You probably get a lot of mail with exciting offers of low mortgage rates and instant cash. I know I do. For instance, one correspondent says I “may be entitled to a mandatory refund of up to $5,100.00” from the FHA mortgage insurance premium.
The wording here is curious. If this is a “mandatory” refund then how come I “may” receive it? Should it not automatically go to my bank account? Isn’t that what “mandatory” means? And about that $5,100.00 — why is that number in bold if I might receive less? After all, a “refund up to” is hardly the same as a plain old “refund.”
If you read the fine print at the bottom of the letter — and for me that means whipping out a magnifying glass — it says “recipients of this letter do not necessarily have FHA-endorsed mortgages, and may or may not be entitled to a refund.”
But the fact is that you don’t have to depend on a helpful merchant to get an FHA refund. If you’ve ever had an FHA loan you may be entitled to a partial rebate of the mortgage insurance premium. Maybe not much and maybe nothing at all but you can easily find out without sending money to me or anyone else — just go to HUD’s online refund page.
A lot of folks are getting fed up with the mortgage come-ons whether they appear in the mail, the paper or on television. In California, Assembly Member Alberto Torrico has just introduced AB 941, legislation which would require lenders who offer option ARMs and negative amortization loans to plainly spell out important terms. If the Torrico bills passes lender offers would be required to say in big print that the “advertised rate of ____ is not the actual interest rate. It is the payment rate. If the borrower chooses to pay this advertised rate, the principal balance of the loan will increase.”
But while Torrico says there ought to be a law, a federal judge in Wisconsin says there is already such legislation in place.
Susan and Bryan Andrews of Cederburg, Wis., thought they were getting a good deal when they decided to accept a loan that would be funded by Chevy Chase Bank, a major financial institution in the Washington, D.C. area.
According to Federal District Judge Lynn Adelman, the Andrews believed that the payments and the interest rate were fixed for five years and became variable thereafter. However, although the minimum monthly payment was fixed for five years, the interest rate was not. The loan carried a discounted or “teaser” interest rate of 1.950 percent, but that rate applied only to the first monthly payment, after which the interest rate increased every month according to a formula.
The question before Judge Adelman was whether the Andrews could begin a class-action suit against the lender under the Truth in Lending Act (TILA). Adelman said yes and now as many as 7,000 borrowers may be involved.
It turns out that under the TILA there are many standards which must be met when mortgage products are advertised and originated. Here are some of the points made by Judge Adelman in her decision.
- “All required disclosures must be clear and conspicuous.” If language can be read in more than one way then under TILA it’s not clear.
- “Information concerning the number, amount and periods of payments must be disclosed clearly and conspicuously.” Lenders must group such information. They must also “conspicuously” segregate it “from all other terms, data, or information provided in connection with a transaction.” Information may be shown conspicuously by using bold print, placing it in a box, etc.
- Small print may not be sufficiently conspicuous to meet TILA requirements.
- Disclosures must be consistent and not contradictory or misleading.
- “TILA does not require a lender to disclose a loan’s interest rate,” said Adelman. “Further, in the present case, defendant was most assuredly not required to disclose the 1.950 percent rate, which applied only to the first monthly payment. However, as discussed, defendant included the 1.950 percent rate on its TILDS. Yet the 1.950 percent figure had virtually no relation to any information required to be disclosed on the TILDS, much less a direct relation. The 1.950 percent rate had no significant connection to the cost of the loan. Moreover, a reference to the 1.950 percent rate would not be useful to an ordinary borrower because it would cause the loan to appear more attractive than it actually was and serve no useful purpose.”
While Judge Adelman has placed a stay on her ruling so that it could be appealed, if her initial decision stands it means that the case may be continued in the form of a class action suit. While Adelman said that the Andrews were not entitled to statutory damages, they can seek rescission and attorneys’ fees. If they’re able to obtain a rescission order from a court, borrowers would be able to demand the return of money paid to the lender to date.
“Whether Judge Adelman’s decision goes further in the court system or not, it at least makes two points,” says Jim Saccacio, Chairman and CEO at RealtyTrac.com, the nation’s largest foreclosure resource. “First, borrowers need to understand all terms before entering into a mortgage agreement. Second, lenders need to spell out loan terms with clarity. Meanwhile, you can bet that as a result of the Andrews case a lot of lenders are reviewing marketing materials and loan documents to make sure they meet all required standards.”
Peter G. Miller is the author of the Common-Sense Mortgage and is syndicated in more than 90 newspapers.