Orlando Mortgage Blog

Do Consumers Understand Loan Disclosures?    

Simple Answer:   NO

In an ongoing attempt to understand the cause and effect of the issues facing the real estate markets today, in January of 2008 the Board of Governors of the Federal Reserve System ordered a testing of what consumers understood in relation to mortgage disclosures given to them by mortgage brokers and loan officers with lenders. It was done across various geographical areas of the United States and demographic models. After extensive research, Macro International, Inc., the firm chosen to do the research, published the results on July 10, 2008 to the Board of Governors of the Federal Reserve.

Some interesting facts came to my attention. The report summary is paraphrased below:

• Some of the disclosures they used in the test were initially effective in communicating to participants particularly in the Los Angeles and Kansas City markets that brokers receive more compensation for providing loans with higher interest rates. However, this was "extremely counterintuitive to participants" to quote the report, most of which previously assumed that if they paid a commission to a broker they would work in the borrowers best interest. That resulted in a significant number who didn't believe or ignored the conflict of interest described in the disclosure.
• Much of the reason test participants had difficulty understanding the conflict that the brokers face was that they didn't understand how or why brokers might decide to show them loans with higher interest rates. Many assumed the interest rates the brokers provided were set by the lender based on their creditworthiness alone, and did not realize they would have latitude in deciding which loans to present them and at what rate (price) to offer.
• Even after reading agreements that explicitly stated that loan officers who work for lenders have the same conflict of interest as (mortgage)brokers, almost all participants still assumed that the compensation worked differently for (lender) loan officers and (mortgage) brokers. In most cases participants believed that they would pay less commission when working directly with a lender, either because a) loan officers received smaller commissions; b) the lender, not the borrower, paid these commissions; or c) loans officers received set commissions for each loan, while brokers had more latitude to set their own fees.
• While participants in early rounds had difficulty understanding the consequences if a lender paid the broker commission most participants in Kansas City understood that they would pay the lender back through an increased interest rate. This was because the agreements used in Kansas City explicitly described the different ways that the commission could be paid. However, they did not relate this information to any conflict of interest on the part of the broker; they assumed that the agreement was simply informing them that this was an option they had if they could not afford to pay the commission up front.
• Some participants, particularly those who saw longer, more detailed broker agreements, resented that a broker would focus so much attention on his or her compensation before providing any services. One such participant commented that the agreement made it seem that "all the broker cares about is how he is getting paid."
• A number of participants were confused by what they saw as a contradiction between the fixed commission shown on the agreement and the statement that the broker receives greater compensation for providing loans with higher interest rates. Participants dealt with this contradiction in different ways, usually either disregarding the text about increases in broker compensation, or by assuming that the broker was going to receive a separate payment from lenders in addition to the amount shown. This latter belief--that the broker would receive two separate payments--often led to negative perceptions of the broker.
• Disclosures that were used in later rounds of testing advised consumers that the only way to ensure they get the best possible loan is to compare offers from different brokers and or lenders. Versions which included this advise prominently did seem to effectively communicate the importance of shopping. However, it was difficult to determine this for certain because most of the participants in the last two rounds of testing understood the value of shopping for mortgages even before reading the agreement, as evidenced by their descriptions of their past behavior.

So many misconceptions and where to start, right? Based on bullet point one and two above, most participants in the test incorrectly believe a mortgage person, whether they work for a mortgage broker or a direct lender, work in their best interest. Both work for a "living" and will price you accordingly, not unlike two Ford or Chevy dealers who sell the same product. The only way to be sure is to shop around.

Bullet point three is one of the oldest misconceptions. Whether you go to a lender or a mortgage broker, the sales force has to get paid to serve you and you pay them. It does not happen in a vacuum. You must shop price and product. To draw a comparison you might think of an independent insurance agent who deals with hundreds of providers offering varied coverages, services and prices. They usually have many more options to offer than the one company down the street that only offers "their" in-house widget. Do you want to pay more today for a recognized "household" name? We don't think it's that's simple any longer.

Under Florida law, bullet point four does not apply to "lenders" since lenders are exempt from this disclosure and don't have to tell you what their commission or profit is when they make your loan, but Florida Mortgage Brokers must. All you have to do is compare the total deal costs. We all price the same way and may even send your loan to the same wholesalers. Mortgage Brokers are the only licensee in Florida that fully disclose it to you folks...That's a FACT!

Bullet point five is a prime example of a good idea gone bad. All first mortgage lenders in Florida require a "Mortgage Brokerage Origination Agreement " on every loan submission from a mortgage broker. Lenders do not, and have not, had to provide this disclosure as to how they get paid nor how much since the law changed in October, 1992. They had better lobbyists I guess. But the consumer gets full disclosure from a broker period. When is the last time a lender, a banker, a car dealer, your grocer or anyone fully disclosed all the sources of their income in your price and how much "Profit" you were paying them BEFORE they gave you the service? FLORIDA MORTGAGE BROKERS MUST DO SO BY LAW!

Bullet point six is a simple answer. A consumer can select an interest level one of three ways. 

1. You may select an interest level that pays the origination fee (cost) for you based on covering that fee with the additional fee paid by the lender on that rate level to the originator.
2. You may select a slightly lower rate that has the lender partially paying the cost of origination and you pay the difference in points or flat fee.
3. You may select an even lower interest level and you pay all the agreed upon origination fee to the lender or broker in points or flat fee.

You may select any of the three above whether you go to a lender loan office or mortgage broker. The question is: Who has the best price/program? On a conforming 30 year fixed rate for example, I might expect there to be about a ¼% rate difference between the three examples. 

The last bullet point is what it's really all about! SHOPPING AROUND! No matter what. IT'S ALL ABOUT PRICE AND SERVICE. Do your homework, please. I sell price every day. That's my product. But if you don't shop around and you pay too much...don't blame the broker or the lender.

"Highlighting and Bolding" of data was added for emphasis.

Bill Wilbanks, Florida Mortgage Broker

(407)647-4440 or (800)646-4019