What Is a Mortgage Broker?

A mortgage broker is a licensed loan originator who takes your application, compares loans from the lenders it works with, and arranges your mortgage with one of them, without lending its own money. The lender decides whether to approve the loan and provides the money, so you borrow from the lender, not the broker. Loan officers at a brokerage need a state license under the federal SAFE Act, and pay rules adopted after the 2008 mortgage crisis bar a broker from collecting from both you and the lender, or from being paid more for giving you a higher rate.

What does a mortgage broker do from application to closing?

On a standard purchase or refinance loan for a home you will live in, a broker's work follows five steps:

1. Application. The broker takes your application. Federal rules define a loan originator as someone paid to take applications for, arrange, or negotiate home loans, and a mortgage broker as a loan originator that is not the lender's employee.
2. Loan options. The broker compares the programs and prices of lenders that accept its loans and recommends one. How brokers find and select loans covers that comparison and what the broker can show you to prove it did not steer you.
3. Loan Estimate. Within 3 business days after you apply, you must be given or mailed a Loan Estimate, the standard form showing the rate, monthly payment, and closing costs. The broker or the lender can send it, and the lender is responsible for getting it right.
4. Underwriting. The broker submits your file to the lender for underwriting, the lender's review of your credit, income, debts, and property, and the lender decides whether to approve the loan.
5. Closing. You must receive the Closing Disclosure, the final statement of the loan's terms and costs, at least 3 business days before you sign the loan. The lender then funds the loan.

When do you deal with the lender yourself?

The broker is your main contact until closing. The lender, or a company working for it, deals with you directly at three points:

• A denial. A lender that turns down your application must tell you why, or tell you how to ask. If the broker sent your file to more than one lender and you did not accept an offer, each lender that declined must notify you, either directly or through the broker, and a notice from the broker must name each of those lenders.
• Closing. The title company, escrow company, or attorney handling the closing may hand you the Closing Disclosure, but the lender stays responsible for it.
• After closing. You pay the loan's servicer, the company that sends your mortgage statements and handles the day-to-day management of the loan. The Consumer Financial Protection Bureau (CFPB) says it is common for a different company to take over servicing after the loan is made, so confirm on each statement where to send payments.

Using a broker does not stop you from shopping with other lenders. On these loans, no lender or broker may charge you a fee other than a reasonable credit report fee until you have received a Loan Estimate and said you want to proceed, so getting a direct lender's Loan Estimate to compare costs little. The CFPB also notes that some companies act as both lender and broker, so ask which role the company is playing on your loan.

How is a mortgage broker different from a lender's loan officer?

Both are loan originators under federal rules, and brokerages employ loan officers too. The difference is who employs them and which loans they can offer:

A state license requires at least 20 hours of approved pre-licensing education, a score of at least 75% on a national test, no felony conviction in the 7 years before applying (or ever, for a felony involving fraud, dishonesty, breach of trust, or money laundering), and a showing of financial responsibility. Federally registered loan officers instead submit fingerprints for an FBI background check and their financial-services employment history for the past 10 years to the Nationwide Mortgage Licensing System and Registry (NMLS), and the federal registration rule sets no education or test requirement.

Were mortgage brokers connected to the 2008 financial crisis?

Yes, as one of several causes. The Financial Crisis Inquiry Commission's 2011 report, citing the industry tracker Wholesale Access, says brokers originated 55% of loans in 2000 and peaked at 68% in 2003. Broker pay generally came as upfront fees from the borrower, the lender, or both, often without the borrower's knowledge, so a loan's later performance mattered little to the broker. One common lender payment, the yield spread premium, was larger on higher-rate loans, which the commission said gave brokers an incentive to sign borrowers at the highest possible rate. JPMorgan Chase's chief executive testified that the bank ended its broker-originated business in 2009 after finding those loans had more than twice the losses of loans it originated itself.

The commission majority's conclusions name failures in financial regulation and supervision, failures of corporate governance and risk management at major financial firms, and collapsing mortgage-lending standards as causes of the crisis. Three dissenting commissioners listed the way brokers were paid among the important factors behind the mortgage bubble, their term for the surge in mortgage lending before the crisis. What caused the 2008 mortgage crisis covers the crisis as a whole.

What rules changed for brokers after 2008?

Three sets of rules now govern how brokers work:

• Licensing. The Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act) requires each individual loan originator to hold a state license or a federal registration, with a unique NMLS ID.
• Pay. A Federal Reserve rule that took effect April 1, 2011, and now sits in Regulation Z, the federal Truth in Lending rule, bars paying any loan originator, whether a broker or a lender's own loan officer, based on your interest rate or other loan terms. Pay can be a fixed percentage of the loan amount. A broker you pay directly cannot also be paid by the lender on that loan, and a broker cannot steer you into a loan because it pays the broker more, unless that loan is in your interest.
• Identification. The brokerage and the individual loan officer must put their names and NMLS IDs on your loan application, Loan Estimate, Closing Disclosure, promissory note (your signed promise to repay), and mortgage.

The pay and steering rules cover closed-end home loans, meaning loans with a set amount and repayment schedule, and not home equity lines of credit. Who pays the mortgage broker explains how broker pay works under these rules and where it shows up on your forms.

How do you check a broker before you apply?

Look up the brokerage and the loan officer on NMLS Consumer Access (nmlsconsumeraccess.org), a free service the CFPB points to for checking whether a mortgage company or professional is authorized to do business in your state. Then ask the broker how many lenders it submits loans to, which of them it would quote for your loan type, and whether the lender or you will pay it on your loan. How to decide which mortgage broker to use covers comparing brokers on those answers, and how to choose a mortgage lender covers weighing a broker's offer against banks and other lenders.