Editorial, New York Times
April 10, 2009

Mortgage brokers are supposed to be impartial advocates who search out the best possible deal for prospective homeowners seeking a loan. The mortgage crisis has revealed a different truth. Too many brokers were far more interested in earning fat fees for steering their clients to ruinously priced loans that the borrowers could never hope to repay.

The numbers are startling. According to a 2008 analysis by the Center for Responsible Lending, subprime borrowers who went through brokers actually fared worse than those who went directly to lenders. Borrowers who used brokers coughed up additional interest payments ranging from $17,000 to $43,000 for every $100,000 they borrowed.

Lenders were, of course, complicit, happily issuing high-priced loans to people with little or no hope of repaying them. But it was often the brokers who steered borrowers away from affordable loans and toward the high-priced loans in the first place.

Many brokers do legitimate work that helps homebuyers sort through competing loan proposals and make good choices. In those cases, the fees they get from lenders — typically 1 percent or 2 percent of the loan amount — are fully justified. But many others, attracted by obscene profits associated with the subprime lending binge, did not act in a fair and ethical manner. Congress is finally seeking ways to rein in these brokers.

The first step must be to outlaw the kickbacks that lenders pay brokers for steering clients into costlier loans. At the height of the boom, brokers typically worked from rate sheets provided by lenders. These sheets showed not just the prevailing mortgage rates but the reward that brokers could reap for bleeding unsuspecting borrowers. To earn the maximum reward, brokers would entice borrowers into adjustable-rate loans with prepayment penalties — discouraging borrowers from refinancing with more affordable loans and assuring the original lender a handsome fee if the borrower refinanced.

The most clearly unethical form of payment is the so-called yield-spread premium. Brokers can claim this premium by steering a borrower whose credit history qualifies him or her for say, a 7 percent loan, into a more expensive loan at a higher rate. Predatory? Yes. And perfectly acceptable under existing lending laws. A House bill introduced by Representative Barney Frank, a Democrat of Massachusetts, would rightly make yield-spread premiums illegal.

In addition to Mr. Frank’s bill, Congress also will be asked to consider a bill introduced in the House by Representative Keith Ellison and in the Senate by Senator Amy Klobuchar, both Democrats of Minnesota.

Based on a forward-looking Minnesota law, the bill would outlaw collusion between lenders and brokers and would impose a fiduciary responsibility on brokers and other mortgage originators, requiring them to find the most beneficial deal.

The brokers and other mortgage originators will fight these and other measures tooth in nail. But there can be no real reform as long as mortgage brokers can be offered kickbacks and other incentives to steer often naïve borrowers into loans that put them at risk the moment they sign the papers.