Savvy home buyers seeking a mortgage know that they need to shop around. They compare the interest rates offered by a variety of banks, brokers, or other lenders, as well as other terms that contribute to the total mortgage package.
One component of a mortgage package that can contribute significantly to a borrower’s costs is known as origination charges. The Consumer Finance Protection Bureau (CFPB) defines origination charges as “upfront fees” charged by the lender and advises home buyers to “make sure to compare the origination charges” when comparing loan estimates. While comparing origination charges may seem like a simple step for borrowers to take, it can be confusing when it is not fully understood.
Origination charges represent a collection of fees that can include application fees, underwriting fees, processing fees, verification fees, and rate-lock fees. The way in which these fees are represented on a loan estimate is left to the discretion of the lender.
For example, Lender X can decide to list a charge of $1,195 as an “orientation fee,” while Lender Y lists a charge of $1,195 as the combined total for an “origination fee” and an “underwriting fee,” while Lender Z lists a charge of $1,195 for only an “underwriting fee.”
Provided that the loan’s “origination points” are disclosed as a separate line on the loan estimate, lenders itemize their origination charges however they choose. They may list a single origination charge or split it up into an application fee, processing fee, underwriting fee, or any combination thereof. The lack of standardization makes it difficult for borrowers to compare mortgage loan estimates in an apples-to-apples way.
Being able to compare these fees is important for borrowers. For example, an origination fee is not the same as origination charges; rather it is one of the many fees that can be included under the umbrella of origination charges. The origination fee covers the expense the lender incurs to originate the loan. It will typically cover the costs of the paperwork required to securitize a loan by validating information like the borrower’s income, employment status, credit, and deposits. In order to keep a potential borrower’s business, lenders are often willing to negotiate on origination fees. Borrowers are less empowered to negotiate if they do not know what the origination fees are.
The practice by lenders of listing origination charges throughout various sections of their loan estimate document also complicates the process. If all the fees were contained in one section of the estimate, getting to the total would be easy and comparing packages from different lenders would be a breeze. But the location for itemization is not standard, making it challenging, if not impossible, for borrowers to get to the total that matters.
Regulations addressing the issue do not seem to help the home buyer. Regulation Z, which is part of the Truth in Lending Act that was passed in 1968, establishes that “the itemization of the amount financed,” which the law requires, “will contain items, such as origination fees or points, that also must be disclosed as part of the good faith estimates of settlement costs” required by the Real Estate Settlement Procedures Act (RESPA). However, Regulation Z goes on to say that “(c)reditors furnishing the RESPA good faith estimates need not give consumers any itemization of the amount financed.” If creditors furnishing loan estimates need not give itemization, the task of comparing estimates becomes exponentially more difficult.
The concept of APR, which stands for Annual Percent Rate, has been used for close to a quarter-century as a reliable measure to compare between lenders. Because the APR includes not only the interest rate but also the fees that borrowers must pay to get a loan, it represents a broader measure of the cost of borrowing money. Simply speaking, APR is the cost of obtaining a mortgage added to the interest rate.
“APR was invented to make it easier to compare loan offers across lenders,” explains Yatin Karnik, Founder and CEO of Confer Inc. “But with the complications associated with a mortgage transaction coupled with the lack of effective regulation verifying if lenders
are consistently calculating APR, borrowers are left with nowhere to seek guidance. This is where the mortgage industry, including banks, lenders, brokers, regulators, and non-profit advocacy groups, has missed the boat, in my humble opinion.”
Confer Inc. is an innovative mortgage platform powered by artificial intelligence and continuous machine learning that helps home buyers by customizing a mortgage so that it is financially beneficial to the borrower. The Confer app makes it easier for borrowers to compare the various costs associated with mortgages and, ultimately, save money. It launches on April 1, 2022.
Yatin highlights the credit report fee, which is a cost commonly associated with obtaining a mortgage, as another example of a cost that should be closely scrutinized.
“The credit report fee charged by a lender typically will be somewhere between $10 to $100 for each person on a credit report,” Yatin says. However, according to law a credit reporting company cannot charge more than $13.50 for the report. Yatin continues, “For a typical household with both spouses on the mortgage loan, borrowers can expect to pay up to $200, yet they could obtain the reports for $27 from the reporting company. How is it still fair for a lender to charge whatever they wish?”
Clearly, the process of finding the best mortgage package can be confusing, even for a savvy home buyer. The best practices encouraged by the CFPB advise all home buyers to compare loan estimates before making a final decision on a mortgage. While that can be challenging for all of the reasons that have already been presented, there are tools such as the Confer app that can help. Until lenders begin to provide the utmost clarity on what they are charging for mortgages, home buyers would be wise to take advantage of those tools.