The Consumer Financial Protection Bureau deplores the fact that almost half of the home buyers it recently surveyed did not shop for a mortgage but dealt with a single loan provider. To encourage shopping, the agency has developed a "Check Interest Rate" tool. It advises borrowers: "As you start talking to lenders, compare their offers to the rates in the tool to see if you are getting a good deal."
My advice to borrowers: Ignore the CFPB tool. It is completely useless. The tool a borrower needs is a "shopping rate," a rate that a competing lender should match or better. CFPB shows a distribution of rates, and leaves it to the shopper to decide which rate in the distribution is the shopping rate, while providing no guidance on how to do it.
For example, given the loan features I entered on Feb. 10, CFPB told me that "In Pennsylvania, most lenders in our data are offering rates at or below 4.188 percent." But two lenders in the distribution charge 4 percent and one charges 3.75 percent, so should a shopper look for 4.188 percent, 4 percent or 3.75 percent? That is not clear. A valid shopping rate depends on a number of factors that CFPB does not consider.
Competitiveness: For a shopping rate to be the best rate available on a particular transaction, it should come from a competitive segment of the market. CFPB shows a distribution of rates from a hodgepodge of market structures, which could range from highly competitive to local monopoly.
Transaction timing: For a shopping rate to be relevant to a particular shopper, it must be timely. Mortgage lenders set their rates every morning after they have checked the opening prices in secondary markets. The prices quoted by loan originators during the day will in most cases be the prices that were updated the same morning.
The rate that shoppers will find on the CFPB site is updated in the evening, which means that it is always stale. If the market changes overnight, which is often the case, the CFPB rate will not be comparable to the rates quoted to a shopper during the day. The timing disparity is particularly pronounced on Mondays, when the CFPB rate harks back to the preceding Friday.
Lender fees: Fees charged by lenders are an important component of the mortgage price. The total price is the rate plus fees expressed as a percent of the loan ("points"), plus fees that are a fixed-dollar amount. A rate quote without fees is useless. The rates posted by CFPB do not specify fixed-dollar fees.
Transaction features: For a shopping rate to be valid, it must apply to the individual shopper's transaction. Shoppers using the CFPB site only input about half of the key factors needed to generate a valid rate. And nowhere on the CFPB site are users warned that the posted rates may not apply to their transaction.
