If you have good credit, get your loan
from the parent bank, not its subsidiary
By Michael D. Larson • Bankrate.com

A home loan is a home loan, no matter which division of the bank makes it, right?

Not necessarily -- and mortgage customers who don't know any better could be getting their pockets picked to the tune of thousands of dollars.

Banks piled into the subprime lending business during the second half of the 1990s, purchasing consumer finance companies and starting their own subsidiaries. That's helped people with damaged credit, because they can now borrow from the corner bank just like everybody else.

But at the same time, it's created a trap for conventional customers that some of the nation's largest financial institutions aren't in any hurry to eliminate. Banks aren't required to offer borrowers who shop their subprime subsidiaries the best rates they have company-wide, and many don't require subprime employees to refer good customers to the parent bank for better loans, either.

It can cost you thousands
That means a prime borrower who visits Citigroup Inc.'s Citifinancial division, Wells Fargo & Co.'s Norwest Financial subsidiary or one of several other bank-owned subprime lenders could end up paying thousands of dollars more for the same loan the parent bank offers, but isn't telling them about.

"If you go in and aren't aware that it's negotiable or that you could be referred up, they can gouge you as much as possible," says Matthew Lee, executive director of Inner City Press/Community on the Move. The Bronx-based consumer advocacy group studies banking practices.

"They make more money making a higher interest rate loan, so the incentive to gouge people is clear," he adds. "There's no law mandating fairness. It's sort of a shame."

Damaged credit boon, but good credit trap
Lending wasn't always this way. In the past, most banks wouldn't touch consumers with credit problems, forcing them to seek out subprime lenders, who charged much higher rates and fees. Now, your local bank or mortgage company is likely to own a subprime lender or refer loans to one. That has made it easier and cheaper for damaged-credit borrowers to get loans. But it has also made the lending process more confusing -- and created the finance company trap for good-credit customers.

How does it work? Bankrate.com shopped several lenders in mid-February, including all of the Citigroup divisions operating in the Buffalo, N.Y., metropolitan area. They include Citibank, Source One Mortgage, myHomeEquity.com and Citifinancial.

We found that someone with great credit who needed a $40,000, 15-year second mortgage would have been charged a rate of about 12 percent at Citifinancial's branch in Tonawanda, just north of town. That's assuming the loan would raise the overall loan-to-value ratio, including the first mortgage, to no more than 80 percent. A loan officer said five points, or $2,000, would be standard for such a transaction.

Same loan costs $11,300 more
But just nine miles away at the Citibank branch downtown, seven miles away at Source One or a couple of mouse clicks away at the equity-lending Web site, the same loan could be had for 9.95 percent. That would be with no points, no application fee and no closing costs. Add it all up and a borrower going to Citifinancial would end up paying a whopping $11,300 more over the life of the loan, assuming no prepayments.

Citibank spokeswoman Maria Mendler says the company is working toward getting customers the appropriate loan no matter which division they shop, though she declined to say how long the process would take.

"It's a situation where a subsidiary of a company is exploiting a consumer's lack of information," says Malcolm Bush, president of the Woodstock Institute. The Chicago-based nonprofit agency studies community reinvestment and economic development issues.

"The ideal situation would be that in a multiple-subsidiary bank holding company that there is a single point of entry for mortgage applicants so that all applications are screened for whether they qualify for prime credit."

Subprime doesn't always refer to prime
Unfortunately, that's not the case. Experts say that the problem is even worse because while banks such as Citibank regularly refer customers to subprime affiliates when they can't qualify for a prime loan, they don't do the same thing in reverse.

Take Cleveland-based National City Corp. The company has a subprime division called Altegra Credit that operates lending centers under the moniker "The Loan Zone," some within a few miles of its bank branches.

While the bank offices can handle subprime-quality customers because of a processing arrangement with Loan Zone, Loan Zone branches can't offer bank-quality loans to prime borrowers. Loan Zone has no policy of referring prime-credit customers who apply for loans at its locations to a bank branch either, according to Mark Decello, Loan Zone's executive vice president of production.

As a result, borrowers with good credit who went to the Loan Zone rather than a National City bank branch would end up paying almost $8,000 more than necessary for a 15-year second mortgage in Indianapolis on Feb. 18. That's because the best-credit rate quoted to Bankrate.com by a Loan Zone employee there was 11.5 percent, compared with the 9.74 percent quoted by a nearby bank officer for the same loan.

"It seems many of the reasons these holding companies came to want subprime companies is to make referrals to them and there's nothing wrong with that as long as they're referring people up," says Lee of Inner City Press. But many aren't, he adds.

"Because they can get away with it"
"Obviously, they make more money charging 12 percent interest than 9.7," Lee says. "Why do they do it? Because they can get away with it."

Bank officials say the problem isn't as bad as consumer advocates claim. They argue that most people don't shop at finance companies unless their credit history or loan requirements force them to do so. Regular customers know to start at the bank, and banks drive home that message by marketing one set of services to good-credit customers and another to the damaged-credit ones.

"Loan Zone is a nonprime mortgage company and I do not advertise to try to attract prime customers," Decello says. "I'd say 99 percent of my marketing is direct mail and I'm picking and choosing and purchasing lists of customers who meet our demographics."

Others point out that lenders get much of their business from referrals. If they stuck customers with loans that have higher rates than they should, word would get out.

"Banks are very concerned for reputation and trustworthiness and things like that," says Kevin Mukri, a spokesman for the Office of the Comptroller of the Currency. The Treasury Department division oversees and regulates national banks.

"They want customers. They want happy customers. They want borrowing customers," he adds. "They don't want a customer who finds out, 'What do you mean I could qualify for a 9 percent loan and I got a 13 percent loan?' "

Standardizing the product line
Some banks are trying to eliminate the problem, too.

First Union Corp., which bought The Money Store in 1998, has almost finished standardizing its product line across the board, according to Mike Rizer, the bank's fair lending manager. By later this year, a prime customer will get the same rate and loan no matter which division's branch or call center handles the application, he says.

"Everyone has just, I think, sort of approached this in their own way," Rizer says. But, "we obviously feel this is the best way to keep a customer for life."

Nevertheless, as long as huge lenders such as Wells Fargo/Norwest and Citibank continue to operate without standardization or a "referral-up" policy at their finance affiliates, experts say borrowers have no protection against getting trapped. And if you're looking for a heads-up from your neighborhood banker, Lee says forget it.

"It's a basic fairness question," he says. "But some of the institutions we've approached, their response has been, 'Buyer beware.' "