I have never worked at a company that charges an application fee and I've always assumed this may be a barrier for getting loan applications. I know that many banks charge a small application fee and I've been brainstorming the pros and cons. Let's assume the fee is $35 per applicant.
- Customer has paid for something and feels more committed so it might help customer retention and prevent shopping.
- It would weed out the people who aren't serious and reduce time lost on taking those applications.
- Application fees cover the cost of the credit report and automated underwriting submission fee.
- Possibly have to sell the idea of the application fee to the borrower.
- Much of the competition does not charge an application fee.
- Could create a barrier to obtaining referral business from real estate agents who don't believe in application fees.
The more I think about the application fee and its purpose it tends to make more sense especially if you aren't charging a processing fee. In my market it is common for processing fees to range anywhere from $100 - $500. So let's assume our company charges a $400 processing fee. Many companies depend on the processing fee to cover the cost of the customers credit report, AUS submission fee, courier costs AND cover the costs of the credit reports and fees of those applicants who DID NOT get approved. While I have seen files that justified a large processing fee most files incur minimal actual costs and the rest of the fee is profit for the company. It makes more sense that origination, yield spread, and/or servicing release premium be used for company profit and the application fee used to cover the costs incurred on a per application basis instead of using a processing fee for those that actually do complete a transaction.
I feel that I can sell the idea of the application fee by providing value to the customer. In addition to a copy of their credit report I always provide a custom credit improvement plan for all applicants that do not credit qualify. It also makes sense to explain to the borrower that because of the application fee you will not be charging a processing fee thereby saving them hundreds of dollars over other companies.
What are your thoughts? Do you have any other pros and cons? Will it help or hurt business?