April 22, 2012
Potential mortgage borrowers look to mortgage lenders for two things: trustworthiness and decision help. They require trustworthiness because mortgages are devilishly difficult to shop effectively - see Shopping For Mortgages Compared to Shopping For Automobiles. Borrowers require decision help because they must make critical decisions for which they are seldom prepared, and the lenders with whom they are working have critical data that affects the decision. See Can Mortgage Borrowers Make Better Decisions?
The record is dismal on both counts. There has never been a registry of bad apple lenders available to borrowers, and lenders leave decision support to loan officers who have neither the training, back-office support or incentive to do it effectively. This is what induced me to begin a certification process.
The initial focus was trustworthiness, which led to the Upfront Mortgage Lender (UML) designation in 2003. In 2012, I developed the Certified Lender Network (CLN) with participating lenders termed Certified Network Lenders (CNLs). The purpose of the network was to provide both trustworthiness and decision support. The CLN provides all the benefits of UMLs, and much more.
In the balance of this article, I will describe each UML
certification requirement, and indicate how the requirement applies to
Requirement 1: Access to Market Niches Served
A UML provides 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. UMLs provide this information in a table of my design that is easily accessed on its web site. If the UML does not serve the shopper’s niche, she can go elsewhere.
CNLs do the same, but there is one significant difference: borrowers can access all CNLs at one web site (mine), and deal with one format for displaying price information. In contrast, borrowers must access each UML separately, and deal with each lender's unique format
Requirement 2: Lender Fee Guarantees
A UML discloses all lender fees, including points, origination fees, and any fixed-dollar fees, 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.
CNLs are subject to the same requirement. But in addition, the Certified Lender Network provides decision support to borrowers choosing between different combinations of total lender fees and interest rate.
Requirement 3: Clarity in Lock Requirements
A UML provides a clear explanation of its lock requirements, and discloses them prominently. The need for this became increasingly important after the financial crisis, and I suggested to the UMLs that they revise their section on locks to respond to the following questions:
- What Must Be Done Before We Will Lock Your Loan?
- What Happens If The Market Price Rises Before We Can Approve Your Application And Lock Your Loan?
- What Happens If The Market Price Drops Before We Can Approve Your Application And Lock Your Loan?
- How Long Are Locks Good For?:
- How and When Can A Borrower Request a Lock?
- What Is Covered By A Lock?
- What Fees Must The Borrower Pay To Lock?
- Under What Circumstances Are Fees Refunded?
- What Happens If The Market Price Increases After The Loan Is Locked?
- What Happens If The Market Price Drops After The Loan Is Locked?
- What Happens If Critical Information In the Application, Such as the Borrower’s Employment, Changes After the Lock?
- What Happens If The Borrower Wants To Change The Type Of Mortgage (Or the Rate/Point Combination) After The Price Is Locked?
- What Happens If The Loan Cannot Be Closed Within The Lock Period?
The problem with this list is that it is too open-ended and vague to be enforced, and implementation has been left entirely to the UMLs. The best I could do was suggest to shoppers that in selecting a UML they check the list to see how well the UML has complied.
The lock rules for CNLs, in contrast, are precise and enforceable.
Maximum Lock Fee: CNLs charge borrowers a maximum fee of $295 to process their loans, with the charge credited back to the borrower at closing. The lender can also collect an appraisal fee of $300-$800, depending on the type of property and its size, to cover the appraisal cost. None of this fee goes to the lender, and it is not refundable.
Lock Confirmation Statement: Upon locking a loan CNLs must provide a lock confirmation statement that includes the following:
- Product Type
- ARM detail(margin, index value, adjustment caps, max/min rate)
- Loan amount
- Interest rate
- Other lender fees
- Mortgage insurance premium - upfront or monthly
- Lock expiration date
“Twin Sibling Rule”: CNLs that do not lock immediately must lock the price the lender would quote on the same day on the identical transaction to the borrower’s twin requesting a price quote. This rule implies that if the market price decreases before the price quoted to the borrower can be locked, the CNL will lock the lower price. If the market price increases before the price quoted to the borrower can be locked, the CNL will not lock until explicitly authorized to do so by the borrower.
Adjusting the Price In Response to a Property Appraisal: CNLs that over-ride a price lock because a property appraisal alters the pricing must play it both ways: If the appraised value is higher by enough to lower the price, the borrower receives the benefit of it.
Failure to Close: CNLs that fail to close within the lock period will extend the period at no cost to the borrower: If the borrower is primarily responsible for the failure to fund, the CNL may charge a fee for a lock extension, but must post that fee. If the CNL and borrower disagree on who was responsible for the failure to fund, the CNL agrees to accept the judgment of the professor.
Requirement 4: Disclosure of Third Party Fees
A UML discloses all third party fees with the best estimates possible, indicating which if any are guaranteed by the UML. CNLs do the same. However, the Certified Lender Network also provides access to prices posted by third party service providers other than those offered by the lenders on the site, which UMLs do not.
Requirement 5: Provision of ARM Data
A UML discloses all the information about its ARMs needed by shoppers to make intelligent decisions. The required information is shown in Information Needed to Evaluate an ARM.
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. None of the UMLs do this. The alternative is to provide the information needed for the shopper to calculate these (and perhaps other) scenarios on their own, possibly using my mortgage payment calculators 7b, 7c and 7ci. The UMLs do it this way.
CNLs provide the same ARM data, but shoppers are not left on their own to enter the data into calculators. Rather, the relevant calculators are integrated into the decision process to generate schedules of monthly payment and interest rate under no-change and worst-case scenarios. This is done as part of the general decision support offered to mortgage shoppers. See Integrated Calculators,
Requirement 6: Disclosure of Financial Incentives of Loan Officers
A UML informs borrowers if its loan officers are
compensated in a way that gives them a financial incentive to overcharge
the borrower. Many lenders allow loan officers to charge overages, and
to share them. An overage is a price higher than the price delivered to
the loan officer by the lender’s pricing department. A loan officer who
shares overages is in a conflict situation with the customer that the
customer ought to know about.
On the Certified Lender Network, such a rule is redundant because loan officers have no discretion over prices. CNLs transmit their prices to the network electronically from their internal pricing systems. This allows borrowers to monitor their prices until their loan is locked. with no involvement by loan officers, See Finding a Mortgage on the Professor's Certified Lender Network.
The individual UMLs may be contacted here. Each lender site must be visited separately. You can shop all CNLs on this site here.