QWe applied for a mortgage loan about a month ago, and were told that our rate was locked in at 57/8 percent plus one point. We are going to settlement in a week, and our settlement attorney has advised us that the rate will be 61/8 percent, plus 11/4 points. Needless to say, we are upset. Is there anything we can do, and can the lender be held to its loan commitment?
AWhen interest rates are steady or dropping, borrowers don't complain. It has been awhile since mortgage "lock-ins" have been a problem, because interest rates have been low. However, in the past few months, mortgage interest rates have been rising. This is when potential borrowers start to have problems.
Many borrowers are now faced with the possibility that the interest rate for which they applied -- and for which they were supposedly locked in -- will no longer be available.
What is a lock-in rate? It means that you have a binding commitment from your mortgage lender that for a fixed period of time (usually 30 or 60 days from the time you make your loan application), you can obtain the rate that was locked in by the lender. The lock-in affects potential borrowers only when rates start to move up. It is my opinion that the primary cause of consumer concern stems from lenders' lack of communication with their borrowers.
The Federal Reserve Board has prepared a helpful booklet, "A Consumer's Guide to Mortgage Lock-ins." (You can order it free from the Federal Reserve at 202-452-3245 or find it on the Web at www.pueblo.gsa.gov/cic_text/housing/lockins/lockins.txt.)
The Federal Reserve's definition of a mortgage lock-in is worth quoting: "A lock-in, also called a rate-lock or rate commitment, is a lender's promise to hold a certain interest rate and a certain number of points for you, usually for a specified period of time, while your loan application is processed. . . . A lock-in that is given when you apply for a loan may be useful because it's likely to take your lender several weeks or longer to prepare, document, and evaluate your loan application. During that time, the cost of mortgages may change. But if your interest rate and points are locked-in, you should be protected against increases while your application is processed. . . . It is important to recognize that a lock-in is not the same as a loan commitment, although some loan commitments may contain a lock-in."
The Fed points out that there are many different kinds of lock-ins. Options include a locked-in interest rate and locked-in points, a locked-in interest rate with floating points, or a floating interest rate with floating points, in which the lender gives the borrower the option to lock-in any time between the application and the actual settlement.
Unfortunately, consumers have learned the hard way that too many lock-ins are oral commitments, not written ones. If that's the case, they can be tough to enforce.
It is important that you get a written document, on the lender's letterhead and signed by an authorized loan officer, spelling out the terms and conditions of your lock-in. If the lender refuses to give you a written statement, you should start looking for another lender. An oral commitment may not stand up in court. However, you probably do not have the time -- or the money -- to sue the lender.
If the lender refuses to confirm in writing the terms of your lock-in, and you do not have time to switch to another lender, send your lender a letter, by certified mail, return receipt requested, outlining your understanding of the lock-in commitment.
Although some mortgage lender lawyers disagree, it is my opinion that a lender that locks in a rate and then is unable or unwilling to meet that deadline may be in breach of contract.
Let us look at the basic elements of any contract. To have a valid, binding contractual obligation, three elements are required.
First, there must be an offer. Here the lender has offered a "locked-in rate" to the borrower.
Second, there must be an acceptance of that offer. Again, the borrower, by telling the lender that he or she will accept that locked-in rate, has validly accepted the offer.
Lawyers may differ as to whether the lender makes an offer or merely permits the borrower to make an offer to the lender. Nevertheless, in my opinion there is an offer and an acceptance between the borrower and the lender when the loan application is made and the lender states that the rate is locked in.
The third vital element of a contract is consideration. Usually, consideration is in the form of money. The borrower has given the lender money for the appraisal, the credit report and possibly other charges.
Even if the borrower does not give money as consideration, the law books also define consideration as something of value other than dollars. In your case, if you refrain from looking for another lender and rely on the first lender's representations, that also constitutes valid consideration so as to make a contract between the parties.
The offer and the acceptance need not be in writing. While we need a written document for the sale of real estate, in this case we are not dealing with real estate, but rather the financing of that real estate. Oral representations are binding. The problem, of course, is proving that the statements were made.
Thus, assuming that you obtained a written document confirming that your rate was locked in, it is my opinion that your lender is contractually bound to honor the locked-in rate that was initially promised you. You have relied on the lower rate, went to that lender in good faith, and the commitment should be honored.
There is a Maryland Court of Appeals case that is directly on point. According to the court:
"The inducement of a guaranteed rate of interest . . . especially in a time of fluctuating interest rates, clearly is intended to entice the customer to deal with the offering bank, rather than with some other lender.
"Although the customer does not covenant that he will refrain from simultaneously making application with other lenders, we think the practicalities of the home loan market, and particularly the expense of each application, have the effect of at least temporarily taking the customer out of the market. As a greater number of loan applications may be expected to result in a greater number of loans, and thus, a greater profit, [the] business advantage to the bank is real, even though every application will not lead to a profit."
Now that rates are rising, lock-in problems are beginning to develop. Lenders can avoid this situation by disclosing to the borrower in writing the terms of the lock-in commitment. And this disclosure must be in simple English, not legalese.
Usually, these lock-ins run for only 30 or 60 days. The borrower should be advised of this time limit. The lender then has an obligation to process the loan promptly. I recommend that borrowers contact their lender on a weekly basis to make sure that the loan process is moving forward.
Different lenders offer different lock-in terms. Of course, that is the lender's business. As long as the borrower understands the terms and conditions under which the loan application is being processed, the lender can do no more.
But if a lender arbitrarily and capriciously cancels a lock-in rate, that is, in my opinion, a breach of contract, for which the borrower has legal recourse.
If you have a problem, you have several options:
* First, talk directly to your mortgage lender. Try to speak with a supervisor, but make sure that you have all your documentation in place before you make the call.
* State and local agencies can assist. Some states have consumer affairs offices; other states have banking commissions. You can also complain to the attorney general in your jurisdiction.
* Federal agencies supervise many mortgage lenders. You can complain to the Federal Trade Commission or the Federal Reserve Board. If your lender is a national bank, you can also file a complaint with the Office of the Comptroller of the Currency.
Whether promised mortgage rates are really locked in will become a real concern for many borrowers in the months to come. Education, information and communication between borrower and lender are the real keys to preventing these issues from becoming problems.
Benny L. Kass is a Washington lawyer. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed stamped envelope to Benny L. Kass, Suite 1100, 1050 17th St. NW, Washington, D.C. 20036. Readers may also send questions to him at that address.