Summary:

This article critiques a few mortgage brokers who expect to be compensated for little or no effort.  They invest minimal time and demand a fee for their hard work or lack thereof.  It’s crucial to underscore the paramount importance of professionalism in our industry, as it not only sets the standard for ethical and practical practices but also underscores the significant role each of us plays in maintaining these standards.

Article:

Lenders of all types, including banks, secondary market participants, real estate, and loan brokers, can access private money lending sources as an alternative.  When a bank or institutional lending source is unable or unwilling to fund a real estate loan, a mortgage broker representing private investors may step in to arrange funding using private investor capital.  The private investor will invest in the loan transaction.  The mortgage broker will usually become the loan servicer.

The mortgage broker representing the Borrower has a fiduciary relationship, which means they have a legal and ethical obligation to act in the best interest of the Borrower and cannot merely pass it on to another party.

The mortgage broker representing the private party investors (beneficiaries) has a fiduciary relationship with those investors.

Some states require licensing, and some do not.  Licensing fees and administrative procedures are a method of collecting money for the state government’s coffers.  However, it’s crucial to stress the urgent need for industry standards and regulations to ensure ethical practices.  Without these standards, the industry is vulnerable to unethical practices that harm borrowers.  It’s time we all take a stand and push for the implementation and adherence to these standards.

Most loan broker agents across the USA engage in a professional business strategy.  Individuals hold themselves out as experts and understand the fiduciary duty to assist the borrowers in deciding what loan program is in their best interest.  Loan agents who engage in loan procurement solicit individuals or entities who request loans, usually secured by the equity in real property.  The collateral may be residential, commercial, personal property, business opportunities, or a combination.

Most salespersons aspire to become professionals in their field, willing and able to display expertise and go the extra mile daily.  Studying real estate, lending, and regulation, as well as gaining experience, are all necessary traits.  Effective marketing, networking, risk-taking, and developing daily planned action habits are also essential.  Yes, any sales business!  Leave out one; you are dead on arrival in the sales business.

Having been in the industry for 45 years and senior to most participants, I am amazed at how many profess 20 or 30 years of experience in the business, but practically speaking, have only one year repeated 20 or 30 times.  Many consider themselves experts but often lack the motivation to perform an effective or professional job.  Additionally, some agents may return from retirement to pass on a lead for a quick profit with minimal effort.

When a mortgage broker takes on the task of procuring a loan for a principal, they assume the role of an agent, collecting relevant data from the Borrower, reviewing and analyzing it, and then delivering the data to the lender for analysis, approval, and funding.  The concept of providing a name and phone number and then waiting for a fat check (build me in for 2 points while I sit on my ass and do nothing) is illegal.  An agent or fiduciary representing a prospective Borrower cannot transfer their agency responsibilities to another broker representing the lenders/investors.

I frequently witness this scenario: Broker A procures a prospective loan and transfers the lead to Broker B, who then shares the information with Broker C and locates a principal lender willing and capable of funding the loan transaction.  The future end broker will set up a digital or paper file and accumulate data to analyze the transaction to submit a letter of interest (LOI) to the Borrower for consideration or acceptance.  In many cases, the lender controlling the funding is unaware of the daisy chain of brokers seeking a substantial fee for minimal work and effort.

When the mortgage broker representing private investors pre-analyzes the loan transaction and expresses interest, they will submit an LOI to the prospective Borrower.  The broker is confronted with the undisclosed fact that multiple brokers want a piece of the action (fat commission for little work).  Broker (A) expresses satisfaction with the lender’s interest in making the loan and willingness to submit an LOI to the Borrower for consideration.  Oh!  By the way, Mr. Lender, did I mention that I need 2 points, and Broker (B) needs 1 point?  And, of course, we could not leave out lonely old Broker (C), who demands 1 point.  No one has ever heard of or received any relevant data from a few of these bozos, although they are all subagents of the Borrower and, as a matter of Law, cannot be compensated for doing anything.

In my 45 years of operating in this business and consulting third parties in the loan business, I have never witnessed one of these 4-tier broker daily chain transactions that have ever closed as initially represented.  Borrowers are not fools.  They always go elsewhere and avoid this exploitative trap.  Examples of such unethical practices include brokers demanding fees for little or no work, or brokers passing on their responsibilities to other brokers for a quick profit.  The consequences of such unethical practices are severe and should serve as a wake-up call for the industry.  These practices not only harm borrowers but also tarnish the reputation of the entire industry.

Unfortunately, a small subgroup of individuals consistently chokes the system with impossible transactions from the outset.  They do not take the time to analyze the transaction’s viability or accumulate industry-standard data necessary to make a prudent lending decision.

Throughout life, various subsets of humanity attempt to extract more from the system than they ever put in.  And they do not care how much time other people waste.  They are willing and entitled freeloaders.  Systematically eliminate them from both your personal and your business life entirely.  It’s easy to say, hard to do.

Building in four separate parties for one percent of the loan proceeds to pay third-party loan origination fees before the lender/broker, who controls the money, even considers adding their cost, is impossible.  It is common practice for a procuring broker, who is responsible for finding and securing the loan, to request that the lender build in 1 or 2 points, which translates to 100 or 200 basis points, or 1% or 2% of the principal loan balance.  My favorite is receiving an unsolicited phone call from an obnoxious and aggressive person I have never heard of throughout the process, claiming they expect to receive a commission.  Without prior warning or material involvement in the transaction, they demand to get paid out of the loan closing proceeds.  Suppose you are wallowing in a broker-to-broker dilemma.  In that case, it may be time to retrain the participants that their contribution is not worth 1% each, but rather a percentage of each, costing the Borrower a combined 1%.  Most likely, the funding lender has also reduced its fees.  Something is better than nothing, especially when little or no effort is involved.