Published January 13, 2015
Need to borrow for a car or home? Look out: Your bank could be a loan shark in disguise.
1. "Our bonuses are really kickbacks."
Michael Moskowitz doesn't mince words. "It's the mother of all potential snookering," says the president of New York-based mortgage lender Equity Now, "and it's a game being played on even the most sophisticated consumers." The name of the game is yield spread premiums -- and homebuyers often end up the losers.
In some circumstances, these premiums are legal, and even helpful: the lender will help you pay closing costs such as the broker's fee; in return, you agree to a higher interest rate over the life of the loan.
But things can get a bit shady when the deal's done behind your back. Say your mortgage broker says you're eligible for a loan at 6.75%. A month later interest rates drop and you qualify for a 6.5% rate. Trouble is, your broker won't tell you. The lender is paying him a yield spread premium for keeping you in the 6.75% loan.
The result? Your broker gets a kickback of several thousand dollars. Your lender gets a more profitable loan. And you pay an extra $12,000 in interest on a $200,000, 30-year mortgage. After reviewing more than 3,000 mortgages, Howell Jackson, an associate dean at Harvard Law School, found that such premiums were paid more than 85% of the time. How can you spot one before you sign on to a loan? The payment will appear on your HUD-1 statement, a federally mandated list of loan expenses you'll receive prior to closing. Usually it's noted cryptically as a "YSP." If you see one, find out whether the increased interest rate is really justified by lower closing costs. If not, start shopping for a new -- and better -- loan.
2. "Want to refinance? Get ready to wait a good long time."
Like many homeowners teased by rock-bottom interest rates, Michael and Sharon Krasowski were hoping for a quick mortgage refinance on their Cicero, N.Y., home. After paying $300 to lock in a 6.1% interest rate last October, they were told by a rep at their bank, Wells Fargo, to expect a November closing. But as November passed and December wore on, the bank refused to commit to a closing date.
One morning in mid-January, on the day the loan was finally scheduled to close, a bank rep called with more bad news: There would be several hundred dollars in additional closing costs. Frustrated but unwilling to wait any longer, the Krasowskis closed on the loan. Sharon, still fuming, says, "The people who write the loans try to process too many and don't service the customers. They were uncaring." A Wells Fargo spokeswoman, Ahnalee Luchtel, says, "We're confident we did the best we could given the environment we were in."
The Krasowski's tale of frustration is hardly unusual. Many banks can't handle the heavy demand spurred by a drop in interest rates. "Lenders don't staff for peak periods, so when you have a refinance boom, the whole process slows down," says Jack Guttentag, a former chief of domestic research at the Federal Reserve Bank of New York. "When that happens, lenders give priority to new home purchases, not refinances."
To avoid delays, ask the bank how long it's taking to process loans before you get started (typically, 45 days for a refinancing, 60 days for a mortgage). Even better, speak to customers who've completed a transaction similar to yours. If you hear tales of woe, look elsewhere.
3. "Our 0% financing on car loans is just a big tease..."
You've seen those great deals being offered by the auto industry: No money down and zero% financing! Sure, it's a sweet offer -- but cool your engines before you speed down to the dealership.
Turns out, just 25% of car buyers who apply for zero% financing actually qualify for the advertised terms. "It's only available to people with top credit," says Rob Gentile, manager of the new- and used-car price service for Consumer Reports. And even if you do qualify, you might not be able to swing the payments. Zero% financing is generally available only on 36- or even 24-month loans -- on a $25,000 loan, your payments could be more than $1,000 a month.
Unless you're certain you'll qualify for zero% financing, get loan quotes from at least three banks or credit unions before you head for the dealership. That way, you'll still be prepared to negotiate a loan from your dealer that at least has better terms than the banks are offering.
4. "...plus we'll smack you with hidden fees."
Once you've negotiated the car's price and interest rate, you're set, right? Wrong. Unscrupulous dealers will quote you a monthly payment supposedly based on the car's price plus finance charges. What they don't say is that the payments include undisclosed add-ons you don't want or need. "It's a widespread practice in the used-car industry," says Paul Richard, executive director of the Institute of Consumer Financial Education in San Diego.
Common add-ons -- loan application fees, warranties, credit insurance and tow insurance -- serve only to profit the dealer. "In most cases, the dealer gets to keep half or three-quarters of the premium on these products," says Richard. You can avoid getting ripped off by asking the dealer to detail all charges before you sign for the loan. Then, reject everything beyond the original negotiated price of the vehicle.
5. "Repaying your loan faster will cost you."
Soon after you close a loan, you'll likely get a letter from your lender offering a new payment plan. The claim: You can save thousands in interest by sending half your monthly loan payment every two weeks. You'll just need to pay a third-party program provider an upfront fee (typically $300) and then $5 every two weeks.
Tempted? Lots of people are. In fact, Paymap, the largest provider of such services (it offers its program through lenders such as Chase, Wells Fargo and Citi Mortgage), says more than 622,000 borrowers are currently enrolled in its Equity Accelerator plan, twice as many as in 1997.
But here's the real deal behind these plans: Payments are applied to your loan only once a month. The only reason you save interest is because the biweekly payment forces you to make the equivalent of one extra monthly payment every 12 months. You could save just as much by making that extra payment yourself -- and your bank won't charge you a fee.
Jon Leon Guerrero, Paymap's corporate training and development specialist, concedes that biweekly payments have no advantage over an extra annual payment. "But only 3% of mortgage holders across the country make extra payments on their own," he says. "Our program helps people who wouldn't pay off their loan any faster if left to their own devices."
6. "Your credit report won't get a boost from us."
If you're a model borrower, shouldn't your lender report your payment history to the credit bureaus? After all, it's the only way you can boost your credit score and get a lower interest rate on future loans.
Unfortunately, there's no law requiring lenders to report your payment history, and too often they don't. "They don't want to lose accounts to other lenders who can offer better rates," says Jan Davis, an executive vice president with credit bureau TransUnion. Before you take out a loan, find out if the lender reports to at least one of the three major credit bureaus: TransUnion, Experian and Equifax. If you already have a loan, check your credit report to make sure payments are recorded. If they're not, call your lender and request it. And if the lender refuses? "Consider moving your business elsewhere," says Davis.
7. "Our fees are phony, but pay them anyway."
Oscar Recalde was delighted when he found a bank willing to refinance his mortgage at 6.625%. "I had spent hours researching the lowest rates," says the Fairfield, Conn., graphic designer. But just before closing, his wife noticed the fee schedule. There were dozens of inexplicable charges totaling more than $4,000. There was a lender inspection fee, for example. "That's a new one!" chortled one mortgage expert whom Recalde contacted. And what about that $195 notary fee? Most lenders charge $30 for the same service. Disgusted, Recalde pulled the plug on his loan.
As he discovered, shady banks sometimes charge for nonexistent services, or boost the fees charged by third parties such as property inspectors. What to do? Jack Guttentag warns against questioning individual fees since it's hard to tell whether the bank's explanations are bogus. Instead, compare the total fee package charged by several lenders before you make a commitment.
Keep in mind, just because your lender asks for a fee doesn't always mean you have to pay. "The fees are usually negotiable," says Robert Withers, CEO of First Alternative Mortgage. "If a good applicant says, "I'm paying an application fee and an underwriting fee, why not waive one?' I'll say, "Why not?' I want the borrower to be happy."
8. "A margin call doesn't mean we'll actually call you."
Investors know that when they buy stocks through a broker on margin, they'll need to cover their loan should their stocks take a dive. The hope: They'll get an opportunity to deposit some cash rather than liquidate stock. Deborah Tang never got that chance. She was shocked when she discovered that her broker, E*Trade, had sold off four-fifths of her stake in AOL to meet a margin call last May. "They never gave me any notice," says Tang, a Sacramento program analyst.
"If they had called or e-mailed, I would have covered the call. As it is, I lost $19,000." When she called customer service, all she got was a lecture on the importance of checking her account on a daily basis. "They said I can't expect E*Trade to contact me," she says.
Connie Dotson, E*Trade's chief communications officer, says that in typical market conditions, a margin call will trigger an alert sent to the customer's online account, along with a next-day mail-gram and a phone call. Still, she says, "there's no guarantee, because there may be extraordinary circumstances."
Surprise: While most brokerages will notify you of an impending margin call, no regulation requires them to. You can question your broker about its practices before you trade on margin, but don't bank on what you hear. Most brokers don't have a notification guarantee you can hold them to. "The deck is stacked against the investor," says Vincent DiCarlo, a former SEC lawyer who represents individuals. "Most times people who have margin blowouts are completely out of luck."
9. "Be smart: Don't consolidate your student loans."
You finally got your MBA, and now you're hypnotized by ads touting the benefits of student-loan consolidation. It's no wonder. This past July rates on these loans dropped to a 40-year low: 4.125%. For many, it's a great time to refinance your variable-rate loans with a single fixed-interest loan. Just be careful.
Patricia Scherschel, consolidation product executive for education lender Sallie Mae, warns that some borrowers lose important benefits by consolidating. If you always make your payments on time, for example, you're likely enjoying a reward rate just over 2%. Your postconsolidation rate would be higher, costing thousands in interest. You could also lose the ability to defer your loan payments, and if you consolidate your debt with your spouse, you become responsible for that loan, even if he or she bolts to Mexico.
Unfortunately, some lenders don't care whether consolidation is really in your best interest. "We've been getting calls from consumers who say their lender advised them to consolidate even before the rate dropped in July, which is crazy," says Barry Morrow, CEO of student-loan provider Collegiate Funding Services.
10. "We'll give you a severe case of PMI."
After property values rose in Coon Rapids, Minn., John and Corrine Lee Thomas were certain that their home equity topped 20%. That meant (or so the Thomases thought) that they would no longer have to pay $60 a month for Private Mortgage Insurance (PMI) -- insurance to protect against foreclosures that lenders require of borrowers who make small down payments. Federal law lets homeowners request cancellation of PMI if they can prove their home has appreciated enough to create 20% equity, and some states, including Minnesota, let them cancel it outright. Unfortunately, as Richard Roll, president of the American Homeowners Association, puts it, "PMI only protects the lender, and they don't want to weaken that protection."
The result: Some lenders can make it nearly impossible to cancel PMI. In the Thomases' case, their lender, Countrywide, refused to accept the first appraisal the couple obtained, telling the Thomases that they had to use a Countrywide-certified appraiser. The Thomases then found an appraiser off Countrywide's list, but that appraisal got rejected too. Countrywide insisted they had to hire an appraiser through an affiliated company. Finally, the Thomases gave up and got rid of PMI by refinancing their loan. In a settlement the state of Minnesota reached on behalf of consumers like the Thomases, Countrywide denied any wrongdoing, but agreed to compensate customers who paid PMI.