The following is an actual story.  I debated whether or not to name the bank in this article.  Due to the size of this bank and the potential of predatory lending, I chose to omit the name.  The disturbing aspect of this story is that it is one of the Top 5 Banks.  I am writing this story because these practices are not being reported in the media.

The Mortgage News Daily defines predatory lending as follows:

“The definition of predatory lending involves who really benefits in the mortgage transaction. The fact that the homeowner does NOT benefit is what turns a legal mortgage into a predatory lending practice which can and should be reported.”

A listener, who we will call Jose, sent me an email to get my opinion on a deal that was presented to him.  He received a call (unsolicited sales call) on his cell phone from a Top 5 Bank.  He has a car loan with this Top 5 Bank so they have access to his credit files.  They know that he has high interest credit card debt and a mortgage that he is paying.

Here is the pitch:

“Mr. Martinez, we see here you are an excellent client.  We want to make a deal for you. We want to provide you with the opportunity to roll all of that high interest debt and your mortgage into one loan with a much lower monthly payment.”

They were basically pitching a refinance of his current mortgage as well as lowering his interest rate on his high interest rate credit card debt.

Of course, that was appealing to Jose.  Who wouldn’t be interested in that deal?  When he contacted me, I requested that he send me the information on his debt and get the particulars of this refinance that they were pitching.

Here is Jose’s current situation:

His entire debt adds up to $93,246.26 with a monthly payment of $1,777.75.

If Jose paid out all of his debt at current payments, this is what his debt pay-off would look like.

Here is what we know about Jose before he received the call from the Top 5 Bank:

• Jose was not having any problems making his monthly payments
• Jose was 16 years from paying off his house
• Jose was 4 years away from being completely out of credit card debt

If Jose had gone through with this refinanced loan with Top 5 Bank, this would be his debt situation:

The new mortgage amount is determined as follows:

Old Mortgage                                      $65,484.00

Fees                                                        4,530.60

Pay off Credit Cards and 2^nd car            11,875.26

Cash to Jose                                       1,769.00

New Mortgage                                    $83,658.60

New Debt Structure

So here is what Jose received for doing business with Top 5 Bank:

• He increased his debt by $6,298.74 – most of which was due to the excessive fees being charged by Top 5 Bank
• Instead of being completely out of debt in 16 years, it will now take him 30 years
• By paying off his debt as it stands now, his total interest paid would have been $66,073.  With his new Top 5 Bank refinance, he would have paid $190,984.00 in interest.
• His monthly note would decrease by $676.54. However, in 7 short months, the $420 car note would be paid off.  Thus, 7 months from now, he will only be saving $256 a month.

This was pitched to Jose as a good deal. This was pitched as a way to get out of that high interest credit card debt.  They took a guy who was 4 years away from being debt free with credit cards and 16 years away with having a paid off a home and transformed him into a debtor for the next 30 years.

Let’s look at what Top 5 Bank gets out of this deal.

• They now have all of Jose’s debt.  They have a mortgage at an interest rate of 10.13% and then a car note at 14.95%.
• They have a consumer who has never defaulted on a loan.  Thus, very reliable.
• They have a consumer who can handle a much higher monthly note payment.
• They closed a deal where they made $3,900 in excessive fees.

Who got the better end of that deal?

Fortunately, Jose came to me.  I analyzed his situation and showed him how bad of a deal this was for him.    I sent him to Alice White-Hinckley, our mortgage consultant.  She was able to secure him the following deal:

• 15 year note
• 7.25%
• Monthly Payment of $763.68

He was able to pay off all of the debt with the exception of the car note with Top5 Bank.  He reduced his overall debt pay-off by a year.  He reduced his overall interest paid on his mortgage loan by 1% and his credit card debt by an average of 7%.  He saved $794 in monthly credit card and debt payments by rolling his high interest rate debt into a lower rate loan.

Did Alice do him any favors?  Yes, she gave him the going rate and a fair deal.

So, why would I write this story? First, no one is writing about these one-sided solicitations from the mortgage industry to people who have adjustable rate mortgages or high interest credit card debt.  I could give you even more examples of excessive fees being charged.  Second, I don’t want you to fall for a sales pitch that looks like it is going to save you money each month but dramatically increase your overall debt and interest payments.

If Jose was in trouble with his monthly payments, maybe a drastic step like this one would have made sense.  When you are in a debt crisis, any bad option is a good one.  Jose wasn’t in a debt crisis.  He is a hard working guy preparing for retirement one day.  He was also an easy target for a sales pitch that would have ended up being a disaster.

A salesperson’s job is to sell product.  A great salesperson is a consultant that carefully analyzes an individual’s situation and makes appropriate recommendations.  Ironically enough, this Top 5 Bank practices a system called needs-based selling.  That is an oxymoron.

The mission statement of the National Association of Mortgage Brokers:

Mortgage brokers are real estate financing professionals acting as the intermediary between consumers and lenders during mortgage transactions.  A mortgage broker works with consumers to help them through the complex mortgage origination process.

A typical broker has a working relationship with numerous banks and other lenders and provides the consumer with access to hundreds of options when it comes to financing a home.  This allows mortgage brokers to provide consumers the most efficient and cost-effective method of obtaining a mortgage that fits the consumer's financial goals and circumstances.

Make sure your broker is working for your benefit and not some banks'.

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.