July 8, 2003, Revised July 19, 2006, August 21, 2006, November 29, 2006, January 3, 2007
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.
The central requirement to be a UML is that borrowers are able to price their particular deals on the site. A set of generic prices does not qualify, and neither does a site where the borrower must go through a loan officer to get prices. A site that requires personal information about the user before it will return prices, does not qualify.
No lender prices every market niche on-line, but a UML prices some, and is upfront in disclosing which niches it prices on-line and which ones it doesn’t.
Being able to price a deal means having all the price components, not just the rate. This includes mortgage insurance and all the price components of piggyback seconds, where these arise. On ARMs, it includes the index, margin, rate caps, recast period, negative amortization caps, and maximum and minimum rates.
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 discloses all lender fees, including points, origination fees, and any fixed-dollar fees, and guarantees them to closing. This assures borrowers that lender 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 discloses all third party fees with the best estimates possible, indicating which if any are guaranteed by the UML.
Requirement 4: A UML Provides a Clear Explanation of its Lock Requirements, and Discloses Them Prominently: 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 5: 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 6: 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.
