Insider Tips
Avoiding another kind of Fraud
By Dan Smith

Avoiding another kind of fraud

Before getting into our story this month, I just wanted to make you all aware of my recent promotion within the Wells Fargo Home Loan network. As many of you knew, my association with Bank of the West was actually a joint venture with Wells Fargo, so that the bank could provide mortgage services to its’ customers. What many of you probably didn’t know was that Wells Fargo is bringing a new bank to Evergreen, which is slated to open sometime in the 1st quarter of 2006. Once I found out about the new bank, I made contact to inquire about the new mortgage manager position this would create. Long story short, I accepted an offer and will be running the mortgage department within the new bank! In the meantime, they asked me to help the Golden branch bank get its’ mortgage department up and rolling. So please make a note of my new phone number and address below.

Now for a disturbing cautionary tale one of my clients recently relayed to me. For the sake of anonymity, let’s call my borrower Mr. White. Mr. White had been shopping for a loan down in Denver, for a new home he was trying to purchase. He had filled in the forms requested, and had expressed concern that his credit might not be A+ to the loan officer. Sure enough, the loan officer came back and told him that some of his old late payments were affecting his FICO score. Mr. White was told he could still get a 30 year fixed rate, but that his rate would be substantially higher. His quote was 6.25% with a 1% origination fee, while rates at the time were 5.75% for regular buyers at the same fee level. Mr. White was wise enough to check and get a second opinion. He contacted me and I likewise pulled his credit report. Mr. White did in fact have a few lates several years ago, but his FICO score was 660. I ran it through the standard decision engine (on the computer system) that all lenders use, and had no problem getting his approval back at the 5.75% rate.

So what does that tell us? Well in no uncertain terms, Mr. White’s first loan officer was trying to use his credit concern as a lever to earn what we call an “overage”. This tactic is all too common and under addressed. All the mortgage companies I have ever worked for (which as been a few) allow for their loan officers to collect overages. However, it is completely up to each individual loan officer, whether they collect overage or not. So what is an overage you ask? Well it works like this. Wall Street will pay back points (1 point = 1% percentage of your loan amount) if you give them a note rate higher than they are asking for. It doesn’t show up anywhere on a settlement statement, but it does show up in the back pocket of the loan officer and the company he works for. (Usually this overage is split between the two) In this case by charging 6.25%, I estimated that the first loan officer would have generated an additional 1.5 points, or approximately $4500 in additional commissions in this case.

So what did we learn? Well this tactic usually works because people are worried and embarrassed about some blemishes on their credit. They don’t know what a good FICO score is from a bad one, and the idea of getting a second opinion just means additional embarrassment. Unscrupulous lenders play on this fear and discomfort. However, the only way you can know for sure is to do just that. Gather up your courage, set your ego aside, and make a few calls. Don’t count on mortgage companies to police this practice either. Many companies set no limits on the amount overage a loan officer can collect. Those that do set limits usually set the limit for overages at 5% to 7%. (Which can hardly be considered a form of protection to the consumer.)

For expert advise on this or any other topic related to home finance, call the expert. Dan Smith can be reached at (303) 674-0201. His new addresses is 1301 Jackson Street, Golden, CO 80401, or visit him at www.ColoradoHomeLoans.com !


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