WASHINGTON — When the federal government's consumer protection agency for financial matters tells you how to shop for a good deal on a home mortgage, you should follow the advice, right?
Maybe some of it. The Consumer Financial Protection Bureau, which was created in the backwash of the worst national mortgage disaster since the Great Depression, recently went online with a new interactive mortgage tool. The CFPB's site (www.consumerfinance.gov) offers helpful tips on shopping and has a guide to loan alternatives, closing costs and a "rate checker" feature.
At first glance, the rate checker appears to be a quick way to research prevailing mortgage interest rates in your area. Here's how it works: You enter the state where you want to apply, a FICO credit score estimate, your desired loan amount and the loan term. The rate checker then displays the local daily rate quotes collected from banks and credit unions by its data vendor, Informa Research Services Inc. of Calabasas.
Say you live in Virginia or California and want to see what rate you might get on a $400,000 house purchase with a $40,000 down payment. You put in your estimated credit score — for example, say you've got a FICO of 680. In Virginia, according to the rate checker readout Jan.16, "most lenders" in the survey would quote you 3.875% or less for a 30-year fixed-rate loan. Two lenders offered 3.625% and six quoted 4% to 4.375%.
In California, most lenders also quoted 3.875% or less, one quoted 3.75% and five came in between 4% and 4.375%. None went as low as 3.625%.
But something important is missing here: the various fees and charges that the CFPB itself requires lenders to disclose as part of any mortgage quote to a consumer. As regulator of the Truth in Lending Act, the CFPB mandates precise disclosures of loan discount fees, or "points," and lender closing charges among others. (A point equals 1% of the loan amount.) These are included in the annual percentage rate — the effective rate that applicants will be paying over the life of the loan.
When lenders advertise their rates, they must include the APR along with the base interest rate. There may be other charges that come into the total cost picture as well, such as lender-paid mortgage insurance.
So how big a deal could it be when only the interest rate is provided? Quicken Loans, the second-largest retail lender in the country, said that quoting a rate alone, with no reference to specific points, fees and the APR, "will deliver a cost estimate that greatly differs from what is accurate."
Steve Stamets, senior mortgage banker for Apex Home Loans in Rockville, Md., said, "It's inherently misleading because you're not getting all the potential charges" you're going to have to pay.
For example, Stamets said, a loan officer might violate CFPB rules by quoting a 3% rate on a hypothetical $400,000 loan to pull in customers, but not mention that to obtain that rate they will need to pay 5 points, or $20,000. Those points could be paid at settlement or financed and included in the principal. In the latter case, using one rule of thumb measure, the effective rate on the loan might jump to 4.25%, not the 3% advertised.
David Stevens, chief executive and president of the Mortgage Bankers Assn., said the CFPB rate checker's failure to disclose full costs "violates everything a lender must do" to quote rates to borrowers in compliance with the agency's own rules.
"It's just a bad idea," he said. "It needs to come down."
But the CFPB shows no signs of yielding to critics. The agency said the rates quoted "assume" discount points ranging from half a point to minus half a point "and a 60-day rate lock," but do not include lender closing charges.
Dave Hershman, a nationally known trainer and author who helps mortgage companies comply with the rules, scoffed at the CFPB's defense: "Could you imagine [the bureau] allowing a mortgage company to be that nebulous? And to quote rates without an APR?"
Bottom line: Check out the rate checker. But remember: There's much more to a mortgage quote than just the rate.