We heard from a bank rep today that one or more lenders are considering charging cancellation fees when a client cancels an approval. (We’re not sure if the fee would be charged to the broker or the borrower.)
Hearing this was both surprising, and unsurprising, at the same time.
It was surprising because some might consider cancellation fees a gutsy move for a lender.
It wasn’t surprising because this is arguably a logical progression in the trend towards lender efficiency.
The idea behind a cancellation fee is to recoup underwriting costs and discourage frivolous applications. Lenders we’ve talked to say it costs them at least $150 to $200 to underwrite a mortgage application. Moreover, cancellations add delays to the system, which disadvantages other customers.
From our own perspective, cancellation fees would be a tough pill to swallow unless the lender’s offerings were clearly superior to the competition. For example, suppose today’s best 5-year fixed rate was 4.15%. Then suppose a lender comes along and offers the option of 4.09% (the best rate in the market), on two conditions:
If the customer cancels before closing, there is a $250 fee to the customer
If the file is declined for obvious reasons (that were clearly stated in the lenders’ guidelines before submission), there is a $150 fee to the broker.
These are just random numbers but the point is this. Lenders will get creative to gain efficiencies. Some will likely implement a derivation of the above in the months or years to come. As long as the client/broker is given the option of saving money, in exchange for helping the lender improve efficiency, the model could be viable.