Regulatory Oversight and Additional Disclosures

Many of the personal and financial problems families have are unavoidable and cannot be helped by government programs.

However, there are many ways that the government can help, including increasing regulatory oversight and requiring additional disclosures.

Mortgage brokers, loan officers and non-bank companies are not subject to federal regulations and enforcement.

The states have the primary responsibility for regulating these parties. Thirty percent of all states do not have any licensing requirements for mortgage brokers and eighty percent to do not require testing.

A Need for Fiduciary Duty for Real Estate Agents

Most professionals, such as lawyers and CPA’s have a fiduciary responsibility to their clients. They must be open and honest and provide full disclosure of any conflicting relationships that might jeopardize their fiduciary duty to their client.

Dual Agencies

Except for real estate agent that are allowed in some states to represent both the buyer and the seller (the "dual agent"), professionals involved in real estate transactions must work for one client and not have conflicting loyalties.

Mortgage Brokers Work for the Lender

A mortgage broker, on the other hand, is working primarily for the lender. The mortgage broker helps a home buyer obtain financing for their house.

In the process, they learn personal information about the buyer, income and assets. It is natural for a home buyer to assume that the mortgage broker is working for them and is shopping for a loan that is best for them. In fact, the mortgage broker is shopping for a loan that is in the best interest of the broker and the lender.

The Yield Spread Premium Penalty

The mortgage broker is paid a fee by the lender to write the loan. The broker is also paid a bonus based on what is known as the "yield premium spread." This is the difference between the best possible rate the borrower could obtain and the rate the broker writes the loan for.

For example, if the market interest rate is 6% and the broker writes your loan for 9%, he will earn a substantial bonus from the lender based on that 3% difference.

The yield premium spread is clearly not in the best interest of the borrower. If the mortgage broker is acting in your best interest, there should be no premium.

An obvious solution is to pass federal legislation that forbids any kickback from the lender to the broker. Similar laws exist between title companies and real estate agents.