Did Your Mortgage Lender or Broker Break the Law?
Mortgage lending has become more transparent thanks to new disclosures and laws, but violations still can happen. Here are some of the more common ones, and what you can do about them.
Mortgage lending violations range from the most egregious equity stripping and predatory lending schemes to minor errors like neglecting to put the Equal Opportunity Lender logo on an advertisement. The five most common mortgage lending violations are in most cases errors of omission, but such omissions can mislead borrowers about the terms of their mortgages.
Violation #1: Missing Paperwork
The Mortgage Disclosure Improvement Act (MDIA) requires that you be issued a Good Faith Estimate (GFE) and Truth-in-Lending (TIL) disclosure. You must have been given the initial GFE at least seven days prior to closing on your mortgage. In addition, any material changes to your loan must trigger the issuance of an updated GFE within three days, and you can't close until you have at least another three days to review it. Once the lender has the following six pieces of information from you, it is required to issue a GFE within three days and cannot make do with a "loan scenario" or informal "worksheet." GFE triggers include:
- Full name(s) of the borrower(s).
- Social Security number(s) of the borrower(s).
- Monthly income of the borrower(s).
- The property address.
- The sales price or property value.
- The loan amount.
If your lender has this information and refuses to provide a GFE, or does not send out the form in a timely manner, it violates Regulations Z and X (federal regulations governing mortgage lending) and the MDIA.
Violation #2: Bad Good Faith Estimate(s)
A common borrower complaint in the past was mortgage lenders provided lowball estimates, then "baiting and switching" to a costlier loan once it was in process. This led to the passage of MDIA and the U.S. Department of Housing and Urban Development's new GFE forms you see today. The new law requires mortgage lenders to honor the charges and fees disclosed within specified tolerances, and if they mistakenly underestimate a charge, they, not you, have to absorb it.
However, these steps don't eliminate bait-and-switch tactics entirely. Changes to the property value, loan amount, your income, your credit rating, locking your loan, or the expiration of your rate lock create the requirement for a new GFE, and it's the final GFE disclosure that has to substantially match the closing statement. That's why the Fed says you get a minimum of three days from the issuance of the final GFE to review it before closing. If your rate or fees change significantly, use that time to shop around and verify that you're getting a fair deal on your mortgage.
Violation #3: Faulty Documentation of Income
In the past, a lot of mortgage fraud was associated with stated income or no income documentation loans. Some borrowers claimed that mortgage brokers gave them applications to sign without income information filled in and that the brokers put in an artificially high amount later on. Know, however, that you are responsible for whatever you sign. Never sign an incomplete form for a lender. Review every document before blessing it with your signature.
Violation #4: Incorrect Payment Representation
When mortgage lenders complete documents with inaccurate loan information or misstated total financing costs, the effects are damaging. In particular, the mortgage annual percentage rate (APR) changes with such errors, and homeowners can get saddled with incorrect payments -- in some cases ending up in foreclosure as a direct result. Although a lender who understates these amounts can be made to reimburse the borrower, your best defense is to check the APR offered to you by the mortgage lender.
The APR is calculated by subtracting financing charges from the loan amount to derive an amount financed. For example, if you are borrowing $100,000 and are charged $2,000 in finance charges, your APR is calculated by taking the payment on your $100,000 loan but applying it to $98,000 ($100,000 - $2,000). A study of lending inconsistency showed that most APR errors that resulted in reimbursement were the result of the following charges being left out of APR mortgage rate calculations:
- Loan application fees;
- Loan origination fees or points;
- Loan setup fees;
- Private, FHA, or VA mortgage insurance;
- Fees for servicing escrow accounts;
- Prepaid interest.
You can always run your figures through HSH.com's APR calculator to find a loan's APR. Re-disclosure with a new TIL form is required when the percentage rate varies by more than 0.125% in a regular transaction (fixed-rate mortgage) or more than 0.25% in an irregular transaction (adjustable-rate mortgage). The comparison is based on the estimated APR at closing and the most recently disclosed TIL form.
Violation #5: Missing Yield Spreads
Mortgage brokers are required to disclose the fact that they are getting a rebate from the wholesale lender for delivering your loan. This rebate is called a yield spread premium (YSP), and it can allow brokers to fund your home loan at a lower cost to you. Rebates are generally paid in exchange for you taking a higher interest rate than the rate on a loan priced at par, with no rebate. While there is nothing wrong with a broker getting a YSP, be suspicious if one shows up on your HUD-1 closing statement that was not disclosed on your GFE.
If you think your mortgage documents may contain errors, first ask your loan agent about the figures and how they have been calculated. If you closed a loan and think there may be errors, a "mortgage counselor or forensic mortgage reviewer" may be able to examine your documents for violations.
Gina Pogol has been writing about mortgage and finance since 1994. In addition to a decade in mortgage lending, she has worked as a business credit systems consultant for Experian and as an accountant for Deloitte.