From February 2004 to June 2006, the National Community Reinvestment Coalition (with funding assistance from HUD) conducted a study to investigate whether race played a role in the rates, fees and loan products offered to potential borrowers.  The coalition used paired mystery shoppers made up of couples or individuals.  The mystery shoppers were either white, African American or Latino.  All shoppers were assigned specific income, credit and employment information.  Minority mystery applicants were given slightly favorable profiles that should have given them an advantage that would result in them receiving the same, if not better, quotes on rates and fees.  The study investigated mortgage brokers in six markets (Baltimore, Washington, Chicago, Los Angeles, St. Louis and Atlanta) and the results were, in the words of the NCRC’s executive VP, “deeply disturbing.”

White applicants were given twice the number of loan options and were far less likely to be offered high-cost sub-prime mortgages.  Only 9% of whites were asked for further information on credit issues or other debt concerns.  Almost 40% of minorities were pressed for information on those issues.  Brokers discussed fixed rate loans with 90% of white applicants but only 55% of minority applicants.

Since this is lowerfees.com, the most relevant finding in relation to this page was that brokers discussed loan fees with 74% of white applicants but only 31% of minority applicants.  As we’ve established in previous blogs, these fees can make up a significant portion of the closing costs and are often an area rife with abuse by mortgage brokers and lenders.

Federal law makes it very clear that this sort of discrimination is absolutely illegal.  Race and ethnicity should have zero impact on the mortgage options, products and fees that an applicant is offered.  This study indicates that there is a pervasive bias, at least in the brokers and markets surveyed, that puts minority applicants at a disadvantage.  Independent of the factors that are supposed to be the determining ones (credit, employment, income etc.), in this study race and ethnicity were used to selectively offer products and information preferentially to whites.

And this brings us back to the Bono quote at the beginning of the blog.  I’m not sure of the context of the quote, but the message resonates here.  We have a product that can fix this problem of bias (and many others associated with closing a mortgage loan) by eliminating predatory and discriminatory practices.  It’s superior to the traditional good faith estimate, or HUD-1.  Lowerfees.com’s technology and the transparency that comes from it takes away the opportunity to bias fees and offerings based on race or ethnicity.  We strive to provide a quote and subsequent transaction that treats all applicants fairly and offers all customers access to the lowest fees.

There has been a lot of headline news focusing on subprime loans and the controversy around this particular lending practice.  I’d like to take a closer look at this issue with the help of a document that is available from Fannie Mae (Lax, et al, “Subprime Lending:  An Investigation of Economic Efficiency”, Housing Policy Debate, Vol. 15-3, Fannie Mae Foundation 2004).  This document provides data from a survey that Fannie Mae asked Gallup to conduct to collect data on the demographics and experiences of consumers with prime and subprime loans. 

Dictionary.com provides the following definitions for subprime:

1. being of less than top quality.

2. being below a prime rate.

The data shows that both definitions of subprime can be applied to the loan that a consumer ends up with.  These definitions can also be applied to the service and product, as well as the business practices, of some lenders who provide and service these loans.

The survey and the analysis compared borrowers with prime and subprime loans.  The data shows that Asians, Hispanics and African-Americans all accounted for a higher percentage of consumers with subprime loans versus prime loans.  Borrowers over the age of 55 stuck to the same trend as other minorities.  These groups are disproportionately more likely to end up with a subprime loan.  Neighborhoods with a high percentage of minority residents were also areas that showed a high concentration of subprime loans.  Borrowers who had subprime loans were less likely to be satisfied with their loan or the process and also faced significant application hurdles such as paying off debt or being turned down for a loan.

One of the most interesting findings (and most relevant to lowerfees.com) was that 25 % of borrowers who took subprime loans paid more than two origination points.  This is more than two and one-half times more than those with prime loans.  And I quote:

“Even at this, the reported difference in points likely understate the total difference in fees typically paid by subprime borrowers.  Our subprime focus group participants, for example, disproportionately reported that significant origination fees were rolled into the principal of their mortgages.”  These data clearly show that discriminatory practices are applied to minorities seeking loans and the fees that they are forced to pay on closing.  It has been established that credit score and worthiness are not linked to race or ethnicity, and this survey shows that despite the fact that minorities do not represent a more significant risk they are burdened with higher fees and interest rates and make up a higher than expected percentage of totals subprime borrowers.  Lowerfees.com offers a new, more efficient and transparent process that eliminates discrimination and saves everybody money when closing a loan. 

I was recently asked by a friend why she was charged certain fees at closing when purchasing her new home (a very common question that is rarely answered by the professionals involved in servicing and closing the loan). 

“Why do I have to pay an administrative fee and a document preparation fee and a processing fee and an underwriting fee?” my friend asked.  I told her the list could have been much longer than that only to find out that it actually was.  More on that later.

My friend even went so far as to say that she would feel better if all of those fees were lumped into one fee with one name.  I tried to explain that back in the dark ages before computers and printers were so readily available, lenders had to hire an outside firm to prep documents for closing.  This fee has been carried over and is now a standard charge on closing.  “But I buy paper and ink for printers for my own business, and I know how much those materials cost.  It’s certainly not enough to make up for the fee that I was charged!”  I couldn’t have agreed with her more.  Granted, there is a person preparing the documents, but shouldn’t the cost of that be included in underwriting or administration?  After all, it’s not like that person is hand-drafting each document with the care of monks illuminating manuscripts.  The document templates are standard forms and the standard software takes the standard information and fills the form.  Administration itself should be covered by underwriting and/or processing.  These are fees that amount to hundreds of dollars and are, in my opinion, extraneous.

Take it even further:  My friend was charged courier fees and e-mail fees.  How are courier fees not accounted for in the overhead of running an office that has couriers making runs on a daily basis?  If you’re charged a courier or overnight fee, ask for a receipt to make sure that you’re only paying the courier.  And can we please do away with the e-mail fee?  E-mail!  I pay for internet service, but I do not pay for every e-mail that I send.  My bank doesn’t charge me for e-mail that it sends on my behalf, nor does my stock broker or doctor or any of the other thousands of people and companies who send e-mail as a part of doing business.  But the lender that my friend used charged an e-mail fee.  I thought one of the benefits of using e-mail over regular mail was that there was no postage.  But since my friend got to pay for a courier and an e-mail fee, she really got the best of both worlds.  Her loan did close and she is happy with her home, but her experience speaks to a much broader problem with the current state of this industry.  Change is coming, and it’s coming in the form of lowerfees.com. 

There has been a push recently to encourage consumers to use no-closing-cost loans.  Most consumers are not naïve enough to think that there is actually no cost to these loans.  There are a number of well-written blogs and publications detailing the pros and cons, pitfalls and things to be aware of when considering a no-closing-cost loan.  There are still fees to be paid on closing (title, appraisal, etc.) and the reality is that no-closing-cost really means no lender fees. 

There currently exist three basic ways to cover closing costs:  pay them in full at closing with available funds (i.e. write a check), add them as additional principal onto the new loan balance, or have them waived in exchange for a slightly higher interest rate.  The consumer’s individual situation will dictate what is best for them, but most consumers don’t choose to pay the additional thousands of dollars out of pocket.  Whether they are paid by increasing the loan amount or as additional interest, or even up front, the amount of the total cost of closing represents a significant dollar amount.  You can always try to negotiate these fees with your lender or broker, or shop around to get the best price, but these methods are not reliable and still do not force the providers to be accountable to the initial quote. 
Lowerfees.com offers the consumer a new way to reduce the fees associated with closing a mortgage loan.  By making the process transparent and providing multiple service provider (appraiser, home inspector, title) options at each step, the consumer is able to save money on the overall cost.  The process is transparent throughout and the customer is able to track progress during the entire transaction.  Rather than a nebulous good faith estimate that can change at the last minute, consumers are able to choose providers with references and fees quoted up front.  Education, full disclosure, up front quoting on fees, competition and a transparent process mean big savings on closing costs, even on a no-closing-cost loan.

It’s one of the biggest financial decisions you will ever make and whether you are a first-time buyer or looking to make a change … “An Eyewitness News Special: The ABCs of the Housing Market” addresses many of your questions on the current housing market in the Southland.

http://abclocal.go.com/kabc/story?section=consumer&id=4977554

WESTLAKE VILLAGE, Calif., Dec. 5, 2006 (PRIME NEWSWIRE) — Consumers will now be able to take control of ever-increasing real estate closing costs and eliminate junk fees with LowerFees, Inc. Launching this week, LowerFees.com provides consumers with online tools such as the Quick Quote and Fee Analyzer that provide fee transparency and reduce confusion about fees such as e-mail document, title search and copy fees, all found on the consumers Good Faith Estimate during a real estate transaction.