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Broken Promises

Backlog of applications partly to blame for broken rate locks

September 15, 2003


With interest rates heading north, state regulators across the country are cracking down on bogus promises of mortgage rate locks being made to consumers.

Most broken promises are likely due to the backlog of mortgage loans lenders are processing, Doug Duncan, chief economist for the Mortgage Bankers Association of America in Washington, said in an interview.

"Rate locks are good in a raising rate environment," Duncan said. "You never hear about losing lock downs when rates go down."

While there are undoubtedly some unscrupulous brokers and lenders reneging on what borrowers believed were legitimate lock downs, most of the problems are more attributable to volume, Duncan said.

By the end of the year Duncan said nationwide mortgage loans will total $3.3 trillion. That compares to the last refinance boom in 1993, when loan totals were just $1.3 trillion.

"We have such as large volume of loans today compared to previous refinance and lending booms, and there have been delays," he said. "That doesn't mean mistakes don't happen. But lenders are also very careful. They recognize their reputations are on the line whenever they deal with a consumer."

Borrowers are being warned to get agreements in writing as rate lock complaints are piling up from Massachusetts to Washington.

In Pennsylvania, Banking Department Secretary William Schenck wrote to every mortgage banker and broker licensed by the state after officials received dozens of consumer complaints about broken lock agreements.

"The department has received numerous complaints during this recent period of increasing interest rates on mortgage loans relating to mortgage brokers offering interest rate lock-in agreements and collecting lock-in fees in their owns names," Schenck said in a written statement. "In addition, certain mortgage brokers have been failing to honor lock-in agreements.

"Such practices are unacceptable," he said.

Massachusetts regulators also issued a notice to lenders and ordered one company -- Best Mortgage Services Inc. of Brookline, Mass. -- to cease making mortgage loans as part of an investigation into an estimated 100 complaints about lenders and brokers backing out of lock agreements. The company has denied the charges and is appealing, according to a spokesman for the Massachusetts Division of Banks.

"All licensed mortgage brokers are reminded that they are prohibited from issuing mortgage rate-lock commitments," Massachusetts Commissioner of Banks Thomas J. Curry said in his letter. "Over the last several years, both consumers and the mortgage lending industries have enjoyed the advantages of a low interest rate environment. The high volume of applications for purchase or refinance mortgages may result in delays processing applications."

In Washington, the Department of Financial Institutions is warning consumers about locked in mortgage rates after two companies were unable to honor rate agreements made with borrowers.

Laws vary state to state so consumers, lenders and mortgage brokers need to know the rules, Schenck said.

"Consumers need to be aware that mortgage brokers (in Pennsylvania) cannot themselves lock in an interest rate on a mortgage loan on behalf of a consumer and mortgage brokers should not represent to consumers that they are able to lock in an interest rate," he said.

Schenck said given the volume of complaints his department has received regulates "will monitor mortgage banker and banker practices regarding lock-in agreements and will continue to investigate complaints."

"Where violations are found, including the failure to honor lock-in agreements, the department will take appropriate enforcement action against licensees which may result in fines and/or license suspension or revocation," he said.

Patrick Crowley is a political reporter and columnist and former business writer for The Cincinnati Enquirer. Email Patrick at: [email protected]

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