasoned homeowner.

That's one of the reasons why more consumers than ever are turning to mortgage brokers rather than community banks or even on-line lenders when looking for a home loan, experts say. With brokers, they can shop among dozens or even hundreds of mortgages to find the one that fits just right.

"A mortgage broker basically does the shopping for you," said Keith Turner, a broker with American Mortgage Co. in Morton, which opened about seven years ago. "Our goal is to give consumers the best rate we can at the time and give them the best program we can find based on their situation."

A decade ago, mortgage brokers were nearly unheard of. But as their popularity increased, and since it doesn't take much to get into the business the number of mortgage brokers nationwide has soared, from an estimated 7,000 in 1990 to about 33,000 today, according Wholesale Access of Columbia, Md., the industry research company.

There are more than 1,540 mortgage bankers and brokers in Illinois.

The mortgage broker industry originates more than half of all residential loans in the United States. They even have their own associations. The National Association of Mortgage Brokers is the voice of the mortgage broker industry with more than 13,000 members and 46 affiliated state associations throughout the country.

"Fifteen years ago, people never heard of a mortgage broker, but now, nationwide, it's becoming more and more popular for buyers to go with mortgage brokers," said Ron Riggins, president and owner of Eagle Mortgage Brokerage Inc., which has been in Peoria since March 1989.

Mortgage brokers might be particularly attractive for those "high- risk" people who otherwise would be turned down for a loan by conventional banks because of credit problems, job gaps or numerous job changes. Brokers, since they have access to more lenders, may be able to work around those hurdles.

"The difference between us and a bank is that we have a variety of programs, and we work with all kinds of different lenders, which sometimes gives the consumer a broader option and more flexibility," said Kim Baptiste, branch manager at Springfield Mortgage Co. in Peoria. "We can fit them into a program where sometimes a bank couldn't."

How they work

Mortgage brokers basically function as the "middleman" between you, the borrower, and the financial institution that lends you the money. You pay the broker a fee to find a lender willing to extend you credit.

Sometimes the borrower pays the broker's fee upfront, and sometimes the fee is paid from the amount borrowed. If the fee is paid from the amount borrowed, you will be borrowing additional money to pay the broker, and you will be paying interest on that additional amount.

Sometimes, the broker's fee is paid by the lender, in the form of a higher interest rate or "points." Points are additional percentage points of interest added to the loan, which may either go to compensate the broker or may be pre-paid interest that serves to reduce the interest rate paid on the loan itself, according to the Federal Reserve Board's Web site.

The Reserve Board suggests consumers ask each broker how he or she will be paid in order to compare the fees.

Consumers also should be aware that in many cases, the broker technically doesn't originate and fund the loan, the wholesale lender does. That lender may sell the loan to a different company, which may sell it again.

Shop around

It pays to take some extra time and care to shop for the right broker, Turner said. Unlike banks, mortgage brokers aren't regulated by any federal agency, and the extent of regulation by state governments varies in each state. In Illinois, brokers are regulated by the Mortgage Banking Division of the state's Bureau of Residential Finance, a department within the Office of Banks and Real Estate. The Mortgage Banking Division licenses, supervises and performs examinations of mortgage bankers and brokers in Illinois.

But, as is the case in any business, there may be some unsavory or incompetent brokers out there, Riggins said, such as the broker who gets money from the lender in exchange for getting the consumer to agree to a higher interest rate than he or she could otherwise get approved.

"The toughest thing for us is competing against somebody who is not honest," Riggins said. "Unfortunately, there are some mortgage brokers around who have a terrible reputation and they don't do a good job. They don't tell the whole truth. They'll quote you a rate, and at the end, say, 'Sorry, I can't get you that rate.'''

When looking for the right broker, word of mouth helps. Talk with friends for potential referrals and check with the Better Business Bureau to see if the company has had any complaints from customers, he said. Or check with the state regulatory and licensing office to see if there are any problems with a mortgage broker you are considering.

In Illinois, state law requires that the broker give their customer a written contract and include a detailed description of the services the broker agrees to perform and how the borrower will pay the broker. A good faith estimate of all payments that will be paid to the broker for those services also must be provided.

The brokerage agreement also must list the conditions that could affect the amounts payable because of details that are unknown at the time of the application, such as appraisal of the home. The contract further has to state that the borrower, with a written notice, could cancel the agreement, recover any money paid for services that haven't been performed and recover costs such as attorney fees if the broker makes false or misleading statements in the agreement.

Consumers should keep in mind when deciding on whether to choose a mortgage broker that while there are many conveniences and advantages to working with brokers, there also may be potential hazards. So it helps to be prepared and shop around before accepting their services, Turner said.