We are considering changing our relationship with mortgage brokers. Currently, we pay the mortgage broker 1/2 point at closing and it is disclosed on the GFE as a fee paid by bank to broker. Is there a problem changing to the following scenario: Our rate is 6.25% for a 30yr fixed and we will pay the broker 1/2 point. If they submit a loan for a 30yr fixed at 6.50%, we will pay the broker 1%. I've been told that this is a common practice among bankers and brokers and that as long as we're consistent, it is okay. Of course, we would have a rate schedule and the broker can't just make up rates. Also, how would the payment to the broker be disclosed? The same way we do it now? and if so, how about the difference in the rate? Does that have to be disclosed?? Please help.

Under RESPA, only payment for services actually performed can be given. How does the broker earn twice as much for a 30yr loan??

Well it's not just a higher fee for a specific product. Now, we're actually talking about just having a separate rate sheet for the brokers (1/4% higher than our regular rates) and paying the brokers 1% period, without the lower rate with 1/2% option. This way it's the same for all broker loans. Also, as far as services, the broker completely processes the application.

I agree with Randy. How is it "reasonable" for the broker to earn more?

I'd also be concerned about fair lending issues. If they charge minorities the 1/4% higher, it becomes your problem.

What about in the new scenario - where they don't have rate options? - I just have a separate rate sheet (different from my direct loans) for wholesale area (broker loans) and I pay them 1% flat at closing???

You are going to have to weigh the fair lending/RESPA implications of that scenerio also. Does the broker do three times the work on a $300,000 loan versus a $100,000? Sounds like you are just paying an overage rather a broker fee. These practices are going to come under increased scrutiny in the future and what was acceptable may no longer be accceptable in the future.

I hear 'tick tick tick' in the background.

Disclose it as a Yield Spread Premium. In aggregate or separately.
A re-visit to HUD I and RESPA rules regarding YSPs will tell you where to enter it.