Are Pre-Qualifications Masquerading as Pre-Approvals Illegal? WA DFI, PA DOBS Say "Yes"

DFI Says "Yes" - it's a "Misleading and Deceptive Act." CFPB calls it "deceptive."

Update 10/2025 - PA Fines Broker $127,500 for Pre-Approvals

• "I issued a pre-approval for a buyer and the lender wouldn't do the loan, so they had to pull the contract."
• "I've been told a pre-qualification is worthless."
• "If I have DU approval and docs, I can do a pre-approval."

As refinance volume dwindles and the spring housing market goes into full overdrive, these good questions increase. This is a minefield for brokers. It comes down to literal definitions. And, where it previously was an ethical issue, states now will cite brokers for pre-approvals that were not backed by a lender's approval. 

From the WA DFI

From PA DOBS

A Pre-approved mortgage means approved before the property, NOT approved before underwriting. If a loan is ready to close, subject to an appraisal, that is a pre-approval. As you know, AUS approval doesn't mean the deal is ready to close. Approved means you, as a banker, are prepared to lend the money. Everything else is a pre-qualification.

Consequences of Fictitious Approvals

Some regulators will cite you - as a broker with no warehouse line or funds to make a loan - for approving a loan. You can also be sued by a seller or buyer for misrepresentation if the loan is delayed due to approval issues. In this market, where people submit contracts without a financing contingency, this becomes even more worrisome. 

Specifically, buyers expose themselves to legal action if they cannot perform under a contract. Though brokers are not parties to the contract, if their representations cause the action, then they become culpable.

Do the work up-front and get the loan approved by the lender (TBD) before you send the borrower out shopping. If your lender doesn't approve loans without an appraisal (TBD), find another lender who does pre-approvals. 

There IS Value in Pre-Qualification

Incorrect use of the term "pre-approved" connotes approved, subject to underwriting approval, which is contradictory. Pre-approval actually means "approved, subject to an acceptable property." (AKA TBD approval) The real estate industry has driven this confusion by recognizing that a pre-approval is better than a pre-qualification to satisfy a seller deciding between two offers; choose one with or without approval. Agents demanding instant pre-approvals have pushed originators to call a pre-qualification a pre-approval. Without underwriting, however, this is a fabrication.

A pre-qualification can include: "We have reviewed the documents and have received an automated underwriting approval; however, the loan request is still subject to lender approval." We suggest this because even with automated underwriting, without a review of the underlying documents, changes can invalidate automated underwriting approval. For instance, if the originator uses a salary for the income when the wages are actually variable, automated underwriting results will change accordingly. 

Does this mean pre-qualifications are useless? NO! Prequalifications are very valuable, but they represent an earlier stage in the process, the first step. The pre-qualification process allows the originator to address a customer's realistic expectations for affordability. Once you address any customer issues, you can request pre-approval and submit an application for approval through a lender's underwriter. Once approved, you can send the borrower into contract negotiations with financing contingencies waived.

Furthermore, brokers should maintain loans not submitted to lenders in their "prospect" pipeline as pre-qualifications to avoid triggering reporting requirements and excess regulatory responsibilities. The fact that an applicant has triggered the requirement for a Loan Estimate does not automatically mean the loan is an "application." It can still be a pre-qualification.

Ethical or Illegal?

While this is primarily an ethical issue, not a legal one, the CFPB is focusing more on "deceptive acts and practices" and saying a loan is approved when it is not falls into this category. It does not rise to a civil legal matter until someone cannot deliver on a "pre-approval" and the loan does not close. Then the consumer, and anyone else who relied on the misrepresentation, can take action under breach of contract, fraud, etc., because they have a cause of action. Some states (such as Virginia and Washington) have mandated that the term "pre-approval" be accompanied by an actual loan offer. What that means is subject to interpretation. It is often difficult to prove misrepresentation when there is no harm - e.g. the customer doesn't take action. 

Ethically, calling a loan approved when it is not ready to close - or the conditions precedent to closing have not been stipulated in a way that could be met by a reasonable person - is a misrepresentation and a deceptive act. 

TBD - Property to Be Determined

The term TBD is the industry jargon for approved, subject to property. That is a correct term.

There is no distinction between which origination channel - e.g., retail lender or broker - that makes calling a pre-qualification a pre-approval right. It's a misrepresentation if the loan isn't ready to close as described. However, a lender who can make loans from its own proceeds certainly can "chance it" based on internal criteria knowing that a loan is "approvable" if AU is correctly applied. A broker cannot "make" a loan - they are brokers. A broker's approval "subject to" is the lender's institutional letter of approval, not the broker's. Technically and logically, a broker could expose him or herself to liability when acting as a lender when, in fact, a broker - e.g., "making loans." A case in Iowa brought this to a head when a broker failed to deliver a loan after issuing a pre-approval. 

The Anti-Kickback Rule - Payment or Receipt of Non-Approved Fees

Background

With the recent spate of enforcement actions surrounding kickbacks, take the time to re-visit your explicit policies and procedures surrounding the anti-kickback rules.

12/23/2024 - CFPB Sues Real Estate Firm for Referral Fees

4/30/2015 - Updated filing shows actual money penalties by participants
1/22/2015 - Baltimore CFPB Action
St. Louis CFPB Action
Kentucky CFPB Action
Baltimore Referral Fee Lawsuit

Kickbacks are a problem because they tend to inflate the cost of a transaction.

Kickbacks tend to inflate the cost to the consumer due to the fact that someone else has to get paid for the referral. 

Prohibited - Kickbacks and Referral Fees

Section 8(a) of RESPA prohibits anyone from giving or receiving a fee, kickback, or “anything of value” pursuant to an “agreement or understanding” for the referral of business related to the purchase or financing process. The purpose of the prohibition is to protect consumers from the payment of fees when no additional work is actually performed. Kickbacks tend to increase the cost of the transaction, since the borrower will have to be charged more in order to cover the cost of the referral fee.

All personnel should avoid even the appearance of accepting or paying for non-approved services.

An “Agreement or Understanding” does not have to be a formal agreement, but can be a verbal agreement or even an agreement established through a practice, pattern, or course of conduct.

Prohibited Payment – “Anything of Value”

Payments include, but are not limited to

A “Thing of Value” Money Discounts Commissions Salaries Stock Opportunities to participate in a money-making program Special or unusual banking terms Tickets to theater or sporting events Services of all types at special rates Trips and payments of another’s expenses

Prohibited - Fee Splitting 

Fee splitting is when a service provider inflates charges and splits the excess funds with another service provider in exchange for the referral of business.  This is tantamount to a kickback and is a prohibited practice.  Service providers may attempt to circumvent this prohibition by establishing joint ventures or entering into business arrangements that allow referrals between organizations and conceal the fee splitting arrangement.

Permitted – Approved Affiliated and Controlled Business Arrangements

In some cases, there can be fee splitting or referral fees paid under what is known as an “affiliated business arrangement”.  An affiliated business arrangement is where a person who refers settlement services has an “affiliate relationship” or “an ownership interest of more than one percent in a provider of settlement services.”

The payment of reasonable fees is acceptable as long as the relationship is disclosed to the borrower and the referrer actually performs a service – or somehow adds value.  The referral service provider may NOT be a REQUIRED provider of services, such as an appraiser or credit bureau that the lender must select.  An affiliate relationship structured simply to legitimize the payment of a fee is referred to as a “sham”. Affiliates must be a “Bona Fide Provider of Services” to receive a referral fee legally.

Approval Required - Desk Rental Arrangements

Because of the level of oversight, and the potential for the payment of desk rental to masquerade as payment for a referral, all Desk Rental Arrangements must be approved in advance. Provide the following:

·         Copy of the lease/rental agreement

·         Document market value of desk rental services through Craig’s list, square footage analysis or other verifiable source

Approval Required – Joint Marketing Arrangements

Similar to a Desk Rental, partnering with referral sources to advertise or market must also be evaluated for potential conflicts and approved by management. Particularly when this relates to commercial communication, the material must also be reviewed against the Provide:

·         Any advertising agreement

·         Copy of publication or proposed media

Approval Required - Marketing Vendors

Payments to marketing vendors, such as lead generation companies, may create problems if we base the payments on anything but the lead itself.  If there is a payment conditioned upon a certain criteria or threshold, such as confirmed application, underwriting approval or closing, the arrangement may be considered illegal.  For approval provide:

• Marketing Agreement
• Fee Schedule for Leads

In addition, the agreement and vendor must be approved to ensure the vendor complies with Fair Lending, Information Security, Customer Privacy and other consumer-facing regulation.

Approval Required - Payments to Counseling Agencies

Payment for services to a non-profit agencies for counseling services performed are permitted.  Provide:

• memorandum of understanding between the lender and the non-profit agency 
• establish how payments to vendor are not based on referrals .

Required Disclosures

·         Affiliated Business Arrangement Disclosure (AfBA) – if Applicable

·         Required Provider Disclosure – From LOS

·         Approved Settlement Services Provider List

Operating Areas Affected

·         Origination - Production

·         Compliance

Penalties for Non-Compliance

Penalties for violations of the anti-kickback provision include fines of up to $10,000 and up to one year in prison.

Should You Reprocess Your Mortgage Loan File Before Submitting It to a Regulator for Review?

When it comes to regulatory reviews, presenting a meticulously organized and thoroughly vetted mortgage loan file is crucial. You might wonder if reprocessing your loan file before submission is worthwhile. The short answer is yes, especially if you are not already post-closing and organizing loans when they close. In this case, reprocessing your mortgage loan file could be the difference between a smooth review and a costly, time-consuming ordeal.

Why Reprocess? It’s All About Precision

Loan files are complex, containing numerous documents, verifications, and disclosures that must be accurate and complete. Even with the best intentions and processes, items can be missed. The reality is that we often discover missing or incorrect items when we take the time to reprocess files. These oversights might seem minor but can lead to significant issues during a regulatory review.

By reprocessing your loan file, you ensure that every document is where it should be, every calculation is correct, and every compliance box is checked. The attached FORM 1-4 QC PROC Closed File Pre-Audit Compliance Checklist is an excellent example of a comprehensive tool to guide this reprocessing. This checklist covers everything from verifying borrower information to ensuring all regulatory disclosures are accounted for. You might use the state required version of the file, such as that provided by North Carolina or Texas, for your review (even though the FORM 1-4 does contain all these items.)

The Benefits of Reprocessing

1. Reducing Findings and Penalties: Regulators are thorough, and they will catch mistakes. By reprocessing your file, you can correct errors before they become findings in an audit. This proactive step can save you from fines, penalties, or even more severe regulatory actions.

2. Cost Savings: When a file is well-organized and accurate, it takes less time for the examiner to review it. This not only makes the review process faster but can also reduce the overall cost of the examination. A clean file means fewer questions, less back-and-forth, and ultimately, less time spent by the examiner—time that you won’t be billed for.

3. Building Confidence: Presenting a thoroughly reprocessed file with a detailed checklist like the Post-Closing Audit Preparation/Regulatory Compliance Checklist gives the examiner confidence in your compliance processes. While it’s unlikely that an examiner will completely forego reviewing your files based on this alone, a well-organized submission can lead to a more favorable outcome, potentially reducing the depth of the review.

4. Streamlined Communication: A file that has been reprocessed is easier to navigate, not just for the examiner, but for anyone in your organization who might need to answer questions or provide additional documentation. Having a checklist attached that shows exactly what has been reviewed and included in the file simplifies communication and ensures everyone is on the same page.

What Happens If You Don’t Reprocess?

If you decide to submit your file without reprocessing, you’re taking a risk. Missing or incorrect items can lead to findings that will need to be corrected under the pressure of a regulatory deadline. This can be more stressful and costly than simply reprocessing the file upfront. Moreover, repeated findings can damage your company’s reputation with regulators and may lead to increased scrutiny in the future.

A Checklist to Guide Your Reprocessing

Consider using a tool like the FORM 1-4 QC PROC Closed File Pre-Audit Compliance Checklist as part of your reprocessing efforts. This checklist is comprehensive, covering all the necessary components of a loan file, including:

• Borrower and Loan Information: Ensuring all borrower details, loan amounts, and terms are correctly documented.
• Fee/Cost Reconciliation: Verifying that all fees are correctly calculated and documented, with copies of relevant checks and invoices attached.
• Record Retention: Confirming that all required documents are included and appropriately filed, from the initial loan application to the final promissory note.
• Post-Closing Audit: Preparing for a regulatory review by double-checking that all compliance requirements are met and that the file is ready for submission.

Conclusion

In conclusion, reprocessing your mortgage loan file before submitting it to a regulator for review is not just advisable—it’s essential. By taking the time to review and organize your file, using a comprehensive checklist, you can significantly reduce the likelihood of costly errors, streamline the review process, and potentially save your company both time and money. So, next time you’re preparing a file for submission, take that extra step to reprocess—it’s well worth the effort.

What items MUST a Broker retain independently in each loan file

Don't let your wholesaler tell you they've got everything you need. They don't. Important lessons in regulatory audits and examinations. 

"If you only do ONE THING - post close your loan files."

Brokers - ALWAYS Retain All Loan Documents

I cannot overstate the importance of meticulous record-keeping. Regulatory requirements and best practices require brokers to maintain comprehensive records of all loan transactions, including disclosure events and closing documents. 

I hear people saying, "I don't see anything in the regulations that says I have to keep certain documents..." but your regulator will require copies of all documents on all the loans you handle. In this article, we provide an explanation of what documents regulators hold brokers accountable for. 

I also hear people saying "My wholesaler will give me copies of everything if I ask for it. So I don't need to post-close my loan files..." While the wholesaler will retain copies, and may also provide a copy of a file a long time after loan closing, we see a lot of inconsistency in the condition of those document stacks from the lender. They can look like a jumble, which will require you to reprocess the file. Furthermore, what happens if the lender shuts down, gets merged or otherwise doesn't have the ability to provide what you need? 

Record Retention Requirements

As a broker, your record retention involves both the disclosures you issue and those provided by the lender. While federal and state regulations may not explicitly mandate the retention of all documents from the lender, best practices and regulatory expectations strongly advise maintaining a complete set of records. 

Also, your loans progress in stages and may not complete or get submitted to the lender. Our system suggests what you must retain at various stages of the process. 

We provide a checklist of this here:

Key Practices and Checklists

1. Retain All Broker-Issued Disclosures:

   • Initial Loan Application Form (1003): Ensure that the signed initial application is on file.
   • Loan Estimate and Required Providers Disclosure: These should be issued within three days of application.
   • Notice of Intent to Proceed: Must be signed by all borrowers.
   • Changed Circumstances Re-issued: Include any tolerance adjustments.
   • E-SIGN Acceptance/Agreement and Delivery Transcript: Keep records of acceptance and delivery audit trails.
   • Signed Initial and Final Broker Fee Agreement: Must match the closing disclosure or settlement statement.

2. Obtain and Retain Lender-Issued Documents:

   • Final Loan Application (1003) and Transmittal Summary (1008): Essential for compliance.
   • Executed Closing Disclosure (CD): Include all attachments.
   • Final Mortgage Loan Lock-in/Financing Agreement: Required at least five days prior to closing.
   • Appraisal and Related Notices: Keep copies of the appraisal order, the appraisal itself, and the right to appraisal notice.
   • Final Sales Contract and Earnest Money Deposit: Ensure these are part of your records.
   • Loan Commitment/Approval Notification: Document the lender's commitment to the loan.

3. Comprehensive Documentation:

   • Fee/Cost Reconciliation: Maintain copies of all application fees, appraisal fees, credit report fees, and other relevant costs.
   • Affiliated Business Arrangement Disclosure: If applicable, retain this disclosure.
   • Compliance Disclosures: Include ARM disclosures, CHARM Booklet Notice, Anti-Steering Notice, ECOA Rights, Fair Credit Reporting Act Notice, and others.
   • State-Specific Disclosures: Ensure all state-required disclosures are documented and retained.

Why Complete Record Retention Matters

State regulators, such as those in Washington and Texas, expect brokers to maintain records similar to those required from lenders. During examinations, brokers are often asked to produce detailed records of all disclosure events, closing documents, and other pertinent paperwork.

Texas, North Carolina, and Maryland Loan File Checklists

Adhering to the checklists from different states can help ensure comprehensive compliance:

• Texas Checklist: Includes initial and final disclosures, funding checks, appraisal reports, and title insurance.
• North Carolina Loan File Checklist: Similar to the Texas checklist, emphasizing the importance of complete documentation.
• Maryland Loan File Checklist: Focuses on detailed retention of all application and closing documents.

Updated Practices and Client Advice

In light of experiences and state examinations, brokers should update their practices to require copies of all signed disclosures and final closing packages from the lender. This proactive approach not only ensures compliance but also protects brokers in the event of an audit. You do not want to have to stop producing and getting new business to have to reprocess loan files to submit to a regulator. 

Advice for Broker Clients: Always obtain a complete disclosure package from the lender, and ensure you send out the required broker disclosures independently. This comprehensive approach to record retention is crucial for compliance and to avoid citations for missing lender documents. If the lender does not cooperate, document your efforts to obtain the necessary records.

Audit Season: Loan Officer Comp Plans vs Loan Officer Employment Agreements

Questions Persist on the Meaning of "Employment Agreement" or "Compensation Plan"

With the onset of annual audit season, we have noticed a large increase in the number of requests we get for compensation plans and loan officer agreements. We need to set the record straight on some definitions so that you have clarity on what is required and what the regulator is requesting.

First, there are two different things at play. 

• The need to establish the arrangement between the loan originator and the company as to employment. This item is referred to as an employment agreement. 
• The need to establish the pay rate for the originator is referred to as a compensation plan
• These two items are exclusive of each other, although an agreement may refer to a compensation plan. 

Employment Agreements are NOT Compensation Plans

Employment agreements define job duties, the terms of employment, and how employment will terminate. In other words - this is your job; do these things and don't do other things. If you do things we say not to do, we can terminate you. This is how we'll wrap matters up if you separate from the company voluntarily or involuntarily. 

One of the difficulties we face in providing compliance services is that we often get asked for advice. Largely, advice on compliance relates to understanding what regulatory rulemaking means. This is not interpretation or advice, it simply is a translation of the rules into a more easily understood or practical application. Employment agreements, on the other hand, are contracts. In order to draft a contract for a third party you need to be authorized to practice law: an attorney or lawyer. A compliance company should not provide this service. Instead, you should seek the advice of a competent advisor familiar with the employment laws of a state. 

When we provide this free sample loan originator employment agreement, we are actually calling it a comp plan, because it forms part of the comp plan. You may copy the text and use it as a model for drafting an agreement yourself. 

That said, we have some general, common-sense guidance for the creation of employment agreements:

1.) Separate compensation plans from the employment agreement by attaching the compensation plan as an exhibit which is SUBJECT TO CHANGE AT ANY TIME.

2.) An Employment Agreement states the general minimum job requirements of the position. You can augment that by having a very detailed job description such as that in our Loan Originator, Loan Processor, Loan Closer or Underwriting policies and procedures. 

Compensation Plans are NOT Legal Agreements

A compensation plan simply states the rate of pay for various services. In the case of the current regulatory scheme, we have to be aware of anti-steering rules. A compliant compensation plan defines how compensation to loan originators happens in a way that does not violate the anti-steering rules. 

Elements of a Compensation Plan

• Loans Subject to the Rule
• Definition of a Loan Originator
• Exclusions from the LO Comp Rule
• Dual Compensation, Upfront Points and Fees
• Proxies for Loan Terms
• Non-Loan-Term Items
• Profits-Based Compensation
• Pick-A-Pay Plans
• Pooled Compensation
• Compensation for LOs that Work as a Team
• Pricing Concessions
• Point Banks
• Competition for LOs
• SAFE Act Requirements
• Anti-Steering Provisions/Safe Harbor
• Record Retention
• QMs and Double Counting
• LO Qualifications
• Written Policies and Procedures
• Non-Cash Compensation Incentives
• Splitting Comp Between LOs
• Bonuses and Retirement Plans
• Bonuses Based on Volume
• Non-Producing Managers and Sales Executives

Our Compliance Module provides a policy and procedure that addresses all of these issues. 

What to do when a Regulator asks for a Business Plan or Org Chart

Vague Company Licensing Requirements can Cause Confusion

With the surge in the mortgage demand, we see many new companies throwing their hat in the ring to become a licensed provider. For the uninitiated, prepare to spend some time gathering and uploading documents. For new and experienced alike, some of the requirements, and the vague way the Nationwide Mortgage Licensing System describes them in their requirement templates, can cause confusion. We get many of these calls every day. Here we provide a primer on answering the less obvious requests:

Provide a Copy of Your Business Plan...

A business plan is a great idea. The SBA definition of a business plan, and what most people think of as a business plan - including agencies like Fannie/Freddie and others - allows you to memorialize how you will do business; the ways and means including LOS selection, pricing, startup costs, volume projections, staffing as well as unique business propositions, marketing strategies, and other relevant elements. It looks like this:

This is a sample of a table of contents of an SBA-Style Business Plan

But... THIS IS NOT what the regulator wants. The regulator wants an answer to specific questions about how you will do business. We recommend that you write a 1 pager and simply answer the questions in a Q&A format. In this way, there can be no question as to the narrative. For Example:

NMLS Requirement for a Business Plan which is quite vague

For the business plan requirement, we recommend that you simply draft a memorandum answering the questions:

• What is your marketing strategy?
• What products will you offer?
• Who will you market these products to?
• How will you operate - e.g.; branch processing, centralized? Manager? Loan Originators? Processors? Whom will they report to?

Organizational Chart Requirement

Once again, an organizational chart makes a great tool to ensure that all of a company's responsibilities get assigned to an individual and who reports to whom. Microsoft includes a good organizational chart template in Word, which we use in our products, too, as below.

Sample Organizational Chart for a Mortgage Business

However, for a small company, an organization "Chart" where you draw lines between functions doesn't really apply.

This is the text from the NMLS requirement for an Organizational Chart

Again, instead of a policy, draft a memorandum to Identify who, within your organization, is in charge of:

• Compliance - reports to?
• Production Sales - reports to?
• Processing, Operations - reports to?
• Financial Control - reports to?

If these are all the same person, then state that. 

If you have any questions about licensing, or if you just want to hand it off to someone else to manage, please let me know. 

MortgageManuals.com does include the business plan in the Complete Broker, Correspondent, Lender and Compliance Packages. 

#mortgagelicensing #mortgagecompliance #mortgagebroker

Brokers: Do I Report HMDA Data?

2/28/23 Update

Significant threshold changes - much lower thresholds may impact non-delegated correspondents. 

4/6/2017 Update

As we approach the 2018 HMDA reporting window, with the wider rubric for filing requirement, we are getting many calls from brokers about preparing to become reporters. We want to reiterate that a broker business that categorizes its customers as PRE-QUALIFICATIONS until the loan is referred to an investor DOES NOT HAVE TO REPORT HMDA DATA.

1.) HMDA is an extension of ECOA, so if you are not making credit decisions, you do not report. Only the ultimate decision maker reports.
2.) Technically, brokers CANNOT make decisions because they do not have the funds available to unilaterally fund applications. 
3.) Many states sanction brokers who represent that they are lenders

Original Post From 12/5/13

As compliance season descends on the mortgage business again, we start to hear growing numbers of concerns over how a firm will comply with a nuance of a rule.  Often the concern originates with a rumor or other misinformation from a networking group or an e-mail from a service provider looking for business. With respect to brokers, you should generally avoid reporting HMDA denial data for the simple reason that BROKERS DO NOT MAKE CREDIT DECISIONS.

Among the risks you expose yourself to:

• State Regulator sanctions for acting as a lender without a lender license.
• Scrutiny from a Federal regulator regarding why ALL your loans are denied?
• Inconsistent reporting/reporting errors on other reports

NMLS Call Report - Requests Denied Applications

The idea that brokers should report HMDA data may come from the fact that the NMLS Call Report has a line item for "Denied."  However, this is not the intention of this element of call reporting:  this is to identify the "net loan volume."  (Pipeline + New Loans - Closed, Withdrawn and Denied Loans = Ending Pipeline) The denied loans, in this case, should be loans that you will never close because ALL of your wholesalers or investors have denied them.

Brokers should only put the loans which the INVESTOR has denied in this column.

NMLS Call Report - Don't include pre-qualifications you have denied.

Is It Really a Loan Until the Lender Has It?

If you are a straight broker, and not a mini-correspondent, you should define your application policy to ensure that loans which will not be sent to an investor, for whatever reason, are coded as pre-qualifications. Pre-Qualifications do not trigger HMDA Reporting.  This does not mean that you will not send GFE or other property or application related disclosures if you are actively processing the file.

According to the staff commentary in the HMDA Small Entity Compliance Guide: "2. Pre-Qualification. A pre-qualification request is a request by a prospective loan applicant (other than a request for preapproval) for a preliminary determination on whether the prospective applicant would likely qualify for credit under an institution’s standards, or for a determination on the amount of credit for which the prospective applicant would likely qualify. Some institutions evaluate pre-qualification requests through a procedure that is separate from the institution’s normal loan application process; others use the same process. In either case, Regulation C does not require an institution to report pre-qualification requests on the HMDA/LAR, even though these requests may constitute applications under Regulation B for purposes of adverse action notices." Commentary Appendix D, Supplement I

HMDA Small Entity Guide

ECOA, Fair Lending and Loan Disposition - Not to be Confused with HMDA Reporting

Due to the overlay of so many regulations, it can be easy to confuse what rule requires what actions.  You are still required to adhere to Fair Lending and Equal Credit Opportunity Act (Regulation B) guidelines with respect to providing an applicant with a disposition within 30 days.  To avoid monitoring challenges and potential violations on small pipelines use your Incomplete Application Notice on all loans.  If the customer fails to provide all of the information, you can withdraw the loan from your pipeline without any further action.  You MAY optionally send a letter noting the withdrawal.   

Avoid Being the Creditor

Under the current regulatory scheme, lenders bear the burden for credit and disclosure risks.  A correctly structured broker pre-qualification process allows for the unique opportunity to avoid many of the lender's pitfalls with respect to creditor actions.

State Examinations - AML/BSA Compliance - Self-Audit Checklist to Ensure Compliance

The Anti-Money Laundering rule (AML) implemented by the Bank Secrecy Act (BSA) creates many questions for lenders and brokers. We know that state examiners focus on a number of specific issues. A recent spate of calls reveals that New York, Indiana, Texas and Pennsylvania have questionnaires and examiners that ask pointed questions about the AML/BSA compliance program for mortgage originators.  To ensure that you are hitting all of the requirements we have compiled a self-audit checklist for you to use to evaluate and collect data.  You should run through this checklist annually.

Use the BSA/AML Self-Audit Checklist for mortgage originators, to ensure you keep all of the information needed for an examination.  Members may download the original form for customization from http://www.mortgagepolicymanual.com/updates-and-downloads.html or mortgagemanuals.com/updatesanddownloads.htm

Compliance Officer Training

New York's examination findings sometimes cite a recommendation for the compliance officer to have training.  The FinCEN rule requires training, but does not say that it must come from a certified 3rd party.  FinCEN offers training on its website, and many compliance providers provide training for a fee. Familiarity with the rule - actually reading your policy - also counts as training.

Here is a video that instructs the Compliance Officer how to register for the FinCEN portal to report SARs

Quality Control and AML

We do not recommend that firms maintain a separate Anti-Money Laundering Plan, but rather that they integrate the AML process with their Quality Control function.  After all, FinCEN wrote the AML rule as a fraud detection/reporting requirement, and that is exactly what the quality control plan should do.  As a consequence, make sure your quality control plan has a robust red flag feature.

Register for the Portal

Your plan loses credibility if your compliance officer isn't even registered with the FinCEN portal.  It implies that you have no intention of participating in the program.  This simple fix will eliminate many citations.

Mortgage Compliance Service Providers Using Scare Tactics

Why do they use Scare Tactics? They get the phone ringing.

But they also  create a lot of unnecessary disruption for companies that are trying to comply. For instance, one e-mail we saw recently, sent from a compliance company, warned Florida mortgage brokers over license suspension issues for non-compliance. As you know, we always try to shed light on issues that confuse participants, and there are some misleading problems with this solicitation. The first one is that the enforcement action WASN'T IN FLORIDA, it was in North Carolina, so Florida brokers can stop worrying about why they weren't aware they needed certain disclosures that don't exist in Florida.

Beyond this misleading alarm, there are other elements to consider.

First, let's just clarify one thing: you have to do something egregious to receive a cease and desist order. In the case of the broker who was the subject of this cautionary tale (whose name was redacted in the marketing piece), the egregious act involved charging borrowers fees which they did not agree to in writing. When a regulator cites you for this type of behavior, if it was unintentional and not systematic,  you can usually negotiate to correct the activity by making restitution for the unearned portion of fees. As we all know, most investors WON'T LET US collect more than we are legally entitled to, so one can conclude that this particular broker didn't have that type of oversight.

Second, in this case the broker surrendered his or her license, rather than deal with compliance. In this case, the broker likely didn't submit or negotiate any required policies and procedures. For regulators, this is standard procedure. If you cite an entity for one element, you cite them for everything that they lacked. Certainly, the lack of a compliance system was not the primary violation.

That said, brokers do need to have a compliance system in place. Regulators generally require policies to cover the elements for which they cited the broker:

1. Lack of control and supervision over its operations and staff; (a quality control plan should provide supervisory guidelines for staff - part of our broker pack)
2. Failure to have a written information security plan;  (Information Security is a requirement of FACTA - part of our broker pack)
3. Failure to have a written Anti-Money Laundering Program and policies and procedures for reporting and maintaining Suspicious Activity Reports; (AML required by FinCEN, is a fraud detection plan - your Quality Control plan doesn't have legs if there isn't a reporting structure - we provide a plug-in)
4. Good Faith Estimates that did not comport with state and federal laws and regulations pertaining to mortgage lending; (Compliance policies and procedures address how to properly disclose - clearly this action is also pre-10/3, due to the GFE reference)
5. Improper charging or collecting of third party fees for loan-related goods, products, and services; (A quality control plan should address the completion of a loan agreement, retention of documents and financial audit to avoid these types of findings)
6. Failure to maintain required records; (you should conduct a Quality Control Compliance audit on each loan you close. This procedure, which is part of Quality Control, identifies documents you must keep and any deficiencies)
7. Failure to provide required disclosures to borrowers (Your production quality control should include a checklist that identifies all required disclosures - this way you can prove you sent and checked for them, even if the borrower doesn't return a signed copy)

Laundry Lists Don't Help you Identify What's Needed

Regulators and investors often provide lists of specific policies or procedures they want to see. Complying with the laundry list creates a false impression that you have satisfied all concerns when in reality much risk remains in the uncertainty of how your procedure gets implemented. The individual responsibility for compliance starts at the function level; the person who actually does the work. If you map out a person's job duties, and provide a detailed rubric for how it gets completed, you ensure compliance. 

There exists a panoply of policy solutions for mortgage industry participants, but only those which specifically spell out HOW you comply will eliminate the risk of non-compliance. 

TRID - Process Management - From Scratch

GFE/HUD-1 Are NOT Extinct - merely deprecated

Of the many TRID change challenges, one curve ball that continues to confuse: GFE and HUD-1 still remain in use! TRID doesn't apply to all transaction - some retain the the GFE/HUD-1 process. Ensuring the correct disclosures at the right part of the process is an important component of compliance.

2010 GFE Process REMAINS IN PLACE

Your old GFE Process doesn't get deleted, it gets denigrated from a primary to a secondary process (depending on your business model). If your business focuses primarily on reverse mortgages, home equity lines of credit or mobile homes, your business continues as usual; the TRID process applies as secondary in the event you pick up a customer to which it applies. Also, business loans, farm loans, temporary financing, such as construction only loans, lot loans and conversions remain exempt.

Loan Estimate Process and Closing Disclosure Process

The procedures remain relatively unchanged. The major difference causing concern among the industry, revolves around the idea that any changes to the Closing Disclosure result in a 3 day closing delay. This will only happen if 

1. The APR (annual percentage rate) increases by more than 1/8 of a percent for fixed-rate loans or 1/4 of a percent for adjustable loans. A decrease in APR will not require a new 3-day review if it is based on changes to interest rate or other fees.
2. A prepayment penalty is added, making it expensive to refinance or sell.
3. The basic loan product changes, such as a switch from fixed rate to adjustable interest rate or to a loan with interest-only payments.

Theoretically, if we strip out all of the day-to-day processing time frames for documents, appraisals, title work and other time-consuming verification, a loan could still close within 7 Precise Regulatory days of application (because the customer must receive the initial disclosure at least 7 Precise Regulatory business days - in lieu of Actual Business Days - prior to closing.) 

Don't Forget the Home Loan Toolkit!!

The Home Loan Tool Kit replaces the "Settlement Costs Booklet" that we have been busy not giving to customers for the last 40 years. This is a foundational piece of the Know Before You Owe process. We have some problems with the information disseminated within the Tool Kit - specifically some mis-information with regard to locking in, but it generally represents a more customer friendly read and it references all of the other TRID material.

Your FREE Know Before You Owe Policy

Of course, remember we have been providing you with a FREE TRID policy since the beginning of the year. Now is the time to examine the easy way to manage your compliance policies and procedures with our Compliance VP Document Management System. 

Processor Boot Camp: Training Processors no Longer Means Re-Inventing the Wheel!

A goldmine of pre-developed training by industry leaders means you no longer have to pay to train new processors

Beginning in 1996 we ran Loan Processor Boot Camp classes as an answer to the fact that there was no real training in the area of processing. Over the last 20 years, the industry grew so much, and so many resources were deployed to use training as a sales tool, we can now benefit from vast libraries of pre-developed material when designing a training program. And the best news is that you can now use these tools to deploy your own pre-developed training program for new processors that you do not have to pay for.

We have often called processing the "life blood" of the industry. We live and die on the quality of our customer service, and so much of that service delivery depends on the processor doing his or her job well. While the processor must have some key skills - attention to detail, ability to multi-task - the industry has a very steep, though not long, learning curve to understand the business. Once a processor has achieved basic competency, the tasks become routine. The individual can start to rely on intuition and internal procedures to smoothly manage a pipeline. Once in place, companies almost forget that they have this critical resource in place. Like a finger, you don't realize how much you depend on processing until it's gone.

It takes some sort of upheaval, like a surge in volume or a raid from a departing manager, to cause the company to initiate the search for new processors. That's when you discover there aren't any. This presents the next choice - training one from scratch. But you don't have a training program. 

Fortunately, we have developed the template for you. But this remains a good opportunity to refine the way your company works. Going through the process of developing the program can really help you understand where the weaknesses in your production system are.

Step 1: Take Inventory of Necessary Skills

The first step in designing a training program involves making a detailed inventory of the key skills it should deliver. In the case of processing, looking at the duties as defined in a job description should provide the key components. If you or your company doesn't have a detailed job description, this may be at the heart of your processing problem.  We have provided a sample overview, but you really should have the detailed step-by-step for the job function, such as we provide here in your processing policies and procedures. 

Step 2: Assess the Training Needs

The training needs involving matching the specific skill with a deliverable, or a topic, that can be quantified in a training program. Sometimes these needs really don't need a whole training program because it's really a step-by-step process performed uniquely in your environment. But then there are elements which everyone in the industry needs to know which require some explanation. These form the core of your training program.

• Introduction to the business
• Basic Skills - Loan Origination System
• Basic Skills - Loan File Set Up
• Basic Skills - Credit Reports
• Basic Skills - Income/Assets
• Basic Skills - Income Calculation
• Basic Skills - Appraisals
• Basic Skills - Purchase Contract Review
• Basic Skills - Submission
• Workflow Management
• Advanced Skills

When you look at this, you realize this represents the core "boot camp" with a focus on all of the general knowledge a processor needs to effectively do the job anywhere. The only thing left is to identify the courses that meet these requirements and assign the individual to take them.

Step 3: The No-Cost Curriculum Assembled

When we began updating our processing courses, we started having the distinct feeling that we were reinventing the wheel. In fact, it was true. Most of the core material in our boot camp was available in the public domain. We just needed to pull it together.

This template covers all of the content in the standard New Loan Processor Initiation Course

You can download the curriculum here as a template, and feel free to edit and share as you see fit.

Other Training Resources - Behind the Registered User Login

Many other training resources exist to supplement your training program for mortgage processors, but many of these are hidden behind password protected areas of a company's site. All of your vendors, however, offer training as part of their bundle of services; some is a value-added service, but some has a cost associated with it.

• LOS provider - Calyx is the only provider that offers open source training to the public, but all of the LOS providers have training of some sort, much of it hidden behind the login screen. Ask your provider for access.
• Investors and wholesalers - Many account executives will provide live on-site training. Utilize this to augment your training. But for each of your wholesalers, ensure someone goes through their offerings to determine if there is a catalog of past on-line webinars that can be added to your library.
• Associations and Agencies - for advanced training, in particular, the agencies and associations often provide needs based training. The associations use this as a tool to drum up membership, so while it may be no-cost, it may be limited to members only.

The Practical Guide to Loan Processing - Still Relevant

Despite this, we still think our Practical Guide to Loan Processing is relevant as a foundational tool that allows an individual to independently learn all of the keys to the loan processing position. We offer hundreds of "job-based" tips and tools that cannot necessarily be provided in a service providers training. In addition, no one addresses the issue of role management and career advancement.

In addition, for companies, the detailed work of identifying process flow, synchronizing forms to ensure that the myriad compliance, quality control, agency and investor rules do integrate into the process mean that a detailed policy and procedure is much more important than the general knowledge that is in the public domain. 

Recent Fine Points to the Need for a Documented Training Policy

New Day Financial received a $5.2 million dollar fine from the Conference of State Banking Supervisors (CSBS) for systemic violations in its licensing training program. Although the CSBS's condemnation of New Day Financial's training program management system stopped short of using the word "fraud," it's astonishing to see the scope of misrepresentation perpetrated by compliance personnel and company leadership.  This incident reminds us that we often have to state the obvious, because in a high paced environment you can often lose perspective in the interest of expediency. But what happened at New Day caused a gasp at the audacity and scope; specifically the practice of having others take your training for you.

SAFE Act Training - It's Here... Deal With It

It's true that most mortgage professionals consider Nationwide Mortgage Licensing System approved pre-licensing and continuing education a fruitless, nuisance exercise. Much of the 8 or 20 hours of mandated material could easily be covered in 1 hour. Compliance training in all fields gets characterized in this way, whether it's nurses, plumbers, real estate agents, insurance agents and all of the rest of the regulated industries. But as mortgage professionals we usually buck it up and take our medicine as the price of admission. That's why no one in the industry has much sympathy for the New Day perpetrators. But the case raises some other interesting issues.

Compliance training isn't real learning. But that is by design. It advances a certain regulatory agenda, namely the idea that days spent mulling countless pages of federal law (much of it obfuscated by lawyerly wordsmithing) will make a commissioned salesperson (loan originator) an ethical and law-abiding industry participant. The New Day case provides more evidence that more compliance training doesn't mean more compliance. Loan originators especially dread the continuing education and pre-licensing training is perceived as largely useless with new entrants requiring weeks or months of vocational training to learn the job. Delivering it with more "engagement" simply means more "work" for the students. Because the material has such a low perceived value, participants naturally minimize the amount of time and effort expended.

While it doesn't excuse the actions of the individuals who cut class, it's likely the class cutters already knew the material being delivered in the "mandatory" continuing education. Like any long time industry professional, one is aware of the regulatory compliance requirements; many long-timers could teach the course (and do!). So, in part, the fault for the fact that people go to such extremes to avoid taking courses on the same old federal regs - the same regs that we talk about ad nauseum all day long - can be laid at the foot of the regulators who constrict the course materials. The Nationwide Mortgage Licensing System (NMLS), a subsidiary of the Conference of State Banking Supervisors (CSBS), mandates the content. It micromanages the approval of licensed training as if it were the holy grail of compliance. If you want professionalism and continuing education, we recommend the regulator de-regulate continuing education training. This will allow individuals to acquire learning in an area which they have some motivation and some diversity of topics.

Pre-Licensing Education and Testing - A Different Paradigm

Again, the intent of requiring pre-licensing education is good. But the idea that a new entrant can sit in a class for 20 hours and understand the mortgage industry is disingenuous. Similarly, the NMLS' recent statement that the 20 hour class cannot simply contain test-preparation material is also disingenuous; the focus of these classes clearly is preparing for the licensing test.

It's Fraud, Though, Isn't It?...

The New Day personnel who allowed others to take licensing courses and tests clearly crossed a line. How that misrepresentation is not fraud on an individual level is not clear. Perhaps there is another suit to follow.

Oddly, NMLS Worried About the Wrong Thing

The action provides more insight into the peculiar mindset of the CSBS and the NMLS. What provoked the Multi-State Mortgage Committee (MMC) most was the so-called "cheating" on the test by the copying of exam questions and sharing them with others. For anyone who has taken the tests, knowing the questions and answers really doesn't provide any advantage. The NMLS believes that the questions have real value, where a test-taker has to really parse each question to understand what the question is asking. The questions on the NMLS exam do not really test knowledge, but more the test taker's cognition and skill at multiple choice. Remember, multiple choice tests PROVIDE YOU WITH THE CORRECT ANSWER. The test taker has to choose which answer is the most correct.

This belies the issue. The test questions - the content matter - scope is so narrow that the same questions get asked again and again in different forms. Learning management specialists tinker with a battery of approximately 600 potential multiple choice questions and provide a range of partially correct answers, with enough "distractors" (technical learning specialist term where a seemingly correct answer incorrect answer is presented) to throw off a seasoned compliance officer. The board reviews the tests result macro data, and if too many people are failing or passing the test, they tweak the questions to make them slightly easier or harder, until they get into the 20% fail rate area. The idea that the questions themselves have any value at all simply reflects the regulator's misunderstanding of the user experience.

Still, the questions are NMLS property. The MMC does have everyone who logs into the NMLS sign a code of conduct that says they won't copy questions and reveal details about the test. We can complain about the absurd nature of the questions and the subjectivity of the "Best" right answer, but rules are rules.

The Need for a Training Policy and Procedure

The pinnacle of shame in the New Day debacle remains the statement of the COO who asserted he had no idea that his employees were taking his CE for him. That he didn't know he was not exempt from the hours is a tribute to willful ignorance, or a level of isolation reserved for reclusive terrorists.

This draws attention to the need for clear policies and procedures with respect to training. What makes a good policy and procedure? This example taught us that we needed to amend our SAFE Act policy to state the obvious - that each licensed or registered (covered) employee must take his or her own CE; that sharing answers and questions on tests is a prohibited practice.

NMLS has to Acknowledge its Part

The mortgage training industry needs to get honest about the problem of redundant training. Here is an opportunity to get creative. Be willing to step outside the box and challenge the NMLS' education department to approve more wide-ranging topics. Understand that compliance training in a vacuum doesn't help anyone except the regulators. De-regulate topics and provide a more dynamic system where the discussion can change based on the headlines of the day and the needs of the current market.

By creating an environment which stifles innovation in favor of conformity, the NMLS' system has condemned the industry to lowest common denominator, homogeneous training. The poor quality and low value of the NMLS content means that people participate ONLY because they have to. The format and content mean that people essentially check in and check out - Zombie Training - present in body but not in mind. If people can find a way around it, they will, as the New Day incident proves. If the NMLS believes that this is the only incidence of short cuts in the CE process, I am certain they are mistaken.

In order to FORCE engagement, the NMLS has mandated that individuals must take a quiz at the end of the class. Originally, these quizzes were not graded, so it was part of the training process. Now, these quizzes are graded as a way of gauging how much the student paid attention. REALLY? Why not have a really good class, where students participate and put their hands on something, question, fail and learn? Socrates would shoot himself if he saw what we were doing.

As further evidence of the difficulty the NLMS creates for students, it recently announced a mandate that SAFE Act CE had to be taken all at once - in one day - instead of the possibility of spreading the training out over a year.  How does this benefit anyone except the NMLS? What could the exception to ongoing training possibly be? Did they just want to avoid clogging up the database with multiple partial credits?

Whoops - How Much is that Whistle-blower's Payday?

Of course, you never know how much a whistle-blower gets paid, unless he or she files a lawsuit to collect. According to various law firms, the payday for a whistle-blower in a government action can be anywhere from 5 to 35% of the fine or recovery. 10% of $5.28 MM is $520,000 - not a bad payday.

Training Policy Sample Here

MortgageManuals customers already have a training policy embedded in their Policies and Procedures manuals. For instance, Originator training is in the Origination Manual; Processor training is in the Processing Module; Compliance training is in the Mortgage Regulatory Compliance Module.

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4/21/2015 - FinCEN SAR Reporting Statistics for 1st Quarter 2015
4/1/2015 - CFPB's Homebuyer Finance Guide

The Audacity of ... CFPB's Misleading Marketing Tool

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. 

False	True
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 mortgage

Wrong	Right
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- approval process

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

False	True
A lock-in can be given at any time.  Once a lender has your loan application, you are locked in.  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?

Wrong	Right
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?

Wrong	Right
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?

Broker	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 and reliable.

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Ken Harney's Article