Your Mortgage : Loan ‘Overage’ Charges Come Under Fire
A commonplace practice by mortgage companies--one that consumers pay for but rarely hear about--is coming under attack by advocates of greater computerization of the home financing process.
The practice is known as “overage.” Essentially it means that when a mortgage loan officer quotes an interest rate or fees that are higher than those posted by the lender who will actually be funding the loan, the loan officer and his or her company get to pocket the difference.
For example, say you apply to a mortgage firm and receive a quote of 7 1/4% with 2 1/2 points on a 30-year mortgage. (A point is equal to 1% of the loan amount.) In reality the national lender who will be funding the mortgage has posted a retail price for the loan of 7 1/4% with 1 1/2 points. The mortgage banker or brokerage firm dealing with the consumer, in other words, will receive its full, normal commission from the lender by delivering the loan at the officially posted price of 7 1/4% with 1 1/2 points. But the national lender doesn’t limit what retail loan brokers quote to their customers.
If the loan officer can persuade a borrower to sign for the mortgage at 2 1/2 points, he or she gets to keep the extra point--$1,000 for every $100,000 of loan amount. Typically the “overage” is smaller, running anywhere from one-quarter to one-half a point. Many loan firms have rules for splits of overages, with a certain share going to the loan officer, and the balance to the firm.
Jack M. Guttentag, a finance professor at the University of Pennsylvania’s Wharton School, says the widespread practice of pocketing overages like this “is one of the reasons why consumers often aren’t getting as good a deal as they should,” despite this year’s decline in interest rates.
Mortgage bankers and brokers don’t deny that pocketing of overages is common, but they argue that the practice has been an integral part of the loan business for years--even if borrowers are in the dark about it. The fees and rates usually are fully disclosed to the consumer under federal law through “good faith estimates” at application and the “HUD-1” form at closing.
What isn’t disclosed, they concede, is that the rate-and-point package received by the borrower was not, in fact, the officially posted package from the lender. It was higher, either through extra points or through additional charges for application or processing-related fees that get tacked on. The latter are known as “junk fees” in the industry.
David Hershman, a Virginia-based mortgage banking executive who authored a book on loan origination for the Mortgage Bankers Assn. of America, argues that “an overage on one loan may help balance an underage on another.” “Underages” occur when competition for a particular type of loan--or for a cream-puff customer--is especially hot in a local market. Aggressive rate-shoppers who “come back and play (mortgage companies) off against one another” can walk away with below-retail loan-quote packages, Hershman said.
Guttentag warned federal officials at the Department of Housing and Urban Development (HUD) in late July about the existence of overage practices and “loan steering” by mortgage officers. Guttentag’s solution to the problem: Computerized loan origination systems that electronically prevent pocketing of overages at the retail level, and that are “lender-neutral” to eliminate bias toward lenders offering brokers heavier fees.
Guttentag is chairman of a Wayne, Pa.-based firm, GHR Systems, that already has installed its computerized loan origination system at two of the largest mortgage firms in the country--GE Capital Mortgage Services and Sears Mortgage Corp.
Separate computerized systems are also being readied for large- and medium-sized real estate brokerage firms this fall allowing them to qualify home buyers and provide preliminary financing commitments on the spot from a variety of competing national and local lenders.
The system will cut out overage charges, Guttentag said, because all loan prices posted are wholesale, and computer searches for the “best” package for a borrower will not be by lender name, but by rates, fees and other characteristics. Realty or mortgage brokerage participants won’t be able to charge more than the posted prices, according to Guttentag, because the system will cross-check all charges paid by the borrower against those posted by the lender. Firms charging more may “be bounced right off the system.”
How can the vast majority of consumers who are mortgage shopping the traditional way--without computerized help--avoid paying expensive overages? The immediate past president of the Phoenix-based National Assn. of Mortgage Brokers, Diane W. Kelly, strongly defends current industry practices on loan pricing. But anyone who wants to minimize the chance of paying overage, according to Kelly, merely has to “know what to ask from a loan officer when you’re shopping.”
Besides rates and points, she says, “ask specifically this question: What other lender and/or broker fees will be added” to the basic quote. Make sure you jot down every one, she advises, “from processing fees to document prep and inspection, tax services, courier, etc.”
Once you’ve got all that, and compare mortgage company A to B to C to D, she says, you’ll be able to spot the junk fees and overages on points. And she adds, “you’ll know where to take your business.”
