Why Do Lenders Itemize Loan Charges?
July 20, 1998, Revised January 8, 2007
"Wouldn't taking out a mortgage be less of an ordeal if lenders, instead of charging borrowers a bunch of different fees, charged a single fee covering everything? Why don't they?"
You have put your finger on one of the needless complexities and irritations of our home loan marketplace. To illustrate the point, here are some of the individual charges I have extracted from various loan settlement sheets: affiliate consulting fee, amortization fee, appraisal fee, credit report, underwriting fee, bank inspection fee, processing fee, lender's inspection fee, settlement fee, signup fee, funding fee, lender's attorney fee, endorsement fee, express mail fee, document preparation fee, notary fee, messenger fee, photograph fee, assumption fee, administrative fee, document review fee, and translation fee.
In other markets consumers wouldn't stand for this. Suppose, for example, when you went to the movies the ticket clerk said "the access charge will be $3, the usher's service is $1.50, your share of our rent is $.75…and we won't be completely certain of these charges until you come out so you will have to line up again for a final reckoning." You probably would go home to watch television! Yet in the home loan market consumers tolerate this nonsense.
The absurd practice of charging for specific itemized services involved in making a loan rather than for the total service goes back to the days when state usury laws restricted the interest rate and fees lenders were allowed to charge. If the maximum allowable interest rate was 6%, for example, but some loans were more costly to administer than others, law makers found it reasonable to allow lenders to recover their higher costs without viewing it as a violation.
Not surprisingly, lenders became imaginative in finding ways to categorize their expenses such that the law would allow them to collect fees from the borrower. And since the acceptable categories varied from state to state, the result was a crazy quilt patch of rules across the nation that still exists, even though the usury laws no longer limit the rates that lenders can charge on home loans.
A few lenders today have indeed adopted the practice of charging a single dollar fee at closing for their own services, rather than a myriad of separate charges. They include Amerisave, Eloan, and ABN-Amro. The first two continue to itemize third party fees, only Amro charges one price covering all fees.
Most lenders continue to itemize charges because they believe that they can extract more in total from the borrower that way. This reflects both their dim view of the shopping acumen of the typical borrower, and the role of the Federal Government which unwittingly supports this view.
While state government regulation provided the original impetus for itemized pricing, Federal Government regulation perpetuates it. The Real Estate Settlement Procedures Act of 1974 ("RESPA") sanctions itemized pricing by providing space on the required Good Faith Estimate of Settlement ("GFE") for any expense category a lender wishes to use. Further, the GSE intermixes lender charges with charges of third parties (for insurance, taxes and the like) and total lender charges are not shown anywhere. In other words, the GFE provides borrowers with all the detail for which they have no use, but no total, which is the only number they really need.
But it gets worse. Because some third party charges are not known with certainty until late in the process, the entire GFE is viewed as an "estimate", although lenders obviously know their own charges with certainty. Viewing lender charges as estimates encourages the practice of some less scrupulous loan officers and mortgage brokers of "overlooking" certain charges at the outset, only to discover them later when it is too late for the borrower to back out.
If RESPA were scrapped, the practice of quoting a single dollar fee would evolve quickly. In the meantime, you must navigate as best you can on your own. I explain how in How to Shop Settlement Costs.
"Wouldn't taking out a mortgage be less of an ordeal if lenders, instead of charging borrowers a bunch of different fees, charged a single fee covering everything? Why don't they?"
You have put your finger on one of the needless complexities and irritations of our home loan marketplace. To illustrate the point, here are some of the individual charges I have extracted from various loan settlement sheets: affiliate consulting fee, amortization fee, appraisal fee, credit report, underwriting fee, bank inspection fee, processing fee, lender's inspection fee, settlement fee, signup fee, funding fee, lender's attorney fee, endorsement fee, express mail fee, document preparation fee, notary fee, messenger fee, photograph fee, assumption fee, administrative fee, document review fee, and translation fee.
In other markets consumers wouldn't stand for this. Suppose, for example, when you went to the movies the ticket clerk said "the access charge will be $3, the usher's service is $1.50, your share of our rent is $.75…and we won't be completely certain of these charges until you come out so you will have to line up again for a final reckoning." You probably would go home to watch television! Yet in the home loan market consumers tolerate this nonsense.
The absurd practice of charging for specific itemized services involved in making a loan rather than for the total service goes back to the days when state usury laws restricted the interest rate and fees lenders were allowed to charge. If the maximum allowable interest rate was 6%, for example, but some loans were more costly to administer than others, law makers found it reasonable to allow lenders to recover their higher costs without viewing it as a violation.
Not surprisingly, lenders became imaginative in finding ways to categorize their expenses such that the law would allow them to collect fees from the borrower. And since the acceptable categories varied from state to state, the result was a crazy quilt patch of rules across the nation that still exists, even though the usury laws no longer limit the rates that lenders can charge on home loans.
A few lenders today have indeed adopted the practice of charging a single dollar fee at closing for their own services, rather than a myriad of separate charges. They include Amerisave, Eloan, and ABN-Amro. The first two continue to itemize third party fees, only Amro charges one price covering all fees.
Most lenders continue to itemize charges because they believe that they can extract more in total from the borrower that way. This reflects both their dim view of the shopping acumen of the typical borrower, and the role of the Federal Government which unwittingly supports this view.
While state government regulation provided the original impetus for itemized pricing, Federal Government regulation perpetuates it. The Real Estate Settlement Procedures Act of 1974 ("RESPA") sanctions itemized pricing by providing space on the required Good Faith Estimate of Settlement ("GFE") for any expense category a lender wishes to use. Further, the GSE intermixes lender charges with charges of third parties (for insurance, taxes and the like) and total lender charges are not shown anywhere. In other words, the GFE provides borrowers with all the detail for which they have no use, but no total, which is the only number they really need.
But it gets worse. Because some third party charges are not known with certainty until late in the process, the entire GFE is viewed as an "estimate", although lenders obviously know their own charges with certainty. Viewing lender charges as estimates encourages the practice of some less scrupulous loan officers and mortgage brokers of "overlooking" certain charges at the outset, only to discover them later when it is too late for the borrower to back out.
If RESPA were scrapped, the practice of quoting a single dollar fee would evolve quickly. In the meantime, you must navigate as best you can on your own. I explain how in How to Shop Settlement Costs.