A dirty lender comes cleanby Gina Pogol
If you read an article called “I helped cause the financial crisis, and I’m sorry,” you might have come away afraid to refinance a mortgage or buy a home ever again. This entertaining tale was told by a 22-year-old subprime loan officer who worked in the business for nine months before fleeing. The bad news is that some of what Ken Kupchik writes about did happen at other companies besides his. The good news is that a repeat performance is highly unlikely.
Adjustable rate mortgage refinances: the bad and the ugly
In one instance, Kupchik mentions putting a client in a hybrid ARM loan called a 2/28, which is a subprime mortgage that’s fixed for two years and then it converts to an adjustable rate loan (ideally, the borrower cleans up his or her credit within that two-year period and then refinances to a better loan).
Kupchik reports that his boss changed the loan to a 6-month ARM instead because the company earned more money on the riskier product (that is, riskier for the borrower, not the lender). Apparently the homeowner did not notice the bait and switch when signing documents, obligating him to the less-favorable mortgage and potentially putting his home at risk.
Why dirty mortgage tricks won’t happen today
One of the major recent reforms changed mortgage disclosure to include plain English in your Good Faith Estimate. For example, your disclosure must now include the following questions and answers:
Can your interest rate rise? The answer is either NO, or YES, it can rise to a maximum of __%.
The first change will be in _______.
This would have exposed the bait and switch tactics of the evil branch manager (assuming the borrower read the GFE).
Even if you make payments on time, can your loan balance rise? The answer is either NO, or YES, the first increase can be in ____ time and the monthly amount owed can rise to $____ . The maximum it can ever rise to is $___.
This lets the borrower know if the mortgage contains negative-amortization provisions, or as they’re also known, “that 1 percent mortgage rate isn’t real” clauses.
Does your loan have a prepayment penalty? YES or NO.
This is another sneaky provision that bad lenders could have buried in your loan documents in the past. Many subprime mortgages had very steep prepayment penalties because lenders could earn a lot more on mortgages that carried these.
Even if you’re careless, some recourse still exists
If you are truly asleep at the switch when you sign your mortgage documents, you still have some recourse under the new laws. If your final mortgage documents differ substantially from what was disclosed–say, you sign off on a 2/28 ARM and end up with a 6-month ARM–you can reverse the transaction later or be compensated.
Changes that went into effect on April 1, 2011 made it illegal for the loan officer or broker’s commission to be increased by slipping a higher mortgage rate or other less favorable terms into the loan.
Licensing requirements keep out the ignorant and unethical
Mr. Kupchik revealed that the training (or lack thereof) he received at his old job was basically to “read a script to unsuspecting homeowners who call with questions.” Employees were told not to deviate from that script, and most had no idea what the paperwork they were pushing actually meant. In fact, these “loan agents” knew little more than their clients.
Today, licensed loan agents are required to complete training, pass exams and adhere to ethical standards to maintain their good standing. Sites like HSH.com help you get quotes from licensed lenders and compare them without disclosing your personal identifying information.
Gina Pogol is a staff writer for HSH.com. Be sure to visit our homepage to read Gina’s latest contributions, including, “The 10 worst cities to buy in now