How to Protect Yourself

At my company we take great pains to tell our clients what is going to happen early in the process so there will be no surprises. I believe that a fundamental obligation of lenders is to give people truthful answers to their questions and accurate information they can rely upon to make decisions. Sadly, those can be hard to get.

The sad truth about the mortgage business is that the success of some lenders is based upon the systematic and deliberate deception of their clients. Yes, there are theoretically some safeguards built into the system, but they are routinely disregarded. Remember that there is virtually no enforcement at the individual loan level, so those loan officers who intend to lie to their clients are not going to bothered by rules they perceive will never be enforced.

At a larger level, the relevant authorities do get involved when the target is big enough. In recent years various lenders have had to curtail bad lending practices when enough of them have come to the attention of authorities. The latest target, as I have mentioned before, is Ameriquest Capital Corp., the largest sub-prime lender, which seems close to agreeing to a fine and settlement with authorities in the 33 states in which it is under investigation.

It is interesting to review so aspects of this settlement because the abuses that have been accused of are, I believe, widespread throughout the mortgage industry, and not just among sub-prime borrowers. So let's look at a few and see how consumers can protect themselves from being victimized.

First, apparently the loan officer would give the borrowers the Federally mandated forms, such as the Good Faith Estimate of Closing costs and the Truth-in-Lending form. These would show the actual rates that the borrowers would be charged which, frankly, are a lot higher than the A-paper loans they might have thought they would get. But then the loan officers would tell the borrowers, "Your actual rate and costs will actually be lower than this," although that was not true.

I think that the easiest way to determine the truth is to ask for a copy of the closing statement and first page of a note on a loan they funded yesterday. They OBVIOUSLY have those and they can get them, black out that borrower's name and address, and show this borrower a typical deal. Of course, the liar will use every excuse not to do that because it would expose him. A truth-teller, on the other hand would gladly show the papers because they would support what he was saying.

Next, borrowers were told that there would not be a pre-payment penalty for early payoff of the loan, where as the loan documents did contain provisions for such a penalty. You can protect yourself from this but reviewing your loan documents in detail, preferably off-line. The lender or his agent who handles the signing will want you to do it quickly, but that may be because they don't want you to read then thoroughly enough to catch it. This can be really important because penalties routinely can be in excess of $5,000, more than you may be paying in upfront costs.

Finally, some loan officers fool around with rate versus fee options. They just tell borrowers one rate. In fact, there are usually a dozen options for borrowers and a good loan officer will show you all of them. The reason they don't want to is that if you don't know the options, they can fool with the pricing in a way that will cost you more money and enrich them.

Technically, they should not show you a rate without calculating the APR, but no one is going to jail for that! You should demand to see the entire rate sheet. I have put a typical rate sheet at my website. Click here so you can see what one looks like. It's a good idea to keep the first one you get and compare that with another sheet that you get when they lock in your rate and draw loan docs.

In summary, protecting yourself is really getting as much information as you can so you know the truth throughout the process. If someone is continually lying to you, don't think you can avoid all the manipulation. Find another lender.

Be very careful out there.