Q: What question are you asked most frequently?
A: I don’t have to think twice about that. The question that appears most frequently is some variant of “What is my recourse?” The question is posed by borrowers who feel they have been treated unfairly, deceptively, untruthfully, or fraudulently by a mortgage broker, lender or servicing agent. Or, occasionally, an ex-spouse.
This is also among the questions I most dislike, because my ability to help is so limited. The question is essentially a legal one, and I am not a lawyer. That wouldn’t stop me from giving advice, since I think that the fact that I am not paid would protect me against charges of practicing law without a license. But I seldom have any useful advice to give.
Even if I knew all the law, borrowers who ask about recourse rarely provide the facts needed to make a judgment about the best course of action. If I ask for the facts, which I do occasionally when the case has some possible broader implications that interest me, I have to be prepared for numerous e-mail exchanges that can be extremely time-consuming. At the end, I may or may not have learned something useful enough to justify the investment of time, and my advice to the borrower may or may not be any better than it would have been had I not known the facts. I don’t do this often.
The recourse situation is a little better when the problem involves servicing as opposed to originations. HUD provides borrowers with a specified procedure for registering a complaint about servicing with a lender. If the lender is not responsive in resolving the complaint within 60 days, the borrower can file the complaint with HUD, and can also sue the lender. The details are spelled out in “Is There Recourse Against Bad Servicing?” which is on my Web site.
On originations, more than half the complaints concern statements made by the broker or loan officer that turn out to be wrong. For example: “This loan has no prepayment penalty,” but in fact it does; “the rate is 5.5 percent,” but in fact it is 6.5 percent; “settlement costs will be $3,500,” but they turn out to be $5,000.
On a purchase transaction, unless the loan provider acknowledges making the false statements, there is no direct recourse. The borrower can get a measure of satisfaction by reporting the incident to the Better Business Bureau, and to the state or federal agency that regulates the loan provider–see the article cited above for addresses. That’s about it.
A post-mortem on why borrowers were taken advantage of may help prevent a repetition. Perhaps they hadn’t done enough homework about mortgages; or maybe they were careless or harried by the stress, or both. Another possibility is that they were too trusting in the loan provider who seemed like such an upright person, or in the government that they assumed would protect them from chicanery.
Indeed, mandatory disclosure rules are designed to do just that, but they work poorly. Loan providers can get away with changing critical features of the deal, or not informing the borrower about such features, without running afoul of the rules. I sometimes wonder whether ineffective disclosure rules that may give borrowers a false sense of security are better than no rules at all. If there were no rules, borrowers would at least understand that they were on their own.
The one type of transaction on which the government provides borrowers with effective recourse is a refinance with any lender but the one holding the existing mortgage. In this type of transaction, the borrower can rescind the deal for any reason within three days of closing and get back any fees that had been paid. Having been lied to is an excellent reason.
This is the ultimate weapon because it turns a transaction by the loan provider from a source of profit to a source of loss. The borrower is in a position to say, “The rate promised me was 5.5 percent, not 6.5 percent. Either I get 5.5 percent or I rescind.” It is unfortunate that home purchasers can’t be given a weapon of similar power.
The writer is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at http://www.mtgprofessor.com.
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