Editor’s note: This is Part 2 of a multipart series.
The initial article of this series examined why the first generation of third-party multilender websites failed, despite rosy expectations and heavy investments by deep-pocketed firms. This article and those that follow will discuss the features that are central to the success of the next generation of sites that will appear in 2011. Perhaps the major feature, discussed in this article, is the provision of competitive loan pricing.
Competitive price quotes vs. competitive price locks
A core function of the third-party network is to collect, store and display price quotes from multiple participating lenders. While this generates competitive price quotes, it does not necessarily generate competitive lock prices that lenders are obliged to honor. A failure to recognize the difference was a critical mistake of the first generation of multilender sites.
The problem is that the more competitors there are on a network, the stronger the incentive to "lowball" — quote prices below those of competitors, and below those the lender has any intention of delivering. Lowballing, in turn, results in lock abuses — if you can’t deliver what you promised, you must find a way to extricate yourself from the promise, and the complexities of the locking process provide many such ways.
A network that generates competitive lock prices, as well as competitive price quotes, must prevent lenders from abusing the lock process. The first-generation sites left the locking process completely in the hands of the lender, which left the borrower as vulnerable to lock abuses as borrowers transacting offline. The new networks will prevent lock abuses.
In today’s market, locking a quoted price is more the exception than the rule. More often, the lender quoting a price on Monday is unwilling to lock until some information — upon which the price is based — has been verified, which may not be until Thursday, at which point the market has probably changed.
Lenders who quote prices Monday but don’t lock until Thursday can scam borrowers by locking the Monday price if rates have since gone down, and offering the highest price they think they can get away with if rates have gone up. However, lenders on the new network will lock at the Thursday price, whether higher or lower, because this will be a network rule and (more important) because the borrower, and also the site ombudsman, can check it. In either case, the borrower must explicitly authorize the lock.
Similarly, when information upon which a price depends has been revised by enough to affect the price, the price adjustment by an offline lender is what the lender says it is. But on the new network, the borrower and ombudsman can check the adjustment.
Transparent lock policies
Lock policies vary between lenders. For example, some lenders offer "float-downs" under which the locked rate can be reduced if market rates decline before closing; others don’t. Lock fees and lock extension fees may also differ. Few lenders disclose their lock policies to borrowers in advance, and none of the mandated disclosures cover them.
The new networks will disclose the lock policies of participating lenders, summarizing the differences that borrowers should consider when selecting a lender. The availability of a float-down option, for example, could induce a borrower to select a lender with a slightly higher price.
The new networks will have an ombudsman to investigate complaints by borrowers that lenders have not treated them fairly, to mediate between the parties, and recommend settlements. In a well-functioning network, the ombudsman will have little to do, but problems will arise occasionally. Most will arise out of the locking process
For example, when a lock expires because the loan cannot be closed on time, the cost is borne by either the lender or the borrower, depending on who was primarily responsible for the failure to close. Disagreements between them would be resolved by the ombudsman. It will be comforting to borrowers to know that recourse is available at no cost if something goes amiss.
Lenders participating in the new network should be certified for their adherence to network rules, which focus on transparency and fairness. They also agree to designate an employee as the ombudsman contact to deal with any disputes that arise with borrowers.
With certification based on operationally defined rules, lenders who don’t want to give up exploitative tactics will not join, while lenders who don’t employ such tactics are grateful for being recognized and distinguished from the others. Participating lenders will also welcome the prospect of dealing with well-informed applicants, who have been qualified by the network and have a high likelihood of becoming borrowers.
Next week: Assuring competitive pricing of third-party services.