The Perils Of Lock And Shop

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.