Is Mandatory Disclosure Unfair to Brokers?

May 8, 2000

"I take exception to your proposal that mortgage brokers be required to quote a price for their services...I like to compare our industry to a department store. Should a law be passed that requires department stores to disclose their markups on all their merchandise? If the customer doesn't like the prices at one store, he goes to another one. Why should mortgage brokers be treated any differently?"

As a consumer, I care about a department store's prices, not its markups, because I can easily compare prices with the store across the street. If it were as easy to compare mortgages, I wouldn't be concerned about the mortgage broker's markup either.

But mortgages are extremely difficult to shop, in part because there are so many different types. For any one type, furthermore, prices vary with a variety of factors, such as the borrower's credit, the down payment, the type of property, the purpose of the loan, and so on. In addition, prices change from day to day.

Because of these difficulties, it would be much easier for consumers to shop mortgage broker markups, leaving it for the brokers to shop for mortgages on their behalf. But consumers don't have that choice. Mortgage brokers don't make an explicit charge for their services. They make their money by placing a markup on the wholesale prices quoted to them by lenders. The prices they quote to consumers include their markups.

There is no way for a consumer to know whether a broker's markup is reasonable because typically it is not disclosed until after an application is submitted. Short of submitting multiple applications through different brokers, which some borrowers do, it isn't possible to shop broker fees.

Under the existing pricing system, borrowers cannot depend on brokers to shop for them because brokers are in a conflict situation with their customers. The higher the price the broker can induce the customer to pay, the more money the broker makes.

Mortgage brokers emphasize the importance of the "human touch" in mortgage lending. And they are right. This pitch would be more convincing, however, if it were not heavily contaminated by conflict of interest. Is that ARM the broker is encouraging me to take really the best mortgage for me, or is it the one on which the broker can make the largest markup?

The upshot is that borrowers who want to ensure that they receive competitive prices must shop for loans, even though most would prefer to use an expert to do it for them.

Mortgage brokers provide an important service, and it is growing more so as the market becomes increasingly complex. But they offer a service, not a product, and they should disclose the cost upfront, as other service providers do.

Borrowers should have a clear choice between shopping lenders and shopping mortgage brokers. If they shop lenders, they compare loan prices. If they shop brokers, they compare the prices charged to do their loan shopping for them, and to provide expert and disinterested counsel.

The process should be transparent. So long as brokers set their fees in advance, it doesn't matter whether they charge by the hour, a fixed dollar amount, or a percentage of the loan. They should be willing to reveal the wholesale prices quoted to them by lenders, and pass those prices on to customers.

The rogues in the industry would be hurt by this change in pricing, but the industry as a whole would benefit:

Establishing pricing transparency while getting rid of the rogues would enhance public confidence and get the government off the industry's back.

Brokers probably would increase market share at the expense of lenders. If provided the opportunity to make a choice, the percent of mortgage borrowers who do their own shopping likely would be no more than the percent of home-owners who paint their own homes.

The bane of brokers, borrowers who submit two or more applications, would be sharply reduced, perhaps eliminated.

Ethical mortgage brokers tired of being tarred by association with the rogues of the industry, need not wait for government intervention.

Consider how consumers would choose if offered the following choice: Broker A, who fully discloses the fee, or broker B, who will reveal the fee 3 days after the application has been submitted, provided the consumer knows where to find it on the settlement sheet.

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