Bellwether Beacon Q2 2014 – To Fee or Not to Fee?
(The debate over up-front loan fees rages on…)
“To fee or not to fee, that is the question.”
If Shakespeare was a commercial loan broker in today’s lending market, he would undoubtedly ask this question. The topic of charging up-front fees has been debated by many commercial brokers, and has been a source of confusion among borrowers for many years. We feel it is time to shed some light on the issue and offer some practical, unbiased recommendations.
As loan brokers, we are compensated on a contingent basis, based upon the closing of the borrower’s loan and being paid a percentage of the loan amount at closing. However, some brokers charge an up-front fee in addition to the “success fee” at closing. This has sparked a long-running debate as to whether the up-front fees are warranted and appropriate. While many borrowers don’t feel they should pay a fee up-front, it is a popular practice in the marketplace today. We feel the real question isn’t whether or not to charge a fee up front, but how much. There are numerous arguments to support the policy, and here are just a few:
First, the borrower pays his or her attorney and accountant a retainer or deposit for work being done, so why shouldn’t a loan broker be given the same professional courtesy? We have research time and cost to prepare a loan for presentation to a lender for funding, so we incur expenses before the loan is ever submitted for review, with no guarantee of approval. Because of this investment of expertise, our time should be compensated to some extent. As such, we believe in charging $495 as an application fee is large enough to cover our costs, yet small enough not to be a deterrent to the borrower.
Second, borrowers say that they don’t have to pay a bank a fee to get a loan funded for them. However, the borrower is paying their bank a loan fee, whether they realize it or not. Many banks will charge a “due-diligence” or “good-faith” deposit once terms are issued, which include fees to compensate the bank for their underwriting process. In addition, many banks will also charge a fee at closing to compensate them for their time, so banks receive income to account for their costs in evaluating the loan.
Third, the loan client can decide to proceed with the broker based upon the costs involved in funding their loan. Although many brokers don’t disclose their fees up-front, we believe in making the fee agreement a part of the application, so borrowers know exactly what we charge before they agree to proceed.
Although up-front fees will continue to be debated among brokers and borrowers, it is ultimately the borrower’s choice to proceed with the broker or not. As long as the fee amount is justified and appropriate, the broker has a strong likelihood of engaging the loan project. We at Bellwether Funding feel we have a fee structure that has proven to be effective and fair over the years. Yet it is the successful result of funding the loan that is the ultimate goal of the process, not the up-front fee paid for the brokers’ time that matters most. That creates a win-win situation for borrower, broker and lender alike.