Expert: liznarr - 10/17/2008

Question
I am writing on behave of my brother in RI who recently applied for a mortgage loan with a Credit Union in RI.  He submitted the loan application and paid the application fee in part based on the interest rate they were offering.  Shortly after this, he realized he had forgotten some other bills he had not considered when he applied for this loan. He now realizes the additional expenses will seriously put him in the hole ($1000/month in the red) and that he should no longer be qualified for the loan and that he can not afford to go thru with the home purchase. He brought the information to the attention of the loan officer in hope that they will reject his loan so that he can receive his deposit back from the seller. Instead of rejecting the loan, the loan officer insists that my brother is still qualified for the loan even with the added monthly expenses, mostly because of the large down payment (33% down) he was planning to put up for the home purchase. To make matters worse, because of the new information, they are increasing the interest rate they were offering him because he is now a higher risk.  Rather than rejecting his loan, they turned around and gave him a Commitment Letter with the new higher rate.  Are they legally allowed to do this?  This was an honest oversight and the only reason he brought it to their attention was because he realized the added expenses will definitely put him in the red each and every month and that this situation will eventually bankrupt him.  He is quite anxious about this situation now because if the bank approves his loan, he may stand to lose his deposit of $7000 to the seller if he defaults on the P&S contract.

My questions are:

1. Can the Credit Union change the rate on him when he was applying for one rate (that rate was supposed to have been locked for 60 days), and then changing it on him on the commitment letter?

2. Shouldn't they just approved or unapproved him based on the original rate that he applied for?

3. The last question is should the bank have even approved this loan? Here is further information related to this item:  When he initially applied for the loan, he reached out to family members for help with the down payment believing he can paid it back once his present house is sold.  What he didn't factor in was the property tax, insurance, and utility bills that he would continued to have to pay while the house remains unsold.  And in today's environment, it remains to be seen if it can be sold.  If the bank had taken all this into account along with his other expenses, and weighted that against his income, I can not see how he can be qualified. Based on his updated expenses, he is over $1000 in the hole each and every month. Even in the best senario if basing only on his expenses from the new home, he is still $300 to $400 in the hole each and every month. This is not even accounting for any unexpected expenses for personal health, auto, and home maintenance. Instead of accepting the facts and the financial hardship in this case for the borrower which will lead to certain foreclosure, the bank instead was only interested in their bottom line.  From their perspective, the property is worth more than what the bank is loaning out, so even if they have to foreclose, they can get their money back in addition to what they are collecting from him for loan processing, points, etc.  If proceed with this loan, my brother will eventually have to declare bankruptcy.  This has been typical of what banks have been doing for the last 5 years - making out loans to individuals who can't afford it and we are all currently looking at a major economic crisis in this country.  How is it possible for someone to be qualified for a loan when his bottom line budget is significantly in the red each and every month. It is unethical for a bank to approve that loan. And to even add additional burden to him by increasing the rate from the initial locked rate is outrageous! If the banker feels the loan is at higher risk now from initial information, the bank should have rejected him for the original loan and then they can offer the higher rate loan to my brother if they still choose to. In this senario, my brother can then accept or reject the new offer. This senario will also then allow my brother to get out of the sales contract and receive his deposit back. Otherwise, he would be in default of the sales contract and may lose his $7000 deposit. Do we have a case with the banker?

Answer
Hi Robert,

When a lender locks a loan rate, normally this rate can NOT be changed unless the lock expires prior to closing and rates are higher at time of relock.  However, in view of the fact that your brother did not give full information at time of application for the lender to consider, I would think they have the right to deny the first loan based on the missing information.  The rate a lender will give a borrower is based not only on credit, but also debt ratio.  The higher risk a borrower is, the higher the rate; so, yes, I believe that a bank could change a rate if your brother, intentionally or Unintentionally, did not disclose all his debt initially.  

If your brother is going in the hole on the “new” approval to the tune of $1,000.00 each month, and the lender is aware of this, I don’t know how – or why – any lender would approve such a loan.  Generally, if a bank is aware that money for a down payment is borrowed, this can SIGNIFICANTLY affect the approval process.  Also coming into play is the type loan your brother has applied for.

You stated that your brother is making a large down payment of 33%.  While I’m sure I do not have all the facts for your brother’s situation, I believe you have made a correct assumption that the lender realizes they might “come out okay” in the event of a foreclosure.  Regardless of this fact, this is why our country is in the situation we are at this time:  Bad loans that never should have been made.  Your brother is an exception in that he realizes this now and does not want to go forward.  For that, we should all applaud him.

My suggestion to you is this:  If the bank is basing the approval on a large down payment of 33% which your brother is borrowing from family members, the family members should now refuse to loan him money to help him purchase property that you say will surely send him into foreclosure and bankruptcy.  With no large down payment for this property and in view of the debt ratio of your brother, the loan should not be approvable.

If the lender still wants to make the loan, your brother needs immediate help.  If this is a government insured or funded loan and your brother does not legitimately qualify, I believe the Feds might want to know about this.  If this bank is doing anything illegal, you can bet your brother is not the only victim.  Your brother should talk with another lender and get an opinion, or call his Senator or Congressman.  Go over the lender’s head and go straight to the top of the ladder complain LOUDLY.  Remember, the squeaky wheel gets the grease.  Also, are there any local TV stations that might be interested in airing his story?  Make sure you have all your facts together and accurately-described before taking such an action.  If all this fails, contact a good attorney immediately.

As to whether or not your brother might have a case against the bank, this is a question that needs to be directed to an attorney.  I am not a licensed attorney and cannot give legal advice.

Before paying money for legal fees, your brother could also make an appeal to the Seller and explain the situation, asking that he be relieved from the Contract and explaining ALL the facts, including the borrowed down payment.  If the Seller balks, offer him, say, $1,000.00 to terminate the contract.  That would be much better than losing $7,000.00.  If all this has happened within a reasonably short period of time and the Seller has not suffered any serious loss of time by having taken his property off the market, cross your fingers that the Seller will be reasonable.

Good luck to your brother, and feel free to write again if you have additional questions.

Regards,
Elizabeth