A loan broker is an individual or business that facilitates loan originations as an intermediary between lenders and borrowers. Loan brokers typically focus on handling and processing loan applications. Depending on the broker and its relationship with the funding lender, the broker may also use the lender’s automated underwriting system (AUS) to obtain a preliminary approval for the applicant – and sometimes even underwrite and close the loan with the borrower.
Many businesses and individuals turn to loan brokers to help them find and arrange financing, especially when they’re unable to obtain a loan from their bank or credit union. Successful loan brokers typically have established relationships with direct lenders and financing sources.
Although loan brokers do work with retail and commercial banks, loan brokers often also look to alternative sources for loans. For example, many loan brokers often turn to pension funds, investment banks, foreign sovereign funds and even individual investors to obtain the financing their borrowing clients need.
The answer is it depends. In general, either the borrower or the lender can pay the loan broker for his or her services. Often, it is the lender who compensates the broker for bringing the loan application and borrower to that lender. In some cases, it is the borrower who compensates the loan broker
However, when the lender provides most or all of the broker’s compensation, the question of broker loyalty comes into play. Who do brokers really serve if their payment is coming from the lender?
Depending on the loan program and state, the broker may be legally required to disclose all incomes he or she receives for originating a loan – and from whom.
Loan brokers work in both the commercial and consumer lending arena. And because brokers can serve a variety of different functions for the direct or end lender, there are varying types of loan brokers:
Depending on the type of loan programs and financing products being handled and the level of work performed by the loan broker, the broker may need to be licensed by the state in which the borrower or subject property is located.
In general, consumer loan brokers are usually required to be licensed by each of the states in which they operate. Commercial loan brokers, however, often do not need to be licensed. With a few exceptions, most states do not require commercial loan brokers to be licensed.
Loan borrowers should always check the licensing requirement in their state and, if a license is required, make sure that the loan broker is properly licensed. In addition, loan borrowers should make sure to conduct their due diligence, explore all their options and speak with a knowledgeable financial advisor.
Disclaimer: NetCredit is a direct personal loan provider and does not provide financial advice, nor does it vouch for any vendor or service mentioned on our NetCredit personal finance blog or online consumer loan glossary. Always research and perform due diligence on any service provider or vendor before deciding to use them, and we recommend that you speak with a financial advisor regarding all decisions that will affect your finances.