"What can you tell me about how a borrower goes about factoring service quality into the selection of a loan provider?"

Quality of service is a critically important issue in selecting a loan provider. This is especially true in connection with a home purchase, where poor service by a lender or a mortgage broker can kill the deal. Despite its importance, I seldom write about service quality because there is little reliable information available upon which to make reasoned judgments.

I hasten to add that never a day goes by that I don't hear from borrowers reporting on their experience with loan providers. I don't make this information publicly available because it is not reliable and is easily misconstrued. Virtually all such letters come from the two tails of the distribution of borrowers: those who were extremely disgruntled and those who were ecstatically pleased. I seldom hear from the great majority of borrowers who fall somewhere in between.

Reports from disgruntled borrowers, furthermore, are not necessarily reliable. In about half of the cases I have investigated, the problems were caused mainly by the borrower rather than by the loan provider.

This leaves the other half, of course, where the loan provider did indeed screw up, but these legitimate complaints don't tell me anything useful. A very large proportion of these cases carry the names of the major lenders -- there is not one of them about which I have not heard horror stories -- but that is to be expected because they account for a large proportion of the loans made.

The fact is that every loan provider screws up on occasion. No matter how well designed a lender's systems are, if the loan officer dealing with the borrower is incompetent or over-committed, the deal can go sour. Other employees involved in the process, especially processors who have to keep track of the all the information and underwriters who are responsible for approving the deal, can also throw a monkey wrench into the process, though this happens less often.

In other industries, there is usually a very close relationship between the quality of the firm and the quality of the firm's employees, to the extent that we seldom bother to distinguish the two. In the mortgage lending industry, however, the relationship is much looser.

Real estate agents understand this very well. When they refer customers to a "lender," the referral usually is to an individual loan officer, not a firm. Indeed, loan officers often switch firms without losing the allegiance of the agents, the only concern of the agent being that the new firm provides the processing and other backup support required by the loan officer.

Real estate agents are primarily concerned with one dimension of service quality: bringing the money to the closing table on the due date. The agent's commission depends on that, and it is critically important to the borrower as well. On the other hand, whether the borrower has been placed in the right loan or given the best price are issues of much less importance to the agent than to the borrower.

Aside from real estate agents, there isn't much information available to a borrower on individual loan officers or mortgage brokers. Recommendations from family and friends are not reliable because they are usually based on one lending experience, which may or may not have been properly interpreted. Borrowers who make selections based on their common ethnicity with the loan officer or broker are advertising that they are easy marks, and will often be treated accordingly.

It would be good to have a national roster containing information about every loan officer and broker. A small step in this direction was taken recently by Upfront Mortgage Brokers Association (UMBA), the non-profit parent of Upfront Mortgage Brokers (UMBs). I worked with UMBA in designing an information page for each UMB, which discloses the broker's practice toward fees, locking procedures, contract with the borrower, and other important information. See www.upfrontmortgagebrokers.org.

In the absence of information about individual loan officers and brokers, a question arises regarding the various types of loan providers. For example, does a borrower stand a better chance of getting good service from large name lenders such as Countrywide, Wells Fargo, Chase, etc., than from smaller Internet lenders, such as E-Loan or Amerisave? This question will be addressed next week.

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 2006 Jack Guttentag