November 22, 2013

The ombudsman concept developed as a protection, or a source of redress, for individuals treated unjustly by governments, corporations, universities and other entities whose powers vastly exceeded theirs. Their role is to examine complaints made about the entity involved, and to find a way to resolve them.  

Ombudsmen may be appointed by the institutions they confront, which a common practice at universities in the US. They may be granted the authority by government, which is common in Europe. Or they may be self-appointed, if they have the stature or clout required for the entity to accept them. Little is known about this last group, which has no official status and may be limited to scattered or even to a single incident.   

We have not had any recognized mortgage ombudsmen, although a very complicated transaction between an individual and a multi-billion dollar corporation is bound to create the kinds of conflicts that the ombudsman process was designed to handle. The following letter, edited down to the essentials, is an illustration. I have omitted the name of the lender at the writer’s request.

“My wife and I have a 6% mortgage with LENDER. In November 2012 we applied for a 10 Year ARM with LENDER . We sent in all the paper work they asked for via email and received an email back from the loan processor that they had received everything. The following month we received an email from the processor that the rate was locked at 2.25 %. 

On a regular basis they requested more information via email, and we responded the same way, within 24 hours.  We always received confirmation that it was received from the loan processor. This went on for many months…On June 4th, 2013 we received a letter from LENDER that the loan was 'withdrawn' due to not receiving requested information... The loan officer told us that it was 'kicked' out because it was over 120 days old.  

LENDER now says they will resubmit the loan but the rate will be 3.25% rather than 2.25%, and fees will be $20,000 rather than $6,000…What should I do?”  

The borrower in this case submitted a loan application at a time when interest rates were extremely low and refinancing activity was extremely high, which resulted in processing delays at many lenders, including LENDER. When a lender has more deals to process than they can handle, they have to set priorities, and a common one is to place applications from their own borrowers at the end of the line. They have less to gain from refinancing an existing customer than from refinancing another applicant whose existing loan is held by another lender. While LENDER was attending to other clients, market prices went up and this borrower’s lock expired. 

Every mortgage loan provider including LENDER has a stated policy that if the failure to close within the lock period is their fault, they will extend the lock period as needed. But having that policy is one thing, a willingness to execute it when it is costly to do so is something else. LENDER was not willing, and shifted the loss to the borrower. 

This borrower has a legal case, but would have to go to court to obtain redress and incur significant legal fees with no assurance of success. That is exactly the kind of situation that calls for an ombudsman.  

My colleague Jack Pritchard and I sometimes assume the role of ombudsman when the lender involved is one to whom we have referred the borrower. As a source of referrals we have enough clout with the lender that it will cooperate with our inquiry as to what happened, and whether any redress is called for. In the case at hand, however, we were not involved and there was no reason that LENDER would have recognized us. 

To our knowledge, we are the only ones who provide an ombudsman function in the mortgage market, which is unfortunate. Our experience suggests that mortgage ombudsmen not only help borrowers who get in over their heads, but the great majority of lenders also find that the benefits outweigh the costs.  

There are two major benefits to lenders. One is to reduce the damage to their reputation that arises from disgruntled borrowers who blame them for problems that are not their fault. In about half of the cases we look at, the problem reported to us is of the borrower’s own creation.  

An ombudsman can also offset some of the damage done by loan officers with poor communication skills, who don’t keep their clients in the loop when they encounter problems because they are afraid the client will walk on them. So they try to solve the problem without the client’s knowledge and sometimes mess it up. Appraisals are a frequent source of such difficulties. Jack Pritchard has rescued many deals that would otherwise have foundered, which the lenders involved didn’t even know about. 

Obviously we can impact only a handful of mortgage loan transactions. A future column will discuss various ways that the ombudsman function could be expanded.