Skip to main content

The Perils Of Lock And Shop

Locking in a rate can be a valuable tool

Tyna-Minet Anderson
Insider
Tyna-Minet Anderson
Lock and Shop

With the recent rapid rate changes, we have started to see innovative programs hitting the market. One such program allows a borrower to lock and shop. In other words, the borrower can lock in the rate while still shopping for a home to get under contract. It all sounds great, until you start reviewing the TILA-RESPA Integrated Disclosure Rule (TRID).

When using this program, a loan is locked with all the borrower’s information except the property address. A To Be Determined (TBD) property address is used on the lock agreement with the creditor. Depending on the program, this allows the borrower to shop around for the next 90 days knowing that the rate is locked for 120 days.

If rates happen to go down during the shopping period, the borrower is often allowed to decrease the rate one time. It seems like the perfect solution for a tumultuous market. Most programs charge an upfront lock-in fee at the time of the lock. It may be a flat dollar amount or a percent of the loan amount.

The mortgage application process typically begins after the borrower has found a property, not when locking in an interest rate with a creditor. This has caused uncertainty and ambiguity as to when and what needs to be disclosed to the potential borrower.

An application is considered received when the consumer supplies the following information:

  • Consumer’s name,
  • Consumer’s income,
  • Consumer’s Social Security number to obtain a credit report,
  • Address of the property,
  • Estimate of the value of the property, and
  • The mortgage loan amount sought. (§ 1026.2(a)(3)(ii))

 

Nothing in the existing mortgage laws and rules specify that the locking of a loan with a TBD address triggers the disclosure requirements, including the Loan Estimate (LE). It seems like a simple solution. You don’t have the six pieces of information to form a full application, so don’t issue an LE.

The problem with that is found in 12 CFR 1026.19(e)(2)(i), which prohibits an entity from charging anything other than a credit report fee before issuing the LE and receiving an intent to proceed from the borrower. If you opt to issue the LE, you are bound to the disclosure without knowing about the property. In fact, comment 19(e)(3)(iv)(A)-3 states that an LE may be issued on a TBD, but “ … if a creditor provides the disclosures required by § 1026.19(e)(1)(i) prior to receiving the property address from the consumer, the creditor cannot subsequently claim that the receipt of the property address is a changed circumstance … ” Emphasis added.

There are several creditors that are using a variety of terms, including “program fee” a “hold fee” and “upfront closing costs, refundable at closing” to collect an upfront lock-in agreement fee. There are some creditors that require a signed financing agreement in conjunction with locking the loan. This fee is often non-refundable if the loan does not close. It may be refundable at closing, paid towards closing costs, depending on the creditor.

Regardless of the terms used it seems clear that the lock-in process is associated with a mortgage loan once the property has been identified. It is virtually impossible to separate the initial fees associated with locking the loan from the actual loan product that will be the end result once the property has been identified. Additionally, creating a separate financing agreement or disclosure, signed by the borrower, does not make the transaction separate from the future mortgage transaction. Even if the borrower is aware and agrees to the fee, they are paying an upfront fee associated with a mortgage loan.

The rules do not address this specific situation, but the official commentary prohibits collecting a check at application to be held or a credit card number to keep on file until the LE is issued and intent to proceed is given. Comment 19(e)(2)(i)(A)-5. From those examples, this is an area that is not intended to have leeway.

Locking in a rate while allowing a borrower to continue to shop can be a valuable tool for loan originators to provide their clients in a fluctuating market, but the ambiguities and potential legal pitfalls make it impossible for me to recommend. I have submitted an official request for an Advisory Opinion from the CFPB related to Lock and Shop programs, but to date they have not responded. Until they issue additional guidance, I urge you to use caution before you offer a Lock and Shop program that requires an upfront fee.

This article was originally published in the Mortgage Women Magazine September 2022 issue.
Tyna-Minet Anderson
Tyna-Minet Anderson

Tyna-Minet Anderson is vice president of Mortgage Educators and Compliance.

Published on
Sep 13, 2022
MORTGAGE WOMEN MAGAZINE
Erum Nayani
MORTGAGE WOMEN MAGAZINE
Confidence And Self-Respect Through Conflict

Find The Rainbow In The Clouds

Tina Asher
MORTGAGE WOMEN MAGAZINE
The Perfect Storm

Understanding the current market

Chrissy Brown

Webinars

How to Win with Non-Delegated Correspondent - Key Insights on the Model and Fulfillment Solutions

Are you a fully delegated correspondent exploring non-delegated options? Are you a broker planning to transiti...

Webinar
Sep 29, 2022
Investor Confidence in Today’s Non-QM And Why Originators Are Paying Attention... A Virtual Town Hall

We host Angel Oak Mortgage Solutions for a special 2021 edition of their virtual town hall series they ran fro...

Webinar
Apr 08, 2021
How to Help Real Estate Pros in a Post-Refi World

Hear from Melissa Merriman, REALTOR® with The Melissa Merriman Team at Keller Williams, on what real estate pr...

Webinar
Mar 18, 2021
Highlights
CoreLogic: Price Growth To Decelerate To 3.2% By August 2023

Prediction is based in part on U.S. home prices slowing for the fourth consecutive month.

Analysis and Data
Higher Rates Mean Smaller Homes

Buyers need to search for cheaper homes, which typically translates to smaller ones. 

Analysis and Data
PennyMac Financial Services Appoints New Chief Mortgage Innovation Officer

Jerry Halbrook brings a long record of fintech service to his new position.

Distributed Retail
Connect with your local mortgage community.

Meet your your colleagues, both national and local, by attending an event in your area.