- The Washington Times - Thursday, February 16, 2006

I’ve been in the mortgage business and an active loan officer for almost 20 years. Just when I think I’ve heard and seen everything, something else emerges that leaves me speechless.

The mortgage business is largely a business of relationships between adviser and client. Successful mortgage loan officers earn their living by helping folks obtain a mortgage loan, whether it is a refinance or a purchase.

The duties of a loan officer are diverse. We help borrowers establish financial objectives, we educate them on the myriad mortgage loan products available, we make recommendations that are compatible with a borrower’s objectives, and sometimes we need to go to bat for a borrower during the approval process.

Loan officers are paid a fee for their services. If the loan officer is acting as a broker rather than a lender, most states require that the fee be disclosed up front. If the loan officer sincerely helps the borrower, does a good job and charges a competitive fee, he is likely to receive referrals from a very happy client.

That’s how it’s supposed to work.

To understand the alternative, I need to share a homeowner’s recent experience.

A woman who reads this column calls me to inquire about refinancing her mortgage. I ask her a few basic questions and I learn that she had refinanced five months ago to a monthly adjustable rate with a loan officer she knows from her church.

The rate is a lot higher today than it was in September when she took out the loan. She is a widow on a fixed income and now wants a fixed rate.

She says she’s calling me because she is uneasy about her refinancing experience.

On the phone with this woman, I am wondering why a loan officer would advise that she take a monthly ARM last September, when short-term rates were almost as high as long-term fixed rates and poised to move higher.

I ask her a few more questions and can tell that she doesn’t completely understand her mortgage program. So I invite her to come and see me and bring with her all the paperwork.

She comes to my office and I peruse her refinance papers — the promissory note, settlement sheet and so forth.

What I see is shocking.

It turns out that this loan officer placed her in a monthly ARM with a margin of 3.80 percent. This is the amount that’s added to the loan’s index to determine the interest rate. I note that a 3.80 percent margin is high compared to industry standards.

I then look at the settlement statement and notice that the fee paid to the loan officer from the lender was $8,500 — certainly high in relation to a $200,000 loan. Such a high fee on a $200,000 loan usually means the broker pays the borrower’s closing costs, allowing her to refinance with no fees at all. Taking a higher rate in order to have all the closing costs paid by the mortgage broker creates a “zero-cost refinance,” a product that has been wildly popular over the last 10 years and something I highly endorse.

But not in this case. There was no “broker closing cost credit” on the settlement statement. I then look at the itemized closing costs. They look typical and customary. But I did notice one thing — a $2,750 origination fee paid to the broker and charged to the borrower.

I see that this loan officer put a widowed church associate in a short-term adjustable rate at a time when any professional in the mortgage business knows that short-term rates are on the rise. In addition, he gave her an uncompetitive rate with a high margin, compared to industry standards. He kept the entire $8,500 fee and provided no closing cost credit. And to add insult to injury, he charged an additional $2,750 origination fee.

This loan officer made $11,250 on his unsuspecting target.

Our victim doesn’t know a lot about mortgages, so she trusted a fellow church member to ensure she would be treated fairly.

As I catch my breath after these discoveries, I notice one more thing. The loan carries a three-year prepayment penalty. If she pays the loan off within three years, she will be subject to a penalty equal to six month’s interest, or $7,200.

Not only did our loan officer gouge this woman, he sentenced her to a three-year commitment on a lousy mortgage. Unbelievable.

I gave her the best advice I could — contact the loan officer’s boss and demand a copy of the broker’s executed fee agreement, which is required by law in Virginia, Maryland and the District.

If she didn’t agree to pay the origination fee in writing, she is due a refund, which can be enforced by the state regulator.

I also told her to demand a copy of the prepayment penalty disclosure. If it wasn’t disclosed, she may be able to go to the lender and request a waiver.

If you read this column often, you will recall that I recommend that consumers ask trusted advisers such as neighbors, friends and family members who they might recommend as a good loan officer. If one person has a good experience with a particular lender, the chances are good that he is honest and competent.

I get steamed when I hear of stories like this one. Most loan officers are honest and competent, but there are some who are not. It is this minority who give this industry a black eye.

I can think of no better example than a widow getting gouged by a fellow church member.

Let’s hope this guy isn’t in business for long.

Henry Savage is president of PMC Mortgage in Alexandria. Contact him by e-mail (henrysavage@pmcmortgage.com).


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