The “Dumbing Down” of the Loan Officer
The embrace of the huge profit potential of the ALT-A and
non-prime loan business among mortgage companies has had unintended
consequences which costs companies more than they realize in lost profits and
time. The result, the further erosion of
credit analysis and qualifying skills of loan officers, reduces the
significance of the role of the originator.
In addition, it contributes to the accidental application of predatory
lending practices.
How it Happens
The wholesale non-prime business’ primary sales focus is to
get originators to submit applications for a pre-qualification. The originator faxes a 1003 and credit report
to the wholesaler to get a credit grade and indicative rate. The wholesale representative then grades the
loan and “stips it out,” adding the standard documentation requirements as a
condition of pre-qualification. The
originator, in turn, contacts the borrower to obtain the requested
documentation from the borrower. When
the originator follows this process, the wholesale representative enjoys a
position of inordinate power in this role, controlling the loan from the minute
it arrives. On the face of it, there is
nothing different in this process from what a loan officer does with a retail
client, so what is the problem?
Problem 1: The Wholesaler’s Control
The position of certainty – that is, “don’t worry, I’ll get
this loan done” – occupied by the wholesaler naturally impairs the loan officer’s
motivation to represent the borrower’s best interests. “The loan is done, and I can go on to the
next deal.” This means that the first
representative who gives a positive answer on the loan will likely control that
loan for the remainder of the process, whether or not it is the best
transaction for the borrower. This tends
to create a situation where the loan officer is at the mercy of the wholesale
representative. The wholesale representative
is usually insulated from conversations with the borrower, so it is the loan
officer who bears the brunt of effort getting redundant or additional
documentation, answering questions and explaining circumstances that would not
necessarily be favorable. Ultimately,
when there is a limited amount of time in the process, there is no
accountability on the part of the wholesaler if the terms of the loan change at
the end of the process due to circumstances beyond his or her control. The loan officer is, again, in the position
of selling the wholesaler’s transaction to the borrower.
More cautionary is the fact that loan officer’s reliance on
wholesale representatives discourages them from learning a program’s detailed
internal underwriting guidelines. When
presented with a problem, they cannot effectively challenge the finding.
Problem 2: The Pre-Approval
The verbiage “Pre-Approval” has become substituted for what
it is – a “Pre-Qualification.” A
Pre-Approval, in the context it is used today, means “Approved subject to
Approval.” Really – it’s a “Pre-Qualification” until it is a “Loan Commitment.”
Unfortunately, many loan officers don’t focus on this blatant distinction. They tell their borrower that the loan is
approved and use it as leverage to advance the application. This results in an obvious question from the
borrower when the transaction ends up not proceeding as planned – “I thought
you said the loan was approved.” There
have been many cases in which borrowers have followed a loan process only to
learn that there was no approval. The
consequences often are; having to close later, at a higher rate, with a lower
loan amount or with a different program.
Many states are now regulating the use of the word
“Pre-Approval” to mean that the borrower must in fact apply and be accepted
prior to being “Pre-Approved.”
For the loan officer, the use of the “pre-qualification as
pre-approval” system costs him or her money.
If all he or she knows about pre-qualification is “give me your name,
social security number and address,” the loan officer does not have any tool for
developing a trusting rapport with the borrower. Only the most desperate borrowers will end up
with this loan officer.
Problem 3: Predatory Practices
Non-Prime loans are already viewed with a jaundiced eye by
regulators because borrowers who can least afford to pay higher rates are most often
offered these loans exclusively. Some
predatory practices are a by-product of the Non-Prime wholesale process:
Bait and Switch – Initially offering a more attractive
product and changing the terms at the end of the process is a problem created
by the “Pre-Qualification as Pre-Approval” process.
Lending without Regard to Repayment Ability – Wholesalers
may encourage loan officers to submit loans as “Stated” income, or change the
process from a Reduced Documentation process to a No-Qualifier process without
consulting the loan officer in an effort to facilitate the approval. As we know there are many ways to get the
loan approved, but should we?
Problem 4: Faulty System
The process of submitting a loan for a pre-qualification
from a non-prime lender is no different that submitting a loan to automated
underwriting through DU or LP. The
approval is really no better than the documentation submitted to support
it. The difficulty is that many
companies do not force loan officers to take complete applications in
advance. As a consequence, individuals –
loan officers, processors, managers – spend a lot of time trying to obtain
documentation that does not exist or is insufficient. These documentation problems would be
revealed immediately with a complete application.
The financial cost of time wasted on loans that do not close
is difficult to quantify. If less than
40% of completely processed pre-qualifications result in a closing, the
man-hours required to close one loan are 237% higher than in the prime
business. Couple this with the fact that
loan officers who only collect social security numbers in their
pre-qualification efforts do not convert as many prospects into borrowers. The borrowers who do convert require
substantially more time to process because retrieving documentation is a
reactive process requiring numerous review and re-review actions.
What to Do
These scenarios are in no way an indictment of the non-prime
business, which performs a vital function in providing financing to
non-standard borrowers. It is a matter
of education of the loan officer, and creating a culture of managing the
process instead of the process managing us.
Valerie Frank, broker-owner of Preservation Mortgage in Warrenton , VA ,
is an example of how to proactively originate non-prime loans efficiently. As a pre-2000 veteran of the mortgage
business, she knew how to produce effectively with a reduced support
staff. Her first step was to hire and
train new loan officers, instead of recruiting seasoned loan officers. “I can’t take the chance that someone who has
learned poor practices in another office will come in and try and change the
way we want to do business. It only
takes one incident to infect the whole office.”
She trains the new loan officers at her “Preservation University ”
to do it her way. “Instead of just
asking for a social security number, I spend a lot of time up front with a
borrower, investigating their background and talking about what they are trying
to do. When I decide to take a loan,
it’s going to close.” She converts
almost all of her prospects who are eligible for financing because “I get to
develop trust and rapport with them while I am pre-qualifying them.”
She also understands that she has to package every loan as
if it was a FNMA/FHLMC loan. “I do a lot
of prime loans. The documentation really
doesn’t change that much from “A” to “non-prime.” She also notes that FNMA’s EA programs are
competing with subprime lenders in aggressive approvals. “The pricing is better. The process is more consistent and it is
faster.” As a testament to the
efficiency of her model, she has 15 loan officers and only one processor.