For example, the posted price on a particular loan is 5 percent and 0 points but the loan officer induces the borrower to pay 5 percent and 1 point. (Points are an upfront payment expressed as a percent of the loan amount). That point is the overage. It is worth $1,000 on a $100,000 loan, and typically the loan officer gets half. So a "nice overage" can double the loan officer's commission.

Overages are heavily concentrated on high-rate loans with negative points, called "rebates." For example, the lender posting a price of 5 percent and 0 points might also quote 5.25 percent and -2 points. The lender will pay 2 points on a 5.25 percent loan.

Loan officers push higher-rate plus rebate combinations because they can collect an overage without taking any cash out of borrowers' pockets. If the loan officer in the example above quotes 5.25 percent and -1 point to the borrower, the other point of rebate becomes the overage. The borrower pays for the overage in the interest rate for the next 5 or 10 years, but that's down the road.

Overages associated primarily with rebate loans are an equal opportunity abuse, practiced by lenders and mortgage brokers alike. The only difference is that mortgage brokers who retain rebates from lenders leave a trail in the Good Faith Estimate of disclosure, where it can be discovered by the borrower, although usually too late to do anything about it. Rebates retained as overages by loan officer employees of lenders disappear without a trace.

Defenders of overages argue that they merely reflect wheeling and dealing characteristic of many markets. They point out that sometimes borrowers turn the tables, forcing loan officers to cut the price below the posted price, which results in an "underage." The automobile market works essentially the same way.

The weakness of this argument is that most people who buy automobiles understand that wheeling and dealing is part of the game, but most mortgage borrowers don't. They are innocents. That's why the number of underages is miniscule compared to the number of overages.

Now that you are no longer innocent, how do you protect yourself? Even if you want a rebate deal, ask first about "the lowest rate possible" and how many points it would require. From there, you can work yourself down to high rate/rebate combinations. Ask to see the schedule of rates and points from which the quote given to you has been extracted. Press to see them on the fax price sheet or computer screen. If the loan officer insists on transcribing them to a separate piece of paper, ask point blank if she is adding an overage. Remember, it's your money.

Borrowers who find even the mildest confrontation disagreeable and who are therefore ripe for an overage plucking should avoid commissioned loan officers. For a set fee you negotiate at the outset, you can retain an Upfront Mortgage Broker (UMB) to act as your agent in shopping for a loan. UMBs are listed on my Web site. Or you can deal with online lenders, such as Eloan.com or Mortgage.etrade.com, which do not allow employees to deviate from posted prices.

The writer is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.  

Copyright 2003 Jack Guttentag