This new regulatory environment has further complicated loan transactions with new requirements that not only make the loan less transparent, but also afford the broker an opportunity to better hide their fees. You basically have two choices:
Borrower paid transaction: The borrower paid transaction requires that the borrower pay the broker a negotiated fee in escrow. Most borrowers don’t want to put money into escrow in a no cash out refinance transaction and the broker can’t structure it so the lender rebate pays his fee because it’s not allowed. What happens then is that if the rebate is too large and exceeds the non-recurring costs and prepaid expenses such as interest, any excess is lost. Consequently, we don’t see a lot of these except in cash out refinances.
Lender paid: This transaction requires the broker to set their percentage rate or fee with the lender in advance. The broker fee is then paid by the lender rebate and any excess is credited to the borrower. This “fee blending” with the rebate has generally resulted with most brokers setting their fees higher than they normally would for bigger loans and lower than they normally would for smaller loans. Additionally, the broker’s charge is not that transparent and takes some hunting to dig out of all the paperwork, unless you ask.
What should be allowed is what I originally suggested in 2001 and was adopted as law in 2010 in the above watered down version- All rebates paid by the lender should be credited to the borrower in escrow and the broker then discloses their fee separately and the rebate is used to pay the broker. This allows the broker to structure the transaction to the borrower’s benefit by offering a lower rate loan with little or no rebate or a higher rate loan with a large enough rebate to cover all the non-recurring costs, including the broker’s fee.
