Deceptive practices used by mortgage loan providers and other participants in the mortgage process. Scams by Loan Providers: Lenders and mortgage brokers may employ a number of tricks to increase their income from originating a loan, at the borrower's expense. Make Low-Ball Offers: To draw customers, some loan providers will advertise low-ball prices that they have no intention of honoring. Mortgage shoppers should place little credence in media or oral price quotes, especially when the price is below that of all other loan providers. Overstate the Market Price: The loan provider making a low-ball offer can attempt to validate it in another way. He can overstate the market price when it comes time to lock the terms. This practice, however, can be deployed regardless of whether the original price was understated. Pocket the Borrower's Rebate: Some unwary borrowers are steered into high-rate loans on which they should receive a rebate from the lender but don't. For example, the loan officer's price sheet shows 6% at zero points, 5.75% at two points, and 6.25% at a two-point rebate. If the borrower is willing to pay 6.25% without argument, the rebate is retained by the loan provider. This abuse can be avoided by asking first about 'the lowest rate possible' and how many points it would require. If you want a rebate deal, you can work yourself down to high rate/rebate combinations. Ask to see the schedule of rates and points from which the quote given to you has been extracted. Press to see them on the fax price sheet or computer screen. If the loan officer insists on transcribing them to a separate piece of paper, ask point-blank if she is adding an overage. Exploit Shifts in Borrower Niche Preferences: Borrowers sometimes change their minds about some feature of the transaction that has pricing implications. If the borrower is in too deep to back out, the loan provider may pad the new price. For example, the borrower decides to shift from a 30-year to a 15-year FRM. On a day when a shopper soliciting rates quotes would find the quote on a 15-year to be 3/8% below that on a 30, a committed applicant might receive only a 1/4% reduction. Other preference shifts where the same thing can happen include changing the combination of interest rate and points, changing between FRM and ARM, and electing to escrow or not escrow. Offer No-Cost Loans That Aren't: Some loan providers tout deals as 'no-cost' when the settlement costs are added to the loan balance. These deals should be referred to as 'no-cash.' This is a scam if the borrower doesn't understand that he or she is borrowing more to pay the settlement costs. Surreptitiously Change the Contract: Borrowers who accept whatever they are told may find that the note includes a provision favorable to the lender, about which the borrower has no knowledge. A favorite is a prepayment penalty, which increases the value of a loan by 1% or more. A loan provider who includes it in the contract without your knowledge can put the point in his pocket rather than in yours, where it belongs. Sell Biweeklies Under False Pretenses: The biweekly mortgage meets the needs of some borrowers, either to help them budget or as a forced-saving device to pay off the loan early. (See Biweekly Mortgage.) Some lenders, however, promote the simple-interest biweekly as a way of substantially accelerating the rate of payoff, compared with a standard biweekly. They offer to refinance borrowers into their simple-interest biweekly at rates 2% to 3% above those the borrower is paying. On a standard biweekly, an extra monthly payment is credited to the borrower's account after 12 months. On a simple-interest biweekly, a half-payment is credited to the borrower's account every two weeks. This does result in an earlier payoff and reduced total interest outlays. The advantage over a standard biweekly, however, is very small. For example, on a 6% 30-year loan with biweekly payments, a borrower would be justified in paying only 6.063% for the simple interest equivalent. This is the rate that would equalize the payoff date and total interest outlays. It is a far cry from the 8% or 9% that would be charged. Deceive Borrowers Regarding ARMs: Because ARMs are complicated, the loan officers selling them tend to focus on one or two major features. In doing this, they sometimes cross the line between acceptable 'puffery' and unacceptable deception. Expecting lenders to police the sales practices of loan officers is probably unrealistic. Some lenders, however, provide their loan officers with tools that aid and abet deceptive practices. Pad the GFE: The Good Faith Estimate of settlement or GFE shows the borrower all the settlement costs connected to the loan. Unfortunately, lenders are not bound to the numbers shown there, and there are no penalties for discovering new charges or increasing existing ones at the 11th hour which is exactly what some lenders do. At the time of writing, HUD was developing regulations that would eliminate this scam. Strictly Broker Scams: Some scams are initiated only by mortgage brokers. The first one described below is directed against the borrower, the second against the lender. Charging for a Lock Without Locking with the Lender: Locking the mortgage rate assures borrowers that the interest rate and points they have agreed to pay will be honored at closing, even if market rates rise in the meantime. Some mortgage brokers tell their clients that the interest rate has been locked with the lender when that is not the case. They substitute their lock for the lenders without informing the borrower. Successive Refinancing Using Rebate Loans: This scam is directed toward wholesale lenders and requires the cooperation of venal borrowers who participate in it. The larger the loan, the more profitable the scam.