Mortgage Broker Reform Could Limit Consumer Options

Starting April 1, a federal law will change the way mortgage brokers earn their pay. Advocates say the rule prevents needless mark-ups on loans that pad brokers' incomes. However, critics argue the law hurts consumers by narrowing the marketplace and funnels more customers to fewer lenders.

Don Hagan, vice president of Arizona-based mortgage bank Wallick & Volk and 30-year veteran of the industry, says that the spirit of the law, which is aimed at protecting consumers, is sound.

"If it works out perfectly it won't change the average, but it will stop the abuses at both ends," says Hagan. "It neutralizes compensation as it relates to loan terms."

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But Hagan adds that the law could reduce market competition as smaller mortgage-broker operations are forced to revise their business models. The law means brokers face increased regulatory expenses, and it limits sources of commission revenue.

"The big lenders will enjoy more advantages with this," he says.

A Changing Industry

The broker industry has experienced a major contraction in the wake of the housing crisis and tightened regulations. In the past five years, the number of loans originating with brokers rather than banks has dropped from around 60% in 2004-2005 to between 30% and 15%, according to Michael D'Alonzo, president of the National Association of Mortgage Brokers.

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In Iowa, the Des Moines Register recently reported a small exodus taking place among brokers in the state. The number of licensed mortgage loan originators has dropped from 3,874 in 2008 to 1,175 this year.

"It's good to have choices in the marketplace," says Thomas Martin, president of America's Watchdog, a consumer-protection advocacy group based in Washington, D.C. "You can't really shop the big banks.

A Better Deal With a Mortgage Broker or Bank?

For most consumers, getting a home loan happens only two or three times in a lifetime. Brokers argue that the value they add to the process is not only financial -- helping home buyers shop and compare a wider set of loan options -- but also psychological.

However, prices at banks and online mortgage sites are increasingly competitive. According to a recent report by LendingTree.com, 21% of consumers use the Web to shop for their home loans.

Hagan says it's critical to find a lender who is an advocate for buyers, and will help them to reach their home-ownership goals.

"You want an expert. Someone who is experienced and knowledgeable," he says. "That is the most important thing, no matter what size of institution."