A lender's end to overages

Will new rules spur other banks to follow suit?

By Inman News Feed
Add Comment Add Comment | Comments: 4 | Posted Mar. 15, 2010

Share this Story:

Will new rules spur other banks to follow suit?

Jack Guttentag
Inman News

Bank of America recently delivered the following message to its loan officers: "Policy Change: Effective with initial locks on or after Jan. 21, 2010, overages will not be allowed on either purchase or refinance transactions."

Some years ago, I had occasion to compare the marketing of home mortgages by lenders in the U.S. with the marketing of carpets in Middle Eastern bazaars. The comparison favored the carpet merchants, who didn't pretend their prices were fixed. Virtually all carpet buyers know that in the bazaar, bargaining is the rule.

While less-competent bargainers may pay a little more, they are paying for their incompetence, not their innocence of the rules. In contrast, a large proportion of mortgage borrowers did not understand that they were in a mortgage bazaar -- they paid for their innocence.

The price of innocence is called an "overage." It is the difference between the price a lender posts with its loan officers -- which is the price the lender expects to receive -- and the price the loan officer (LO) charges the borrower.

If the posted price is 5 percent and zero points, for example, and the LO charges the borrower 5 percent and 0.5 point, the 0.5 point is the overage. Typically, the LO will get half. Interested readers will find a full discussion of how overages work on my Web site.

We have not always had overages. In the 1920s, before there were secondary markets, consumers who wanted mortgages visited the offices of commercial banks, savings banks, or savings and loan associations, and dealt with salaried employees who had no discretion or incentive to adjust prices.

Overages arose following the development of secondary mortgage markets after World War II. Secondary markets made it possible to go into the loan origination business without becoming a regulated financial institution. Because you could sell loans as fast as you made them, all you needed was a little capital and a line of credit.

These firms are "mortgage companies," or (as they much prefer) "mortgage banks." I sometimes refer to them as "temporary lenders" as distinguished from "portfolio lenders" who hold the loans they originate in their portfolios.

Mortgage banking developed its own operating methods and a culture to match that were very different from those of depository institutions. They invested very little in physical facilities designed to attract walk-in traffic during business hours. Instead, they retained loan officers (LOs) to actively pursue clients, as opposed to sitting behind a desk waiting for clients to appear.

To develop purchase-loan business, LOs courted real estate sales agents, making themselves available to the agents wherever and whenever they were needed to take a loan application, which might be on the hood of an automobile on a Sunday morning. To develop refinance business, LOs might camp out in the office of a public agency that maintains records of deeds and liens, developing lists of borrowers who might profit from a refinance.

Because LOs did most of their work out of the office, subject to little supervision, they were compensated largely or entirely on a commission basis. While legally employees of the mortgage bank, LOs operated largely as if they were independent contractors. And the more loans they brought in, the more independent they were.

Overages were part of the package. Most LOs wanted to be free to charge what the traffic would bear, and profit from it. The lender who wouldn't tolerate overages would lose LOs, and the most successful LOs would be the first to leave.

The LO-based mortgage origination system made the depository office obsolete as a source of mortgage loans. Depository institutions that wanted to be major players in the home-loan market had to hire their own loan officers -- or acquire an entire mortgage banking firm as an affiliate.

The affiliate approach was the more popular because it avoided clash between very different cultures.

I recall my shock when I joined the board of a large savings and loan association some years ago and found that the CEO was the third most highly compensated employee of the association. The two who earned more were LOs who had not yet been moved into a separate affiliate.

The general attitude of most depository institutions has been that overages were a necessary evil that they would like to eliminate, if they could do it without losing their best loan producers. Bank of America has evidently decided that that time had come.

Not the least of the reasons is that under revisions to Truth in Lending recently proposed by the Federal Reserve, lenders will not be able to share overages with LOs. This will eliminate the financial incentive for LOs to charge overages.

Page: 1 2 |Next
Add to favoritesAdd to Favorites PrintPrint Send to friendSend to Friend

COMMENTS

Comments 1 - 4 of 4
Report Violation

1. george morgen said... on Mar 9, 2011 at 05:14PM

“APPLY FOR YOUR LOAN HERE
This is an international lending firm located in some countries,we offer all type of loans to interested persons for any purpose.contact us through this email address if you need a loan:
georgemorgen@yahoo.com

Report Violation

2. joseph amir said... on Apr 15, 2014 at 09:23PM

“LOAN / MONEY AVAILABLE TO LEND AT JOSEPH AMIR INVESTMENT COMPANY.
The opportunity is here for you to get what you have been looking for, the development and growth of the economy depends on investment and all business/startup needs funding to expand. It is time to move forward and establish. Joseph Amir investment company is out to help investors, enterpreneur, individuals and companies get the funding they needed.Contact us if you need loan.
josephamir@blumail.org”

Report Violation

3. wemasundas said... on Oct 28, 2014 at 12:51PM

“Hello Sir / Ma,
WEMA LOANS NOTIFICATION!
Are you seeking for legitimate and fast loan? Free collateral loans / non-collateral loans, we offer loan services of different types ranging from full loans to subordinate loans best designed for you. The loans are given at a very low interest rate. We offer mortgage, company, business, personal, housing, land acquisition and many more. No social security number is required and no credit check required 100% guarantee to the nation / world.Our dignity is to respect while providing the highest quality services, We will not also forget to bring to your notice that we grant loans to sincere and seriousminded customers that need to be uplifted financially with the help of loan / loans. Contact us now via our mailing address.
Sincerely,
Mrs Wema Sundas.
Email: mrswemaloans@rocketmail.com”

Report Violation

4. AnonymousWEMA BRING LOANS TO ALL IN JUST 3% INTEREST RATE FOR XMAS! Email: mrswemaloans@rocketmail.com said... on Oct 28, 2014 at 12:56PM

“Dear Sir/Madam,
We the Wema Loans, Provides both long and short term loan financing. We offer secure and confidential loans at a very low interest rate of 3% per year.
We offer;Personal loans, Debt Consolidation Loan, Venture Capital, Business Loan, Corporate Loans, Educational Loan, Home Loan and Loans for any reason!
We are the trusted alternative to bank financing, and our application process is simple and straightforward. Our loan ranges from $5,000.00 (Five Thousand dollars ) to
$25,000,000.00 (Twenty Five Million dollars).
Additional Info: We're fast becoming the private, discreet, and service oriented lending choice for general loans. We're the company to turn to when traditional

lending sources fail. If you are interested do not hesitate to contact us with information’s below by
Email: mrswemaloans@rocketmail.com
1. Your Full names:
2. Contact address:
3. Occupation:
4. Your Contact Telephone Numbers:
5. Monthly Income:
6. Contact Email Address:
7. Loan Amount:
Mrs Wema Sundas.
Head, Loan Application Department,
Wema Loans,
mrswemaloans@rocketmail.com ..”

ADD COMMENT

Rate:
(HTML and URLs prohibited)