Got a mortgage with a floating interest rate? Better make sure that rate is right.
Borrowers have found that lender errors in calculating interest rates on adjustable mortgages can cost them thousands of dollars.
Citibank, for example, settled a $3.26 million class-action lawsuit in late May over errors in calculating interest. Refund checks were sent to 20,000 customers in June, a Citibank spokeswoman said.
First Nationwide Bank settled a similar $6 million class-action suit last year. And 6,000 Bank One borrowers are awaiting audit results before getting refunds from a settlement reached in May.
Consumer Loan Advocates, a nonprofit Illinois consumers group, last year conducted a survey of 9,000 adjustable mortgages nationwide. The organization found a 48.5 percent error rate, said Larry Powers, executive vice president.
"The average return on these errors was a $1,588 refund," he said.
In California, institutions commit fewer errors because adjustable-rate mortgages have been offered longer than in other parts of the nation. But the refund rate is higher because homes are more expensive -- the average runs from $3,000 to $4,000, Mr. Powers said.
Lender errors tend to be found when a second corporate eye gets to look at a portfolio -- after a bank merger, a takeover by federal regulators or the sale of a loan's servicing rights.
Kirk Schumacher, vice president of Bank of America's residential-loan division, said BofA has encountered such problems. But BofA officials declined to say how many errors they have found.
"In connection with the institutions we acquire, we've found errors by the former institution or the RTC" [the federal agency assigned to manage seized institutions], he said. "When portfolios are transferred to us, we have to the review notes and compare them with the data originally on the loan tapes transferred to us."
Mr. Schumacher advised borrowers to visit a lender's loan officer to ask questions and review calculations. Mr. Powers suggests that borrowers check the interest rate on their adjustable-rate loans after the first year, and then about every two years -- providing the lender does not change.
What to look for
Here are a few steps borrowers need to take to calculate the interest rate on their adjustable loan:
* Find the original copy of the loan agreement.
* Look for the initial interest rate and payment amount listed.
* Find the date the interest rate is set to change and the frequency it will change.
* Study the clause that describes how the new interest rate will be calculated.
* Pay particular attention to the index that will be used and the date from which the index rate will be applied.
When a loan is transferred to another lender or servicer, the borrower should check the index, adjustment dates and lender-profit margin listed with the new loan holder to make sure all numbers remain the same as those on the original loan. These same figures may also be re-examined when a loan comes up for a rate adjustment.
Borrowers can call the lender to review the figures. And in some cases lenders will send out mailers to verify the figures they have are accurate.
Once the borrower has all the correct figures, it's a matter of laying out the figures and crunching the numbers. One incorrect calculation can throw off the entire mathematics.
But the tally isn't always so easy to do.
Many borrowers have adjustable-rate mortgages tied to the 11th District Cost of Funds Index (COFI). Many of these loans require that the most recent published COFI be used when the rate is adjusted. And because lenders need to forewarn borrowers of a rate change 45 days before they occur -- as required by federal law -- the calculation becomes interesting.
Let's say you have a loan set to change May 1 and tied to the COFI. Count back 45 days, which brings the federal notification time to mid-March. The most recent COFI published is the one for January.
Why? COFI is released on the last business day of each month reflecting the index for the preceding month. In this case, the January index was reported Feb. 28 and would be the most recent COFI when notification time arrives in mid-March.
But borrowers aren't the only ones confused. More than 75 percent of errors are caused by lenders using the wrong index in determining the mortgage rates, Mr. Powers said.
Lenders who make a systemic error on loans are required to give refunds to all borrowers of those type of loans, Mr. Powers said. The refunds, however, are not a two-way street.
If a lender has undercharged a borrower, the customer does not have to provide a refund. And if a lender has both undercharged and overcharged a borrower, the lender cannot subtract the difference and provide a refund, said Brian Moloney, vice president of development at Consumer Loan Advocates. The lender has to refund all overcharges and chalk up the undercharges as a loss.
Regulators generally do not become involved in resolving these issues because the loans are considered contractual arrangements, Mr. Moloney said. Borrowers, as a result, have turned to the courts.