The Case of the Bad Home-Loan Deal
Should a mortgage company refund processing fee to customers after a costly home refinance?
Rita and Barry Weintraub live in a semidetached energy-efficient townhouse in a modern development in Stafford, Va., about an hour south of Washington. Barry can see the community pond from his home office, where he works as a lawyer. In 2008, six years after buying their home, the Weintraubs, both 59, noticed the dropping interest rates. They decided to refinance their $220,000 loan and began researching mortgage companies.
A deal changer
On Feb. 1, the Weintraubs applied to an Internet loan company, Quicken Loans, for a 30-year fixed-rate mortgage. After applying for the loan, the Weintraubs received a "good faith estimate," showing the loan's interest rate of 5.75 percent and an estimated house value, based on the Weintraubs' assessment of $340,000. The Weintraubs also paid $500 to cover the cost of a home appraisal and credit report.
When the Weintraubs' townhouse was appraised, the value was determined to be $308,000, $32,000 less than the Weintraubs' estimate. The lower appraisal meant that the Weintraubs' loan would amount to more than 70 percent of the townhouse's value. For this reason, Quicken added an additional "discount fee" of half a point, or $1,100, to the costs that would be charged to the Weintraubs when they closed the loan.
The Weintraubs were not happy with the additional charges and believed that the appraisal was not done in a fair manner. Deciding to take their business to another lender, they sent a notice to Quicken Loans advising the company that they were canceling the loan. The Weintraubs also requested a refund of the $500 fee they had paid. Quicken only returned $129.41 to the Weintraubs, claiming that the rest of the fee had been used for the appraisal and credit report. If the Weintraubs wanted the rest of the fee back, they had to complete the whole loan deal, which meant closing on the loan. Only then would they be allowed to rescind the deal and get back any money paid at closing, plus the $500 fee they paid to get the loan process started.
Suing for their refund
The Weintraubs sued Quicken Loans to get back the rest of their $500 deposit, minus the $129.41 Quicken had refunded. They argued that the federal Truth in Lending Act (TILA) required Quicken to refund the money as long as the Weintraubs had backed out of the deal in a timely manner and with proper notification. According to the TILA, Quicken had to return "any money or property given as earnest money, down payment, or otherwise" within 20 days of being notified by the Weintraubs that they no longer wanted the loan — and the Weintraubs had done so.
The Weintraubs also argued that the TILA required Quicken to return the entire $500 fee. It would waste time and money for everyone, the Weintraubs argued, if they knew they wanted to cancel the deal but had to go through the entire closing process before canceling.
Read the fine print
Quicken Loans said the Weintraubs had it wrong. They had signed an agreement that said that "[t]he deposit will not be refunded if you" chose to withdraw your application, or chose not to close the transaction for any reason (including changing interest rates). The Weintraubs had backed out of the loan, they said, because Quicken had added the discount fee. Quicken argued that they were free to end the loan deal for this reason. But according to the TILA, they were not entitled to any money back unless they completed the loan, and then canceled.
Should the Weintraubs be allowed to cancel their loan and get their money back? How would you decide?
Next: Read the verdict. >>
The Court of Appeals for the 4th Circuit reviewed the decision of the district court, acknowledging that the TILA allows a loan deal to be rescinded where there is a "consumer credit transaction." The court also noted that the Weintraubs define a "consumer credit transaction" as any situation where two or more parties begin negotiations that could lead to extending credit.
While the court agreed that the paying of the $500 fee was a transaction, they did not agree that it was a transaction for credit. According to the court, there is no consumer credit transaction unless the loan deal is closed and credit has been extended to the borrowers. If the court allowed the Weintraubs to rescind prior to getting the loan, potential borrowers would have a right to a free application for home financing. Lenders would end up bearing all the costs of credit reports and appraisals, regardless of whether the borrower intended to close the transaction.
Barry Weintraub said he brought his suit because unscrupulous lenders lure consumers with false promises, and then make it difficult to back out of the loan without losing money on the fees. Weintraub refinanced a year later for a better interest rate. At closing, Weintraub's fees ended up being less than his brick-and-mortar lender had estimated.
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Robin Gerber is a lawyer and the author of Barbie and Ruth: The Story of the World's Most Famous Doll and the Woman Who Created Her.