Eight months after paying off an adjustable-rate loan on a Deltona, Fla., vacation home, Katherine Lee could not rid herself of a nagging feeling that something was not quite right.
The Baltimore resident decided to act on her suspicions by hiring the Gaithersburg, Md., loan auditing firm Loantech to check over paperwork on the $78,900 adjustable-rate mortgage she and her husband obtained in 1983.
Loantech concluded that the lender had failed to correctly apply extra payments made towards reducing the principal balance. The bank had overcharged her by $3,500 and she is now seeking a refund.
Typically consumers hire loan auditors to examine existing loans. Recently, though, a growing number of ex-ARM borrowers, including the surging numbers who are refinancing out of ARMs and into fixed-rate loans, are exhuming their old mortgages, with the help of a loan auditor, for a second look.
“If you do not check it out you will never know and then that money is gone forever,” said Loantech president David I. Ginsburg.
Apparently, there are plenty of junked ARMs ripe for excavation. At the beginning of the year, 75 percent of borrowers opted for some type of fixed-rate loan when refinancing an ARM funded by the Federal Home Loan Mortgage Corp., or Freddie Mac, a major supplier of mortgage capital.
Several loan auditing firms said they find errors in a quarter to half of loans.
State contract law generally dictates how long borrowers have to seek redress of an error, said John Geddes, president of Consumer Loan Advocates, a north suburban Lake Bluff loan auditing firm. The statute runs from three to 10 years, he said.
Some legal experts believe the statute of limitations starts running from the time an error is discovered, Geddes said.
Even small errors add up quickly, Ginsburg said. For example, a lender who used an incorrect index value and then employed a rounding method other than that specified in the mortgage contract can easily overcharge a borrower $50 a month on a $100,000 loan, he said.
For around $100, suspicious borrowers can order a loan autopsy from any one of the auditing services which have sprung up in recent years and operate across the nation. Less expensive do-it-yourself books are also available from two of the firms.
Verifying the accuracy of the interest calculations for an ARM starts with the mortgage note and any riders or addendums.
Those documents lay out the terms of the loan, including the initial payment rate, initial payment date, initial payment amount, a schedule of rate change dates, the definition of the index used, the margin added to the current index value to determine the new interest rate, the rounding method used and the periodic and lifetime caps or floors on interest rate changes.
However, the greatest potential for lender error arises with how the interest rate changes are calculated, Ginsburg said. The rate change notices supplied by the lender provide one way to double-check the process.
Borrowers who have not saved those notices can request copies from lenders, who are required to keep at least two years worth of those records, Geddes said.
To request a refund, Richard Roll, president of Mortgage Monitor in Norwalk, Conn., suggests writing lender and pointing out that the letter constitutes a “qualified written request” under the Cranston-Gonzalez Affordable Housing Act.
The law gives a lender 20 days to acknowledge the letter and 60 days to correct the problem.
