How lenders compare
Question: I am choosing between a loan from an Internet lender and one from a well-known bank. The loan officer at the bank made the following claims regarding online lenders: First, their loan officers are not commissioned, and therefore their service is generally poor. Second, Internet lenders sell all their loans, so borrowers don't know what lender will service their loans. Third, Internet lenders don't stand by their rate locks. What do you think?
Answer: Let's take the issues one at a time.
Does the compensation system used by major lenders result in better service to borrowers? Loan officers working for name lenders such as Washington Mutual, Citibank and GMAC are commissioned, and successful ones make a lot of money. They are highly paid because they bring in the borrowers. Commissioned loan officers constitute the marketing muscle of the major retail lenders.
Loan officers working for Internet lenders, such as E-Loan and Amerisave, don't bring borrowers to the firm. The firm finds its potential borrowers on the Internet and brings them to the loan officers for counseling and gentle persuasion. These officers may be salaried or commissioned, but commission rates are much smaller than at the large-name lenders.
I don't think one can infer anything about service quality from these facts. Some big lender loan officers are great salespeople, but it is not at all clear that this translates into better counseling or other dimensions of service that affect the long-term interests of borrowers.
However, there is one other difference in the compensation arrangements of the two groups that I believe is relevant to service. Loan officers working for Internet lenders do not have any pricing discretion. The prices shown on the screen are those that apply. Those employed by large-name lenders can adjust the prices delivered to them, up or down as needed. That's why they keep the price sheets to themselves.
The loan officer who can induce the customer to pay more than the posted price, called an "overage," typically shares it with the lender. If the officer has to cut the price to deliver the deal, called an "underage," the shortfall is shared with the lender. Overages are much more common than underages.
I view this as a negative. Most borrowers don't understand that their dealings with major lenders are governed more by the rules of the bazaar than by professionalism, and their ignorance usually costs them.
