A Mortgage Broker is not a Lender

At the beginning of every law, there’s a preamble and then a set of definitions. Many of you know this: A mortgage broker is not a lender.
A lender is defined by federal law, RESPA, as an entity that makes loans.  This means the entity has the money to fund the loans.

Brokers, by definition do not loan their own money. Instead, they’re middlemen who go out and find the mortgage money. The entity funding the loan is the “lender.

68 thoughts on “A Mortgage Broker is not a Lender

  1. I think part of the reason so many correspondents are upset is because this came as a surprise. “Word is” that WAMB asked DFI if there were any issues that would impact brokers with the passing of SB 6471 and WAMB was assured this only impacted Consumer Lenders.

    I’m disappointed that WAMB would trust DFI without having their own legal staff review the legislation.

    I’m betting that many correspondents will not retain both licenses. Why pay the state double and expose ourselves to double liability by being regulated under two Acts instead of one? Don’t get me wrong, Correspondents would much rather be under MBPA instead of CLA. But I see no reason to reward DFI’s coffers just to maintain the title of being a “licensed loan originator”.

    The cost is $18 per $100k of loan amount. What’s the difference if it’s called a tax or assessment? It’s my understanding that it is an excise tax to the State. DFI just doesn’t want the stigma of over-taxing consumers–WA all ready is one of the highest taxed states in the country.

    The bonding is a huge issue too. When I talked with Marilyn Porter (sister of John and sister-in-law to me and President of Mortgage Master) last night, she’s concerned that there may not be a bond large enough to cover our correspondent operation. This is a big time expense for family owned mortgage operations.

    I also found it interesting when someone suggested to Deb Boitner that during the rules session of this legislation, they re-define the lender to essentially be those correspondent/mortgage brokers who did elude licensing before and she offered a sound “no”.

    There’s huge money in this for the State.

    When Loan Originator Licensing began over a year ago, DFI had 18k LO’s that were charged $150 per head for licensing, etc. The initial fee was accurate for what it costs for the background checks, testing, etc. Renewels of LO Licensing is not as expensive and would provide profit for the state…although Deb B. did say yesterday “I wouldn’t call it a cash cow”. Well she really can’t call it a cash cow since DFI only has just over 5000 Licensed LO’s to charge renewal fees too (which will drop from this legislation).

    Adam Stein, former WAMB president, asked Deb B yesterday something along the lines of “Gee Deb, I’m just doing some simple math and with the revenue DFI will gain from the $18 per $100k fee…what are you going to do with all the money?” Her response? Well it’s not like we’re going throw a party.

  2. Those of us Correspondents who complied with the MBPA are also angry because we did what we were supposed to do. We went through the background checks (which was a pain in butt for some of us–I had to be fingerprinted 3x including a trip to Olympia State Patrol because my fingerprints are too fine), pass the exam, change all of our marketing to include our license numbers by our names (or else!), take continuing education courses and renew our licenses. Correspondent Mortgage Brokers embraced MBPA.

    Only to have SB 6471 come along in an effort to chase approx. 300 correspondents who do not broker (we broker less than 10% of our loans and therefore are CURRENTLY licensed LOs)…and now this law is taking a hybrid broker and, as you say it, is putting us in a different class of mortgage company. It does not change who we are or what type of business we do. It does smack us in the face since we endorse MBPA and now as a CLA (as one of the lenders said yesterday) we can revert to hiring felons, will no longer have to take c/e classes, will not have to uphold a license, can charge rates beyond usery. Deb B/DFI’s reply “oh we hope you don’t do that”.

    Jillayne, how is forcing Correspondent Lenders to become legislated by CLA good for the consumer? I don’t see ANY benefit. The State screwed this one up…big time.

  3. In terms of correspondents hiring convicted felons (there is no mandatory background check and fingerprinting of LOs who work for a consumer loan lender) I seriously doubt the majority of correspondent lenders will go this route.

    We have about 8 months until the next legislative session. Correspondents and CL lenders are free to now work on legislation that would raise the barrier of entry for LOs licensed under the Consumer Loan Act and have it ready to go for Senator Weinstein to sponsor next January.

    Don from Evergreen yesterday said that his company conducts a background check on LO candidates. Correspondents are free to perform background checks as well.

  4. “we can revert to hiring felons, will no longer have to take c/e classes, will not have to uphold a license, can charge rates beyond usery. Deb B/DFI’s reply “oh we hope you don’t do that

  5. Good article. A couple comments on consumer lenders: The perception (by many at the meeting) that holders of consumer loan licenses heretofore were hard money lenders is inaccurate. Many companies such as mine, which originates primarily conforming and government loans, and banks including Wells Fargo and HSBC also have held Washington Consumer Loan Licenses for many years. In recent years however, DFI has significantly changed their interpretation of which loans get assessed, hence the fee structure needs to be revisited.

  6. Jillayne, you could see yesterday that many are confused if they are a mortgage broker or a lender. Many, like my company, are both and the definations vary depending on if you’re using RESPA, TILA or the State of Washington on what “a lender” is.

    The fee charged is essentially excise since DFI is levying a percentage of the loan amount for their coffers. Perhaps correspondents who charge the fee will simply call it a “DFI Fee” on the GFE and HUD…much like some escrow companies added an “AIOLTA” fee when they had increased costs added for the Attys Trust Acct.

    This is not adding to competion. More LO’s and companies will continue to exit the business. We’re down significantly as it is. Fewer LO’s means less competition. This will not bring rates down…especially in light of the higher cost to do mortgages.

    Deb B/DFI also suggested that they may seek ways to adjust the costs for CLAs to be more equitable (increasing the costs to pure brokers who can operate solely under MBPA).

    MBPA was good for the mortgage broker community and the consumer. CLA does nothing for the mortgage broker community nor the consumer seeking a mortgage loan.

  7. Hi Rhonda,

    Don Burton may disagree with you on your last point:

    “CLA does nothing for the mortgage broker community nor the consumer seeking a mortgage loan.”

    Many brokers and correspondents are confused as to if they are a broker or a lender because correspondents have been very good at trying extremely hard to make sure everyone knew that they were DIFFERENT from a broker. Now correspondents want to be treated like brokers because it’s less expensive among the most salient of reasons.

    No wonder consumers are confused.

    Maybe there is a silver lining and I’m trying hard to find it. Perhaps the added revenue into DFI will HELP consumers by bringing more government resources into the area of CL regulation.

  8. Hi Don,

    Thanks for stopping by.

    I remember yesterday that you helped us understand that Evergreen decide on a consumer loan license way back then, instead of becoming licensed under the Mortgage Broker Practices Act, because interest rates were higher. With customary fees added to the APR calculation, it was necessary to go with a CL license.

    Q: Has the current structure of the DFI assessment been terribly burdensome to your operation?

  9. Jillayne, I would say that switching licensed loan originators to CLA where a licensed is not required will add to the confusion of consumers on what type of institution they’re working with.

    I still don’t see where Don has said that CLA has improved the mortgage broker/consumer community.

    Don had to obtain a CLA for the very same reasons Mortgage Master (our company) considered one: 2nd mortgages (HELOCs) can adjust to a rate defined as being above “usury” in which case, you need a consumer loan license. Don opted to obtain the license so he could continue to do second mortgages “in house”. MM elected to not do second mortgages in house, they are one of the few loans that we broker in order to not “make” a loan with the potential to fall under the CLA.

    Don, please correct me if I have this wrong. 🙂

  10. “Many brokers and correspondents are confused as to if they are a broker or a lender because correspondents have been very good at trying extremely hard to make sure everyone knew that they were DIFFERENT from a broker. Now correspondents want to be treated like brokers because it’s less expensive among the most salient of reasons.”

    Correspondents ARE different than mortgage brokers and consumer loan lenders. Jillayne, you wrote about and referenced the posts above in this article. Correspondents did not choose to be treated like Mortgage Brokers–we did not have a choice. I’m sure we’d prefer to have the choice of regulation specifically suited for Correspondent Lenders instead of Mortgage Brokers and then swapping us to Consumer Lenders.

    “Maybe there is a silver lining and I’m trying hard to find it. Perhaps the added revenue into DFI will HELP consumers by bringing more government resources into the area of CL regulation.”

    1) Why should Correspondent Lenders be assessed/levied/taxed to improve Consumer Lending? We’ve had nothing or little to do w/CLA in the past.

    2) It will be ultimately be the consumer who will wind up paying in the long run.

  11. Hi Rhonda,

    It sounds like correspondent lenders are more like consumer loan lenders than brokers….in that they “make loans” whereas a broker does not make a loan.

    “Why should Correspondent Lenders be assessed/levied/taxed to improve Consumer Lending? We’ve had nothing or little to do w/CLA in the past.”

    Because what’s good for an entire group of people is also good for one’s self interests.

    The consumer may ultimately pay. Yes: Maybe it’s time that the consumer pay more to become a homeowner.

  12. I need to correct my comment in #8 re: “you could see yesterday that many are confused if they are a mortgage broker or a lender”.

    Mortgage companies know if they’re a broker or correspondent lender…what I meant was that it’s confusing with the current law as to whom it applies to.

  13. Actually, I agree with you in Comment #8. Many LOs are confused as to if they’re a lender or a broker. Many LOs who work for a broker would say they’re a lender because many LOs are not all that familiar with the intricate workings of RESPA.

    Yesterday’s meeting started out with Deb (I believe) talking about how it will be very important to define the word “lender” in a very clear way.

    This means, hopefully, that brokers will NOT be able to hold themselves out as being able to “make a loan” or call themselves “lenders.”

    Only “lenders” will be able to call themselves “lenders.”
    Correspondents, consumer lenders, credit unions, and banks will all be together in that ballpark, which flattens the hierarchy in one area, but the psychological caste system will remain.

    Pure brokers would then stand alone.

    This means industry standards for brokers, which are higher, probably SHOULD be higher because of their unique role.

    If correspondents, CL lenders, CUs and banks want to all get in bed together and decide to raise standards on themselves, as “lenders” then I say go for it.

    However, I do not believe the majority in this new pool would be as gung ho for raising standards because it means elevating costs.

    We shall see
    near and dear
    “elevated standards” really are for correspondent lenders very very quickly now.

  14. Hi ladies! Can a guy get a word in edgewise? 🙂

    OK, OK, don’t shoot! Just looking for a little levity. Though I admit I about doubled over with the turd in the pool line! Jillayne, have you sent your stuff to SNL?

    Rhonda, you clearly know a thing or too as well, and it would be a shame to see this affect your business even more than it has been affected by, well, ….everything else! Everybody’s cheese is being moved, faster than we can figure out the new maze, but I predict that the best and the brightest will persevere (or sell pharmaceuticals to all of us remaining in the mortgage biz with huge headaches).

    I can, and will, offer a different viewpoint, as I was there as well, and have a different background and perspective in lending than Jillayne, or Rhonda (or Don).

    I am a Loan Originator (LO). We are the ground troops, if you will, in the mortgage wars. I don’t want to be a broker, or a correspondent lender, or really anything other than what I am. OK, I’d like to be younger, and in better shape….and have a few more dollars saved up for retirement!

    As a loan originator, I have worked retail (Countrywide), then brokered only loans for 2 years, and for the past year, at a large broker/correspondent shop, in a net branch environment (it means now I get to pay ALL of my own bills, including an office, and have a dba/ company name). While I have a choice of placing a loan with a correspondent line, or a brokered line, I have only completed a few correspondent loans to date, and MANY brokered loans.

    I understand the advantages and disadvantages of both, and wish to continue to have the option of choosing one vs. the other, depending on which benefits my clients, and allows me to viably continue in this business (which can never be taken for granted in the current atmosphere).

    When I tried to find out what the bill meant, before it’s passage (by reading it carefully and asking around, including trying to get an answer from MY Senator, Mr. Weinstein, the sponsor of the bill, but he’s too busy to answer his constituents), it was not remotely evident that it would affect the correspondent lenders that were already licensed. I think laws should be written clearly, so that legislators know what they voting for, and citizens know what to support or oppose. The bill, and its outcome, fail miserably in that regard. Unless the intent was to trick citizens, in which case it succeeded mightily. Let us all remember that business owners (including lenders/brokers) are citizens, not criminals (except in countries that outlaw free enterprise).

    Generally, the predictable result of more regulation is that the smaller businesses go away, as the regulatory burdens force the small guy to either get big enough to manage compliance, hiring specialists for that purpose, or throw his hand in, and fold.

    As we have seen from the passage of this law, there are almost always unintended consequences of legislation, not matter how well intentioned.

    But, as everyone there said, what’s done is done, and the business at hand was strictly “how does DFI implement the law, by June 12, 2008, as the law mandates”.

    Deb Bortner from DFI is a smart lady, and certainly was doing her best to appease the audience, suggesting that the bond requirement may be modified, and that they were looking for ways to make the ruling workable for everyone. In general, I have nothing but praise for the people of DFI, but my ox has not been gored (yet), thankfully. They particularly seemed eager to ameliorate the issue of the rather large bond required.

    The main points that I left with were these (in addition to those previously mentioned by Jillayne and Rhonda):

    A mortgage broker that wishes to continue correspondent lending can choose to have both CLA licensing and MBPA licensing, or ONLY CLA licensing. If they choose both, which I believe the larger broker/net branch companies will, then:

    Any loan closed (completed) in the correspondent channel will be regulated by CLA rules: The per transaction fee, the ability to conceal YSP, no LO licensing, no continuing ED, no fiduciary responsibility to borrower, no negatively amortized loans (with an exemption Reverse Mortgages) and possibly some restrictions on charging certain fees (that was not entirely clear to me).

    Any loan closed in the brokered channel will be regulated by MBPA rules: YSP must be disclosed, no per transaction fee, the LO must be licensed, and the LO and broker must act as a fiduciary to the borrower (act in the borrower’s best interest)

    General lending rules (TILA, RESPA, Consumer Protection, FHA, HUD, Fannie Mae, etc.), will apply to everyone.

    Since so many brokers in the state vehemently opposed the fiduciary responsibility act, I predict that most will weigh the pros and cons, and conclude that the per transaction fee is an acceptable price to pay to avoid the potential liability of the fiduciary responsibility (and licensing LOs, CE, etc.). I only hope that some will conclude that the benefits of offering both channels to their LO’s outweighs the difficulties in management costs and liability exposure.

    For the LO that chooses to market him/herself (in the dual licensing environment), the conundrum is how to present yourself: As a lender/correspondent? As a fiduciary/broker? I think it would be difficult to switch hats.

    Man, I am not even close to funny…..I couldn’t get a gig on Public Access with this stuff!!!

    Jillayne and Rhonda, back to you!

  15. Roger, I totally agree with you…especially that laws should be written clearly. Even when I watch testimony on C-SPAN with issues regarding mortgages, our elected officials in “the other WA” often are clueless about mortgages and what they’re voting on…yet this is what we get to deal with.

    Jillayne, I know you understand that a lot of what I’m saying is reaction and of course I’ll deal with it and be fine. I just think it totally stinks and resembles some of the descriptive pool language you used earlier.

    It will be interesting to see how this pans out.

  16. Hi Roger,

    I was exposed to Saturday Night Live at a very young age, which makes me a perfect candidate for the mortgage industry, where a sense of irony is needed to survive each day.

    With that said, mortgage companies can run but they can’t hide from fiduciary duties.

    They are coming. Whether it’s the state level or the federal level. It’s only a matter of time.

    Some folks will have to be dragged kicking and screaming into fiduciary status. Others are afraid of lawsuits. Many are fine with moving forward towards professional status.

    I believe there are plenty of brokers out there who want nothing to do with a consumer loan license and who will be just fine operating under the MBPA as pure brokers. They see the liability issues under the CLA as greater than the liabilities under the MBPA.

    The tougher barriers to entry and fiduciary duties will eventually reach the consumer loan lenders as well.

  17. Oh, I love irony….it’s just that I’ve discovered you cannot eat it, and it has almost no value in bartering.

    I do not think that fiduciary responsibility will, or should, extend to the retail level. It becomes illogical, since the retail employee owes loyalty to the employer, and good faith to both the borrower and employer. A lender does not owe fiduciary duty to a borrower, only good faith.

    The sticky part comes when a broker/loan originator can act as both an agent/broker OR a lender/correspondent.

    I propose that it is possible to act as IF you were an agent/fiduciary, and still place the loan with the correspondent line, so long as you follow the guidelines of the MBPA AND the CLA (pay the per transaction costs, and disclose the YSP, as disclosed to the loan originator). I make that distinction, since as a Loan Originator, I may not know what the “true YSP” is, but I do know what is shown to me, and can disclose that, thus treating the managing broker as another bank.

    This might not fly with DFI, but I think it is worthy of consideration.

    The attorney for DFI (did not catch his name) pointed out that the fiduciary responsibility statute specifically avoids the loyalty aspect of fiduciary duty, and only covers the good faith aspect.

    We probably won’t know what exactly that means until some other attorneys begin advising brokers on the avoidance of liabilities, or when the lawyers descend on the state looking for actionable, and profitable cases.

  18. Jillayne, I would also say that correspondents feel they are different than a true mortgage broker–because we are. I don’t think any correspondents “look down” on mortgage brokers. My brother in law, John, who you reference in the post is a great example. He’s the VP of Mortgage Master and we are a Correpondent Lender (90% of our business closes in our line) yet he is very dedicated to WAMB and fellow mortgage brokers.

  19. Here’s some simple math that I think sheds light on why the State passed this:

    300 correspondents x (a conservative figure the est. annual excise/levy fee on volume of business) $45,000 = $13,500,000 new revenue for the state. (BTW Mortgage Master’s levy/assssessment/tax/fee will be much higher).

    OR what the state currently receives:

    4000 licensed loan originators x $150 per head = $600,000.

    Yep…I guess our elected officials do not need to understand what legislation they’re passing or who it impacts as long as they can have a calculator and can manage basic math.

  20. Hi Rhonda,

    For the compare and contrast math, please remember to add in the mortgage BROKER revenue that the state collects on the broker’s license.

    Also, I’m not following your math on the correspondent example. Can you lay it out for us in greater detail?


  21. “$20,000 to $60,000 per year in fees that the correspondent lender will have to pay to the state of Washington each year.”

    OMG, that’s robbery without a gun. How are the good people of your state letting these predators get away with this?

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  23. I’ve been checking DFI’s site all day today and I’m not finding any new info offering clarity. 🙁 I guess they day is not over…we have 5 more minutes (unless they work past 5).

  24. Well, we’ve been waiting for the definition of “lender” and what it means to “make a loan.” Instead, they went right to the heart of the matter and drew a line as to which business models fall under the Mortgage Broker Practices Act and which business models fall under the Consumer Loan Act.

    DFI has given the industry a little gift:

    “Non-delegated Correspondent – You close loans in your name with funds provided by a lender through a line of credit. The lender provides the underwriting criteria the borrower must meet and makes the final underwriting decision.”

    Non-del correspondents would consider this a victory. They can stay licensed under the MBPA.

    DFI is going to grant CL licensees a grace period for obtaining their bond, fee adjustments, and they also answered our questions regarding private money lending.

  25. Jillayne, where is the gift? I’m not seeing it…perhaps I’m too close to the wrapping… a grace period for something that was not given much time for lenders to deal with is not my idea of a “gift”.

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