“Recently I locked my $100,000 mortgage at an interest rate of 5.75 percent and 1 point, with an APR of 5.94 percent. Now the rate is the same, but I’m told that the APR is 5.99 percent. I don’t understand this, how can the rate be locked but not the APR? When I asked the lender about it, he spoke to me like I was an idiot; he said yes, of course, the APR can change…What good is the Truth in Lending statement if the APR can change all the way to closing? I close in two weeks, so I feel like I’m stuck.”

You are caught up in one of the most perplexing failures of our mortgage disclosure system, one the Federal Reserve could fix easily but doesn’t.

The annual percentage rate, or APR, is a single summary measure of the cost of the loan to the borrower. The easiest way to think of it is as the interest rate adjusted upward for all upfront fees paid to the lender. The APR of 5.94 percent quoted to you when you locked included fees of about $2,000, whereas the second APR of 5.99 percent included fees of about $2,500. The lender jacked up the fees by about $500 after you locked.

Lender fees are of two types, those expressed as a percent of the loan, called points, and those stated in dollars. You paid 1 point, which on a $100,000 loan is $1,000. Points are locked with the rate, so that $1,000 did not change between the first APR and the second.

Fixed dollar fees, which were $1,000 at the time of the first quote, are not locked unless the lender elects to lock them, as some do (see below). Your lender does not lock fixed dollar fees, and raised them by $500 between the lock date and the date of your recent statement.

This is inexcusable, a stain on the Federal Reserve, which administers Truth in Lending. It could fix the problem simply by ruling that a lender locking the price also locks the APR. It is also a stain on the mortgage banking trade groups, which don’t press the Federal Reserve to do this.

Borrowers avoid the problem if they deal with a mortgage broker because brokers won’t deal with lenders who play games with their fees. Brokers won’t tolerate a scam that puts money only in the lender’s pocket.

Borrowers can also avoid the problem by only dealing with lenders who guarantee their fees and show them on their Web sites. Here are some of them: Eloan, Countrywide Financial, ETrade Financial, ABN/AMRO, and IndyMac Bank. Others will if borrowers insist.

With only two weeks before you close on a house purchase, it is too late to change lenders. However, you have one strong card to play: the real estate sales agent who referred you to this lender.

Lenders often live and die through their referrals, or lack of referrals, from sales agents. The last thing a lender wants is a client who causes problems for the agents who refer customers to him/her. That could mean the end of the referrals.

If I were in your shoes, I would inform the lender that I expected a settlement statement at closing with the fees shown on the statement you received when you locked. If you don’t get it, you are going to demand that the sales agent who recommended the lender pay the shortfall. Given the choice between losing $500 and losing a source of referrals, the lender will almost certainly give up the money. Odds are that the lender will also stop treating you like an idiot.

Is There a Lender For This Borrower?

“I have a home worth $142,000 on which I owe $81,000, so I have $61,000 of equity. I want to turn the equity into cash, but my credit is poor, in the 400s, and I can’t find a lender who will deal with me. Do you know any lenders who will help me?”

I do, but I won’t tell you who they are. Some are in jail, and the others ought to be in jail.

The probability that a borrower with a credit score in the 400s will default is considered to be so high that no interest rate is high enough to compensate a lender for the risk. The only lenders who might be interested in you, therefore, are those who figure they can move some of your equity out of your pocket into theirs when you default. I have no intention of being the one to introduce you to them.

The writer is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.

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