What is Reasonable Compensation?

The Department of Housing and Urban Development's pronouncement on mortgage broker compensation is that it ought to be reasonably related to the work required to get the loan. That is a definition broad enough to drive a truck through, so it's not much use.

As you might suspect, one of the things people like least to talk about is their compensation. Do you like telling people what your salary is? But what is obvious to me is that the range of compensation is a lot broader than many people imagine. I think that flies in the face of the "common sense" assumption that competitive factors would keep the range narrow.

The information I get is from the closing documents on transactions people have completed or are considering. Last week, I got a copy of the final estimate of charges on someone's refinance transaction. The loan amount was $240,000 and the lender's total compensation was over $6,000, more than twice what I would have charged her. Another story circulated recently where a broker made over $60,000 on a million dollar transaction. HELLOOOOO!  How can that be reasonable?

In fact, I cannot remember one instance in which their lender in question isn't charging more than I do. When others in the industry and I share stories, the patterns are similar. The most competent and trustworthy loan agents in the industry charge less than average, plus we do a better job for our clients.

I think that the following might explain this. First, I think that we are more efficient than average. Second, our client base is sophisticated and intelligent. Most have good income and excellent credit, A-paper borrowers who have fewer problems to solve. Third, we have a higher volume of loans so we don't need to make it all on one deal. Fourth, we are going to be in the business for a long time and we want to treat people right so they become the source of future referrals. Finally, we fund virtually all the loans we get.

These factors are not present at many lenders, many of whom hire scruffy people who operate in inefficient conditions. One person I know worked at a place where they only funded 20 percent of the applications. They have to make a lot of money on the ones that actually fund to cover all those costs.

Another interesting factor is the spread of compensation, even in the same company. The compensation on one loan might be three times that on another. How is it possible to justify making $2,000 on one loan and $6,000 on another, almost identical loan? Obviously there might be a little more work on one but no one can reasonably justify that kind of a spread. The fact is that those companies are charging whatever they can get each borrower to pay. The ones who complain get a better deal, and the ones who don't complain get fleeced.

I try to earn a fair fee for my services, and it's something that we talk about upfront at the beginning of a transaction. Sometimes people ask if it's negotiable and generally, I tell them no. I know it's already less than what they might pay elsewhere! And there are those who want to negotiate everything!

My clients have a right to compare my compensation with what I am getting them. My compensation also increases for larger loans. After all, the larger the loan, the more I am able to save them. Makes sense to me.

While compensation and service may be hard to calculate before the transaction, it is easier when it closes. I have been told by many of my clients that for what they get, they think I'm a bargain. I want to keep it that way because that's how the referrals keep coming in. My fellow Upfront Mortgage Brokers tell me the same thing.

The big question in my mind is how all those other lenders get away with charging so much. I think that some borrowers are more desperate than others, especially the ones who have been turned down somewhere else. In other cases, people just don't check. That's just not smart. With the Internet, you can go see the pricing at big banks that post true pricing at their website.

In other cases, deceptive lenders give an initial Good Faith Estimate that looks OK, but then they change the deal later so that they make more money. This is a pattern that is all too common in the mortgage industry. It is particularly distressing for those of us who believe our people ought to be held to a higher standard of ethics.

We're not going to change peoples’ ethics but we can tell borrowers how to protect themselves, like by comparing the final figures with the initial ones. (I hope you kept a copy!) Refuse to sign docs if they are different. You can stonewall a lender that is gouging you with increased fees and they will give you a better deal.

Be careful out there.