Is it legal for my lender to renege on a rate lock?

By Gina Pogol
Mortgage Credit Problems Columnist

Dear Gina, I locked in a mortgage with a lender at 4.05 percent (3.75 percent plus 0.3 percent in add-ons due to some credit problems). I signed an agreement that said my rate would be locked for 30 days. However, the loan documents said my rate was 4.75 percent! Is this legal? - Nathan, Los Angeles, Calif.

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Dear Nathan,

There are several reasons that you might not get the rate you locked. Some are icky, others are not. I'll go through them here.

Bad reasons for your mortgage lender not to honor a rate lock

  1. Your lender made an error and won't own up. Sometimes, loan officers or mortgage brokers think they have submitted a rate lock but they make mistakes. If submitted online or faxed, the request might not have gone through. Or the rate/pricing was filled out incorrectly. Or the request was never made. In any case, by the time the error was discovered, rates were higher.
  2. Your lender submitted a lock request but rates had already moved up. Mortgage rates may change several times a day and when pricing is increasing rapidly the lock desk may not be able to keep up with requests. Sometimes the wholesale lender may botch the lock, leaving the broker with an unhappy customer.
  3. The lender may have deliberately misled you. Fortunately, this is very rare. One advantage that mortgage brokers may have over direct lenders is that when rates drop after a mortgage applicant has locked a loan, they can simply move the application to another wholesale lender and lock at the lower rate. However, brokers that make a habit of this may be barred by wholesale lenders from locking in rates until the loans are ready to close. They don't always disclose this to their customers.

Legitimate reasons for a mortgage lender not closing at a locked rate

  1. Your rate lock has "blown." This happens when your loan's processing time exceeds the term of your lock. If your rate is locked for 30 days but your loan takes 45 days to close, you may not close at the rate you locked. However, this should never be a surprise. Your lender should have advised you earlier and given you the opportunity to extend your lock (for a fee).
  2. Your loan application changed -- some bad credit crept into your history, you switched from a 5/1 adjustable-rate mortgage (ARM) to a 30-year fixed-rate loan, your home appraised for less than expected -- any material changes to your loan can also change your pricing. Again, however, this should not come as a surprise to you if you have a good loan agent.

What can you do?

If you feel that your lender pulled a fast one, you may be able to do something about it.

  1. Your first stop is your loan officer's immediate supervisor. Someone with the authority to do so may give you the rate you locked in.
  2. If your lender refuses to or is unable to make good on your locked rate, file a complaint at the state level. Some states use the same agency to regulate banks and mortgage lenders, while other states regulate mortgage lenders using the same agency that regulates real estate agents and appraisers. You may also try your state's Attorney General.
  3. At the national level, you can file with the FDIC, Federal Reserve or HUD. This is where you'd typically complain about your disclosures or about Equal Opportunity or Fair Lending violations.
  4. The Better Business Bureau can get your complaint where other potential customers can see it. They don't have the authority to prosecute violations, but they can hurt the lender's reputation.

Why wouldn't the lender just give you the lower rate you locked? They may not be able to afford to. The difference in costs between a loan at 4.75 percent and one at 4.05 percent may be seven to ten points! On a $250,000 loan, that's $25,000. In contrast, the average lender earns $346 on a mortgage, according to the Mortgage Bankers Association.

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