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Revised April 30, 1999
"
We recently refinanced our first mortgage and a home equity line of credit with the closing on June 17,1998. The mortgage broker said that monthly payments
would start on Aug. 1 but the lender demanded a payment on July 1. Upon
researching the loan documents we saw that we did sign that the first payment
would begin on July 1st. Now I realize that we are being charged a lot of extra
interest. I called the lender, and was told that 'you signed that you would pay
on July 1st,' and no other explanation was given� Is this legitimate?"
Collecting the first monthly
payment a month early is legal, but it is also a sneaky practice that has been
challenged in the courts. Getting it fixed in your case should not be a problem,
for reasons I will indicate below.
To facilitate their bookkeeping,
lenders always design mortgage contracts so that the first monthly installment
payment is due on the first day of a month. At closing, the borrower pays
interest from the closing date to the first day of the following month. In
almost all cases, the first installment payment is then due the first day of the
month after that. Since you closed on June 17, you paid "per diem
interest" for the 14 days to July 1, and the first installment payment
should have been due August 1.
A few lenders, however, collect the
first payment a month early, on July 1 in your case. The total amount paid
remains the same but the lender receives the money sooner, which raises the cost
modestly. For example, on a 30-year loan at 7% with zero points or fees, moving
the first payment one month forward raises the true Annual Percentage Rate (APR)
of the loan over 30 years from 7% to 7.06%.
Prior to your letter, all the
lenders that I knew about who collected the first payment early were depository
institutions. In the 1970s there was a class action lawsuit against a group of
savings and loan associations in Pennsylvania who throughout their entire
history had been collecting the first payment early. One of the charges was that
these lenders had violated the Truth in Lending Act by understating the APR. The
institutions settled the lawsuit and relinquished the practice, as did other
depositories in Pennsylvania who had been doing it. Yet there are still a few
states in which some depositories continue the practice.
What is surprising about your case
is that the lender is a large and reputable mortgage banking firm that would not
want its name associated with this sneaky practice. Furthermore, this firm sells
all the loans it originates in the secondary market, and most investors will not
purchase early-payment loans. The chances are, therefore, that you have been
victimized by a combination of clerical error and bureaucratic lethargy.
Hopefully this column will help you reach someone higher up in the organization
so you can get the problem fixed.
Postscript: John
Carroll of Merit Mortgage in Florida, who read the above comment,
wrote me that in Florida:
"Many lenders
are allowing settlement agents to 'back charge'...or credit a partial month's
interest to the borrower rather than debit it, as is the usual custom. This is
done to lower the 'cash out of pocket' necessary to pay any costs of
re-financing. It is quite possible that the borrowers in question were credited
with the interest from their closing date "6-17-98" to
"6-1-98", thereby lowering their closing costs and making the
effective date of their 1st payment July 1, 1998 instead of the August 1 date
quoted by their mortgage broker."
I was not aware of this practice, and
don't know if it is the explanation for the events described above or not. If it
is, the lender and mortgage broker did a poor job of explaining it to the
borrower.
Copyright Jack Guttentag 2002
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