The mortgage lending business has been one of the most criticized and maligned industries in the modern economy ever since the financial crisis in 2008 that led to the end of some of the countries oldest firms. While careful study reveals that the melt down was the result of questionable practices at multiple levels, the shortfall most easily understood is in the residential lending sector. Since that time, industry practices have remained the focus of attention and now a new issue has emerged. The dual pricing practices that can be observed in residential mortgages have created confusion and frustration amongst both industry insiders and observers. As in most cases, the truth is more complex that a single opinion, but understanding this phenomenon is important for anyone considering purchasing a house with a mortgage
What Is Dual Pricing
In the mortgage business, dual pricing refers to a lender offering one price on a mortgage directly to the public while offering another price through intermediaries like mortgage brokers. In most cases, the direct price is far more attractive to the borrower and less profitable for the lender. The result is that the consumer pays more if he or she selects a mortgage through an intermediary. This difference tends to be more that the fees and profit margin attributable to the broker, making the ultimate cost significantly higher. Essentially, in the case of many lenders, customers who deal directly with the lender will pay a meaningfully lower price that is paid by those who get their mortgage through an intermediary with the same mortgage lender.
The Regulatory Stance
In response to requests for investigation, regulators have correctly concluded that the practice of dual pricing is a commercial issue. While critics have complained that the practice has the potential to lead some consumers to overpay for the same service, this is not in violation of any laws, including Truth in Lending. The practice, which falls under the economic principle of price discrimination, is common across industries. For example, when a car company offers several vehicles which are essentially identical but are branded differently and sold at different prices, this is price discrimination. By definition, price discrimination is the practice of maximizing profits by charging different prices to different customers based on their willingness to pay. While there may be an argument that the practice is not ideal for consumers, there is a simple way to avoid overpaying. If one makes a responsible effort to research rates and prices, finding a competitive option is possible.
The Chief Critics
The widespread confusion and criticism of dual pricing leads one to ask who is most opposed to this practice and why. There are two primary groups for whom the practice poses a problem; one with a legitimate concern and one with a more personally motivated one. In the first group are consumer’s rights advocates who worry that the practice puts the public at risk. They argue that the public should be insulated from lenders who are trying to maximize their profits. Some suggest that the lender should be required to provide a guarantee that the rate being offered is the most competitive one available from that lender. In addition to being anti-competitive, this would be an impractical requirement. The specifics of a given loan are complex, based on the borrower’s unique credit history as well as the details of the property being purchased. An attempt to standardize pricing would simply lead to further disagreement as to what objective standard was fair and the problem would have no resolution.
The other group most upset about dual pricing is the mortgage brokers themselves. The rates offered to them from most major lenders is higher than the rates they offer directly. They argue that it is unfair to put them at a disadvantage by not allowing them to sell the most attractive products that a given lender has available. The flaw in their argument, however, is that it assumes the lender and the broker are similarly situated toward the market. This is not the case because when a lender accepts a mortgage from a broker, it has additional exposure. The broker is not lending the money, so it does not have the same level of risk. Many analyst actually blame mortgage brokers for driving the real estate bubble by forcing through loans to which they had no further responsibility. While the dual pricing approach does place added pressure on mortgage brokers, it appropriately apportions risk and is not contrary to reason.
Why Lenders Prefer Dual Pricing
In order to fully alleviate the confusion surrounding dual pricing, it is helpful to understand the motivation for the practice on the part of the lender. In addition to some of the reasons cited above, there is the matter of public perception. While most lenders would prefer to have access to the more lucrative end of the lending business, they likewise wish to be able to advertise that they offer the most attractive rates. Most of these companies are publicly owned, so they have a responsibility to their shareholders to attempt to maximize profits. This can be accomplished in a number of ways, but in all cases this goal includes finding a balance between increasing profits on a transaction by transaction basis, while still maintaining an image that drives business. A lender will want to secure the most profitable loans it can, but does not want to advertise that they offer the most expensive mortgages available.
Dual pricing solves this inconsistency and serves to broaden available options. The lender is thus able to extend some of its loans at higher rates, while being able to accurately claim that the rates it offers directly are amongst the most competitive available. The net effect is that consumers are forced to exercise reasonable care and take personal responsibility for the decisions they make. This last feature is at the heart of the complaints of the critics. They seem to take the position that personal responsibility should be removed from the process and that the needs of those who do not wish to exercise care should trump commercial pursuits.