A loan broker is a third-party intermediary that represents the financial interest of consumers in retaining loans for them. Loan brokers represent both individuals and businesses in finding them the most suitable terms based on the individual or businesses credit, income, and needs.
While consumers can apply for loans without the assistance of a loan broker, a loan broker has the knowledge to direct clients to the loan products that best benefit them. With so many lenders and mortgage products available, or the lack thereof in some instances, loan brokers can find clients the most suitable loan terms, particularly when these borrowers have a hard time qualifying on their own.
Benefits of Working with a Loan Broker
Loan brokers play an integral role in the overall loan market because of their expertise with mortgage products, rates, terms, and conditions. Although a consumer can theoretically get a loan without a loan broker, the benefit of working with a loan broker is typically the speed in which the loan product can be found, approved, and the ability of the broker to package the file in a manner that gets the buyer qualified.
Mortgage loan brokers assist borrowers find financing from various sources. Because mortgage brokers spend their days talking to various lenders, investors, and other sources of capital, they have significantly more information on mortgage programs than the vast majority of consumers.
Through the Real Property Loan Law brokers have the authority to:
Solicit loans from borrowers
Negotiate terms of a loan for a homeowner or purchaser
A broker’s ability to qualify an applicant is based on the borrower’s income, credit, down payment amount or if it’s for a purchase the down payment amount. Because brokers typically have relationships with various lenders and banks, they can exhaust multiple avenues to attain a loan. This maximizes the borrower’s ability to retain a loan should they commonly encounter denial. In some instances, brokers may directly provide loans themselves. It is the responsibility of the broker to provide the prospective borrower with the source of funds.
Under the California Finance Lender’s Law, financial institutions are required to be licensed brokerages. Brokerages are subject to intense scrutiny regarding required disclosures and the procedures they must take.
How Loan Brokers Get Paid
Brokers make their money by finding loans or directly providing loans to their clients. They get paid in the form of commissions, which is charged through points. As previously stated, a one-point charge represents 1% of the total loan amount.
Commissions depend on a few factors such as:
The loan amount
Loan term or length
If the loan is a first or second lien
Clients handle associated loan expenses such as appraisals, bank fees, the cost of pulling a borrower’s credit, escrow fees, title fees, and any other miscellaneous fees a broker may charge.
Required Disclosures for Loan Brokers
Loan disclosures must be provided to clients. Disclosures provide consumers with the information they need to understand the loan such as the terms, fees, charges, source of funds and payment schedule.
Brokers can only advertise using their license number. The law does not permit brokers to engage in a marketing campaign without providing their license number. This law was created to give borrowers the option of researching their broker.
According to the Truth in Lending Act (TILA), it is against the law for brokers to engage in predatory lending. Predatory lending is the practice of imposing unfair loan terms for a borrower. This includes exorbitantly high rates, fees, or commissions. The chart below will indicate the maximum commission brokers can charge based on the specifics of the loan.
Why Consumers Use Loan Brokers
The vast majority of real estate purchases require some form of financing. Agents and brokers who assist clients in their real estate needs may also assist clients with their financing requirements. Because agents are aware of the needs of their transaction, they may be best equipped to assist clients with their financing needs.
A mortgage loan broker can dramatically reduce the time it takes to find suitable financing, and may even introduce borrowers to lenders that they may not have previously considered. In order to begin the process of representing clients financing needs, the client and broker will sign a loan broker listing agreement. This listing highlights the major components of the transaction, including the borrower’s rights, each party’s obligations, and the broker’s commission structure.
Case Law As It Relates to Loan Brokers
Case Review: Barry v. Raskov (1991)
The case, Barry v. Raskov (1991) 232 Cal.App.3d 447., involved a novice investor lender who brought action against a loan broker, alleging fraud and misrepresentation.
Barry was a retired person with a large savings account however had no investment experience. A mortgage loan broker (Raskov) told Barry about the benefits of investing in home loans. His company provided borrowers who could not obtain loans from banks or other loan institutions due to poor credit with a high interest loan. Raskov said that any investment Barry made would be guaranteed “one hundred per cent” and that he “would not lose one cent”.
Raskov said Barry could invest $55,000 into a borrower’s second mortgage that had a first trust deed of $100,000 and earn 23% on the investment, plus more over time. Raskov hired an appraiser who valued the borrower’s property at $400,000. Raskov told Barry that his investment would be protected as the property’s value was significantly higher than the totaling loan amounts. Barry agreed to invest the $55,000, and Raskov made $30,000 in commission.
However, the borrower immediately defaulted on the loan, and Barry began losing his promised monthly earnings. Upon further inspection, Raskov learned that the borrower’s property value was actually only $98,000, not the appraised value of $400,000. Barry filed suit against Raskov.
The Superior Court ruled in favor of Barry, but did not hold Raskov liable for punitive damages. Upon appeal, the Court of Appeals did rule that Raskov was liable to Barry for fraud and negligence in his failure to independently verify the appraiser’s property report. The court determined that the employer of an independent contractor — in this situation, Raskov employed the appraiser — will be liable for the contractor’s torts.
