Bank of America Corp. is taking another stab at simplifying the often bewildering bevy of fees that mortgage borrowers pay at the closing table.
Today it will begin offering up-front guarantees of closing costs for most home-purchase loans made at its 6,100 bank branches and retail mortgage offices. If the costs of third-party services such as appraisals or title insurance turn out to be higher than the "flat fee" B of A quoted, it will make up the difference.
Several lenders (including B of A) have offered similar guarantees in past years. But for the $2.32 trillion-asset Charlotte company — which acquired Countrywide Financial Corp. last year and will drop the name today — the promise is part of an effort to brand itself as a responsible provider at a time when many consumers have come to mistrust mortgage companies.
"There's no question that we are hearing from consumers that they are changing their views of the process based on this crisis, and we're trying to be responsive," said Barbara Desoer, the president of B of A's mortgage, home equity and insurance services.
"We're going to launch a new brand that is focused on responsible lending and successful homeownership," she said.
The guarantee goes beyond what will be required of all lenders under new Real Estate Settlement Procedures Act rules.
Beginning Jan. 1, lenders will generally be forbidden from charging closing costs that are more than 10% of what was quoted in the good-faith estimate provided at the time of application. The rule is intended to make mortgage offers more understandable and comparable.
Currently, third-party costs can end up differing greatly from good-faith estimates, causing sticker shock for borrowers at the closing table.
Joel Horn, the president of Mortgage Spirit LLC, a Denver provider of product and pricing software, said that by overhauling its practices now, B of A may gain a "first mover" advantage.
"This is a very powerful statement of where the industry is going," Horn said. "They are coming up with a guarantee on closing costs, which provides more transparency for the homebuyer."
B of A introduced a "no fee" mortgage option in 2007, in which it dispensed with customary settlement charges in exchange for a slightly higher interest rate. The option was never rolled out across Countrywide's much larger mortgage operations.
Desoer said that the "no fee" option caught on initially, though many customers were skeptical about a pitch that sounded too good to be true.
"There's no such thing as a free lunch," she said. In its research, B of A discovered that borrowers "lost their suspicion when we talked instead about a flat fee."
Unlike the "no fee" mortgages, the flat-fee ones will be sold in the secondary market.
B of A held the No Fee Mortgage Plus loans in its portfolio because it did not require private mortgage insurance for those with low down payments. However, such insurance will be required on flat-fee mortgages when it is necessary to fit secondary market guidelines.
In 2002, ABN Amro Mortgage Group (now a part of Citigroup Inc.) introduced OneFee, a product with a similar up-front guarantee of closing costs.
That year the Department of Housing and Urban Development proposed a much more ambitious Respa reform rule than the one it finalized last year. The earlier proposal would have given lenders incentives to bundle settlement services, so that borrowers could know at the outset what they would end up paying. Providers of such servicers roundly opposed the idea.
"It's not an untested concept," said Keith Gumbinger, a vice president at the mortgage research firm HSH Associates. "The concern has always been that downstream service producers would get squeezed, and the power of pricing was all going to be put in the hands of the lender."
B of A's flat fee will range from $1,995 to $2,995, depending on the state. It will be made available on refinancings early next year.
The flat fee is available on 90% of B of A's first mortgage products, but not on the 10% of products in which the company works with community organizations and third-party counselors primarily to help first-time homebuyers, Desoer said.
Also beginning today, the company will provide applicants with a one-page summary of the estimated total costs of a home loan, in addition to the good-faith estimate required under Respa. B of A calls the summary a "commitment to clarity."
The company also is launching a Web site to walk borrowers through the steps of the loan process and help them determine what they can afford.
Gumbinger said it is fitting that B of A is taking these steps at the same time as it drops the Countrywide name.
"Given that at least some failing borrowers claimed they didn't understand the loans they got, and that Countrywide was perhaps the biggest lender tarred with the 'obfuscating' contention, I wonder if this is more intended as a kind of 'new name, new practices' type of break, especially for the rebranded offices," he said.
"It's not as though B of A couldn't have done this before now," Gumbinger said
Desoer said it is making the changes now to capitalize on the beginning of the spring homebuying season.
"We wanted to be operating under one brand for the peak season," she said.
"We've taken this step and used this opportunity of our new brand launch to offer this clarity commitment."
B of A also is offering two guarantees with the new "flat fee" product: that the loan will close on time — or the company will pay the borrower's first month of principal and interest — and that the loan offers the "best value" to the customer.
If a borrower whose application is approved shops around, gets approved by another lender, decides to go with the competitor, and provides evidence of the offer, B of A will pay the customer $250, DeSoer said.
In the first quarter B of A originated $85 billion of mortgages, of which three-quarters came from refinancings.
The company hired 3,000 people from November to March to handle a surge in applications, and it expects to hire another 1,000 people "based on volume and forecasts about the government continuing to support lower rates for an extended period of time," Desoer said.
Many borrowers have complained that it is taking too long to close refinancing applications, and Desoer conceded that rate locks had finally fallen in early March to 45 days, from an average of 60 days, when the Obama administration introduced its Making Home Affordable Initiative.
Before details of that plan were announced, B of A had taken reservations from 200,000 potential borrowers in just 30 days, she said, and is just now getting back to those customers to determine their eligibility.