Video Summary:
Topic: Mortgage lenders' pricing practices.
Welcome back to Dirty Little Secrets Week. So, this video is a little bit complicated, but it's definitely worth watching. This is about mortgage lenders and how mortgage lenders are pricing loans. Half of the industry thinks this is legal; the other half doesn't. I'm in the half that doesn't think this is legal. I don't think it matches the intent of Dodd-Frank, which is the law that governs how lenders get paid, and I think it's harmful for consumers. So, we're going to talk about what it is, and then I'm going to tell you guys why it's harmful to consumers.
Actually, I'll give you a sneak peek. The reason why what I'm going to explain is harmful to consumers is because it punishes people who are less educated. The way that the law was designed, it was designed so that lenders had to charge consistently, whether someone was educated or not educated. They wouldn't pay a higher rate because of their lack of education. However, with this new pricing scheme, that is exactly what's happening.
So, if you're from the CFPB or a regulator watching, that is what we're looking at right now. We're going to look at a pricing practice that harms less educated buyers. Mhm, yeah, serious. Okay, so let's talk about it.
Discussion on legality and alignment with Dodd-Frank Act.
Focus on consumer impact, especially less educated ones.
Stipulates flat percentage or fee per loan.
Dodd-Frank makes it so that with lenders, we're not supposed to get paid based on any variable of the loan. It's supposed to be a flat percentage or fee per loan. So, let's say that I want to make 1%. That means I'm going to make 1% on every single loan I do, whether it's FHA, VA, USDA, conventional, jumbo, whatever it is. 1%, right? Okay. Or half a percent, whatever it is, or 2%. The lender sets what they're going to get paid per loan, and they get paid the same no matter who the borrower is, what their education level is, or what type of loan it is. Okay, pretty clear, right? Oh, goodness.
Prohibits varying compensation based on loan type, borrower's education, etc.
Aimed to ensure uniformity and prevent discrimination.
Some lenders not competitive in rates.
Okay, so here's what's happened. So, we started seeing this a couple of years ago, and what we saw is that some companies were not very competitive in rate, and some originators – so loan officers, I'm an originator or a loan officer – they wanted to make more money than they could be competitive with, but not everyone was going to shop them. So, how could they make as much as possible, but then if someone shopped their rate, still get paid? That was the problem they were solving for.
Okay, now look, it's a simple solution: lower what you're making. You know, if the company is making so much they're not competitive, lower it. If the lender's charging so much that they're not competitive, lower it. That's the solution. Oh, God. But, of course, that's not what they did.
Originators (loan officers) seeking higher earnings without losing non-comparative clients.
Companies not reducing their rates to remain competitive.
Describes a hypothetical scenario with "Bob" from SLE Corp.
So, let's say that Bob – Bob, some of you guys love Bob, my character. Okay, so Bob is a sleazy lender. Bob works at SLE Corp, right? Because any lending institution – oh, I'm going to make some enemies – that is promoting this... Here's the interesting thing. So, if the CFPB actually cracks down on this, it's the actual loan originators individually that are going to lose their licenses as well. The company will get in trouble, but these people are going to lose their livelihood. Yeah, because the way that our licensing works, and I know this because I'm in 48 states, so all I do is continuing education, is that even if a company tells you something's okay, you have to know what the rules are. MH. And the rules are very simple: you charge the same, regardless.
Okay, so Bob is a SLE Hound. Covered Bob wants to make 2% on every deal, and if someone's not educated, or if they're a realtor referral and they don't shop him, Bob can make 2%. But once in a while, he gets someone that's savvy, and they can shop him. Now look, if Bob can't compete, then often Bob would not be able to do that loan, and Bob would lose his commission because the way that Dodd-Frank works, it used to be before this rule where you could be like, 'Oh, I'll make less on one deal and more on another,' and they were like, 'Wow, this is how discrimination happens.' Obviously. So, they outlawed that.
Okay, so instead of Bob just losing the deal, right now, what happens is Bob goes, 'Oh, Tommy. Tommy's the guy who's shopping. We've just named him. Tommy's a branch lead.' Oh, well, guess what? On branch leads, Bob only makes 1%. If Bob's only making 1%, he can offer Tommy a better deal. Yep, that's what's happening.
Bob aims to earn 2% on deals with less educated or non-comparative clients.
Reduces commission to 1% for savvy clients who compare rates.
Consumers not comparing rates potentially paying higher premiums.
So, basically, there are lenders out there right now where if you're not shopping them, there's a very good chance you're going to be paying a premium. And if you do shop them, then suddenly, you're going to be put in this magical Branch Lead and they have different names for it, pricing bucket, where Bob makes less but can still do your deal and be competitive on rate. And you're like, 'Well, wait, Jen, I'm confused. You said that they have to charge the same consistently.' They do, with one exception, and the exception is like, let's say you have a corporate account, right? Let's say that you're the lender for IBM. Wow, cool. If you're the lender for a huge organization, or it's a different channel of business, right, then you could have a different amount that you make on that channel of business.
Different 'pricing buckets' created for different types of clients.
So, what's happening is they've created a channel of business. Now, here's the thing. Does my company have channels of business? Yeah, but it's really clear. Like, look, if you are an Amazon employee and Guaranteed Rate, there's specific lenders at Guaranteed Rate that can waive your lender fee if you're an Amazon employee. You have to be an Amazon employee. They have a commission agreement. Everything is lined up. That makes it really clear how all this works.
If I want to waive an Amazon employee's, uh, thing, I can't. It's not my commission. It's not my agreement. It's not my comp. Okay. You can't just change your comp. But you can have different channels of business. But they're supposed to be very specific and documentable. This where, 'Oh, they rate-shopped me, so they're a branch lead now,' that is a misuse of the channel of business concept. Okay. And we're seeing a lot of it. A lot of it. Like, I've had people try to recruit me by saying, 'Hey, Jen, we have this really great pricing thing you can do.' And I'm like, 'What is wrong with you? Like, what is wrong with you?’
Concerns over misuse of the channel of business concept.
https://www.youtube.com/watch?v=bTHimpAp91o
Caution in choosing lenders.
So, basically, what you're telling me is that you've devised a way where you are charging people who are less educated more money for the same loan. Wow. And you're calling me, like, the worst lender to call for that, ever, right? So, that is happening right now, guys. That is happening at some pretty big companies.
Suggestion to inform lenders of rate comparison to secure better rates.
So, if all of a sudden, like, look, here's my advice to you: number one, be very careful who you work with. Number two, you tell every single lender, even if you're not shopping them, be like, 'Yeah, you know, I've been comparing rates for six months now.' Okay. Because then, they'll put you in that bucket, and you're going to get a better rate. But here's what's so wrong about that. You guys are educated, right? Cool. You're going to get a better deal. But what about the people who aren't? It's so wrong, and it's totally against the entire way these rules were devised.
These rules were devised to stop this because that's what used to happen. People who didn't know anything, sleazy lenders would take to the cleaners, and the people who were sharper and more educated would get really good deals. This whole law, I mean, there's a lot to the law, but a big portion of this law was to stop that. Yet here we are. Here we are.
So, that is a dirty little secret that not a lot of people are talking about. Look, half of the mortgage industry thinks this is okay. Let me know. Do you guys think this is okay? Do you think it's okay where, if somebody rate shops you, you put them in a different, you say they're a branch lead, and you cut your commission, but you're charging people who don't shop you more? Do you think that's right? Drop it in. I think it's wrong. I think that the law was devised to protect people. And I think that as a lender, you charge the same, no matter who the client is, or who the education is – or, excuse me, what the education is – because that's what's right. That's what's right.
Criticism of the system exploiting less educated consumers.