Another Subprime Market Crash? Unfortunately, The Big Game Is Rigged

A Dire Warning About Inappropriate Partnerships

By: Shmuel Shayowitz

He called us in November to see if we could quickly help him get pre-approved for a townhouse he wanted to buy in a new development in Florida (yes, we are actively lending outside of the New York and New Jersey area). As you can imagine, the market in Florida is booming, and anyone interested in buying must be ready to act immediately with all their ducks in a row. We dropped everything to help expedite his approval and to ensure his offer would be given the best consideration possible. We knew that his employment situation was complicated, but we found a loan program that would accept his circumstances without issue. Indeed his offer was accepted!

Unfortunately for us, it didn’t take much time for us to receive the dreaded phone call. The development has a partnership with an in-house lender that offers incentives for buyers who use their services. They not only offered him a lower rate than we did, but they told him that due to their relationship, he would be getting approximately $13,000 in rebates from the lender. We reminded him of his complicated qualifications, but he said they too had no problem approving him. We wished him well and told him to be in touch after he closed.

This week he called to tell us they could not approve his loan, and his escrow is in jeopardy. After reviewing their documentation, we noticed that while they were indeed giving him a $13,000 credit, they were also charging him $9,000 in excess fees for that privilege. The rate was also higher than they initially promised him, but that was irrelevant as they were unable to deliver altogether. At the time of this writing, I am pleased to say we were able to still offer him an approval based on his circumstances, but I am not yet sure if they will be moving forward after months of hardship and stress brought upon by this crooked partnership between the developers and their lender.

This is not the first instance of misrepresentation with such associations and is far from the last. In fact, this week, The Consumer Financial Protection Bureau released a statement warning consumers about unlawful schemes where online financial providers are in collusion with mortgage companies claiming that they have better rates and terms based on their preferred relationships, partnerships and associations. Instead, the CFPB reports, “consumers may face higher prices, be set up to pay thousands of additional dollars in interest, and unwittingly participate in a market that is anti-competitive.”

The CFPB notes that people often turn to purportedly objective and unbiased comparison-shopping platforms for help finding the best lender or service provider. But sometimes, these platforms produce results that are rigged. Instead of being neutral referees, some of these platforms extract illegal kickbacks to steer shoppers toward more expensive or lower-quality lenders. In some cases, in spite of the platforms claiming to provide neutral information about what provider best suits the consumer’s needs, their interaction with a platform results in little, if any, personalization – under the guise of neutrality, they are just presented with a list of companies from which the platform operators extracted the requisite kickbacks. Other times, the platforms may preference companies they have a financial stake in without acknowledging the conflict of interest. Platforms sometimes will also simply hand off a shopper to the highest bidder – telling the shopper this company is their best option or that they are in good hands.

There is yet another example of potential risks and red flags to consumers without their knowledge. Over the past year, as interest rates spiked, many banks exited the consumer mortgage market and terminated all employees in those departments. Unbeknownst to many consumers, some of these same banks entered into joint ventures or affiliated business relationships with online lenders to whom they outsource all of the mortgage functions. Consumers think they are getting support and protection from the bank with whom they have a relationship when they are being passed on to online lenders such as Rocket Mortgage or the like.

In an already competitive and frustrating market, such as the one we have been in over the past year, this is another reason to be mindful of whom you do business with and whom to trust. Good luck out there.

Shmuel Shayowitz (NMLS#19871) is President and Chief Lending Officer at Approved Funding, a privately held local mortgage banker and direct lender. Approved Funding is a mortgage company offering competitive interest rates as well as specialty niche programs on all types of Residential and Commercial properties. Shmuel has over 20 years of industry experience, including licenses and certifications as a certified mortgage underwriter, residential review appraiser, licensed real estate agent, and direct FHA specialized underwriter. He can be reached via email at [email protected].