Knowing the difference between a retail bank and a mortgage broker could save you money.
Years and years ago when someone wanted money to buy a home, they would go to their bank. The bank would evaluate the application, go to its vault of money and transfer it to the borrower’s account to be used to buy the home. The funds the bank used came from the deposits of other bank customers. You remember the Christmas Classic, “It’s a Wonderful Life” don’t you? When there was a mini-bank run and the tiny bank lobby was filled with bank customers demanding their money? It was explained to them all the money wasn’t in the bank but used to help other bank customers buy their own home.
How Retail Banks Operate Today
Today, banks operate on a slightly different model. While banks use customer deposits when it comes time to finance a home for a customer, a line of credit is used instead. Once the home has been financed, the bank then sells the loan, replenishing the line of credit. It’s a bit more complicated than that but this is how banks finance the purchase of a home in its simplest form.
Another source of funds to buy a home is from a mortgage broker. A mortgage broker, like any other broker, doesn’t access its own line of credit but arranges financing for a client with a mortgage company. The mortgage company in turn uses a line of credit to fund a particular transaction and then sells the loan individually or in bulk, again replenishing the line of credit in order to make more loans.
In the end, both the bank and the mortgage broker ultimately provide the same service. They both are a source of funds to finance a home. But they are different in other ways, primarily in how they both are regulated.
Retail Bank vs. Mortgage Broker
Banks are regulated by both federal and state statute, primarily by the Office of the Comptroller of the Currency, or OCC. The Federal Reserve supervises and regulates larger, national banks as well as smaller, regional state-chartered banks. The Federal Deposit Insurance Corporation, or FDIC also plays a role in banking regulation. These guidelines address multiple banking operations such as reserve requirements, consumer lending and interest on checking and savings accounts, just to name a few. A bank is sometimes referred to as a “depository” institution because it accepts deposits from its customers.
A mortgage broker however is not regulated by the OCC or FDIC but does however have to meet specific licensing and education requirements both before becoming a mortgage broker as well as annual continuing education requirements.
A mortgage broker must first complete an initial prelicensing course of at least 20 hours of education. This 20 hour course covers a wide range of topics relating to mortgage lending. Included in these 20 hours there must be at least three credit hours devoted to Federal Laws pertaining to mortgage lending and consumer protections, three credit hours of ethics plus an additional 14 hours of approved electives. In addition to the initial 20 hours of prelicensing a minimum of eight hours of continuing education in approved courses each and every year. In California and for some other states in order to become a mortgage broker it requires a real estate salesperson’s or a broker’s license through the California Bureau of Real Estate. This requires college level courses to attain the license. In addition, there is a 45 hour renewal requirement every four years consisting of consumer service or consumer protection courses along with courses in ethics, fair housing and management etc.
Benefits of Working with a Mortgage Broker
A loan officer who works for a retail bank is not required to complete the 20 hours of credit that a mortgage broker must. If a loan officer works for a “depository institution” there is neither a requirement to take these additional credit hours initially nor any requirement for annual continuing education.
When you walk into your bank and apply for a mortgage at a loan officer’s desk, the loan won’t typically be processed there at the bank. Instead, the bank loan officer accepts your loan application and then forwards it to another location where the loan will be processed, documented and approved.
A mortgage broker will also accept your loan application but can also prequalify you based upon the information provided, run a credit report and issue a preapproval letter. The mortgage broker will then locate a mortgage lender and forward the entire package for a final approval. Due to the strenuous prelicensing requirements as well as annual continuing education, you will know in advance you’re working with a loan officer that is not only properly licensed but well versed in the mortgage industry.