Lender policy key to mortgage shopping
Truth in Lending disclosures may be of little use
By Jack Guttentag, Monday, August 31, 2009.Among the more interesting of the Federal Reserve proposals for amending the Truth in Lending Act (TILA) is one to expand the disclosures required at application. The purpose is to encourage mortgage borrowers to shop before they commit themselves.
The major new disclosure is one called "Key Questions to Ask About Your Mortgage." The heading atop the list of key questions states, "The only way to make sure you get the best possible loan terms is to talk to several lenders: Shop, Compare, Negotiate."
This is a great idea, except that the seven questions posed by the Fed will be answered in the same way by every lender. I will illustrate with answers to the first three questions that would work for every lender.
Fed: "Can my interest rate increase?"
My answer: It can if you select an adjustable-rate mortgage (ARM).
Fed: "Can my monthly payment increase?"
My answer: It can if you select an ARM, or a fixed-rate mortgage (FRM) with an interest-only option.
Fed: "Will my monthly payments reduce my loan balance?"
My answer: It will unless you select a fixed-rate mortgage with an interest-only option, or an ARM with an interest-only option or a negative-amortization option, and you take advantage of the option.
I could do the same with the remaining four questions. The problem is that the questions apply to mortgage types or options rather than lender operating policies. Since with minor qualifications all lenders offer the same types of mortgages and options, they will all answer the seven questions in the same way. The answers would be useless to borrowers trying to select among different lenders.
To help borrowers select from among different lenders, the questions must apply to lender operating policies, not to their mortgages. There are important differences in operating policies that borrowers currently have no way of knowing. The following are seven questions that I would want the answers to if I were selecting a lender.
Q: Do you allow your loan officers (LOs) to charge "overages"?
Comment: I would not want to deal with an LO who has a financial incentive to overcharge me. An overage is a price higher than the price the lender shows on its price sheets, which show the prices the lender will accept. Overages are usually shared with LOs, encouraging them to charge what the traffic will bear. Some lenders do not allow overages, and this disclosure at the point of application will give them the edge they deserve.
Q: Do you have a financial interest in, or a financial arrangement with, any of the third parties providing services to your borrowers?
Comment: I would not want to deal with a firm that referred me to title agents or other service providers in which they had a financial interest. Overcharges on third-party services are chronic, and lender deals with service providers are a major reason. The RESPA restrictions on payment of referral fees have had no impact, but a disclosure requirement would. Note to home purchasers: This is also a good question to ask your Realtor. ...CONTINUED
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Submitted by Robert T. Boyer, Ph.D. on August 31, 2009 - 10:09am.
These are great observations and questions that should be asked. I would offer that specific details on the loan type should be provided as well, but not ones that a blanket statement can satisfy.
Additionally, we have oft heard that people didn't really understand what a neg-am loan really was or what an adjustable rate loan could do. Perhaps a disclosure needs to include a graph that presents total out of pocket costs, on a month by month basis, for several different loan types being offered by a lender with all the fees, loan buy downs, etc. paid by the borrower. Then it becomes clear very quickly there the break-even points are. A similar chart for remaining principal over time would be useful also.
To deal with the unknown of future rates, the governing body should mandate two (or three) scenarios be presented. 1. Today's rates continue. Then borrowers would see how the teaser rates erode over time. 2. Rates, one year from today are at +2%. Then the borrower would see the payment risk of their ARM vs a fixed. 3. For neg-am loans, what happens if they pay the minimum.
The idea of wanting LOs to be certified financial planners is conceptually good, but that specific implementation is wrong. A CFP is much too tied into the SEC end of the world with a ton of additional specialized knowledge that is beyond excessive for the job of an LO. And keeping up with all the continuous legal changes is almost a full time job in and of itself. It would be useful, however, if there were a new classification, say one notch below a CFP, that ensured some level of financial expertise existed. Such a classification should include a focus on the real estate end of the world, which does not seem to be an important part of a CFP.
Robert T. Boyer, Ph.D.
Co-Founder - FinestExpert.com
The Cashflow Search Engine
Home of the FE-Score
VP America's Finest Real Estate
Submitted by Bradley Allen on August 31, 2009 - 12:24pm.
Interesting. The article seems to be exclusively geared toward lenders. Only one of the questions asked might apply directly to brokers. The intent, it seems, is to offer guidance to help the borrower shop among lenders. That's a service they might (and should) get with a broker. But no questions are posed that would help a borrower shop for a broker (a provider of origination services). I find that a little strange given that brokers have been the source of the majority of loan originations for several years now (don't know if that's still true).
The last question is particularly interesting. There is generally no regulatory standard for holding out as a financial planner. If having LO's that are financial planners becomes point of differentiation, all the lender needs to do is define his LO's as financial planners (he might even have them become CMP, CMPS, or any number of new "planning" designations for LO's that would likely spring into existence). That is simply window dressing. If the lender seeks to have his LO's become CFP's or hires CFP's it will become even more interesting. If the LO of a lender is a CFP, he has a problem. As a CFP he is bound (by the CFP Board of Standards - not a regulator) generally to act as a fiduciary when rendering financial advice - he is an agent of the client (borrower); as an LO of a lender he is bound to act as an agent of the lender who does not have fiduciary responsibility. Guttentag's point seems to be that a lender who hires CFP's as LO's will be superior because it will have LO's who are qualified to offer financial advice. Again, there is no regulatory standard that defines who is "qualified to offer financial advice", and furthermore, it would be unethical for a lender to suggest that it is in the business of rendering financial advice - lenders make loans. Lenders are not in the advisory business nor should they be. The conflicts of interest are overwhelming. Guttentag says, "I would not want to deal with an LO who has a financial incentive to overcharge me" - so why would he consider taking financial advice from a lender that similarly has a significant financial incentive to overcharge?
A broker acting as fiduciary, i.e., acting on behalf of the borrower, is the answer. A broker can spot and avoid the overcharging lenders much more readily that a consumer. And a true fiduciary standard is the key to removing the financial incentive that currently exists for the broker to overcharge for his services – a broker’s fee should not be simply a retail markup but rather should be a fee set based on the origination services being provided. A broker, acting as a fiduciary, is necessarily operating in an advisory capacity. Guttentag gives no guidance for comparing loan origination services offered by competing brokers. And the uneducated consumer (as well as most LO’s) doesn’t understand the difference between shopping for a loan and shopping for a provider of loan origination services.
Brad Allen, CFP(R)