Saturday, August 25, 2007

Credit Crunch, Yet Monitor Litter Continues

by Tanta on 8/25/2007 08:04:00 AM

The Washington Post reports that some lenders still have sufficient operating cash to run deceptive mortgage advertising. I guess it can't be as bad as we thought.

My favorite part:

LendGo.com, another Internet company that sends information to lenders, declared: "Bad Credit OK!" in an ad on Time magazine's Web site. "Refinance Rates at 5.8% Fixed!" the ad said earlier this week.

But in an interview, Cyrus Zahabian, a manager at the California company, said, "We don't necessarily target those types of people. We look for more of the prime and Alt-A type credit here." Alt-A borrowers are in between prime and subprime.

He also acknowledged that it would be a challenge for a person with bad credit to get a rate as low as 5.8 percent. "Yeah, I don't have anybody that would offer a good rate for those types of people," he said.
Remember that every time we bring up fiduciary requirements for brokers, we are told that consumers have the responsibility to assure they are getting a "market" interest rate.

A consumer reading this advertisement would possibly get the impression that someone with bad credit could get a rate of 5.80%. So that consumer goes to a broker who can't get that rate for him or her, but can get 8.50%.

Why should the consumer believe he is not getting ripped off by the broker? Why do brokers think consumers have realistic ideas about what a current "market rate" is? If the borrower who thought 5.80% was reasonable will accept 8.50%, will he also accept 9.50% if someone just wants to pick up some spiff? Once it's a matter of the broker saying "trust me, this is the rate you get," then, well, it's a matter of "trust me."

"Bait and switch" advertising is already illegal, and if the FTC had a few spare minutes, busting this LendGo.com outfit would be a no-brainer. My point is that lenders are flouting those advertising regulations right out in front of everyone's nose, and then they're turning around and claiming that increased regulation of brokers would ruin the business.

The Truth-in-Lending Act, which dates from the seventies, requires lenders to quote an "APR" as well as the simple contract interest rate. The APR is an effective or "construct" rate that takes into account the total cost of financing over the stated loan term, including fees and points. The idea, originally, was that a consistent APR calculation allowed a consumer to compare Lender A's offer of 5.80% note rate with 2.00 points and $375 in fees with Lender B's 6.00% note rate with 1.00 point and $800 in fees. Or Lender A's 5.80% fixed rate with Lender B's 4.80% 3/1 ARM. The APR for each of these loans gives you the "total cost of credit" of each of those loans (over the stated term), so that you are comparing apples to apples.

That regulation was, obviously, written long before the internet and current competitive practices in the industry involving rate quotes. I'd personally like to see the APR requirement supplemented with a requirement that a lender also disclose some industry-standard market comparison rate (such as Freddie Mac's or FHFB's national average actual, not "advertised," contract rate) for a fixed or ARM loan. It would be fine with me if the regulators forced OFHEO or HUD or someone else to start collecting a national average actual jumbo and subprime rate, too, instead of just the conforming conventional rate.

This doesn't make for a perfect comparison, and disclosures should have conspicuous language saying that. But it would give consumers at least some kind of reality check on an interest rate that is substantially higher (and possibly predatory) or lower (and possibly a deceptive teaser) than a rough approximation of "market." If the reason the borrower's rate differed so widely from the national average is the borrower's specific credit profile or down payment or selected property, this would be an excellent "teachable moment" for making sure that borrower understands that he or she is taking on more than average risk. No?

As someone who has been involved rather intimately with the nuts and bolts of meeting regulatory requirements like this from the lender's side, I'll be the first to admit it sounds like a thorough-going pain in the butt from the lender's operational perspective. I weigh that against the social and economic costs to the whole world of crazy lending, and I suspect that lenders could take some Advil for the butt pain. Certainly there may be more operationally efficient alternatives, like, say, forcing lenders to make their rate sheets available on demand, but I'm guessing that won't be popular with the industry either.

It's worth going to these lenders' 10-Ks sometimes, and looking at what they claim to have invested in software and hardware and administrative staff, and then asking why they can't manage to accomplish something like what I'm proposing. From the Washington Post article, here's a Countrywide flack commenting on the advertising issue:
Asked about the ad, a spokeswoman e-mailed a statement saying: "Countrywide operates a highly-sophisticated marketing system for both on- and off-line advertising with a wide variety of marketing messages available to the broad array of customers that the company's products and services are designed to assist. The company monitors and adjusts advertisements to help ensure that the leads generated are likely to be within our underwriting parameters."
Wow. And I can remember the days when loan officers had to dig out the paper copy of Statistical Release H-19, fire up the Monroe, and pencil in that APR on a hand-written Good Faith Estimate. If CFC can do all that mind-blowing sophistication with the "marketing system," I'm guessing they could print an "average contract rate" on a TILA disclosure. It's funny sometimes how inconsistently those computers work.

This is the point where the put-upon small business-owner brokers who can't even afford to buy a 10-key solar calculator at OfficeMax can pipe up in the comment section about how hard it is to make a living in this country. You get bonus points if you argue that consumers are obligated to have a better internet connection than you are.