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July 8, 2003
Since I began fielding questions about
mortgages in 1998, I have been frustrated by my inability to answer one question
in particular, which gets thrown at me all the time. The question is "Can
I trust [name of mortgage lender]?" A variant is "Where
can I go to find out about [name of mortgage lender]?"
Many potential borrowers are shocked to
discover that there is no registry of bad apples, and no system to certify good ones. So I finally decided to start a certification system of my own. I call the
lenders who are certified Upfront Mortgage Lenders, or UMLs. For a number of
reasons having to do with my capacity to monitor lender performance, the
certification process applies to internet-based lending only.
It is important for mortgage shoppers to know
what is and what is not being certified. A UML is not necessarily the lender
with the lowest interest rate, the fastest processing, or the most complete
product line. At a future time, these and other factors might be included. Right
now, however, certification is directed solely to the provision of the
information that borrowers need to make informed decisions; and to assurance of
fair treatment after shoppers have become applicants and committed themselves to
the lender.
The requirements are as follows:
Requirement 1: A
UML Must Provide Quick Access to the Market Niches it Prices On-Line.
The home loan market in the US is divided
into millions of market niches and no one lender serves them all. Shoppers need
a quick way to determine whether a particular lender prices the niche in which
that shopper falls. If not, the shopper can go elsewhere without wasting time.
Each UML fills out the form shown at Market
Niches Priced On-Line.
Requirement 2: A UML includes its
fixed-dollar fees, including credit and appraisal charges, in its price, and
guarantees them to closing. This assures borrowers that price information is
complete, and that new fees won�t be added, or existing ones increased, after
they have committed themselves to working with the selected lender.
Requirement 3: A UML Provides a Clear
Explanation of its Lock Requirements: Mortgage shoppers need to know when
they have the discretion to lock the terms of the loan. The explanation includes
any required payments, processes that must be completed, how expired locks are
handled, and whether the borrower is committed as well as the UML.
Requirement 4: A UML discloses all the
information about its ARMs needed by shoppers to make intelligent decisions.
Shoppers need information on potential ARM performance � what will happen to
the interest rate and mortgage payment under assumptions about future interest
rates that make sense to the shopper.
UMLs can comply with this rule in two ways.
One way is to offer schedules of monthly payment and interest rate under
no-change and worst-case scenarios. The first assumes that the most recent value
of the index remains unchanged through the life of the loan, while the second
assumes that the ARM rate increases by the maximum amount allowed in the
contract.
The alternative is to provide the information
needed for the shopper to calculate these (and perhaps other) scenarios using
calculators on my web site or other sites. The required information is shown in Information
Needed to Evaluate an ARM.
Requirement 5: A UML informs borrowers if
its loan officers are compensated in a way that gives them a financial incentive
to overcharge the borrower. Loan officers often benefit financially if they
can induce the borrower to pay more than the prices posted by the lender or
broker. Where this is the case, the borrower ought to know about it.
Copyright Jack Guttentag 2003
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