Sunday, February 15, 2009

Psst! Want to make a thousand bucks?


You could be a thousand bucks richer, right now. More, actually, if you were to add in the money you'd be saving by paying your actual mortgage payment, instead of the mortgage payment on your bill.

Here's how and why you could be a thousand bucks richer: The Federal Trade Commission in September, 2008, reached a settlement with Bear Stearns and EMC Mortgage. As part of the settlement, Bear Stearns and EMC (which is a subsidiary of Bear Sterns) agreed to pay out $28 million. That's why I'm writing about this now; the payments that Bear Stearns has started to make are starting to arrive in people's mailboxes -- because Bear Stearns has started paying that $28 million to borrowers who were (allegedly) affected by its (alleged) actions.

Here's part of why the FTC sued those companies: they were ripping you off.

Well, maybe not you.

But they were ripping people off. The FTC alleged-- that means accused, but hadn't yet proven-- that Bear Stearns and EMC were ripping people off by charging them too much on their mortgage. (There was a lot more going on there, too -- allegedly-- but I'll focus on the part about ripping you off, because that's how you could make some money.)

As we all know by now, when you borrow money for a house, the original lender almost never stays your lender. Instead, it gets sold and resold and resold, as companies peel a little money off of it here and there (the golden crumbs Tom Wolfe once wrote about.) That means that the company who ultimately holds your mortgage -- the company you are actually paying the money back to -- knows almost nothing about your actual mortgage.

Which makes the mortgage "servicer" an important person or company. The servicer collects your money and applies it to your account. The servicer sends out the monthly statements telling you what you've paid and what you owe. The servicer may be your original lender, or it may be a new company. The servicer may change from time to time, too, as different companies use different servicers.

Servicers gather a lot of information -- information on how much you owe, what the interest rate is, how much you should escrow for taxes and insurance, when those need to be paid, and a lot more.

Imagine, now, if a servicer got just a tiny mistake in your information. What effect would that have? Let's take a look. Suppose you borrowed $150,000 over thirty years at 6% interest. Your monthly payment amount (not counting taxes and other things) would be $899.33 per month. Over the course of thirty years, if you just kept paying, you'd pay back the loan plus a total of $173,758.80 in interest -- so you'd pay back a total of $323,758.80 for your $150,000 loan.

Now, suppose that a servicer makes just a little tiny typo in your loan. They type in the amount borrowed as "$151,000" instead of $150,000. An easy enough error to make, right?

If your servicer did that, your payment would only go up to $905.32 per month -- so small that you might not immediately notice it; it's only $6 more per month. But you'd repay $325,915.20 -- so that small error costs you two thousand dollars.

If, instead, your servicer types in a different wrong number, types in 6.1% interest instead of "6%", your payment would go up to $915.05, and that error would cost you about $6,000 over the course of your loan.

But wait -- as they say -- there's more. If you don't catch the error and go on paying $899.33 per month, then your payments aren't sufficient anymore. So each month, your servicer is going to apply the payment differently -- they'll impose late fees, for one thing, and they may not apply your payment at all, because these things are computerized and if your payment doesn't match what the computer thinks should be there, your payment may get stuck in a "suspense account," and before you know it, you're in default.

Luckily for you, and unluckily for Bear Sterns and EMC Mortgage, there are laws that may prohibit that kind of thing. There's the Fair Debt Collection Practices Act (FDCPA). The "FDCPA," which you can read here if you're into that sort of thing (it's pretty boring to read a statute) prohibits "debt collectors" from taking certain actions that have been ruled out-of-bounds by Congress.

Among the things the FDCPA prohibits are falsely representing the amount of the debt that's owed. Which means if a debt collector sends you a bill that doesn't show the correct amount that you owe, that debt collector has done something illegal.

Not everyone who sends you a bill is a "debt collector." Keep that in mind: there are very specific rules about who is, or is not, a "debt collector."

Now here's the fun part: not only is it illegal for an FDCPA "debt collector" to send you an incorrect bill, but if they do, you might get yourself a thousand bucks. If not more.

See, if a debt collector violates the FDCPA in any way, then you -- the person who suffered the violation -- can sue the debt collector, and can be awarded $1,000 in what they call "statutory damages." "Statutory damages" are money you get just for proving a debt collector violated the law. You can also get "actual damages," which is money to compensate for the harm the debt collector caused you by violating the law.

And, because attorney's are expensive, if you win, the debt collector will have to pay your attorney's fees.

So the FTC -- remember, that's where we began-- looked at Bear Stearns and EMC and accused them of violating (among other laws) the FDCPA in a variety of ways. And rather than fight that out in court Bear Stearns and EMC decided to pay out $28 million in settlements.

Sending out notices containing the wrong amount owed is just one of the ways a debt collector might violate the law -- and remember, not everyone's a debt collector. Also, the FDCPA doesn't penalize innocent mistakes; debt collectors are people, too, and people can make mistakes without getting their pants sued off.

So what's the lesson here?

Read your mortgage statements! If the amount changes for any reason, call the mortgage servicer and ask why. Have them document the reasons in writing.

Every now and then, double check things. It's easy to do. You know how much your original amount borrowed was and how much you're paying. So once or twice a year, go to a mortgage calculator like this one and double-check your statements to see if the payments are being applied correctly and the math works out. I know -- you don't like to do math. But maybe you'll catch an error and save yourself some money.

Or make some. Because a thousand bucks could really help out, couldn't it?



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