Are Loan Brokers looking out for your best interests?
Many small to mid-size firms and investors look to loan brokers to help them secure financing for their infrastructure, properties, or operations. What most brokers fail to mention is that:
Brokers do not necessarily have your best interests at heart when arranging financing on your behalf.
In fact, in many instances, brokers are receiving far more compensation than they disclose to you, the trusting client.
How does this happen?
Oftentimes, brokers are compensated by the funding sources to which they deliver their clients. These fees are sometimes in the form of “yield spread premiums”, which are fees a broker can earn for “up-selling” the actual rate the lender is offering on the deal.
For example, on many commercial real estate transactions, a broker might earn a fee of as much as 1% of the loan amount for every 0.25% they are able to “upsell” the rate to the client. So, if we had a $5 million transaction wherein the lender was offering financing to the broker at 6%, the broker could earn $100,000 in additional compensation by “upselling” the interest rate at 6.5% to the client.
Such “yield spread premiums” are rarely, if ever, disclosed to the client, and may be on top of a disclosed “origination” or “brokerage” fee charged by the broker.
In other instances, brokers are compensated in the form of plain-old referral fees, which are also rarely disclosed to clients.
These undisclosed fees can serve as an impetus for a broker to deliver a client to a lender that might not be offering the best terms available for the client’s need, or, if the lender is offering the best terms available, the client may receive less favorable terms from the broker as the broker looks to collect a yield spread premium.
It is our opinion that such undisclosed fees are unethical and clearly not in the best interest of the client. As such:
We guarantee that we will not accept any referral fees or yield spread premiums without full written disclosure to, and agreement with, our clients beforehand.