Pub. 1 2020 Issue 5

19 ISSUE 5 | 2020 The firms get borrowers’ attention by pointing to figures of lender overcharges and borrower refunds like these: • Average borrower refunds of over $1,500 • 21% of refunds ranging from $3,500 to $10,000 • 13% of errors exceeding $10,000 Reasons for errors The calculation of ARM rate changes is a complex process, and errors can occur in a variety of ways. Add to this the fact that many lenders offer, and servicers support, a variety of ARM products with different rate adjustment intervals, indices, margins, and other terms. Another potential complicating factor is the widespread practice of transferring loan servicing, presenting another opportunity for human mistakes and software mismatches to cause errors. In addition, some of the mortgage audit firms assert that ARM rate and payment adjustment errors have been linked to: • Lack of training, supervision and experience of loan servicing personnel • Simple human error • Computer data entry or software errors • Clerical or calculation errors • Fraud • Sale or transfer of the loan to a different company • Riders, handwritten changes, or other irregularities in the note • Very complex calculations or use of an unusual index or interest rate • Dissolution or merger of the original loan institution How to avoid these problems The federal banking supervisors began encouraging financial institutions back in 1991 to perform reviews of their adjustable rate loan systems to ensure that interest rate information is correctly ascertained and administered, and that rates are adjusted properly. Banks and thrifts should have effective internal controls and procedures in place to ensure that all adjustments are made according to the terms of the underlying contracts and that complete, timely, and accurate adjustment notices are provided to borrowers. Also, a system for the ongoing testing of adjustments should be in place to ensure that adjustments continue to be made correctly. A critical component of any successful loan servicing program, including correctly implementing rate and payment adjustments, is a thorough training regime for lending personnel involved in the process. Those involved must be given the appropriate tools — including knowledge — to succeed in their jobs. Any review of ARM adjustments should include documentation indicating the basis for interest rate adjustments made to a lender’s ARM loans, showing whether changes have been made that are consistent with the underlying contracts. If a lender finds that it has made errors in the adjustments for interest rates, which have resulted in interest overcharges on ARMs, the supervisory agencies expect that you will have in place a system to correct the overcharges and properly credit the borrower’s account for any interest overcharges. In general, undercharges cannot be collected from borrowers.  William J. Showalter, CRCM, CRP is a senior consultant with Young & Associates, Inc. (www.younginc.com ), with over 35 years’ experience in compliance consulting, advising and assisting financial institutions on consumer compliance and compliance management issues. He also develops and conducts compliance training programs for individual banks and their trade associations, and has authored or co-authored numerous compliance publications and articles. Bill can be reached at (330) 678-0524 or wshowalter@younginc.com. Adjustable-rate mortgages (ARMs) have not been much of an issue for many banks and thrifts in recent years since fixed rates have been so low. But they are still an important tool for serving those customers who cannot meet the secondary market qualifications applied to most fixed-rate loans.