December 6, 2010, Revised January 21, 2011, January 17, 2012 Postscript

“In your recent article on locking problems, you advise borrowers to protect themselves by getting the lender ‘to clarify its ground-rules for locking, preferably in writing’. We always play it straight with borrowers but we don’t write too well – how about giving us your version of what an honest lender’s lock statement would look like?”

Fair enough, here it is.. The statement is for a “Fair-Locking Lender” or FLN. Side comments directed to borrowers are in italicized brackets. 

FLN’s Lock Policy

 When FLN locks your loan, it commits to the interest rate, points and other fees that are shown in our Lock Confirmation Statement, regardless of whether or not market interest rates increase between the date the lock is issued and the date your loan is funded. Similarly, you are committed to honor the lock if market rates decline during that period.

FLN will inform you when all the requirements and conditions for a lock, which are shown below, have been met. At that point you can request that we lock, or you can allow the price to float and lock later. FLN will not lock until authorized by you. We will also keep you up to date on current prices, which could be different from the prices quoted to you earlier.

[Borrowers should not request a lock while they are still shopping, that is an unfair practice]  

Lock Period

 FLN's lock commitment holds only for a specified period during which the loan must be funded. If it is not funded within that period, the lock expires. Whether or not the lock can be extended depends on the reasons for the failure to fund, see Rate Lock Extensions below.

Our obligation in assuring that the loan is funded in time is to provide you at the outset with our best judgment of how much time we need to process, underwrite and fund your loan, assuming you do your part. Your obligation is to provide all the documents we request from you in a timely fashion.

[Borrowers should keep a written record of document requests, when received and when provided, it could save them some grief later on]. 

Requirements to Lock and Conditions For Lock to Be Honored

Before we lock the rate, we want reasonable assurance that we have all the information about you and your loan that affects the rate. The column labeled “Required to Lock” in the table below shows information that we may require you to provide us before we lock your loan. The requirements can vary from case to case, and we will check those that apply to your case. The “Condition of Lock” column shows any conditions that must be met for us to honor your lock.

For example, if we require an appraisal before we lock, we will check item (f) under “Required to Lock”. Alternatively, we may lock without having an appraisal but require that the appraisal, when it is received, equal or exceed a specified minimum value shown under “Condition For Lock”. A lower value voids the lock.

Action	Required to Lock	Condition of Lock
a.  Application completed.
b.  Required disclosures (GFE, TIL, etc)), signed and returned.
c.  If transaction is a refinance, required contact information for homeowners insurance, homeowners association and existing mortgage holder, provided
d.  Required income documentation provided.		Minimum Income =
e.  Required asset documentation provided.		Minimum Assets =
f.  Appraisal completed.		Minimum Value =
g. Title report completed		No Title Issues

[This is the way it should be done, but in practice requirements and conditions are usually conveyed orally if at all. Print out the table and pin the lender down.] 

Fees to Lock and Refunds

Locking is costly to us. To assure that we lock only for committed customers, we require that you pay us the following fees before we lock: 

1.  Lock fee of $_______.

2.  Processing fee of $_______

3.  Administration fee of $_______

4.  Appraisal fee of $________

When your loan is closed, you will be credited with (1, 2, 3, 4).

If we lock your loan and you elect not to close, we will refund (1, 2, 3, 4.)

[Pin them down on fees if they are not forthcoming]

Rate Lock Extensions

In the event that the rate lock expires prior to funding, we will extend it at no cost to you if we are primarily responsible for the failure to fund. In the event that failure to fund was a direct result of actions or inactions on your part, or on the part of third parties selected by you, we will charge the following lock extension fee: _________.  

Advance Notice of What Will Be in the Lock Confirmation Statement

This is FLN's Lock Confirmation Statement:

[The statement should include product type, loan amount, LTV, interest rate, points, other lender fees, mortgage insurance premiums (if any) and lock expiration date. On ARMs, should include margin, current index value, adjustment caps, and max/min rate.]

Warning About Changes in Price

Because the market may well change between the time you apply and the time FLN has all the required documentation, the price at lock may be higher or lower than the price at time of application. The price may also change as a result of a difference between the information provided by you and the information that FLN could verify. 

[Unless the lender tabs you as a “slam dunk” and is willing to lock you on the same day you apply, which in today’s market does not happen very often, you can’t escape the possibility that the price at lock will differ from the price quoted to you when you applied. Unlike the earlier quoted price, which you had an opportunity to shop, you have no opportunity to shop a delayed lock price. The price you should get is the price the lender would quote to your twin sibling who applied for the exact same deal on the lock date. I am working on a method to test whether or not a lender adheres to the twin sibling rule. For now, you are completely dependent on the integrity of the lender, which should not prevent you from requesting an explanation of how the lock price is determined.]  

Good Faith Estimate

Within 3 business days of submitting your loan application, we will send you a Good Faith Estimate (GFE), which is a Government-mandated disclosure. If your loan has been locked at that point, the locked rate and settlement charges will be shown on the GFE along with the period for which the lock holds. If your loan has not yet been locked on the date the GFE is issued, the prices on the GFE will be those prevailing on that date. If the lock price differs from the GFE price when the loan is locked, a new GFE will be issued that will be consistent with the lock confirmation statement. 

[Borrowers can use this lock statement, even if the lender doesn’t. Insist on receiving three lists IN WRITING: 1) Requirements to lock and conditions of the lock; 2) Fees to lock, identifying those that are credited if you close and those that are refunded if you don’t; and 3) Information that will be in the lock confirmation statement.]

January 10, 2012 Postscript

 Borrowers using the professor's Certified Lender Network are protected against lock gamesmanship by the following certification requirements.

Lock Charges: Certified Network Lenders (CNLs) charge borrowers a maximum fee of $295 to process their loans, with the charge credited back to the borrower at closing. The lender can also collect an appraisal fee of $300-$800, depending on the type of property and its size, to cover the appraisal cost. None of this fee goes to the lender, and it is not refundable.

CNLs Upon Locking a Loan Must Provide a Lock Confirmation Statement That Includes the Following:

1. Product Type
2. ARM detail(margin, index value, adjustment caps, max/min rate)
3. Loan amount
4. Interest rate
5. Points
6. Other lender fees
7. Mortgage insurance premium - upfront or monthly
8. Lock expiration date

CNLs That Do Not Lock Immediately Must Adhere to the “Twin Brother Rule”: : That rule states that the price locked will be the price the lender would quote on the same day on the identical transaction to the borrower’s twin requesting a price quote. This rule implies that if the market price decreases before the price quoted to the borrower can be locked, the CNL will lock the lower price. If the market price increases before the price quoted to the borrower can be locked, the CNL will not lock until explicitly authorized to do so by the borrower.

CNLs That Over-ride a Price Lock Because a Property Appraisal Alters the Pricing Must Play it Both Ways: If the appraised value is higher by enough to lower the price, the borrower receives the benefit of it.

CNLs That Fail to Close Within the Lock Period Will Extend the Period at No Cost to the Borrower: If the borrower is primarily responsible for the failure to fund, the CNL may charge a fee for a lock extension, but must post that fee. If the CNL and borrower disagree on who was responsible for the failure to fund, the CNL agrees to accept the judgment of the professor.

For more on the network, see Finding a Mortgage on the Professor's Certified Lender Network.