Shopping For Service Quality in Loan Providers
August 21, 2006, Revised September 21, 2006
"What can you tell me about how a borrower goes about factoring service quality into the selection of a loan provider?"
Quality of service is a critically important issue in selecting a loan provider. This is especially true in connection with a home purchase, where poor service by a lender or a mortgage broker can kill the deal. Despite its importance, I seldom write about service quality because there is little reliable information available upon which to make reasoned judgments.
I hasten to add that never a day goes by that I don’t hear from borrowers reporting on their experience with loan providers. I don’t make this information publicly available because it is not reliable and is easily misconstrued. Virtually all such letters come from the two tails of the distribution of borrowers: those who were extremely disgruntled and those who were ecstatically pleased. I seldom hear from the great majority of borrowers who fall somewhere in-between.
Reports from disgruntled borrowers, furthermore, are not necessarily reliable. In about half of the cases I have investigated, the problems were caused mainly by the borrower rather than by the loan provider.
This leaves the other half, of course, where the loan provider did indeed screw up, but these legitimate complaints don’t tell me anything useful. A very large proportion of these cases carry the names of the major lenders, there is not one of them about which I have not heard horror stories, but that is to be expected because they account for a large proportion of the loans made.
The fact is that every loan provider screws up on occasion. No matter how well designed a lender’s systems are, if the loan officer dealing with the borrower is incompetent or over-committed, the deal can go sour. Other employees involved in the process, especially processors who have to keep track of the all the information and underwriters who are responsible for approving the deal, can also throw a monkey wrench into the process, though this happens less often.
In other industries, there is usually a very close relationship between the quality of the firm and the quality of the firm’s employees, to the extent that we seldom bother to distinguish the two. In the mortgage lending industry, however, the relationship is much looser.
Real estate agents understand this very well. When they refer customers to a "lender", the referral usually is to an individual loan officer, not a firm. Indeed, loan officers often switch firms without losing the allegiance of the agents, the only concern of the agent being that the new firm provides the processing and other backup support required by the loan officer.
Real estate agents are primarily concerned with one dimension of service quality: bringing the money to the closing table on the due date. The agent’s commission depends on that, and it is critically important to the borrower as well. On the other hand, whether the borrower has been placed in the right loan, or given the best price, are issues of much less importance to the agent than to the borrower.
Aside from real estate agents, there isn’t much information available to a borrower on individual loan officers or mortgage brokers. Recommendations from family and friends are not reliable, because they are usually based on one lending experience, which may or may not have been properly interpreted. Borrowers who make selections based on their common ethnicity with the loan officer or broker are advertising that they are easy marks, and will often be treated accordingly.
It would be good to have a national roster containing information about every loan officer and broker. A small step in this direction was taken recently by Upfront Mortgage Brokers Association (UMBA), the non-profit parent of Upfront Mortgage Brokers (UMBs). I worked with UMBA in designing an information page for each UMB which discloses the broker’s practice toward fees, locking procedures, contract with the borrower, and other important information. See www.upfrontmortgagebrokers.org.
In the absence of information about individual loan officers and brokers, a question arises regarding the various types of loan providers. For example, does a borrower stand a better chance of getting good service from large name lenders such as Countrywide, Wells Fargo, Chase, etc., than from smaller internet lenders, such as Eloan or Amerisave?
"I am choosing between a loan from an internet lender and one from a well-known bank. The loan officer at the bank made the following claims regarding on-line lenders: First, their loan officers are not commissioned, and therefore their service is generally poor. Second, internet lenders sell all their loans, so borrowers don’t know what lender will service their loans. Third, internet lenders don’t stand by their rate locks.."
Lets take the issues one at a time.
The large lenders operate through all channels, but the major channel to which my comments are directed are is the commissioned loan officer (LO). LOs are compensated largely or entirely by commission, and successful ones make a lot of money. They are highly paid because they bring in the borrowers. LOs constitute the marketing muscle of the major retail lenders.
In contrast, LOs working for lenders who find their customers on the internet, such a Eloan and Amerisave, don’t bring borrowers to the firm. The firm finds its potential borrowers on the internet and brings them to the LOs for counseling and gentle persuasion. These LOs may be salaried or commissioned, but commission rates are much smaller than those enjoyed by LOs of the large name lenders.
I don’t think one can infer anything about relative service quality from these facts. My observations of a few hot-shot LOs led me to the conclusion that they were great sales persons, but it is not at all clear that this translates into better counseling or other dimensions of service that affect the long-term interests of borrowers.
However, there is one other difference in the compensation arrangements of the two LO groups that I believe is relevant to service. LOs working for internet lenders do not have any pricing discretion. The prices shown on the screen are those that apply. LOs employed by large name lenders do have pricing discretion, meaning that they can adjust the prices delivered to them, up or down as needed. That’s why they keep their price sheets to themselves.
The LO who can induce the customer to pay more than the posted price, called an "overage", typically shares it with the lender. If the LO has to cut the price to deliver the deal, called an "underage", the shortfall is shared with the lender. Overages are much more common than underages.
I view this as a negative. Many if not most borrowers don’t understand that their dealings with the LOs of major lenders are governed more by the rules of the bazaar than by professionalism, and their ignorance usually costs them.
[September 21, 2006 Note: After the publication of this article, I was challenged by a representative of one major lender who claimed that his firm did not provide pricing discretion to LOs. I am in process, therefore, of surveying the largest 20 retail lenders regarding their compensation practices, which I will report on as soon as it is completed. Readers are also reminded that I have a financial relationship with Amerisave that is explained in Alternative Approaches to Selecting a Loan Provider].
The second point raised by the LO was that internet lenders do not service their loans, so borrowers have no idea what lender will end up servicing their loan. That is true, but it doesn’t matter unless there is some reason to believe that the servicing they end up with is inferior, and that is not the case. There is no information available to borrowers, or to me, about servicing quality. I have never heard of a case where a potential borrower wanted to borrow from a specific lender because he wanted that lender to service his loan.
No way. Internet lenders shift the risks involved in locking prices to the large wholesale lenders to whom they sell their loans. In many cases, these are the wholesale arms of the same large retail lenders we have been discussing. There is no difference in the quality of a rate lock obtained from the LO of a large retail lender or from an internet lender.
However, there is a difference in borrowers’ risk exposure during the period between the time they receive the price quote on which they made their selection decision, and the time the price is locked. This can be a period of one or several days, or even longer. Changes in the market during this period create a hazard that on the lock day, the price will be higher than the price quoted earlier.
In dealing with an internet lender, borrowers get a fair shake on market changes during this period because they can check their price on the internet every day until it is locked. In dealing with an LO for a major lender, on the other hand, borrowers discover that the market price on the lock day is what the LO says it is. This is the source of many overages.
"What can you tell me about how a borrower goes about factoring service quality into the selection of a loan provider?"
Importance of Service Quality
Quality of service is a critically important issue in selecting a loan provider. This is especially true in connection with a home purchase, where poor service by a lender or a mortgage broker can kill the deal. Despite its importance, I seldom write about service quality because there is little reliable information available upon which to make reasoned judgments.
I hasten to add that never a day goes by that I don’t hear from borrowers reporting on their experience with loan providers. I don’t make this information publicly available because it is not reliable and is easily misconstrued. Virtually all such letters come from the two tails of the distribution of borrowers: those who were extremely disgruntled and those who were ecstatically pleased. I seldom hear from the great majority of borrowers who fall somewhere in-between.
Reports from disgruntled borrowers, furthermore, are not necessarily reliable. In about half of the cases I have investigated, the problems were caused mainly by the borrower rather than by the loan provider.
This leaves the other half, of course, where the loan provider did indeed screw up, but these legitimate complaints don’t tell me anything useful. A very large proportion of these cases carry the names of the major lenders, there is not one of them about which I have not heard horror stories, but that is to be expected because they account for a large proportion of the loans made.
Importance of the Individual Loan Officer
The fact is that every loan provider screws up on occasion. No matter how well designed a lender’s systems are, if the loan officer dealing with the borrower is incompetent or over-committed, the deal can go sour. Other employees involved in the process, especially processors who have to keep track of the all the information and underwriters who are responsible for approving the deal, can also throw a monkey wrench into the process, though this happens less often.
In other industries, there is usually a very close relationship between the quality of the firm and the quality of the firm’s employees, to the extent that we seldom bother to distinguish the two. In the mortgage lending industry, however, the relationship is much looser.
Real Estate Agents as a Source of Information
Real estate agents understand this very well. When they refer customers to a "lender", the referral usually is to an individual loan officer, not a firm. Indeed, loan officers often switch firms without losing the allegiance of the agents, the only concern of the agent being that the new firm provides the processing and other backup support required by the loan officer.
Real estate agents are primarily concerned with one dimension of service quality: bringing the money to the closing table on the due date. The agent’s commission depends on that, and it is critically important to the borrower as well. On the other hand, whether the borrower has been placed in the right loan, or given the best price, are issues of much less importance to the agent than to the borrower.
Other Information Sources Are Unreliable
Aside from real estate agents, there isn’t much information available to a borrower on individual loan officers or mortgage brokers. Recommendations from family and friends are not reliable, because they are usually based on one lending experience, which may or may not have been properly interpreted. Borrowers who make selections based on their common ethnicity with the loan officer or broker are advertising that they are easy marks, and will often be treated accordingly.
It would be good to have a national roster containing information about every loan officer and broker. A small step in this direction was taken recently by Upfront Mortgage Brokers Association (UMBA), the non-profit parent of Upfront Mortgage Brokers (UMBs). I worked with UMBA in designing an information page for each UMB which discloses the broker’s practice toward fees, locking procedures, contract with the borrower, and other important information. See www.upfrontmortgagebrokers.org.
Do Large Name Lenders Provide Better Service?
In the absence of information about individual loan officers and brokers, a question arises regarding the various types of loan providers. For example, does a borrower stand a better chance of getting good service from large name lenders such as Countrywide, Wells Fargo, Chase, etc., than from smaller internet lenders, such as Eloan or Amerisave?
"I am choosing between a loan from an internet lender and one from a well-known bank. The loan officer at the bank made the following claims regarding on-line lenders: First, their loan officers are not commissioned, and therefore their service is generally poor. Second, internet lenders sell all their loans, so borrowers don’t know what lender will service their loans. Third, internet lenders don’t stand by their rate locks.."
Lets take the issues one at a time.
Do the Compensation Systems Used by Major Lenders Result in Better Service?
The large lenders operate through all channels, but the major channel to which my comments are directed are is the commissioned loan officer (LO). LOs are compensated largely or entirely by commission, and successful ones make a lot of money. They are highly paid because they bring in the borrowers. LOs constitute the marketing muscle of the major retail lenders.
In contrast, LOs working for lenders who find their customers on the internet, such a Eloan and Amerisave, don’t bring borrowers to the firm. The firm finds its potential borrowers on the internet and brings them to the LOs for counseling and gentle persuasion. These LOs may be salaried or commissioned, but commission rates are much smaller than those enjoyed by LOs of the large name lenders.
I don’t think one can infer anything about relative service quality from these facts. My observations of a few hot-shot LOs led me to the conclusion that they were great sales persons, but it is not at all clear that this translates into better counseling or other dimensions of service that affect the long-term interests of borrowers.
However, there is one other difference in the compensation arrangements of the two LO groups that I believe is relevant to service. LOs working for internet lenders do not have any pricing discretion. The prices shown on the screen are those that apply. LOs employed by large name lenders do have pricing discretion, meaning that they can adjust the prices delivered to them, up or down as needed. That’s why they keep their price sheets to themselves.
The LO who can induce the customer to pay more than the posted price, called an "overage", typically shares it with the lender. If the LO has to cut the price to deliver the deal, called an "underage", the shortfall is shared with the lender. Overages are much more common than underages.
I view this as a negative. Many if not most borrowers don’t understand that their dealings with the LOs of major lenders are governed more by the rules of the bazaar than by professionalism, and their ignorance usually costs them.
[September 21, 2006 Note: After the publication of this article, I was challenged by a representative of one major lender who claimed that his firm did not provide pricing discretion to LOs. I am in process, therefore, of surveying the largest 20 retail lenders regarding their compensation practices, which I will report on as soon as it is completed. Readers are also reminded that I have a financial relationship with Amerisave that is explained in Alternative Approaches to Selecting a Loan Provider].
Do Major Lenders Provide Better Servicing?
The second point raised by the LO was that internet lenders do not service their loans, so borrowers have no idea what lender will end up servicing their loan. That is true, but it doesn’t matter unless there is some reason to believe that the servicing they end up with is inferior, and that is not the case. There is no information available to borrowers, or to me, about servicing quality. I have never heard of a case where a potential borrower wanted to borrow from a specific lender because he wanted that lender to service his loan.
Do Internet Lenders Fail to Stand By Their Locks?
No way. Internet lenders shift the risks involved in locking prices to the large wholesale lenders to whom they sell their loans. In many cases, these are the wholesale arms of the same large retail lenders we have been discussing. There is no difference in the quality of a rate lock obtained from the LO of a large retail lender or from an internet lender.
However, there is a difference in borrowers’ risk exposure during the period between the time they receive the price quote on which they made their selection decision, and the time the price is locked. This can be a period of one or several days, or even longer. Changes in the market during this period create a hazard that on the lock day, the price will be higher than the price quoted earlier.
In dealing with an internet lender, borrowers get a fair shake on market changes during this period because they can check their price on the internet every day until it is locked. In dealing with an LO for a major lender, on the other hand, borrowers discover that the market price on the lock day is what the LO says it is. This is the source of many overages.