Protecting Yourself Against Lock Scams

October 30, 2012

Shopping for the best deal on a home loan has many pitfalls, but by far the most daunting is that lenders will not commit to the prices they quote to shopping borrowers. While borrowers seldom realize it when they begin the process, the fact is that they are forced to select loan providers without knowing the exact price they will pay.

Why Quoted Prices Are Subject to Revision  

Because locking imposes a cost on lenders, they won’t lock until a) they have enough information about the borrower to be reasonably sure that the borrower qualifies and that the price quoted is the correct price; and b) there is a significant probability that the borrower will go to closing. If the quoted price that is locked by the lender is wrong, the lender can realize a loss when it is sold, and if the transaction doesn’t close, the lender has incurred the lock cost for nothing. 

The quoted price can be wrong for two reasons. One is that the information provided by the borrower does not check out for the lender. For example, the borrower said that his credit score was 740 but when checked by the lender it is 710, which raises the price of the mortgage.  

The quoted price can also be wrong because the market changed. Lenders reset prices every morning, based on changes in the secondary market, and sometimes they change them during the day.  

Why the Revision of Quoted Prices May Be a Scam 

A reset of the information used to set prices, or changes in market prices are legitimate reasons why borrowers often don't receive the prices they were quoted. But these same factors provide a screen behind which less-scrupulous lenders can execute lock scams. It is useful to distinguish three scams that occur at different stages of the lending process.  

Low-Balling Scam: The borrower shopping for a mortgage may encounter this scam. Low-balling lenders quote a price below the price the lender can or has any intention of delivering. The purpose is to be selected by the borrower who is shopping prices. It is easy to low-ball when you are not committed to your price quote, and it is tempting because it often is the only way that lenders have of distinguishing themselves from other lenders. 

Low-ballers are not deterred by the price disclosures mandated by the Good Faith Estimate. They merely date the disclosure so that the price has expired before the borrower receives it.   

Market Volatility Scam: The borrower who has selected a lender but has not yet been locked may encounter this scam.  The lender takes advantage of changes in the market between the date the lender quoted a price to the borrower and the lock date. If the market price goes down, the borrower is charged the price quoted earlier, and is probably content, since he received what he was quoted. If the price on the lock date is higher, on the other hand, the borrower will be charged the market price or higher, because “the market went against you”.

Property Valuation Scam: The borrower whose loan has been locked may encounter this scam. Locks are always contingent on a specified credit score and loan-to-value ratio. A material change in one of these can invalidate the lock. While lenders will always verify the credit score before locking because that only takes minutes, in most cases they will lock based on a property valuation that has been checked only against an automated valuation program. An appraisal, which is the final word on valuation, takes days and often weeks.  

Nonetheless, the appraisal when it becomes available can invalidate the lock. If the appraisal comes in lower by enough to raise the loan-to-value ratio past a notch point where the price increases, the lender increases the price accordingly. But if the appraisal comes in higher by enough to reduce the loan-to-value past a notch point where the price should decrease, the original lock price is retained. As with the market volatility scam, if the coin comes up heads the borrower loses, and if it comes up tails the lender wins. 

None of the mortgage disclosures mandated by the Government would prevent the scams described above. This includes the disclosures planned by the new Consumer Financial Protection Bureau. Borrowers can protect themselves, however, if they know how to go about it.

Importance of Posted Prices 

These lock scams all involve a deviation between a lender’s posted price and the price quoted to or charged the borrower. The posted prices are those the lender will accept, and which are delivered to its loan officers, telemarketers and other employees or agents authorized to offer the lender’s products to the public. Scams involve these employees or agents quoting less than the posted prices when they are attempting to corral borrowers, and more than the posted prices when they lock. 

Borrowers can avoid lock scams by obtaining direct access to posted prices. They then can’t be low-balled by loan officers, and they can’t be fooled about the market price when they lock.  

It isn’t easy, however, because with some notable exceptions, lenders do not want the public to have such access. When my software firm many years ago developed a system for delivering posted prices to loan officer laptops, our lender clients insisted that critical numbers be obscured. The purpose was to prevent a prospective borrower dealing with a loan officer from seeing the posted prices by peeking at the laptop screen! 

The growth of the internet has made it possible for any lender to make its posted prices available to borrowers, but very few do. In general, lenders view their web sites as a way to stimulate potential borrowers to contact a loan rep. For this reason, the prices that borrowers can access on most individual lender sites are incomplete – meaning that they do not take account of all the factors that affect the price of a specific transaction. 

Furthermore. in many cases the site won’t provide any prices at all unless the borrowers identify themselves. This guarantees that they will be contacted for a sales spiel.  

Channels Through Which Borrowers Can Access Posted Prices 

A group of lenders I certify as Upfront Mortgage Lenders (UMLs) allow borrowers to access complete prices on their web sites without identifying themselves. Borrowers can shop UMLs without fear of lock scams However, this requires that they access multiple sites, all of which are formatted differently, and they must do it on the same day because prices are reset every day.

Much more convenient are third party networks on which multiple lenders post complete prices, allowing borrowers to comparison shop at one site. A listing of the major features of 14 multi-lender sites, one of which is mine, will be found at my Features of Multi-Lender Mortgage Sites. These sites are not all created equal, by a long shot.

Make Sure the Prices You Try to Lock Have Not Lapsed

A word of warning about using any web site, single-lender or multi-lender, to avoid lock scams. Mortgage prices can be locked only during normal business hours when the lock desks of lenders are open. Ordinarily, this is between about 10:30am and 5:30pm EST. Within these hours, posted prices are lockable by a borrower who has been cleared to lock.

This means that the price a borrower sees on a site at 9am EST is the price that expired at 5:30 pm the previous day. The price that borrower can lock is the one that will appear about 10:30am.  Similarly, the price a borrower sees in shopping on the weekend is the one that expired at 5:30pm on Friday. That borrower must wait until Monday morning to see a lockable price.

Borrowers using multi-lender sites who have not understood these constraints have sometimes tried to lock prices that had lapsed, and when they were unable to do so, have complained that the lenders on the site were not honoring their posted prices. Because this has happened on my site, I have decided to flag lapsed prices along with an indication of when new lockable prices will be posted. I recommend that other sites do the same.

Check Your Mortgage Price if the Appraisal Comes In High

Locks that are issued before the property is appraised usually are conditional on a minimum appraised value. If the appraisal comes in below the minimum, the mortgage price will be raised. But if the appraisal comes in significantly higher, the borrower might deserve a price reduction, yet might not get it.

To check this out, the borrower receiving a favorable appraisal should check current pricing on the site to see whether the higher property value would result in a lower mortgage price than the lower value that had been assumed when the mortgage was originally priced. If the answer is “yes”, the borrower should petition the lender to reduce the price accordingly.


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