Instead of "Playing Lender" the CFPB Should Teach Consumers How to Rate Shop
Considering the number of blows the mortgage industry has patiently withstood at the hands of well-intentioned but misinformed regulators, it may seem surprising to some at the level of affront taken over the "Check interest rates for your situation" (the checker)
on the Consumer Financial Protection Bureau (CFPB) webpage. All of the industry professional associations have launched attacks against the checker.
|Much of the criticism of the tool surrounds the apparent opacity of the checker. "It leads people to believe they would be eligible for a loan based on no other information." (Mortgage Broker) Specifically, credit score only driven modeling doesn't account for many other features of a credit history that makes you ineligible for financing, such as recent bankruptcy, credit counseling, co-signed loans, insufficient trades and others. In addition, missing are: 1.) APR, 2.) Mortgage Insurance Costs, 3.) Doesn't distinguish or provide Government loan options.|
The CFPB has defended the site against industry complaints, saying a customer who is aware that interest rates are different from lender to lender is 50% more likely to shop, and the page remains active. Perhaps the CFPB feels the protest shows they have struck a nerve - exactly what they wanted. Sadly, though, this agency has taken a page out of online marketers' playbook, and walks a fine line between information and deception to create engagement. The checker goes down the same "bait and switch" path that many online lead generation sites engage in. The message a lender would take from the regulator's site:"It's okay to provide misleading rate options if enough remains unknown so you can be sufficiently vague."
The Checker reveals another clear misunderstanding of the business rule the Bureau has set into place. It ignores a fact of life for mortgage lenders and brokers alike; under the Anti-Steering Rules, you cannot change your pricing based on any feature of the loan. The customer CAN'T negotiate with a lender because the lender CAN'T change the price. Period. The CFPB sets up the consumer to believe that they CAN negotiate the price. One can see the frustration the consumer will experience when, after providing all the information the lender has required to issue a price quote, a rate negotiation results in no price improvement and will wonder "what was all that about?"
Another flaw in the CFPB's mandate that customers shop; many lenders require a hard credit pull to quote rates. The impact of a single inquiry may not have a deleterious effect on your score, but two or three in succession may drop your score enough to negatively impact your rate.
Deceptive and (Honestly?) Useless
I myself have been through this Unfair, Deceptive and Abusive Act and Practice several times after seeing a great rate on a marketing website. Ultimately, there was always a reason that the advertised rate was unavailable to me. Self-employment, length of employment, asset sufficiency or sourcing, the property's characteristics or other impediment get pulled from a panoply of potential barriers. I'm in the industry - these are legitimate barriers - but they don't excuse holding out a rate that may not be available to the public. The checker's functionality does LESS than the lead generation sites.
The site acts as if rates exist at some place in time. The reality is that rates are very fluid and change from moment to moment. Intraday rate changes are common. If, as a consumer, you shop rates over the course of a few days, you may select a higher rate that seems good because rates have decreased over that time. Conversely, you may miss an opportunity to lock in if interest rates rise while you shop. The MOST common error consumers make when shopping is to compare lenders when they are not in a position to lock in - because they do not yet have a signed sales agreement. The CFPB should provide real instruction on rate shopping, such as what we have provided below.
A Homebuyer's Guide to Rate Shopping
Purchasing a home is probably one of the largest financial decisions
you will ever make. You want to make informed choices, but the mortgage process
is complex, and it’s hard to even know the right questions to ask. Financial alternatives exist and you have
choices for where you can go to get financing to buy a home. But before you
even know how and where to shop for a mortgage, you should know the right time
WHEN to shop.
I shopped for a pre-approval so, I should
stick with that lender for my mortgage.
Once you have talked to one lender, you have to use that
lender for your loan.
You can talk to as many lenders as you like about
pre-approval and pre-qualification.
You can also apply with different lenders or lock in with different
lenders. By working with a few
lenders, you can negotiate more effectively. NOTE: The CFPB regulates compensation, so lenders and brokers are no longer able to "negotiate" on pricing as in the past. Most companies offer a fixed price.
Be careful how many times you have your credit report pulled
by a lender or broker. For the purposes
of a pre-qualification, most lenders or brokers will take the credit report you
can get for yourself from the credit bureaus (like annualcreditreport.com). This is cheaper, too. The lender will want what is called a Three
Bureau Merge (Tri-Merge) with all three repositories.
Whether face-to-face or online, you should talk with a few
lenders and ask for recommendations to find the best fit for your situation. While
the interest rate is a big factor, it is not the only factor. Consider the
different types of loan options available; get a written estimate of closing
costs and fees. Find out their policies for locking in interest rates.
When to shop for a
You just started shopping for a home and you are looking
in a neighborhood. You figure your
price range is $200,000 to $225,000.
You have a sales contract, signed (or about to be signed)
by the seller, which details a sales price, your down payment, the closing
date and any costs that the seller will pay for you. You may have been
through the pre-
You have been told that you need to shop around for a
mortgage. So you do, calling lenders asking for rate quotes and comparing offers. More than likely, you are finding that you
have more questions than answers. If you find yourself in this position, it’s
because you didn’t do some of the earlier steps, like getting pre-approved or
pre-qualified. More importantly though, is the timing right when it comes to
the bigger picture?
Do you have a contract to purchase a home? If yes, then you should shop for a mortgage. If you don’t have a contract, the information
that the lender gives you is not accurate. Without a sales contract, you don’t
have the correct loan amount and settlement date you must have to meet the requirements
of your legally binding sales contract. If you don’t have a contract, the lender
cannot guarantee your interest rate, which is known as locking in.
After you find the home then you can
lock-in your rate
A lock-in can be given at any time.
Once a lender has your loan application, you are locked
The lock-in is only for the points because the rate
continues to float until closing.
A lock-in of your rate includes a guarantee of the
interest rate, loan type, loan amount, and any points you must pay. These
expire on a specific date, so in order to get the terms of the lock-in, you
must close before the expiration of the guarantee.
Lenders are often accused of “bait and switch” tactics;
offering one rate at the beginning then giving another one at the end. The reality
is that many things can change the interest rate lock-in, like pricing
adjustments for your credit, the type of property you are buying, and how much
you are putting
in your down payment. It is likely that in order to lock-in your rate
accurately, you will have to provide your social security number, along with
the information from your contract.
What loan terms are you shopping for?
I’m shopping for a mortgage. What’s your best rate?
I’m looking for your interest rate quote for a 30-year
fixed rate loan with a loan amount of $145,000, a down payment of 10%,
closing in 45 days, with no points.
Here’s an example. If you go to a Ford dealer and say, “I
want the best price you have on a car”, the salesman will take you all the way
to the beginning of your decision-making process and start to ask you about
what kind of car you want. You should already have this information. To
accurately shop, give the lender the most specific request you can.
When should I call to
check interest rates?
I can call any time, day or night, and compare rate quotes
over the course of a week or two.
I need to check rates between a few lenders I’m
considering between 11:00 am and 4:00 pm.
Rates change ALL THE TIME. Even over the course of the day
sometimes. Most lenders publish their rates sometime after the bond markets
open and when the direction of rates is clear.
That’s usually around 10:00 AM Eastern Time. While some lenders hold
their pricing overnight, there is no guarantee that a quote you receive at
11:00 AM will be valid after 5:00 PM. Wrap
up your shopping by 4:00 of the same day so that you can compare and call the lender with the
best price before the close of business.
Am I dealing with a
broker or a lender?
Cannot guarantee a rate or approve a loan directly – Get
a copy of confirmation of lock or approval from investor.
Can shop multiple investors for the best rate.
May have special products
Can lock a rate directly
Can approve loans directly
Cannot shop on your behalf
Limited selection of products
Banks, savings banks, and credit unions usually make loans
from their own funds, so they CAN commit to giving you a loan at a specific
interest rate. Mortgage lenders have the
ability to approve and fund loans using money generated from selling loans into
the secondary market. Brokers arrange financing by surveying many lenders in a
specific marketplace and finding the most competitive programs, flexible
guidelines, and reliable service, but CANNOT fund or approve loans.
You can begin your search online, but also ask your friends,
family, and co-workers for referrals as well. Your real estate agent can also
recommend at least three local lenders who have a track record of being honest
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