Being vulnerable to interest-rate fluctuations is a risk home buyers accept when they select an adjustable mortgage for its low initial rate. But some borrowers are finding they also are vulnerable to an unexpected variable- errors by lenders when they periodically adjust that rate.
Just how many mistakes are generated by the intricacies of the adjustment process-which may come annually, every six months or at some other interval-is a matter of debate.
Of the 9,000 adjustable rate mortgages, or ARMs, that Lake Bluff-based Consumer Loan Advocates audited in 1991, 47 percent had errors, with about 78 percent of the mistakes being overcharges, according to company officials.
Regulatory agencies have found error rates of 20 to 38 percent in their studies of adjustable mortgages. (Technical differences in the studies explain some of the variation, which also turns up in the ratio of overcharges to undercharges.) For their part, banking spokesmen downplay the problem.
If even a quarter of the loans are being calculated incorrectly, however, there is good reason for borrowers to be concerned. Consumer Loan Advocates estimates that the average overcharge can reach $1,588 over the life of a loan; a half-percentage point error in a $160,000 mortgage can add up to hundreds of dollars in just a year.
Problems with older loans
Government regulators and loan analysts say mistakes are most common in older loans, especially those made before 1985, when terms tended to vary more and lenders hadn`t yet fully updated their computer software and systems to deal with the relatively novel ARMs.
But loan analysts advise borrowers to be watchful even with newer loans. They especially suggest caution when loans have been transferred to another lender or servicer, when an interest rate has moved against the general trend or when a loan has complex or unusual terms.
”This is not a deliberate lender problem,” says Lawrence Powers, executive vice president of the non-profit Consumer Loan Advocates. But lenders ”are almost in an impossible situation.”
Loans are constantly being traded on the secondary market, ”and every time that loan goes somewhere, it`s going to a new servicing system,” Powers explains. ”The sheer diversity of loans, the secondary market, the complexity of the software, the different servicers” all add up to lots of room for error.
Among the most common mistakes, say regulators and loan analysts:
– Using the wrong interest-rate index to calculate the new loan rate;
– Reading the index or making the adjustment at the wrong time (a matter of days can add up to many dollars, especially as interest rates fall);
– Miscalculating the rate changes;
– Not rounding the rate figures involved or rounding them improperly;
– Misapplying the caps on rate changes that are part of most ARMs;
– Mistyping data.
Consumer Loan Advocates says incorrect interest rates turn up in 30 percent of the ARMs it examines, while miscalculated payment amounts or loan balances show up in another 17.5 percent.
Tracking down these blunders can be a challenge, and it will require patience and a calculator. You will need a batch of documents-including a copy of your loan note and adjustable rate rider, and all notifications of rate changes from the lender-and you have to know how to read them. Not only must you extract your original interest rate and all the changes, but also the formulas for adjusting and rounding it, the dates of the changes and the limits on the movement of your rate, up or down.
To complicate matters, the calculations involved in auditing your loan will vary depending on its terms. With some loans the new rate is derived by adding a set percentage to the appropriate index on the date specified in the note. For example, your rate may be 2 percent plus the weekly average yield on Treasury securities, an index available from the Federal Reserve. Or your interest level may be determined by adding or subtracting changes in the index.
Help on calculations
If this seems daunting, there is help available.
Consumer Loan Advocates (800-767-2768) publishes a $19.95 workbook
($39.95 with a supplementary video) that takes you step by step through the auditing procedure. The workbook includes sample form letters for requesting information from your lender, for documenting any errors you find and for asking the lender to fix them.
Consumer Loan Advocates and several other firms, including Norwalk, Conn.-based Mortgage Monitor Inc. (800-AUDIT-USA), will do the audit for you; both charge $119. Mortgage Monitor`s report analyzes other areas where it says errors are frequent, such as escrow accounts and private mortgage insurance. The company also offers a booklet that lays out the basic issues of mortgage mistakes.
In some cases you can get your loan audited on a contingency basis. Mortgage Monitor, for example, charges $49 upfront and a third to a half of the overpayments recovered to do an audit and collect any refunds due on the mortgage, which must have monthly payments of $800 or more.
The two companies also audit home equity and commercial loans, which are subject to the same kinds of errors that affect ARMs. Consumer Loan Advocates sells computer programs for checking those two types of loans.
For analyzing ARMs, the Amortizer Plus program, around $55 from Good Software Corp., can come in handy. You need to supply it with rate and date information, which means going through many of the steps outlined above, but the software will automatically calculate your payment amounts and changes, and it will pump out an amortization schedule. The program is powerful enough to let you select from several amortization methods, and other tools will help with making extra principal payments, balloon payments or an early payoff, as well as calculate car leases and savings plans.
The question remains of what you can do if loan errors do turn up.
Lenders are bound by the loan contract to properly calculate interest rates and payments, but the key weapon in the consumer arsenal, say loan analysts, is the Cranston-Gonzalez Affordable Housing Act of 1990, which requires lenders to respond promptly to borrower complaints and inquiries. Lenders must fix the error or provide an explanation if they don`t. The law spells out damages if they refuse to cooperate.
”More and more people are finding success getting errors fixed,” Powers says, adding that his firm`s clients manage to collect something more than 80 percent of the time.
”When the consumer is able to demonstrate clearly the cause of the error and the amount of the errors, lenders generally comply, because not to comply opens the lender to penalties plus regulatory intervention, as well as the potential for class-action suits,” says Richard Roll, president of Mortgage Monitor. He adds, however, that ”there is room for greater regulatory intervention” as well as for better training of loan-servicing personnel.
Powers adds that ARMs could be further standardized, and he suggests that loan-servicing procedures could be made more consistent to reduce the problems caused by widespread trading of mortgages in the secondary market.
Meanwhile, though, while the costs of borrowing inevitably will add up, with some help and a little effort, at least you can make sure they add up correctly.
