Mortgage lenders using "loophole" to offer lower rates based on source

A "loophole" in Regulation Z which "prohibits a creditor or any other person from paying, directly or indirectly, compensation to a mortgage broker or any other loan originator that is based on a mortgage transaction's terms or conditions, except the amount of credit extended", may allow you to get a lower interest rate on your home loan if you locate the lender online. This regulation, which went into effect in April 2011, basically requires mortgage lenders and loan originators to agree to a compensation plan (for example, a common plan is a 1% commission on the total loan amount) and stick with it, regardless of the complexity of the file and anticipated labor for any given loan. Of course, banks must retain a profit so mortgage pricing and loan originator compensation are directly correlated (loan originators that are paid higher commissions must are typically "stuck" having to offer higher interest rates). Prior to April 2011, it was common practice for a loan originator to accept a lower commission in exchange for a lower interest rate for prime credit borrowers since the anticipated required hours is much less for the best borrowers. Apparently a few bad apples ruined it for everybody due to the ability to do the reverse (raise the interest rate to receive a higher commission). Some greedy lenders were taking advantage of trusting prime credit borrowers and earning commissions as high as 4% of the mortgage amounts, when the hours required to close the loan may equate to commissions as high as $1,000 per hour, and this isn't open heart surgery!

The good news is that lenders have found a way to legally compensate loan originators less and give borrowers a lower rate at the same time. This "loophole" allows lenders to compensate loan originators differently if the customer was acquired through company marketing dollars. For example, if a customer calls the lender's main line after visiting the lender's website or online advertisement (a paid form of marketing by the company), then many lenders will flag this borrower as a "company generated" lead. Because the company used their marketing dollars to acquire the customer, the lender may pay the loan originator a smaller commission and simultaneously use a different "company generated" pricing sheet to offer the borrower a lower rate.

Here is an example of a common scenario:

• Mortgage lender and loan officer agree that loan officer is to be paid a 1% commission on all loan volume for customers that are "self generated", which are typically referrals from real estate agents, etc. The compensation agreement will then stipulate that if the borrower is deemed to be "company generated", the loan officer will be paid a commission of 0.5% of these loan amounts.
• The lender then has two separate "rate sheets". One is for "self generated" customers and the other is for "company generated" customers.
• Borrower A gets a referral from a real estate agent and contacts the loan officer to apply for the loan, therefore this borrower is subject to "self generated" pricing. Assume that on this day 4.25% costs zero "points" and 4% costs half a point (0.5% of the loan amount) to get. Borrower B went online the same day to shop for a mortgage and ultimately was introduced to the loan originator through some type of website or advertisement that required company marketing dollars, therefore borrower B is subject to "company generated pricing". Because the loan originator is paid a commission of 0.5% less per the compensation agreement between the lender and loan originator, this borrower might be offered the 4% interest rate without paying any points.

The theory behind this is that advertising costs money, lenders need be able to maintain a consistent profit margin to stay in business, so this "loophole" allows lenders to pay loan originators a smaller commission for loans that were acquired through advertising. In exchange, because it is more difficult to "sell" a higher interest rate to a customer that was not referred to the loan originator by a trusted source (such as a real estate agent), lenders typically offer lower interest rates for these "company generated" borrowers. In the end, it may be in the best interest for good credit "prime" borrowers to skip the real estate referral and shop for the home loan online.