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Q: I am shopping for a mortgage. I have heard that there are hidden fees to mortgage brokers and that these fees can increase the interest rate on my loan. How can I find out what these fees might be in advance?

A: The federal government has periodically attempted to help consumers by mandating disclosure in connection with residential mortgages. The Real Estate Settlement Procedures Act (RESPA) requires consumers receive disclosure at various times in the transaction.

Lenders must provide good faith estimates of closing costs at time of loan application, a special information booklet, and a mortgage servicing disclosure statement. A specific settlement statement must be used to show all charges to borrowers and sellers in connection with the residential transaction.

The Federal Truth In Lending Act (TILA) also requires disclosure of key terms of the lending arrangement and costs. However, neither RESPA nor TILA require disclosure of all costs. Fees paid to mortgage brokers by lenders are one expense that need not be disclosed and does not generally appear on settlement statements.

The mortgage lending industry generally revolves around the sale of mortgages on Wall Street. Large institutional investors (such as pension funds and insurance companies) purchase blocks of mortgages to hold as long term investments. The interest rate desired by these investors varies from day to day and can vary between investors. Lenders commit to sell blocks of mortgages at certain interest rates to these investors and then fill their commitment by closing mortgage loans with consumers.

Profit in the lending industry comes from three basic sources. First are charges by the lender for services in connection with the loan such as document preparation. Second are points or loan origination fees, which are generally charges to the borrower paid the lender or mortgage broker for the privilege of borrowing.

Third is payment of a yield spread premium. The yield spread premium need not be disclosed to the borrower and is the only one of the these three profit sources that does not usually appear on the closing statement.

Yield spread premium is hidden profit for a mortgage broker. It’s the premium paid by a lender for a loan that bears a higher interest rate than the Wall Street market rate for that lender. This hidden fee can yield thousands of dollars in profit for the mortgage broker and can encourage the broker to arrange higher interest rate loans because they are more profitable. Because the yield spread premium is hidden profit that increases interest rate to the borrower, Florida’s Legislature recently adopted a law that requires disclosure of these fees to borrowers.

Effective Oct. 1, mortgage brokers can only be paid a fee if they have a signed and dated mortgage brokerage agreement between the mortgage broker and the borrower. The agreement must be signed within three business days after a mortgage loan application is accepted. And, if the mortgage broker is to receive payment of any kind from a lender, the agreement with the borrower must reference the maximum total dollar amount of the payment. The mortgage brokerage agreement must also state the nature of the relationship with the lender, how compensation is paid by the lender, and how the mortgage interest rate affects the compensation paid to the mortgage broker. When the mortgage broker determines the exact amount of payment for the lender, the broker must inform the borrower in writing within three business days and not less than three business days before execution of the settlement statement.

The new law also requires disclosure of all loan fees in a good faith estimate. The good faith estimate must identify the recipient of all payments charges to the borrower. It must also disclose all fees earned by the mortgage brokerage business, including payments from the lender. The good faith estimate must be provided to the borrower with the written mortgage brokerage agreement.

Until the new law is effective, mortgage brokers needs not disclose these fees. But, that does not stop you from asking for disclosure. It’s the legislatures hope that the expanded disclosure will allow borrowers to compare loans from different sources and make informed decisions. In the interim, it will be harder to obtain this information.

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William G. Morris is a lawyer with offices at 247 N. Collier Blvd., Marco Island. The column is not intended to be legal advice for specific circumstances. General questions can be sent by e-mail to wgmorrislaw@earthlink.net or by fax to (239) 642-0722. Read other columns at http://www.wgmorris.com.