Can You Trust Your Bank?
I have a strong belief that when a consumer is researching buying a product or service that he can rely upon the provider to give him accurate information on which he can make a decision. That's not always true, hence the concept and term "buyer beware."
Nordstrom, probably the most trusted name in retailing, got their exalted position by earning it year after year, customer after customer. But you don't know anything about the street vendor and if you buy a purse from one, as my wife recently did in the SoHo area of New York City, you realize that you are taking a chance.
When it comes to financial products, there have likely been more dishonest individuals per square foot than any industry I can think of. My end of it, mortgage lending, may be the worst with fly by night mortgage brokers and subprime lenders who taught classes in how to deceive customers. And they did. And while I try to have sympathy for borrowers who were hornswaggled, there were so many warnings that there were a lot of shady characters in the mortgage business, that those borrowers should have done a better job of verifying the reliability of the lender they chose.
But when it comes to the big banks known world-wide and, theoretically, highly regulated, you would think that a consumer could trust the information. More particularly, when a bank has over 1,000 branches, you would think that you would get the same rate whether you went into an office in a big city like San Francisco, a branch in a small town like Yuba City, to the bank's Internet website, or called an 800 number. Apparently that has not been the case.
It has been reported that one big bank has eliminated the ability of their loan officers to make "overages." In a nutshell, an overage is industry terminology for extra compensation the loan officer earns when he is able to smooth-talk the borrower into accepting a loan on terms that are higher than the best rate that the customer was qualified for.
For example, let's say that the best rate is 4.75 percent. If the loan officer tells the customer that the best rate he can get him is 4.875 percent and the customer agrees, then an overage comes into play. That loan has a higher value because outfits like Fannie Mae will, logically, pay more for a loan with a higher yield.
The differential would typically be about one-half point, or $2,000 on a $400,000 loan. Of that, the loan officer might get half, or $1,000. The loan officer's normal compensation might be $1,000 per loan so with the overage, he just doubled his income. And the bank made more too. You might think this is illegal, but it isn't.
You can also see that the loan officer can get away with this only under two circumstances. The first is when the customer doesn’t understand or know what the proper rate is. The second is when he completely trusts the bank and the loan officer.
Thus on the one hand, the loan officer and his employer are exploiting the customer's misunderstanding of the proper rate and on the other hand they are violating the relationship of trust the customer counted on. If it occurs to you that this is an awful way to run a business, especially one that is regulated, you would be right.
Worse, I will guarantee you that no regulator is looking into practices like this so as to police their behavior. They believe, quite seriously but also quite incorrectly, that "market forces" will not allow such behavior to be successful.
Good for that bank to remove temptation but bad for them to have allowed it for so long. And you wonder how many of their loan officers are looking for jobs at other banks that don't operate quite as ethically, that will still allow overages.
Bottom line, you need to look out for yourself because no one else will.
Randy Johnson – Author of How to Save Thousands of Dollars on your Home Mortgage and Savvy Borrower articles, Randy is a mortgage broker who has financed over $1 billion in properties. He writes about home buying and real estate finance topics for CreditBloggers.com.