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Can Mortgage Brokers Have Hidden Fees on Back End
I just read a post from FaceBook Internal Group and someone posted the text below. There are mortgage broker companies that claim loan officers will make 275 basis points and the company just charges a per file fee. NEXA Lending charges a 25 bps off the 275 and another 30 bps for a total of 55 bps so the loan officer nets 220 bps up to $2 million. Companies like Barrett Financial, C2 Financial Group, Loan Factory all compensate the loan officer the full amount of 275 bps and charge a per file fee. I wanted to know if these companies they charge a per file fee are playing games where they are making a hidden compensation on the back end where they get a silent kick back from the wholesale lender. Please read the post below:
Just played a fun little game with a recruit from Loan Factory. Guess we could call the game, “The $595 Flat Fee is BullSh!t Game.” I had heard about companies putting in BP’s into the rate sheet before sharing what an LO thinks is a truly raw rate sheet, that isnt really raw.
We put in the same exact scenario 800 Fico, 750K Price at 75% LTV, Purchase, SFR, impounds included, owner occupied. I used Rate Checker at zero comp and he used zero for his. My cost at Pennymac, which was a place we both had in common. on the rate we selected may have been 6.375% or 6.5%, our rebate was 1.810. His was 1.016 Was a difference of $5715 so add the $595 flat fee and we are $6310 better.
I kind of already sold him on building a downline, but that just kind of pissed him off about his own company. Happy hunting!
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1 Reply
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Yes, a mortgage broker can build margin into pricing, but a true “silent kickback” from a wholesale lender for steering loans would be a serious violation of RESPA Section 8 and Regulation Z’s loan originator compensation rules.
I won’t accuse Loan Factory, Barrett, C2, or any company without seeing the actual lender-paid comp agreement, rate sheet settings, PPE setup, lock confirmation, and branch/company fee schedule. But the Facebook post raises a legitimate concern.
The Core of the Issue: Raw Rate Sheet Might Not Be Raw Rate Sheet
In the example, the two loan originators (LOs) ran the same borrower scenario with Pennymac. One showed a rebate of 1.810, while the other showed 1.016. This represents a difference of 0.794%, which equals 79.4 basis points.
On a $562,500 loan, this would mean a difference of $4,466 (not $5,715), unless there was another difference with the loan amount or pricing. If the difference were $5,715, that would mean a pricing difference of 101.6 bps on a loan of $562,500.
That level of difference in pricing can be due to a number of factors:
What Could Cause the Listed Pricing Difference?The Company Might Get to Keep Some Margin Before the Pricing is Sent to the LO
Some broker shops might advertise a flat fee. But the company can still have a corporate margin, a tech fee, a branch override, a platform margin, or adjustments that would get built into the rate sheet or the pricing tool before the LO sees it.
That does not necessarily mean it is illegal. But it does mean the LO is not seeing raw wholesale pricing.
The LO Could Have a Distinct Compensation Structure
Wholesale lenders have to factor in the LO pricing structures to ensure equality. For example, if a broker is set at 275 bps lender-paid comp versus a broker set at 0 bps borrower-paid comp, the pricing will differ.
One may be pricing at what they think is no compensation, but if there is no compensation at the pricing firm, the margin is priced in, and the rate sheet is likely to reflect a negative spread.
Possible Setup Variations: PPE vs Rate-Checker
Pricing discrepancies can be triggered by:
- A difference in lock period
- Impound/escrow settings.
- State or county differences
- Property type classification differences
- Loan purpose differences
- Variances in the credit score bucket
- Differences in LLPAs
- Differences in the compensation plan
- Branch margin variance
- Lender channel variance
- Time of day pricing
- In the same lender scenario, a 70-100 bps difference is significant enough to warrant an investigation.
What Happens if a Broker Receives an Undisclosed Kickback From a Wholesale Lender?
Receiving a hidden kickback for directing a loan to a lender would pose a significant problem. RESPA Section 8 makes it illegal for anyone to give or receive fees, kickbacks, or anything of value for referrals of federally related mortgage loans.
Regulation Z limits the payment of a loan originator in other ways. Payments to a loan originator in a brokerage firm are also subject to the payment restrictions under Regulation Z.
Thus, it will be illegal for a wholesale lender to make a secret payment to a broker firm for directing a loan to the broker firm, in addition to the payment disclosed as the payment to the broker firm.
This is the More Likely Situation
- What is more likely is that a wholesale lender will not pay a kickback.
- What is more likely to happen is that the firm could say that the fee is a “$595 flat fee” while at the same time controlling the price at the firm with their own rate sheet, a pricing and execution (P&E) system, branch margin, corporate margin, or an adjustment made to the (LO) loan originator’s compensation.
- What all of this means is that they are not actually charging only $595.
- They are also keeping some of the money as a pricing spread before the loan originator ever sees the rate.
- This is why the term “flat fee company” is actually a pretty confusing term unless the loan originator is able to confirm the pricing that is actually being offered.
What NEXA Is Doing Is More Transparent
- From what you have described, NEXA states the full lender-paid comp is 275 bps.
- NEXA keeps 55 bps, and the LO receives 220 bps up to $2 million.
- The split may or may not be preferred, but since the company’s margin is disclosed, it is definitely more understandable.
With a “Full 275 bps Plus the File Fee” Model, the Only Question is:
- Are they actually passing through the full 275 bps, or is the company making additional margin through a pricing spread?
How an LO Can Test This Properly
The only way to really test this is to do more than just send screenshots. The LO needs to have the same:
- Lender
- Loan Amount
- Lock Period
- Borrower Profile
- State and County
- Escrow
- Loan Program
- Day and Time
- Loan Comp Type
- Lender Paid Comp Plan
- Borrower Paid Comp Plan
- Branch/PPE Margin
Then Request the Following From the Company:
- Lender Paid Compensation Agreement
- Broker Company Comp Plan with the Lender
- PPE Margin
- Company Fee Schedule
- Branch Level Pricing Adjustments
- A Lock Confirmation showing pricing and compensation
- If the company is unwilling to disclose how pricing is determined, it is a clear indication that something is wrong.
My Opinion
The Facebook commenter might be right that not all “flat fee” models are as simple as they appear. A company may advertise a low file fee, but if the loan officer is not seeing the truly raw wholesale pricing, the company could still be making money through the pricing margin.
However, I would use caution when discussing the term kickback. A covert kickback from a wholesale lender would be a significant legal issue. The safer and better term would be:
“The company may be factoring in their undisclosed corporate margin into the rate sheet or PPE, thereby making the flat file fee model appear cheaper than it actually is.”
This is what the loan officer should look into before recruiting, joining, or moving branches.
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