Banker, Broker, Consumer Lender or Credit Union?
Jillayne Schlicke on 06 17, 2007
In this four part series of blog articles, I will outline the possible advantages and disadvantages of different types of lending institutions. I will also offer suggestions on how a consumer can help himself or herself before and during your loan process. First, a quick primer. Consumers often tell me they think of the word “lender” and “loan officer” as words that mean any type of lending institution and the salespeople who work at them, respectively. This is not entirely accurate.
Bank: The entity which has the money to lend. The source of the mortgage funds.
Mortgage Banker: A mortgage company with a state or federal banking charter.
Mortgage Broker: A middleman who locates the funds for you, for a fee.
Correspondent Lender: A licensed mortgage broker with a line of credit from a bank.
Consumer Finance Company: A consumer loan lender that also originates mortgage loans.
Credit Union: A cooperative financial institution owned and controlled by its members.
A Loan Officer traditionally works for a bank or mortgage banker. Loan officers who work for a state or federally chartered bank are exempt from state licensing laws. No experience required.
A Loan Originator works for a mortgage broker and is required to be licensed in most all states and required to show their job title as it appears on their license: Loan Originator. No experience required but must pass a competency test in many states. Some states require continuing education.
Loan officers and loan originators are paid in many different ways: commission, salary plus a bonus, basis points, yield spread premiums or rebates, loan origination fees, and broker fees. It is perfectly reasonable for a consumer to ask a loan officer/originator how he or she is paid.
Loan Consultant, Mortgage Planner, Account Executive, Account Manager, Business Development Specialist, Mortgage Consultant: These are all subjective job titles that mean loan officer or loan originator.
Since a college degree with a specialization in mortgage lending finance are rare, some loan officers and loan originators choose to earn specialty designations. Industry trade groups NAMB, MBAA, NAPMW, and CMPS all have designation programs; no college degree required. Some designations require only a few hours of training. Others require weeks of training, rigorous exams, and continuing education. MBAA’s School of Mortgage Banking remains the gold standard for loan officers climbing the corporate ladder at a bank.
For part one of this series, I will provide reasons for and reasons against choosing a bank as your lending institution. Part two will cover brokers and correspondent lenders, part three will delve into consumer finance companies and in part four we’ll look at credit unions.
[photopress:FirstNationalBank.jpg,thumb,alignleft]Banks
State banks such as Golf or Homestreet in Washington State, or federally chartered banks such as Wells Fargo or WaMu are in your community. It’s nice knowing you can walk into a bank branch in your city and talk to a real human. Because of their investment in the local community, banks traditionally have a higher degree of reliability, unless the mortgage market is experiencing high volumes. Because these institutions operate with strict budget guidelines, staffing will always be at its absolute minimum. During a refi boom, all lenders are looking for good people. Banks hire green people and train them, thereby keeping labor costs down. More experienced people are often recruited by other institutions offering higher pay. This often happens during a refi boom, and then banks are left with their newer staff members still in training. A bank such as Bank of America who is currently running a large, no-loan-fees promotion, will have hopefully staffed up ahead of time. BOA is running the current promotion at a slight loss, in order to make up the difference by selling you many bank products. Be aware of product type (ex: purchase only) and time limitations on promotions before you make application.
Banks are highly regulated, must submit to state or federal audits on a regular basis, and must maintain an internal auditing, compliance, and training department. Banks offer a variety but limited number of loan programs. Because of their internal compliance infrastructure, banks are often already set up to do FHA and VA loans. If it is true that many subprime loans could have gone FHA/VA, then a bank is definitely a place for a first time homebuyer OR someone with less than perfect credit to seek out for a Good Faith Estimate. Banks pay their loan officers less when the loan is brokered to an outside company. Therefore, an LO has an external incentive to try to fit a consumer into its available products.
At a bank, your mortgage loan application may be quickly be transferred to an out-of-state processing center. Ask about this before you make application. Banks are not very flexible with their policies. Why? Because they have the money and you want it. If you don’t like their policies they will likely tell you there’s nothing they can do, with a smile on their face.
Some banks that specialize in mortgage banking such as Countrywide offer so many different products that their loan officers rarely need to broker a loan to an outside lender and they often have human underwriters located on site or within the same state.
Loan officers will often have more experience at a mortgage bank. Mortgage bankers usually have a national or regional presence. Sometimes they will even service their own loans. Many mortgage banks have a formal, ongoing, staff training program. Loan officers here will most likely be working on commission with monthly quotas to meet, which might mean a high pressure sales environment. Examine the Good Faith Estimate carefully. Watch for creative fees. Watch for steering into controlled business arrangements. For example the mortgage bank might also own a companion escrow company. You will be steered there for closing. They must disclose their affiliation with the escrow company on a prescribed form.
How to help yourself
Test out their service ahead of time: Get the phone number of the processing center and call them in the presence of your loan officer, especially if the bank is running a national promotion. Do the same thing with their loan servicing department. Find out how long the loan officer has been with the bank and the number of loans he or she has originated. Why let a loan officer practice on you? If your transaction is falling apart, go directly to the manager. Ask the loan officer to sign the Good Faith Estimate and guarantee the quoted fees. Do not let the loan officer quote anything less than 15 days interim interest unless he or she is willing to guarantee, in writing, that your loan will close during the last 15 days of the month. Finally, ask your loan officer the following questions: “How are you paid?” and “Can you point to the lines on the Good Faith Estimate and tell me which fees go into your pocket and which fees go to another person?” “Are your fees negotiable based on the level of care and service I receive from you?”
Little known fact for consumers: Most all banks and mortgage bankers also have a wholesale lending department. This means a mortgage broker might be able to get you a better rate. Why do banks do this? Simple: more profits.
Important fact: Banks do not have to disclose the yield (profit) they make on your loan. (Link opens a PDF.)
A yield spread premium is a cash rebate paid to the bank based on selling you an interest rate above the wholesale interest rate. Banks bundle their loans into pools and sell them into the secondary market after the close of escrow and federal disclosure rules found in RESPA do not apply to secondary market activities. For example, if a mortgage banker offers a borrower a loan of $400,000 at an interest rate of 7.25%, and the going rate is 7%, the bank may earn a Yield Spread Premium (YSP) equal to 1.0% of the loan amount. This $4,000.00 fee is paid by the lender directly to the bank as a rebate. None of this is disclosed to the consumer when your loan is originated with a bank. Now pool that loan together with several hundred other loans and that’s a nice profit. Maybe banks need the profits so they can hand out those business-casual polo shirts with the bank logo now sported by front line bank employees. No, I bet they make the employees pay for them. Let’s get real; Banks need the profits in order to pay their government lobbyists.
In part two, we’ll take a look at mortgage brokers and correspondent lenders.
In part three, we examine consumer loan lenders.
Part four will cover credit unions.
About the Author: Jillayne Schlicke
- Author's website: http://www.ceforward.com
- More posts by Jillayne Schlicke
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44 Responses to “Banker, Broker, Consumer Lender or Credit Union?”
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“Some banks that specialize in mortgage banking such as Countrywide offer so many different products that their loan officers rarely need to broker a loan to an outside lender”
Banks pay Loan Originators less of a commission split if they broker or use a product not provided by the bank. A little extra motivation for the LO to try to find something that works within their guidelines.
And, Bank of America’s no fee product does come with a higher rate….
Hi Rhonda,
Q: Could a mortgage broker (or correspondent lender) match the interest rate offered by Bank of America’s no-fee promotion, and also offer the no-fee structure?
Hi Jillayne, I would need to see a GFE from BOA to check it out.
“Let’s get real; Banks need the profits in order to pay their government lobbyists.”
So true!
However, I have found that a good loan officer may work at a bank simply because the bank’s offerings may be more beneficial for their clients under certain market conditions. I tend to work with a specific loan officer rather than worrying about what institution they represent – service is everything, and a good loan officer knows their product, no matter what type of institution they’re working for.
Hi Linda,
There are great loan officers and loan originators at all types of lending institutions.
The type and structure of an institution can have a strong effect on employee behavior.
Although it is true that a good loan officers knows their product, no matter what type of institution they work for, it is also true that a good loan officer knows his or her competitor’s products, and knows when the client is better served someplace else, similar to how a residential real estate agent refers a commercial client to a commercial agent.
Great info! Thanks!
Oh I forgot to say, looking forward to reading the other parts!
Jillayne,
Lance here. Don’t forget that some true local banks keep their loans and dont sell them. That is part of their assets and liabilities. Dads bank did all loan approvals on Weds night over scotch. That was until synovus bought them, then the applications were approved out of state. It wasnt until the big dog bought themdid that happen but the loans still stayed “local”as did the name. And Dads folks were on salary. Ah but those were the days before brokers…when you actually had to walk into a bank for a loan. Now local bankers are faced with competing with local brokers.
Hi Jillayne,
Great post! One thing you might consider to complement your posts in this series is a chart (spreadsheet) listing what features each type of financial institution offers or doesn’t offer (if it won’t fit on RCG, perhaps put it on your website, and give us a link to it from here?). We hear so much “spin” these days that as a consumer it’s often hard to sort out meaningful info from meaningless sales dribble. A chart may give a person a quick summary reference of your important points.
[...] When clients ask for a recommendation on a lender, I often recommend speaking to a Loan Officer and a Loan Originator. What’s the difference you ask? I leave the explanation up to Rhonda Porter’s recent post at Rain City Guide. [...]
Hi Joe,
Thanks for the idea, I will consider it!
[...] Banker, Broker, Consumer Lender or Credit Union? In this four part series of blog articles, I will outline the possible advantages and disadvantages of different types of lending institutions. I will also offer suggestions on how a consumer can help himself or herself before and during your loan process. First, a quick primer. Consumers often tell me they think of the word […] [...]
Jillayne:
Thanks for the post. I enjoy your insight, and I couldn’t pass something up. Regarding BofA’s No Fee structured loan, I’d bet I could beat it no problem. Most likely, an L.O. could beat it and make about 1% total compensation (no upfront fees, so there’s only be Yield-Spread-Premium).
This would likely be on the 30 year fixed, simply because for every 0.125% increase in rate, you have about a 0.4-0.5% increase in Yield-Spread-Premium.
Ciao!
David, check out this comment I received from a borrower re. BOA:
“I have one pre-approval from Bank of America for a stated income 6.375% 30 year fix 20% down and 2.77 discount points with no Closing Costs on a program called “No Fee Mortgage Plus”….
Granted, I don’t know when the consumer received their rate quote, it just strikes me odd to have discount points associated with a mortgage and still call it “no closing costs/no fee”.
Brilliant marketing or ???
Rhonda, thanks for the info. You’re quite right. 6.375% is their par pricing on the wholesale side. And, of course, Fannie Mae typically gives Stated Income/Asset findings with 20% downpayment (a ‘bonus’ so-to-speak).
I don’t know what the loan amount is, so I can’t interpret the 2.77% discount fee, but it’s basically Loan Origination Fee.
I bet you could go to BofA, and do the same thing for 2% fee, or 6.125% with the same fee overall.
Ultimately, competing with banks isn’t that hard to compete. What do you think?
The B of A program one of my clients liked was the “no PMI and they pay all 3rd party costs program”. I think it’s called the “Too Good to Be True” loan.
David, it’s not at all hard to compete. In fact, as a Correspondent Lender, we’re often able to provide a better rate than the bank from that bank’s wholesale division. We don’t work with BOA anymore…
BTW it’s nice to see you take your LO number seriously. I’ve not seen many brokers displaying their number. Mine is on the about page of RCG…and my email signatures, etc. I think being a Licensed Loan Originator will prove to be an asset over “unlicensed” LOs in WA State.
What are your thoughts, David?
“Too Good to Be True” LOL…that’s a great name for it. As long as buyers compare apples to apples (no pmi would be an LPMI product if the LTV is over 80%) and they add up ALL costs in section 800 of the GFE and compare rates with costs…they can hopefully figure it out…and hopefully…it’s all true and good.
Is it 5 yet?
Rhonda, I enjoy your thoughts. Thank you.
While I hope that the licensing procedures do weed out the chaff and keep the wheat (so-to-speak), I’m afraid it all simply has to come down to self-government. Also, honestly, the LO Test was just too easy…or maybe it was b/c Jillayne’s a good teacher…either way, I just hope the industry tightens down to the ones who take the ‘long-term-view’ approach to their business.
Kindly.
David, I’ve been waiting to take the test…hoping that WAMB will get their much promised pre-test course together…waiting and waiting… I all ready have my two required classes complete (ethics and reverse mortgages).
I don’t understand what you mean by “long term view”?
I just mean that I prefer to be in an industry where a majority of people don’t focus on the immediacies at hand.
In other words, I was talking with someone who’d been in the biz for 40 years…now that’s wisdom! He told me not to worry when the “boom” is over or the “bust” is on the rise.
Ultimately, tighten your belt in famine, and don’t be greedy in times of feasting….make sense?
Cheers!
David, it makes complete sense. I’m tuning out from blogging for tonight…Griffey’s in town, salmon is soon to be on the grill and Chardonnay is in the glass.
Cheers!
Hi David,
The test was easy for you because you studied! You know your federal regulations, you most likely read the Mortgage Broker Practices Act, you came to my exam prep class, and you have had training in critical thinking and logic.
Perhaps for a future post, I’ll put some of the Q&As on raincityguide and we’ll see how our readers score on the exam.
I do agree that there were some god-awful, throw-away EASY questions in the study guide. I mean, what’s the point? The math questions will be difficult for folks who have always relied on their software to do the Truth-in-Lending calculations. We also know that there are questions on the exam that are NOT in the study guide.
Thanks for stopping by; I’m glad you did!
Hi Rhonda,
No need to wait for the WAMB class; my company has been offering the Loan Originator Exam Prep class since February and we’ve done the Broker Exam Prep course successfully for many years now. We run the class every month in many locations and it is approved for continuing ed.
http://www.ethicallending.org/educationexampreploanoriginator.htm
I may have to take up on it, Jillayne. THE main reason why I joined WAMB was for the two free classes and the prep-course. I can’t stand waiting…I just like to get things done…I keep pestering WAMB about when they’re going to have the pre-exam available… oh well!
They could always hire me or Gordy!
We have many study options for LOs all the way from free to $995 for a three-day boot camp. I am willing to guess that the WAMB voluteer team is busy with the National convention which is taking place right here in the Seattle area over the next several days.
With any course (WAMB, yours, or ???), I’m concerned about how those of us on the Correspondent Lenders (the short bus), will do with the exam since we’re such different animals.
For example, I think back to my first CFP course where they addressed title insurance and had wrong or old information…my info was correct, however if I answered “technically correct” vs. what was taught “text book”, I would be wrong.
Hi Rhonda,
What’s a CFP?
Certified Financial Planner. I only have one course under my belt and I am a member of the Financial Planners Association (FPA) due to my CMPS (Certified Mortgage Planning Specialist) designation.
That’s what I thought, but wasn’t 100% sure. Too bad that their information on title insurance was old/out of date.
The test throw-away questions are more like this:
Q: What federal law mandates the use of the HUD 1 Settlement Statement?
A: Truth in Lending
B: RESPA
C: Mortgage Broker Practices Act
D: The Settlement Statement Act
Well if you’ve been around the block once or twice, it doesn’t take much to figure this one out. The Mortgage Broker Practices Act is a state law and the question relates to a federal law. There is no such thing as a Settlement Statement Act. That leaves TILA and RESPA. Even a new to newer loan originator can get this one correct.
Back to David’s observation in comment #19…..No, I don’t believe the test will keep the unscrupulous out of the industry. On the contrary, they will make sure they pass the test. What HAS helped is the FBI background check. There have been plenty of people denied a loan originator license by DFI simply because they lied on their licensing application about prior felony convictions.
http://www.dfi.wa.gov/cs/adminactions_2007.htm
Great class!!
Just from me from class
[...] Banker, Broker, Consumer Lender or Credit Union? Part 2 July 5, 2007 This is part two in a four part series in which I outline advantages and disadvantages of different types of lending institutions. I will also offer suggestions to empower the reader on how to help yourself before and during your loan process. Part one covered banks. [...]
[...] Banker, Broker, Consumer Lender or Credit Union? Part 3 July 16, 2007 This is part three in a four part series in which I outline advantages and disadvantages of different types of lending institutions. Part one covered banks, part two covered mortgage brokers and correspondent lenders. Today’s article is about consumer finance companies. [...]
Hey guys…just quick to anyone out there…big deal at this point…federally chartered bank…owed commissions over 20k….i’m a contract 1099 originator and have over 10 years experience….i don’t know of any other bank who is doing as this one is….Equity Bank is who it is…I do nothing but A paper…and am generating 8-10 closed files a month 40-50k in fee income….considered to be an independent loan originator…have my brokers license on hold due to not needing it, paying a flat fee per file…does anyone know of anyone?? i’m working from true home office but that is legal in my state. any suggestions??
a mortgage banker if you will…here is the current process….actually running fannie findings…assigning to a designated MI company…contract MI UW, then back to bank for docs…when i’m locking loan…that is where the investor comes into play…secondary market loans being sold…funded by bank…but immediately assigned/sold….im dying…i’m going to have to obtain an attorney evidentally and of course go through all the corporate process to report them…my family is suffering now.
Hi Rachel,
I’m not following your questions. Can you help me out and lay down some more background? What state do you work in and specifically, how can we help you?
LA…im just looking for a mortgage banker to originate for…1099….just going on forums/blogs to visit with others in the industry…just looking for any input….i’m not sure even if the way this bank is paying is legal…i’m not having success with finding any other “banks” that are doing this…
here is my current setup….running fannie findings..picking contract MI company, underwritten there..and is funded by the bank, immediately picked up by investor at closing…just looking for advice/insight..thanks jillayne
Hi Rachel,
I’m going to do some asking around for you. I’ll email you a direct reply and also post it here.
Hi Rachel,
Without a written contract in place between you and the bank, it will be difficult to recover your commissions due. I highly recommend that you seek out the advice of an attorney.
[...] If you enjoyed part four of this four part series on different types of mortgage lending institutions, here are links back to the other three: Part 1 Banks and Mortgage Banks Part 2 Mortgage Brokers and Correspondent Lenders Part 3 Consumer Loan Lenders [...]
[...] When Chicago home buyer clients ask for a lender recommendation, I often advise speaking to a Loan Officer and a Loan Originator as a comparison. What’s the difference you ask? I leave the explanation up to Jillayne Schlicke’s recent post at Rain City Guide. [...]
[...] there’s one small problem. As I addressed in my four part series on the differences between a banker, broker, consumer finance company, and a credit union within the realm of licensed mortgage [...]
[...] there’s one small problem. As I addressed in my four part series on the differences between a banker, broker, consumer finance company, and a credit union within the realm of licensed mortgage [...]