Dave: In reality, it is the applicant’s choice when to lock in their loan. If you advise them to float and rates rise, it is the applicant who pays the price, not the loan officer. Thus, it is risky to make a clear recommendation.
It is the job of the loan officer to educate the consumer on the risks of locking or floating. Yes, there are risks in both directions. If they lock and rates fall, they lose—and you might lose the loan if they have time to make an application with another lender. If they float and rates rise, again they are the ones that will be paying a higher payment or extra points.
It is also important to educate them in a way that they understand the extent of the risks. For example, how much will an increase of one-eighth of a percent in rate increase the payment after taxes (if the tax ramifications are relevant). It is my experience that most clients are risk-adverse. When educated on the risks, they will typically choose to lock. Of course, when you inform them that the decision to lock is final and rates fall, many will conveniently forget the lecture.
There is another issue. If the client is close on qualification, especially their debt ratios, they risk something more if they do lock and rates rise. The risk is losing the home on a purchase transaction.
I want to finish with a comment on a practice that has dogged our industry from the beginning of time. That practice is the “floating of loans.” When a loan officer is competing for a loan, they sometimes take extraordinary measures to secure the loan, despite not being able to meet their competitors’ rates.
What do they do? They quote a below market rate, but do not lock the rate with their company. This practice was more prevalent when loan officers were able to make overages on a loan. However, it still exists today. This practice is illegal because a rate commitment must be issued when the customer is told that they are locked.
It is also unethical because if rates move up after the quote is given, the rate most likely can’t be honored, leading to something which can be termed “bait and switch.”
Just as importantly, when we put ourselves in this situation—sacrificing our ethics in order to procure a loan—there is little chance that we will exceed our customers' expectations because we started the relationship on false pretenses. Our goal is to exceed expectations in order to garner referrals. Those who do business this way not only give themselves a bad reputation, but also sully the reputation of the industry.
Dave Hershman is Senior VP of Sales of Weichert Financial and the top author in the mortgage industry. Dave has published seven books, as well as hundreds of articles and is the founder of the OriginationPro Marketing System and Mortgage School – the online choice for expert mortgage learning and marketing content. His site is www.OriginationPro.com and he can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..
