Chapter 15 - Mortgage Brokerage

Mortgage Brokerage and Lending

The mortgage landscape in New York is strictly regulated by the New York State Department of Financial Services (DFS), formerly known as the Banking Department. Understanding the distinction between those who "arrange" loans and those who "fund" them is a critical component of the state exam.

I. Defining the Mortgage Broker

A Mortgage Broker is an intermediary. They do not lend their own money; instead, they serve as a matchmaker between a borrower and a lender.

• Role: A mortgage broker is registered by the NYS Department of Financial Services to place, negotiate, solicit, and process mortgage loans.

• Compensation: They earn a fee for their services, which may be paid by the borrower or the lender (often called a Yield Spread Premium).

• Transaction Types: Mortgage brokers assist in various scenarios, including:

  • Acquisition (buying a home).

  • Gut Renovation and Construction/Development.

  • Conversion (e.g., changing a building from a warehouse to lofts).

  • Refinancing existing debt.

II. Licensing Requirements & Costs

To operate as a mortgage broker or loan originator in New York, individuals must meet rigorous federal and state standards under the SAFE Act.

Registration Process

• NMLS Account: All applicants must register with the National Multistate Licensing System (NMLS) to receive a unique ID number.

• Education: Completion of 20 hours of pre-license education is required.

• Testing: Applicants must pass the official NMLS mortgage license exam.

• Renewal: Licenses are valid for one year and must be renewed annually (expiring December 31st).

Fee Schedule

• Investigation Fee: $1,500 (Non-refundable).

• Fingerprint Fee: $102.25 (Required for background checks).

• Branch Office Fee: $500 for each additional location.

• Loan Originator (Individual) Fee: $319.

Surety Bond Requirements

A mortgage broker must post a surety bond to protect consumers. The amount is based on the broker’s annual loan volume:

• $10,000 bond for volume up to $1,000,000.

• $15,000 bond for volume between $1M and $7,499,999.

• $25,000 bond for volume between $7.5M and $14,999,999.

• $50,000 bond for volume of $15,000,000 or more.

III. Dual Agency & Ethical Disclosures

A conflict of interest often arises when a licensed Real Estate Broker also acts as a Mortgage Broker in the same transaction.

• The Conflict: As a real estate agent, you represent the seller’s interest (highest price). As a mortgage broker, you represent the buyer’s interest (securing a loan).

• Disclosure Requirement: Under NYS Banking Law, a dual agency relationship must be disclosed at the first substantive contact.

• Informed Consent: The agent must present the Mortgage Broker Dual Agency Disclosure Form.

• The Rule: Both the buyer and the seller must provide written informed consent before the agent can act in both capacities.

IV. Mortgage Broker vs. Mortgage Banker

The "Banker vs. Broker" distinction is a favorite topic for exam questions. Use the following breakdown to differentiate them:

Mortgage Banker (The Lender)

• Licensing: Bankers are Licensed (not just registered) by the NYS Department of Financial Services.

• Funding: They use their own funds (or lines of credit) to originate and fund loans.

• Service: They often "service" the loan (collecting monthly payments).

• Capital Requirements: To be a Banker, one must have:

  • A minimum net worth of $250,000.

  • An open line of credit of at least $1,000,000.

  • 5 years of experience in originating residential loans.

• Fees: $3,000 Investigation fee; $50,000 starting surety bond.

Mortgage Broker (The Intermediary)

• Registration: Brokers are Registered with the NYS Department of Financial Services.

• Funding: They cannot fund loans. They bring the borrower to a lender (like a banker).

• Net Worth: Unlike bankers, there is no specific net worth requirement for brokers.

⚠️ EXAM ALERT: QUICK FACTS

• The "Middleman" Rule: Remember that a Mortgage Broker "arranges" or "solicits" loans for a fee but never funds them with their own money.

• Net Worth Trap: Only Mortgage Bankers are required to have a $250,000 net worth and a $1,000,000 line of credit. Brokers do not have these requirements.

• The Regulator: All mortgage activity in New York is overseen by the NYS Department of Financial Services (DFS).

• Dual Agency Form: If you are acting as both the real estate broker and the mortgage broker, you must get written consent from both parties using a specific disclosure form.

Key Terms

Key Terms

Lender Rebate: A payment made by a lender to a mortgage broker or borrower that can be used to offset closing costs, usually in exchange for the borrower accepting a higher interest rate. 

Mortgage Banker: An individual or entity licensed by the New York State Department of Financial Services to originate, fund, and sometimes service mortgage loans using their own funds or funds borrowed from a warehouse line of credit. 

Mortgage Broker: An individual or entity registered with the New York State Department of Financial Services that acts as an intermediary, bringing borrowers and lenders together for a fee but does not fund the loans themselves. 

Mortgage Broker Dual Agency Disclosure Form: A mandatory disclosure form in New York used when a real estate licensee acts as both the real estate broker and the mortgage broker in the same transaction. 

Mortgage Commitment: A formal written communication from a lender to a borrower indicating that the lender has approved the loan application and promises to provide the funds under specific terms and conditions. 

Nonconforming Loan: A mortgage loan that does not meet the standardized purchase requirements of Fannie Mae or Freddie Mac, often because the loan amount exceeds the "conforming" limit (a jumbo loan) or because the borrower has unique credit issues. 

Pre-Application and Fee Agreement: A required written agreement between a mortgage broker and a borrower that outlines the services to be provided and any fees that may be charged during the application process. 

Preapproval: A formal evaluation by a lender that determines a specific maximum loan amount the borrower is qualified for based on a thorough review of their credit, income, and assets. Prequalification: An informal, preliminary assessment of a borrower's ability to obtain a loan based on unverified information provided by the borrower. 

Rate Lock: A written agreement in which a lender guarantees a specific interest rate and a certain number of points to a borrower for a set period while the application is processed. 

Underwriting: The process by which a lender evaluates the risk of a borrower and the property to determine if the loan should be approved.