Q: How much information do you need to ask customers?
A: First-tier lenders say that, for the customer, the application process requires more information than a credit card application, but a lot less than a mortgage.
If you have multiple lending sources, it’s a good idea to qualify customers yourself. For instance, Murphy asks customers basic questions about income, debt, equity in the home, and credit history. This information helps him decide which lender to steer the customer toward, reducing the chance of rejection.
Q: Does the remodeler have any liability if the borrower defaults on the loan?
A: Remodelers aren’t liable if the customer defaults unless, of course, they are offering some sort of in-house financing (see “Loans of Your Own,” page S134). However, the finance company can hold the contractor responsible for getting the work done. “If a customer complains, and the contractor chooses not to fix the problem, then I can ask him to buy the loan back,” says Bruce Christensen, vice president of GE Money’s home improvement division. “But we have found that even if a customer does log a dispute, 96% of the time it’s resolved in favor of the contractor.”
Q: Does the remodeler have to pay for the privilege of offering financing?
A: Some lenders require a nominal fee — usually $100 or less — for remodelers to come onboard. From that point on there are usually no costs. The exception is for deferred payment loans. Some lenders allow the remodeler to offer promotions that let customers defer the first payment for a set period — which could be as little as three months or as long as a year. In these cases, the remodeler is charged a fee based on the length of the deferment period.
Q: Does the remodeler make a profit from the loan? If so, must he disclose this to the homeowner?
A: The anti-kickback federal law known as RESPA (Real Estate Settlement Procedures Act) prohibits contractors from making money off finance referrals for secured transactions. However, it doesn’t apply to unsecured transactions, which are generally used for loans below $25,000.
Builder Direct Lending offers a commission to contractors who are willing to do a little extra work. The contractor signs on as an “agent,” and is able to get direct, computer-generated quotes from various lenders without having to talk with a loan officer.
The contractor performs services such as explaining the benefits of various loan products to customers, taking the loan application from the customer, ordering title search, closing, and other services.
“This fulfills the RESPA requirement to earn additional revenue,” according to Terry Gilliland, the company’s vice president of business development. The agent commission is currently one half of 1%. He says that some contractors keep it as income, while others pass it on to customers as a savings.
Q: What are the most common questions customers have about financing and how should they be answered?
A: “Customers always ask about monthly payments,” says Dave Anderson, a regional sales manager with GE Money. He says that a ballpark rule of thumb is that their monthly payment will be about 2% of the total job cost on an unsecured loan and 1% to 1.3% on a secured loan.
Some customers also ask about their obligations if approved. Lenders say that until the customer signs off on the loan they have no obligation to use it.