Why Lenders Don't and Won't Tell Borrowers Their Loan Was Turned Down (Games Lenders Play, Part 9)

The short answer is because they will lose the business.

But they still want it. It's not like they're paid by the hour. If they don't take a loan all the way to funding and recording, they don't paid. If they actually tell you the whole truth - that there's no way in the universe that the loan they originally told you about isn't going to happen - then what do you think most people are going to do? That's right - forget the whole thing or go looking for someone else to do that loan.

So what they do is pretend everything is going along smoothly. They pretend this right up until the moment they hand you the final loan paperwork. In the meantime, ignorance is bliss, as in your ignorance of the truth means that they don't have to worry about you taking the loan elsewhere. Because they're still pretending they can deliver the loan that you thought you were getting, most people will have no desire to shop other loans. Signing up for a back up loan is probably the best performing and cheapest policy of insurance you will ever get, but most people won't do it.

With this in mind, many loan providers have stopped limiting themselves to loans that can actually be delivered at any price. During my short period at The Company Which Shall Remain Nameless, there was quite a bit of discussion about how low of a rate companies could get away with advertising - including things like putting up illegal advertisements when state regulators (Monday through Friday, 9 to 5) wouldn't be on the job, and replacing it with legal ads before they returned on Monday. In the meantime, of course, people would be calling the office looking for that loan that didn't exist, and they would be signing these people up. The laws about rate advertisements are remarkably weak and trivial to violate in spirit, but that's not enough for a lot of companies. You want an eye-opener about how far it's legal to lowball a mortgage quote, click that link.

So they talk about a thirty year fixed rate loan at 5% to get you to sign up. Maybe they even put it on an MLDS (California) or Good Faith Estimate (the other 49 states), with a so-called Truth In Lending Advisory. None of it means anything if the lender doesn't want it to. Nor will the proposed regulatory amendments stop this practice. They'll just issue amended paperwork later, at final signing.

What happens when you get to final signing? They've got some other loan ready to go. Nor do they bring the differences to your attention. If you don't notice, they've got a funded loan they just got paid for without any unpleasantness. Most people don't know what to look for at loan closing to make certain what was delivered was what they originally talked about. If you notice later, it's almost always too late to change your mind. If you do notice at time of signing, they can point out that this loan is ready to go - all you have to do is sign to be done with it. If you don't sign, you're back to square one, with many possible negative consequences for not signing. In the case of a purchase, with a deposit at stake, I'll bet $100 sight unseen that the people will sign whatever loan they're presented in order to not lose that house and not lose the deposit. Even in the case of a refinance, too many people have already spent the money for this month's payment. You never really skip a payment, but that doesn't stop many lenders from promising that you will. It does, after all, increase the probability they'll be paid for a loan.

Lenders deal with this elementary fact of life every day. They talk about whatever they talk about to get you to sign up first, then thirty days down the line, it's perfectly legal for them to deliver something else. A good loan officer doesn't do this. I'm not going to say I've never had a loan go south on me, but I always tell people why that loan is not deliverable despite what I previously thought, and tell them about the new loan within no more than seven days of initial sign-up. In all but the craziest refinance booms, that's plenty of time to get the loan submitted for lender feedback and a loan commitment from the underwriter. I don't like getting anything but routine "prior to funding" conditions on my loan commitments, but even if I do get such a condition, I should know whether it can be met immediately (It can, in the vast majority of cases). Lenders almost always know when you initially sign up what loan you will really qualify for, and what it's really going to cost, but most people won't ask the questions necessary to nail down a mortgage quote to something real, and the lender certainly won't volunteer the information, as their probability of getting paid depends upon getting people to sign up. In turn, getting people to sign up hinges upon them pretending to have a better loan than the other lenders pretend they have. The similarities to a singles bar (or internet dating) are pretty close. Most folks are telling the story that they think will get them what they want, regardless of whether it has any connection to reality or not. You want to be able to separate out the real from the unreal, because no matter how attractive the unreal stuff seems, you're not going to be getting it.

Caveat Emptor